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AUD > Engagement Planning > Flashcards

Engagement Planning Flashcards

1
Q

Who has the responsibility of preventing and detecting fraud?

A

Management has the responsibility of preventing and detecting fraud?

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2
Q

When is the best time to engage an auditor?

A

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

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3
Q

When can audit procedures be performed at interim dates?

A

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.

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4
Q

What is the purpose of the Audit Committee? what should be communicated?

A

Responsible for Hiring Auditor

Oversees Internal Control

Matters to be communicated:

  • fraud, illegal acts
  • significant matters on IC
  • significant adjustments
  • disagreements with mgt
  • serious difficulties with mgt related to the audit
  • consultation mgt had with other cpas about accounting and auditing matters
  • major issues discussed regarding initial or recurring retention of auditor

communication should be in writing (by product reports) and restricted to those charged with governance

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5
Q

what is audit risk and How is it calculated?

A

risk that an auditor unknowingly may fail to modify then opinion on financial statements that are materially misstated (the risk the auditor could render the wrong opinion)

(Inherent Risk x Control Risk )x Detection Risk

Risk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit report

Measured in both Qualitative and Quantitative

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6
Q

Describe Control Risk

A

risk the IC structure will not PDCMM on a timely basis

cannot be controlled by the auditor

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7
Q

Describe Inherent Risk.

A

the susceptibility of an assertion to a material misstatement, assuming there are no related controls

cannot be controlled by the auditor

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8
Q

Describe Detection Risk.

A

the risk that the auditor will not detect a material misstatement. it is a function of effectiveness of the procedure and the application by the auditor

inverse relationship with RMM

can be controlled by the auditor by modifying the NET of substantive procedures

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9
Q

What are the three factors that affect/influence fraud?

A

Rationalization (ability to)
Incentive/Pressure
Opportunity

(RIO)

The presence of the fraud risk factors does not guarantee that fraud has taken place

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10
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

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11
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 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)

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12
Q

what are the elements of quality control (undertaken by the cap firm)?

A 
Human resources
Engagement and continuance of the client
Leadership
Performance of engagement
Monitoring
Ethical requirements
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13
Q

What is the difference between fraud and errors?

A

Errors are unintentional- fraud is intentional.

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14
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

Current audit procedures may need to be reconsidered if red flags exist.

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15
Q

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

A

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

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16
Q

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

A

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

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17
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.

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18
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

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19
Q

What type of assurance is provided by a Compilation?

A

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

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20
Q

What type of assurance is provided by Review services?

A

Reviews provide NEGATIVE assurance.

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21
Q

What is the independence requirement for a Review?

A

Reviews require independence.

No Internal Control work allowed
Performs analytical procedures
No material indirect financial interest allowed
No immaterial direct financial interest allowed

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22
Q

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

A

Must have an understanding of the client industry.

23
Q

What is the independence requirement for consulting services?

A

Independence is not required for consulting services.

24
Q

What are the types of fraud considered in an audit?

A

fraudulent financial reporting (misstatements or omissions intended to deceive)

  • manipulation, falsification or alteration of records
  • misrepresentation or omission of events, transactions, etc.
  • intentional misapplication of accounting principles

misappropriation of assets (theft of assets)

  • embezzling receipts
  • stealing assets
  • causing an entity to pay for goods and services not received
  • using entity assets for personal use
25
Q

Describe the overview of the audit process?

A

Planning

  • establish understanding with the client
  • obtaining understanding of entity, environment and IC
  • assessing RMM

Gather and evaluate evidence

  • design and perform procedures to address RMM
  • evaluate the audit evidence

Form Opinion and Issue Report

26
Q

What is required to establish an understanding with the client?

A

engagement letter (written documentation) that describes:

  • management responsibilities
  • auditor responsibilities
  • nature, scope and limitation of services
27
Q

what is management’s responsibilities in an audit?

A
  • financial statement and application of accounting policies
  • establishing and maintaining IC
  • prevent and detect fraud
  • compliance with laws and regulations
  • making all records available
  • corrections of MM in the financials
  • representations letter (confirms mgt.’s representations at the conclusion of the audit)
28
Q

what is the auditor’s responsibility in an audit?

A
  • express an opinion of the financials
  • conduct the audit in conformity with GAAS
  • what is included in the audit:
    • understanding of entity, environment and IC
    • sufficient understanding to assess the RMM
    • design the nature, extent and timing of audit procedures
  • audit is NOT designed to provide assurance about IC or identify significant deficiencies
  • ensure that those charged with governance aware of significant deficiencies that come to auditor’s attention
29
Q

what is the audit strategy?

A 
-game plan of the audit
determine/define:
-the scope of the audit
-reporting objectives, timing of fieldwork, communications
-materiality levels
-areas of higher RMM
-material locations and balances
-plans to perform test of controls
-assign personnel
-specific industry or financial reporting developments
30
Q

what is the audit plan?

A
  • detailes set of audit programs that address specific audit objectives
  • document the nature, timing and extent of audit procedures
31
Q

what is the audit program?

A
  • designed to show the audit precedes selected achieve the audit objectives
  • evidence gathered supports the conclusions reached
32
Q

what is the audit planning documentation?

A

audit strategy, audit plan and the audit program

33
Q

How doe the auditor evaluate the RMM?

A

evaluate RMM by performing risk assessment procedures while obtaining an understanding of the entity

34
Q

what are further audit procedures?

A

test of controls - optional (depends on IC)

substantive test - required

35
Q

what will preclude an auditor from taking on an audit engagement?

A

if the auditor is not able to gather sufficient evidence to support an opinion

36
Q

what is the purpose of test of controls?

A

to determine is internal controls are operating effectively

control will PDCMM on a timely basis

RIIO (reperformance, inspection, inquire, observation)

37
Q

what are substantive tests? which are required?

A

detect material misstatements, $ misstatements

test of details of transactions and account balances

38
Q

what is a material misstatement?

A

errors and fraud which cause the financial statements to not be presented fairly in conformity with GAAP

39
Q

what is the effect of decreasing the tolerable level of misstatement?

A
  • perform auditing procedures closer to the B/S date
  • select more effective auditing procedures
  • increase the extent of a particular auditing procedure
40
Q

what does the auditor consider when making judgements about materiality?

A
  • considers the needs of a reasonable person who will rely on the financial statements
  • considers materiality in terms of the smallest aggregate level of misstatements that could be material to any one of the financial statements
41
Q

what is a tolerable misstatement?

A

the amount of misstatement we are willing to tolerate

42
Q

what is the risk of material misstatement?

A

the risk that the relevant assertions (related to balances, transactions, disclosures) contain misstatements that could be material to the financial statement when aggregated with other misstatements

43
Q

what is the relationship between RMM, DR and substantive tests?

A

increase in RMM(IR*CR), DR decreases, substantive test increases

decrease in RMM(IR*CR), DR increases, substantive test decreases

44
Q

what should be considered when continuing a client relationship?

A
  • the integrity of the client
  • determining is the firm is competent to perform the engagement
  • determining that the firm can comply with legal and ethical requirements
45
Q

what is required before accepting an engagement? what must be done?

A

communication with the predecessor auditor

must ask:

  • integrity of client management
  • any disagreements with mgt on principles, auditing procedures or other significant matters
  • predecessor’s understanding of the change in auditors
  • communications with the audit committee regarding IC, illegal acts and fraud

communication may be written or oral

46
Q

when should an auditor reject an engagement?

A
  • client unwilling to make all records available
  • mgt disregards IC
  • no sufficient evidence to support opinion
47
Q

what are the risk factors of fraud due to fraudulent financial reporting?

A

management attributes and control environment:

  • high turnover of mgt
  • strained relationship with auditors
  • overworked internal auditors
  • no support for IC
  • nonfinancial mgt involved with selecting accounting methods
  • history of violations

industry conditions

  • declining or competitive industry
  • industry with rapid changes

operating characteristics/financial stability

  • significant related party transactions
  • unusual or complex transactions
  • declining cash flows while showing growth
  • operating in tax-haven jurisdictions
  • unrealistic incentives
  • hostile takeover
  • poor financial condition
48
Q

what are the risk factors of fraud due to misappropriation of assets?

A

susceptibility of assets to misappropriation (inherent risk)

inadequate/ineffective controls

  • segregation of duties
  • background checks of personnel w/access to assets
  • recordkeeping for assets
  • authorization of transactions
  • reconciliation of assets
  • documentation of transactions
  • no requirements for mandatory vacation
  • access controls over automated records
  • mgt understanding of IT
49
Q

is the auditor responsible for detecting illegal acts?

A

mgt is responsible for detecting illegal acts

auditor is only responsible for detecting illegal acts that have a direct and material impact on the financial statements

50
Q

what is the approach of the clarity standards?

A

use a principles based approach

  • responsibilities of the audit team (competent, ethical, maintain professional skepticism, professional judgement)
  • performance of the audit (reasonable assurance)
  • reporting the results (express an opinion)
51
Q

is a new engagement letter required for a recurring audit?

A

PCAOB - yes - engagement letter every year

GAAS - no - auditor should remind client of terms and document - may written or oral, if oral - document

52
Q

what is fraud?

A

an intentional act involving the use of deception that results in a misstatement in the financial statements

53
Q

what are the factors that will not allow the detection of fraud?

A
  • concealment (sophisticated and carefully organized schemes)
  • collusion

mgt fraud is worse than employee fraud because mgt is in a position to directly or indirectly impact accouting records, financial information and internal control

AUD (10 decks)

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