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CPA AUDIT > 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
  • Auditor determines what the reporting objectives are.
  • Auditor determines the scope of the audit.
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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)
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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

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
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19
Q

Describe Control Risk

A
  • Risk that internal control will not detect error or fraud
  • Auditor cannot control this.
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20
Q

Describe Inherent Risk.

A

Which transactions have a higher level of risk?

Auditor cannot control

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21
Q

Describe Detection Risk.

A

Will the auditor fail to detect a material misstatement?

  • Auditor CAN control
  • Do testing at year-endIncrease substantive testing
  • Run more effective tests
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22
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)
23
Q

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

A

Quantitative Measurement

  • 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
24
Q

Whose responsibility is it to FIND and PREVENT fraud?

A

It is Management’s responsibility.

25
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)
26
Q

What are the three factors that affect/influence fraud?

A

Fraud is born out of:

  • Rationalization
  • Incentive
  • Opportunity

(RIO)

27
Q

What is the difference between fraud and errors?

A

Errors are unintentional- fraud is intentional.

28
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.
29
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
30
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

31
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
32
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.
33
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
34
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)
35
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.
36
Q

Which literature governs Compilation services?

A

SSARS - Statements on Standards for Accounting and Review Services

These govern reporting for non-public entities only

37
Q

What is the independence requirement for Compilations?

A
  • Independence NOT required for Compilations
  • No Internal Control work allowed
  • No assurance given
38
Q

What type of assurance is provided by a Compilation?

A

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

39
Q

What type of assurance is provided by Review services?

A

Reviews provide NEGATIVE assurance.

40
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
41
Q

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

A

Must have an understanding of the client industry.

42
Q

What are attestation services?

A
  • CPA expresses a conclusion about an assertion - Compliance with laws
  • NOT considered a Consulting engagementIndependence Required
43
Q

What is the independence requirement for consulting services?

A

Independence is not required for consulting services.

44
Q

Describe the limitations on Prospective Financial Statements?

A
  • Report is restricted to specified users.
  • Agreed-upon procedures are implemented.
45
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;
46
Q

Who is on the Group Engagement Team?

A

Firm Partners;

Group Engagement Partner;

Audit Staff

47
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
48
Q

What is the Group Engagement Partner responsible for?

A
  • Group Audit Engagement Direction
  • Supervision
  • Performance and the Audit Report
49
Q

What is the role of a Component Auditor

A

Audit a component of the entity

50
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

51
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

52
Q

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

A

Analytical Procedures performed at Group Level

53
Q

Why does an Auditor do if they suspect legal proceedings could contribute to a Material Misstagement?

A

Contact Client external counsel through a Letter of Inquiry

CPA AUDIT (16 decks)

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