Engagement Planning Flashcards
To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.
Engagement Planning
Auditors are not responsible for detecting theft or fraud.
Instead- they are responsible for providing REASONABLE ASSURANCE that the financial statements are not materially misstated.
Engagement Planning
The earlier the auditor is hired- the better for audit planning and efficiency.
Engagement Planning
If Control Risk for the accounts and/or transactions is low- audit procedures can be performed at interim dates.
The auditor then reviews changes in the balances at year-end.
Engagement Planning
The auditor can take the engagement if they are able to overcome the limitations of the engagement.
Engagement Planning
To plan the scope of the audit
To plan the objectives of the audit
Engagement Planning
The auditor can compare actual versus forecasted numbers.
Engagement Planning
If issues relating to predecessor auditor’s work on previous Financial Statements come up during the current audit- Auditor must have client’s permission to discuss the issue.
Engagement Planning
Were they adequately performed? (Review the working papers)
Are the results consistent with the audit report?
Engagement Planning
Auditor determines what the reporting objectives are.
Auditor determines the scope of the audit.
Engagement Planning
Materiality and Audit Risk
Engagement Planning
Training and Proficiency (Education and Audit Experience)
Independence
Due Professional Care
(TIP)
Engagement Planning
Auditor must be independent in fact and appearance
Honesty
No direct financial interest
No indirect material financial interest
Engagement Planning
Technical abilities mirror those held by peers in the profession Follow GAAS Standards Obtain a Reasonable Level of Assurance Maintain Reasonable Level of Skepticism Supervise Audit Staff Review judgment at every level
Engagement Planning
Planning and Supervision
Internal Control
Evidence
(PIE)
Engagement Planning
Consistency
Disclosures
Opinion
GAAP
(CDOG)
Engagement Planning
Review the previous financial statements
Speak to third parties
Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)
Engagement Planning
Note: must have permission of client to contact predecessor auditor (no permission = no engagement)
Why the Auditor Change?
Any Serious Discussions with Audit Committee?
How is Management Integrity? Disagreements?
How was Internal Control?
Understand Industry or Be Willing to Learn
Consider Scope Limitation - Limited evidence available = no engagement
Engagement Planning
Note: must be written
Objectives of Engagement
Limitations of Engagement
Responsibilities of Management - Provide written assertions
Responsibilities of Auditor - Limited error/fraud responsibility
Expectations of Access to Records
Financial Statements (and Disclosures) are Management’s Responsibility
Compliance with Laws
Internal Control
Engagement Planning
Management is responsible for financial statements and adequacy of disclosures.
Presentation & Disclosure Existence (Tests Overstatements) Rights & Obligations Completeness (Tests Understatements) Valuation & Allocation
Engagement Planning
Responsible for Hiring Auditor
Oversees Internal Control
Must Agree with Auditor on: Responsibility of the Parties- Audit Fee- Timing of the Audit- Audit Plan
Acts as Liaison Between Auditor and the Board
Auditor Communicates Concerns about: Internal Control Deficiencies- Errors- Fraud- Illegal Activities
Engagement Planning
Inherent Risk x Control Risk x Detection Risk
Risk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit report
Based on Auditor Judgment
Measured in both Qualitative and Quantitative
Engagement Planning
Risk that internal control will not detect error or fraud
Auditor cannot control this.
Engagement Planning
Which transactions have a higher level of risk?
Auditor cannot control
Engagement Planning
Will the auditor fail to detect a material misstatement?
Auditor CAN control
Do testing at year-end
Increase substantive testing
Run more effective tests
Engagement Planning
Less Acceptable DR = Run More Substantive Tests
More Acceptable DR = Run Less Substantive Tests
More Substantive Tests (DR down) = Less Audit Risk; (AR = IR x CR x DR)
Less Substantive Tests (DR up) = More Audit Risk; (AR = IR x CR x DR)
Engagement Planning
Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of percentages
Non-Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of acceptable ranges
Engagement Planning
It is Management’s responsibility.
Engagement Planning
Assess the RISK that such things will lead to material misstatements
Design the audit to provide reasonable assurance against fraud- illegal acts that directly and materially affect the financial statements
Report ALL management fraud to the audit committee (minor fraud by low-level employees not reported to committee)
Perform required inquiries and procedures (management inquiries- analytical procedures- discussions with audit personnel about fraud)
Engagement Planning
Fraud is born out of:
Rationalization
Incentive
Opportunity
(RIO)
Engagement Planning
Errors are unintentional- fraud is intentional.
Engagement Planning
Management compensation tied to stock
Aggressive financial forecasting
Former auditor disagreed with Management
Records not available for audit
Current audit procedures may need to be reconsidered if red flags exist.
Engagement Planning
Has been observed in similar situations
Does NOT necessarily mean that there is a material weakness in internal control
Leads to an auditor taking action
Engagement Planning
Internal control analysis can result in the conclusion that IC is weak- but probably won’t identify illegal acts
Engagement Planning
Strives to make audit engagement procedures less patterned and predictable
Re-evaluates management’s application of accounting procedures
Finds and assigns audit personnel with relevant skills in this area
Engagement Planning
Any fraud risks identified that could lead to material misstatement
Audit procedures performed to assess risks
Nature of communication made to audit committee and company management
Disclosure to third parties regarding fraud not normally the auditor’s responsibility
Fraud by management should normally be reported to the audit committee- NOT the SEC.
Engagement Planning
Created PCAOB
Designates Officer responsibility for internal control
Must disclose significant internal control weaknesses to auditor and audit committee
Must disclose any level of fraud discovered by employees with internal control responsibilities
Engagement Planning
- Statements on Auditing Standards (SAS)
- Auditing Interpretations- AICPA Guides & SOPs
- Industry Articles (no authority)
Engagement Planning
Firm Leadership exhibits quality and leads by example and sets the tone for the organization
Firm should Monitor and document that its policies and procedures are being followed
Firm should have Relevant Ethical Requirements
Acceptance and continuance of client engagements should continue to be evaluated for client integrity- auditor competency- and legality
Firm should have competent and ethical personnel
Firm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.
Engagement Planning
SSARS - Statements on Standards for Accounting and Review Services
These govern reporting for non-public entities only
Engagement Planning
Independence NOT required for Compilations
No Internal Control work allowed
No assurance given
Engagement Planning
Compilations are not an assurance service. No assurance is provided.
Engagement Planning
Reviews provide NEGATIVE assurance.
Engagement Planning
Reviews require independence.
No Internal Control work allowed
Performs analytical procedures
No material indirect financial interest allowed
No immaterial direct financial interest allowed
Engagement Planning
Must have an understanding of the client industry.
Engagement Planning
CPA expresses a conclusion about an assertion - Compliance with laws
NOT considered a Consulting engagement
Independence Required
Engagement Planning
Independence is not required for consulting services.
Engagement Planning
Report is restricted to specified users.
Agreed-upon procedures are implemented.
Engagement Planning
