Engagement Planning

Question 1

What is the primary duty of an auditor?

Answer 1

To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.

Question 2

What is the auditor’s responsibility for detecting theft or fraud?

Answer 2

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.

Question 3

When should an auditor be hired in relation to the balance sheet date for optimum audit planning and efficiency?

Answer 3

The earlier the auditor is hired- the better for audit planning and efficiency.

Question 4

When can audit procedures be performed at interim dates?

Answer 4

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.

Question 5

When can an auditor accept an engagement offered after the year is already closed?

Answer 5

The auditor can take the engagement if they are able to overcome the limitations of the engagement.

Question 6

For what does an auditor use professional skepticism?

Answer 6

To plan the scope of the audit To plan the objectives of the audit

Question 7

How can analytical procedures be performed in audit planning?

Answer 7

The auditor can compare actual versus forecasted numbers.

Question 8

What must an auditor have in order to discuss issues relating to a predecessor auditor’s work?

Answer 8

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.

Question 9

What questions must an auditor ask with respect to procedures carried out by assistants?

Answer 9

Were they adequately performed? (Review the working papers) Are the results consistent with the audit report?

Question 10

How is audit strategy mapped out?

Answer 10

Auditor determines what the reporting objectives are. Auditor determines the scope of the audit.

Question 11

What are the foundations of Generally Accepted Audit Standards (GAAS)?

Answer 11

Materiality and Audit Risk

Question 12

What are the General Standards for auditing?

Answer 12

Training and Proficiency (Education and Audit Experience) Independence Due Professional Care (TIP)

Question 13

Describe the key components of maintaining auditor independence.

Answer 13

Auditor must be independent in fact and appearance Honesty No direct financial interest No indirect material financial interest

Question 14

Describe Due Professional Care

Answer 14

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

Question 15

List the Standards of Field Work

Answer 15

Planning and Supervision Internal Control Evidence (PIE)

Question 16

List the Standards of Reporting

Answer 16

Consistency Disclosures Opinion GAAP (CDOG)

Question 17

What should an auditor do prior to accepting an audit engagement?

Answer 17

Review the previous financial statements Speak to third parties Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)

Question 18

What questions should be asked by an auditor prior to taking an engagement?

Answer 18

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

Question 19

What should be included in an audit engagement agreement?

Answer 19

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

Question 20

What is management’s responsibility with respect to the financial statements?

Answer 20

Management is responsible for financial statements and adequacy of disclosures. Presentation & Disclosure Existence (Tests Overstatements) Rights & Obligations Completeness (Tests Understatements) Valuation & Allocation

Question 21

What is the purpose of the Audit Committee?

Answer 21

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

Question 22

How is Audit Risk calculated?

Answer 22

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

Question 23

Describe Control Risk

Answer 23

Risk that internal control will not detect error or fraud Auditor cannot control this.

Question 24

Describe Inherent Risk.

Answer 24

Which transactions have a higher level of risk? Auditor cannot control

Question 25

Describe Detection Risk.

Answer 25

Will the auditor fail to detect a material misstatement? Auditor CAN control Do testing at year-end Increase substantive testing Run more effective tests

Question 26

What responses should an auditor take based on different levels of acceptable detection risk (DR)? What type of tests should be performed?

Answer 26

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)

Question 27

What are quantitative measurements versus non-quantitative measurements with respect to risk?

Answer 27

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

Question 28

Whose responsibility is it to FIND and PREVENT fraud?

Answer 28

It is Management’s responsibility.

Question 29

What is the auditor’s responsibility with respect to fraud and illegal acts?

Answer 29

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)

Question 30

What are the three factors that affect/influence fraud?

Answer 30

Fraud is born out of: Rationalization Incentive Opportunity (RIO)

Question 31

What is the difference between fraud and errors?

Answer 31

Errors are unintentional- fraud is intentional.

Question 32

What red flags may indicate higher risk in an audit?

Answer 32

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.

Question 33

Describe the characteristics of a Fraud Risk Factor.

Answer 33

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

Question 34

What does an examination of internal control accomplish with respect to illegal acts?

Answer 34

Internal control analysis can result in the conclusion that IC is weak- but probably won’t identify illegal acts

Question 35

What is the purpose of adjusting audit procedures in light of fraud risk factors identified during an audit?

Answer 35

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

Question 36

What should be documented with respect to fraud risk factors in an audit?

Answer 36

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.

Question 37

What was the effect of the SOX Act of 2002?

Answer 37

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

Question 38

What is the Hierarchy of Authoritative Literature?

Answer 38

1. Statements on Auditing Standards (SAS) 2. Auditing Interpretations- AICPA Guides & SOPs 3. Industry Articles (no authority)

Question 39

What quality control activities are undertaken by CPA firms with audit practices?

Answer 39

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.

Question 40

Which literature governs Compilation services?

Answer 40

SSARS - Statements on Standards for Accounting and Review Services These govern reporting for non-public entities only

Question 41

What is the independence requirement for Compilations?

Answer 41

Independence NOT required for Compilations No Internal Control work allowed No assurance given

Question 42

What type of assurance is provided by a Compilation?

Answer 42

Compilations are not an assurance service. No assurance is provided.

Question 43

What type of assurance is provided by Review services?

Answer 43

Reviews provide NEGATIVE assurance.

Question 44

What is the independence requirement for a Review?

Answer 44

Reviews require independence. No Internal Control work allowed Performs analytical procedures No material indirect financial interest allowed No immaterial direct financial interest allowed

Question 45

For compilations and reviews- what knowledge must a service provider have?

Answer 45

Must have an understanding of the client industry.

Question 46

What are attestation services?

Answer 46

CPA expresses a conclusion about an assertion - Compliance with laws NOT considered a Consulting engagement Independence Required

Question 47

What is the independence requirement for consulting services?

Answer 47

Independence is not required for consulting services.

Question 48

Describe the limitations on Prospective Financial Statements?

Answer 48

Report is restricted to specified users. Agreed-upon procedures are implemented.