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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)

No permission to contact prior Auditor=No Engagement

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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 Detection Risk.

A

Will the auditor fail to detect a material misstatement?Auditor CAN control DRDo testing at year-endIncrease substantive testingRun more effective tests

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21
Q

Describe Inherent Risk.

A

Which transactions have a higher level of risk?

Auditor cannot control

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22
Q

Describe Detection Risk.

A

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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23
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)

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24
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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25
Q

Whose responsibility is it to FIND and PREVENT fraud?

A

It is Management’s responsibility.

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26
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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27
Q

What are the three factors that affect/influence fraud?

A

Fraud is born out of:

Rationalization
Incentive
Opportunity

(RIO)

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28
Q

What is the difference between fraud and errors?

A

Errors are unintentional- fraud is intentional.

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29
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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30
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

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31
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

32
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

33
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.

34
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

35
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)
36
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.

37
Q

Which literature governs Compilation services?

A

SSARS - Statements on Standards for Accounting and Review Services

These govern reporting for non-public entities only

38
Q

What is the independence requirement for Compilations?

A

Independence NOT required for Compilations

No Internal Control work allowed

No assurance given

39
Q

What type of assurance is provided by a Compilation?

A

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

40
Q

What type of assurance is provided by Review services?

A

Reviews provide NEGATIVE assurance.

41
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

42
Q

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

A

Must have an understanding of the client industry.

43
Q

What are attestation services?

A

CPA expresses a conclusion about an assertion - Compliance with laws

NOT considered a Consulting engagement

Independence Required

44
Q

What is the independence requirement for consulting services?

A

Independence is not required for consulting services.

45
Q

Describe the limitations on Prospective Financial Statements?

A

Report is restricted to specified users.

Agreed-upon procedures are implemented.

46
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;

47
Q

Who is on the Group Engagement Team?

A

Firm Partners; Group Engagement Partner; Audit Staff

48
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

49
Q

What is the Group Engagement Partner responsible for?

A

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

50
Q

What is the role of a Component Auditor

A

Audit a component of the entity

51
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

52
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

53
Q

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

A

Analytical Procedures performed at Group Level

54
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

55
Q

What are the General Standards?

A 
Training and Proficiency
Independence
Professional Care
Planning and Supervision (Fieldwork)
Internal Control (Fieldwork)
Evidence (Fieldwork)
Consistency (Reporting)
Disclosures (Reporting)
Opinion (Reporting)
GAAP (Reporting)
56
Q

General Standard: Training and Proficiency

A

Education and Audit Experience

57
Q

General Standard: Independence

A

In Fact and Appearance
Honest
No Direct Financial Interest
No Indirect Material Financial Interest

58
Q

General Standard: Professional Care

A
  • Technical abilities mirror those held by peers in prof
  • Follow GAAS Standards
  • Obtain a Reasonable Level of Assurance
  • Maintain Reasonable Level of Skepticism
  • Supervise Audit Staff
  • Review judgment at every level
59
Q

General Standard: Planning and Supervision

A

During Fieldwork

  • Audit should be adequately-planned and the work of any supporting staff should be supervised
60
Q

General Standard: Internal Control

A

During Fieldwork

  • Auditor must understand the entity and its internal control environment.
61
Q

General Standard: Evidence

A

During Fieldwork

-Auditor must obtain sufficient & appropriate audit evidence

62
Q

General Standard: Consistency

A

During Reporting

  • Consistency is implied. Report only refers to consistency if accounting principles have not been consistently applied period to period.
63
Q

General Standard: Disclosures

A

During Reporting

  • Adequacy is implied. Report only refers to disclosures if disclosures are NOT adequate
64
Q

General Standard: Opinion

A

During Reporting

  • Audit Opinion is based on Financial Statements as a whole
65
Q

General Standard: GAAP

A

During Reporting

  • Audit Report MUST state whether the financial statements have been prepared in accordance with US GAAP
66
Q

What are the responsibilities of the Group Engagement Team?

A
  • Develop Audit Strategy
  • Communicate with component auditors
  • Establish materiality threshold (must be lower than group materiality
  • Perform work on consolidation process
  • Evaluate audit conclusions
  • Must understand work of component auditors
  • Include: Partners, Group Engagement Partner, Staff
67
Q

What are the responsibilities of the Group Engagement Partner?

A

Group Audit Engagement: direction, supervision and performance

Audit Report

68
Q

What are the responsibilities of the Component Auditor?

A
  • Audits one “component’ of the entity
  • If significant component: due to materiality?
    • Audit the information
    • Audit procedures performed
    • Documentation showing listing of significant components and work performed
  • If Non-Significant Component
    • Analytical procedures performed at the group level
69
Q

How is Materiality measured?

A
  • Quantitative and Qualitative Measurements can be on the Transactional or Financial Statement level
  • Based on Auditor Judgement
  • As acceptable Materiality level decreases: auditor must find smaller misstatements.
70
Q

What should the Auditor due if it suspects legal proceedings could contribute to material misstatement?

A

Must contact the entity’s external legal counsel

71
Q

What is WebTrust?

A

Service developed under AICPA attestation standards, provides internet users, including businesses and internet providers assurance about electronic commerce activities.(Online Privacy, Security, Processing Integrity, Availability and Confidentiality)

72
Q

Are Assurance and Consulting services the same?

A

No. Assurance services do not include consulting services. Assurance services differ from consulting services in two ways 1) they focus on improving information rather than providing advice and 2) usually involves one party monitoring another rather than two parties engaged in common agreement.

73
Q

What is an Attest Engagement?

A

AT - a practitioner is engaged to issue or does issue an examination, review or agreed upon procedures report on subject matter or an assertion about the subject matter.

74
Q

How to develop expectations during the Audit Planning phase?

A

Five sources of information:

1) Financial Information from comparable prior periods
2) Anticipated results (budgets, forecasts)
3) Relationships among Elements of Financial Information
4) Comparable Information from the clients industry
5) Relationships btw Financial and Relevant NonFinancial Information.

75
Q

What is scanning?

A

A type of of analytical procedure using auditor judgement to identify significant or unusual items to test.

CPA AUDIT (8 decks)

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