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Audit > Engagement Planning > Flashcards

Engagement Planning Flashcards

1
Q

What is the primary duty of an auditor?

A

Provide REASONABLE ASSURANCE financial statements not materially misstated.

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2
Q

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

A

NOT responsible for detecting theft or fraud.

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3
Q

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

A

Earlier the better for audit planning and efficiency.

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4
Q

When can audit procedures be performed at interim dates?

A

Control Risk is low.

Reviews changes in the balances at year-end.

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5
Q

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

A

If able to overcome limitations of the engagement.

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6
Q

For what does an auditor use professional skepticism?

A

To plan scope and objectives of the audit

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7
Q

How can analytical procedures be performed in audit planning?

A

Compare actual versus forecasted numbers.

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8
Q

How is audit strategy mapped out?

A

Auditor determines reporting objectives and scope of the audit.

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9
Q

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

A

Were they adequately performed? (Review the working papers)

Are the results consistent with the audit report?

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10
Q

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

A

Materiality and Audit Risk

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11
Q

What are the General Standards for auditing?

A

Training and Proficiency (Education and Audit Experience)

Independence

Due Professional Care

(TIP)

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12
Q

Describe the key components of maintaining auditor independence.

A

Auditor must be independent in fact and appearance

Honesty

No direct financial interest

No indirect material financial interest

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13
Q

Describe Due Professional Care

A 
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
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14
Q

List the Standards of Field Work

A

Planning and Supervision
Internal Control
Evidence

(PIE)

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15
Q

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

A

Review the previous financial statements

Speak to third parties

Contact predecessor auditor (with client permission)

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16
Q

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

A

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

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17
Q

List the Standards of Reporting

A

Consistency
Disclosures
Opinion
GAAP

(CDOG)

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18
Q

What should be included in an audit engagement agreement?

A

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

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19
Q

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

A

Management is responsible for financial statements and adequacy of disclosures.

Presentation & Disclosure
Existence (Tests Overstatements)
Rights & Obligations
Completeness (Tests Understatements)
Valuation & Allocation
20
Q

What is the purpose of the Audit Committee?

A

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

21
Q

How is Audit Risk calculated?

A

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

22
Q

Describe Inherent Risk.

A

Susceptibility of error assuming no related controls.

23
Q

Describe Detection Risk.

A

Risk audit procedures will lead to conclusion material error does not exist when error does exist.

24
Q

Describe Control Risk

A

Risk that internal control will not detect error or fraud

Auditor cannot control this.

25
Q

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

A

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)

26
Q

Whose responsibility is it to FIND and PREVENT fraud?

A

Management’s responsibility.

27
Q

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

A

Assess the RISK that such things will lead to material misstatements

Design 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)

28
Q

What are the three factors that affect/influence fraud?

A

Rationalization
Incentive
Opportunity

(RIO)

29
Q

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

A

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

30
Q

What red flags may indicate higher risk in an audit?

A

Management compensation tied to stock
Aggressive financial forecasting
Former auditor disagreed with Management
Records not available for audit

31
Q

What is the difference between fraud and errors?

A

Errors are unintentional- fraud is intentional.

32
Q

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

A

Can result in conclusion that IC is weak- but probably won’t identify illegal acts

33
Q

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

A

Procedures less patterned and predictable

Re-evaluates management’s application of accounting procedures

Assigns audit personnel with relevant skills in this area

34
Q

Describe the characteristics of a Fraud Risk Factor.

A

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

35
Q

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

A

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.

36
Q

What was the effect of the SOX Act of 2002?

A

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

37
Q

What is the Hierarchy of Authoritative Literature?

A
  1. Statements on Auditing Standards (SAS)
  2. Auditing Interpretations- AICPA Guides & SOPs
  3. Industry Articles (no authority)
38
Q

Which literature governs Compilation services?

A

SSARS - Statements on Standards for Accounting and Review Services

39
Q

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

A

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.

40
Q

What is the independence requirement for Compilations?

A

Independence NOT required for Compilations

No Internal Control work allowed

No assurance given

41
Q

What type of assurance is provided by Review services?

A

Reviews provide limited assurance.

42
Q

What is the independence requirement for a Review?

A

Reviews require independence.

No Internal Control work allowed
Performs analytical procedures

43
Q

What type of assurance is provided by a Compilation?

A

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

44
Q

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

A

Must have an understanding of the client industry.

45
Q

What are attestation services?

A

CPA expresses a conclusion about an assertion - Compliance with laws

NOT considered a Consulting engagement

Independence Required

46
Q

What is the independence requirement for consulting services?

A

Independence is not required for consulting services.

47
Q

Describe the limitations on Prospective Financial Statements?

A

Report is restricted to specified users.

Agreed-upon procedures are implemented.

Audit (9 decks)

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