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AUD > Engagement Planning > Flashcards

Engagement Planning Flashcards

1
Q

What is the primary duty of an auditor?

A

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

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2
Q

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

A

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.

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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

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

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4
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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5
Q

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

A

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

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6
Q

For what does an auditor use professional skepticism?

A

To plan the scope of the audit

To plan the objectives of the audit

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7
Q

How can analytical procedures be performed in audit planning?

A

The auditor can compare actual versus forecasted numbers.

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8
Q

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

A

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.

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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

How is audit strategy mapped out?

A
  • Reporting objectives
  • Scope
  • Timing
  • Nature, including evaluations of materiality, audit risk, and internal control; tolerable misstatement
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11
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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12
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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13
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 to evaluate whether engagement should be accepted (must have client permission); Make inquiries of management’s integrity
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14
Q

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

A

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

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15
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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16
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

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17
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

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18
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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19
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

20
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)
21
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.

22
Q

What is the role of the Group Engagement Team?

A

Develop Audit Strategy; Communicate with Component Auditors; Perform work on the Consolidation Process; Evaluate Audit Conclusions; Understand work of Component Auditors;

23
Q

Who is on the Group Engagement Team?

A

Firm Partners; Group Engagement Partner; Audit Staff

24
Q

Who establishes the Materiality threshold for the Component Auditor?

A

The Group Engagement Team; The Materiality threshold must be lower than the Group Materiality threshold

25
Q

What is the Group Engagement Partner responsible for?

A

Group Audit Engagement Direction - Supervision - Performance and the Audit Report

26
Q

What is the role of a Component Auditor

A

Audit a component of the entity

27
Q

What should the Group Engagement Team do if a Component Auditor audits a Significant Component due to Financial Materiality?

A

Audit the Financial Information

28
Q

What should the Group Engagement Team do if a Component Auditor audits a Significant Component due to Risk of Material Misstatement?

A

Perform Audit Procedures

29
Q

What should the Group Engagement Team do if a Component Auditor audits a Non-Significant Component?

A

Analytical Procedures performed at Group Level

30
Q

What does an Auditor do if they suspect legal proceedings could contribute to a Material Misstatement?

A

Contact Client external counsel through a Letter of Inquiry

31
Q

What are the required contents of an engagement letter?

A

1) Objective of the scope
2) Responsibilities of the auditor
3) Responsibilities of management
4) A statement of inherent risks of the audit
5) Indentification of applicable financial reporting framework
6) Reference to the expected form and content

32
Q

How often should engagement letters be provided to the audit committee?

A

Annually

33
Q

What are some guidelines for communication with predecessor auditor?

A

Required for an initial audit, though client permission is needed
1) Management integrity

34
Q

What are an auditor’s responsibilities with opening balances?

A

Obtain sufficient audit evidence - opening balances could be misstated and consider application of accounting policies.

35
Q

What must an auditor do to obtain sufficient appropriate audit evidence?

A

Read recent F/S and check for:

1) Modified opinions
2) Review predecessor’s work and audit documentation

36
Q

What is the auditor NOT required to do with the predecessor auditor before acccepting an engagement?

A
  • Get client’s signature on engagement

- Learn about client industry and business

37
Q

What must an auditor do during the planning stage?

A

1) Obtain knowledge of client business & industry
2) Develop audit strategy
3) Develop audit plan
4) Perform risk assessment procedures

38
Q

What is the engagement partner responsible for?

A

1) Planning the audit
2) Supervising the work
3) Compliance with audit standards

39
Q

How can an auditor obtain information on client industry?

A

1) AICPA accounting & audit guides
2) Trade publications & professional trade associations
3) Government publications
4) AICPA accounting trends & techniques (annual survey)

40
Q

How can an auditor obtain information on client business?

A

1) Tour client facilities
2) Review financial history of client
3) Obtain understanding of client accounting
4) Inquire of client personnel

41
Q

What audit procedures are performed in an audit?

A

1) Risk assessment procedures

2) Further audit procedures, including test of controls and substantive procedures

42
Q

What is the role of the client’s internal auditors?

A
  • They are not independent of client
  • Cannot share audit decisions or judgments
  • The higher the level of the people the internal auditors report to, the more objectivity can be assumed
  • Cannot rely on internal auditor for items with high risk of material misstatement
43
Q

What is the auditor’s responsibility in regards to internal auditors?

A
  • Obtain understanding
  • Assess competence & objectivity (prior experience, evaluations, and talk to management).
  • Supervise & review
  • Bear resposibility
44
Q

How should an auditor treat a specialist?

A

As one of their staff - assess competence & objectivity

45
Q

Which factors help assess an internal auditor’s competence?

A

1) Education
2) Professional certification
3) Experience
4) Performance evaluations
5) Audit plan
6) Audit procedures
7) Quality of audit documentation

46
Q

Which factors help assess an internal auditor’s objectivity?

A

1) Organization level of who the internal auditor reports to
2) Policies that prohibit audit of areas where internal auditor lacks independence or was recently assigned (Ex: internal auditing standards developed by the IIA).

47
Q

When should an auditor refer to a specialist’s work?

A

When the work of a specialist causes the auditor to modify the report due to a difference between the client’s and the specialist’s valuations/findings.

Do not refer to a specialist to emphasize findings or corroborate information

AUD (9 decks)

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