Engagement Planning Flashcards by Pankaj Mallik

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

Engagement Planning

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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.

Engagement Planning

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

Engagement Planning

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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.

Engagement Planning

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

Engagement Planning

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To plan the scope of the audit

To plan the objectives of the audit

Engagement Planning

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The auditor can compare actual versus forecasted numbers.

Engagement Planning

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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.

Engagement Planning

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Were they adequately performed? (Review the working papers)

Are the results consistent with the audit report?

Engagement Planning

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Auditor determines what the reporting objectives are.

Auditor determines the scope of the audit.

Engagement Planning

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Auditor must be independent in fact and appearance

Honesty

No direct financial interest

No indirect material financial interest

Engagement Planning

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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

Engagement Planning

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Review the previous financial statements

Speak to third parties

Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)

Engagement Planning

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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

Engagement Planning

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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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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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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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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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Risk that internal control will not detect error or fraud

Auditor cannot control this.

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Which transactions have a higher level of risk?

Auditor cannot control

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Will the auditor fail to detect a material misstatement?

Auditor CAN control

Do testing at year-end
Increase substantive testing
Run more effective tests

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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)

Engagement Planning

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

Engagement Planning

It is Management’s responsibility.

Engagement Planning

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)

Engagement Planning

Fraud is born out of: Rationalization Incentive Opportunity (RIO)

Engagement Planning

Errors are unintentional- fraud is intentional.

Engagement Planning

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.

Engagement Planning

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

Engagement Planning

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

Engagement Planning

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

Engagement Planning

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.

Engagement Planning

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

Engagement Planning

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

Engagement Planning

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.

Engagement Planning

SSARS - Statements on Standards for Accounting and Review Services These govern reporting for non-public entities only

Engagement Planning

Independence NOT required for Compilations No Internal Control work allowed No assurance given

Engagement Planning

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

Engagement Planning

Reviews provide NEGATIVE assurance.

Engagement Planning

Reviews require independence. No Internal Control work allowed Performs analytical procedures No material indirect financial interest allowed No immaterial direct financial interest allowed

Engagement Planning

Must have an understanding of the client industry.

Engagement Planning

CPA expresses a conclusion about an assertion - Compliance with laws NOT considered a Consulting engagement Independence Required

Engagement Planning

Independence is not required for consulting services.

Engagement Planning

Report is restricted to specified users. Agreed-upon procedures are implemented.

Engagement Planning

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

Engagement Planning

Firm Partners; Group Engagement Partner; Audit Staff

Engagement Planning

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

Engagement Planning

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

Engagement Planning

Audit a component of the entity

Engagement Planning

Audit the Financial Information

Engagement Planning

Perform Audit Procedures

Engagement Planning

Analytical Procedures performed at Group Level

Engagement Planning

Contact Client external counsel through a Letter of Inquiry

Engagement Planning