Engagement Planning Flashcards
Prior to fieldwork, the auditor will discuss general audit strategy with the clients mgmt. What do they agree on at this point?
They determine how much help is needed of the client’s personnel and must coordinate that help.
What monitoring should a CPA firm’s system include?
It should provide for maintenance of documentation of the various quality control policies and procedures. This includes policies like peer review, updated personnel files, file of minutes.
What level of assurance does the auditor have to provide for errors, fraud, and direct effect illegal acts?
Reasonable assurance of detecting material errors, fraud and direct effect illegal acts.
What must the successor auditor do relating to the predecessor auditor?
The successor must attempt communication with the predecessor either prior to accepting the engagement, or after the engagement has been accepted, or both. It is the successors responsibility not the predecessors.
What are the elements of a system of quality control for a CPA firm?
The elements are
- leadership responsibilities for quality within the firm,
- relevant ethical requirements,
- acceptance and continuance of client relationships and specific engagements - minimize the likelihood of becoming associated with mgmt that lacks integrity, ensure firm is competent to perform
- engagement performance - personnel have knowledge required to enable them to perform in accordance with professional standards, engagement is adequately supervised
- human resources - adequate technical training
- monitoring
What is a required inquiry in a successor auditor’s communication with the predecessor?
Includes questions regarding the predecessor’s understanding as to the reasons for the change in auditors, including matter bearing as to mgmt’s integrity, disagreements with mgmt, communications with those charged with governance on fraud and illegal acts, and communications on significant deficiencies and material weaknesses.
For the planning of a year end audit, when can substantial parts of the examination occur?
It is acceptable for it to be done at interim dates - to lessen an auditor’s seasonal workload, and procedures can be performed before the BS date.
When an auditor becomes aware of a possible client illegal act, why should they obtain an understanding of the nature of the act?
By understanding the nature of the act, the circumstances in which it occurred, and sufficient other info to evaluate the effects on FS. After evaluation, it is communicated to audit committee. The auditor will not necessarily recommend remedial actions.
What are the purposes of the quality control element on accepting or continuing a client relationship?
1 - consider integrity of client
2 - determine that the firm is competent to perform the engagement
3 - determine that the firm can comply with legal and ethical requirements
This will minimize the likelihood of associating with clients whose mgmt lacks integrity.
Why is the work performed by each assistant reviewed?
To determine whether it was adequately performed and to evaluate whether the results are consistent with the conclusions to be presented in the auditor’s report.
What is the objective of an audit of FS
It is the expression of an opinion on the FS. When sufficient competent evidence is not available, it is unlikely that an audit will be performed.
Note that clients ‘shopping for principles’ will not necessarily lead to rejection of a potential audit engagement.
When will auditors usually confirm receivables?
Will usually confirm receivables prior to year end in circumstances where internal control over receivables, not disbursement, is operating effectively. They can be performed when balances are material or immaterial. Having confirmed receivables in the preceding year does not affect this year’s decision.
When the control risk for receivables is low the auditor may be more likely to confirm receivables at an interim date.
At year end, the auditor will review significant changes in the balances - review supporting docs for new large balances occurring after interim date, and evaluate any significant changes in balances at year end.
When performing an attestation engagement, what does a CPA do?
Expresses a conclusion about the assertion on the subject matter.
What does reviewing a client’s accounting policies and procedures do?
Helps auditor to understand the client’s operations and business. It will not provide adequate info for sampling or materiality levels, or nature of reports to be rendered.
What must the understanding with the client include?
Professional standards require the following to be communicated: 1 - objectives of engagement 2- mgmt's responsibilities 3 - auditor's responsibilities 4 - limitations of the audit
What do technical standards that apply to consulting service engagements require?
1 - estimates are to be supported and clearly identified
2 - understanding of the nature of the engagement must be obtained
3 - accountant is to maintain objectivity
Note independence is not required.
What are the three conditions generally present when fraud occurs that individuals have
1 - incentive or pressure
2 - opportunity
3- ability to rationalize
How can the different types of risk be assessed
Inherent, control, and detection risk can be assessed in quantitative and nonquantitative terms such as a range from min to max or percentages.
Define fraudulent financial reporting
It involves intentional misstatements or omissions of amounts or disclosures in FS to deceive FS users. Example is mgmt improperly records as revenue the proceeds of a loan.
This is not to be confused with misappropriation of assets.
What happens with agreed upon procedures to prospective FS? Who takes responsibility?
This always results in reports with distribution restricted to the specified users - the specified user will take responsibility for the adequacy of the procedures performed, not the accountant.
Statements on standards for attestation standards are followed, NOT Statements on standards for accounting and review services.
How does sampling risk arise
Arises from the possibility that, when a test of controls or a substantive test is restricted to a sample, the auditor’s conclusions may be different from the conclusions he would reach if the procedures were applied in the same way to all items in the account balance or class of transactions.
What is detection risk
Detection risk is the risk that the auditor will not detect a material misstatement that exists in an assertion
This can be changed at the discretion of auditor. Auditors determine an appropriate level of DR based on their assessment of the risk of material misstatement - composed of IR and CR. DR arises due to the effectiveness of the auditor’s substantive procedures.
DR does not exist independently of the FS audit.
What is inherent risk
Inherent risk is the susceptibility of an assertion to a material misstatement, assuming that there are no related controls.
Exists independently of the FS audit.
What is nonsampling risk
Includes only those aspects of audit risk that are not due to sampling
What is agreed upon with the client before implementation of the audit strategy in the audit planning process?
The auditor normally wishes to observe the counting of inventory and this has to be coordinated between the client and auditor.
When are procedures relating to discovery of litigation, claims, and assessments determined?
They are determined subsequent to implementation of the audit strategy, same with the procedures relating to the discovery of pending legal matters.
Which area has a presumption to be a fraud risk?
AU316 - Revenue for improper revenue recognition is a fraud risk and analytical procedures should be applied during the overall review stage of an audit if not already performed.
