Engagement Planning 2 Flashcards
What is the difference between fraud and errors?
Errors are unintentional- fraud is intentional.
What red flags may indicate higher risk in an audit?
Management compensation tied to stockAggressive financial forecastingFormer auditor disagreed with ManagementRecords not available for auditCurrent audit procedures may need to be reconsidered if red flags exist.
Describe the characteristics of a Fraud Risk Factor.
Has been observed in similar situationsDoes NOT necessarily mean that there is a material weakness in internal controlLeads to an auditor taking action
What does an examination of internal control accomplish with respect to illegal acts?
Internal control analysis can result in the conclusion that IC is weak- but probably won’t identify illegal acts
What is the purpose of adjusting audit procedures in light of fraud risk factors identified during an audit?
Strives to make audit engagement procedures less patterned and predictableRe-evaluates management’s application of accounting proceduresFinds and assigns audit personnel with relevant skills in this area
What should be documented with respect to fraud risk factors in an audit?
Any fraud risks identified that could lead to material misstatementAudit procedures performed to assess risksNature of communication made to audit committee and company managementDisclosure to third parties regarding fraud not normally the auditor’s responsibilityFraud by management should normally be reported to the audit committee- NOT the SEC.
What was the effect of the SOX Act of 2002?
Created PCAOBDesignates Officer responsibility for internal controlMust disclose significant internal control weaknesses to auditor and audit committeeMust disclose any level of fraud discovered by employees with internal control responsibilities
What is the Hierarchy of Authoritative Literature?
- Statements on Auditing Standards (SAS)2. Auditing Interpretations- AICPA Guides & SOPs3. Industry Articles (no authority)
What quality control activities are undertaken by CPA firms with audit practices?
Firm Leadership exhibits quality and leads by example and sets the tone for the organizationFirm should Monitor and document that its policies and procedures are being followedFirm should have Relevant Ethical RequirementsAcceptance and continuance of client engagements should continue to be evaluated for client integrity- auditor competency- and legalityFirm should have competent and ethical personnelFirm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.
Which literature governs Compilation services?
SSARS - Statements on Standards for Accounting and Review ServicesThese govern reporting for non-public entities only
What is the independence requirement for Compilations?
Independence NOT required for CompilationsNo Internal Control work allowedNo assurance given
What type of assurance is provided by a Compilation?
Compilations are not an assurance service. No assurance is provided.
What type of assurance is provided by Review services?
Reviews provide NEGATIVE assurance.
What is the independence requirement for a Review?
Reviews require independence.No Internal Control work allowedPerforms analytical proceduresNo material indirect financial interest allowedNo immaterial direct financial interest allowed
For compilations and reviews- what knowledge must a service provider have?
Must have an understanding of the client industry.
