Engagement Planning

Question 1

What matters must be communicated to those charged with goverance and how should these matters be communicated?

Answer 1

Written or Orally

Disagreements with management

Illegal acts and significant errors and fraud involving senior management

Significant accounting policies adopted/changed by management

Auditor-proposed adjustments/reclassifications with a significant impact on the financials

Prior discussions with management

Problems with obtaining evidence and employee cooperation

Responsibilities of the auditor under GAAS (obtain reasonable assurance and provide an opinion)

Other information

Views of other professionals contacted by management on signficant matters

Estimates used by management

(DISAPPROVE)

Question 2

What are the objectives of a firm’s system of quality control?

Answer 2

To provide reasonable assurance that the firm and its personnel comply with professional standards and applicable regulatory and legal requirements

To ensure that the firm or engagement partners issue reports that are appropriate in the circumstances

Question 16

Planning and Supervision (GAAS)

Answer 16

The auditor must adequately plan the work and must properly supervise any assistants.

Question 28

Under what standards does a CPA firm use as the framework for establishing a system of quality control and for which type of services?

Answer 28

Statements on Quality Control Standards (SQCS), issued by ASB, for auditing, accounting and review services.

Question 29

6 Elements of Quality Control

Answer 29

Human Resources (Personnel Management)

Ethical Requirements (Independence)

Acceptance and continuance of client relationships and specific engagements

Leadership responsibilities for quality within the firm (“tone at the top”)

Monitoring

Engagement performance

(HEAL-ME)

Question 30

Do deficiencies in or noncompliance with a firm’s quality control system indicate that an engagement was not performed in accordance with the applicable professional standards?

Answer 30

NO, these deficiencies in or noncompliance with the firm’s quality control system do not, in and of themselves, indicate that an engagement was not performed in accordance with professional standards.

Question 31

In SQCS 7, what is the purpose of firms following policies and procedures before accepting new clients, engagements, or continuing its association with existing clients?

Answer 31

To ensure that the firm only associates with clients whose management have integrity.

Question 32

Before accepting an engagement to audit a new client, a CPA is required to obtain

• An understanding of the prospective client’s industry and business
• The prospective client’s signature to the engagement letter
• A preliminary understanding of the prospective client’s control environment
• The prospective client’s consent to make inquiries of the predecessor auditor, if any

Answer 32

The prospective client’s consent to make inquiries of the predecessor auditor, if any.

If the prospective client denies permission, then it is a red flag and the auditor should turn down the engagement.

Question 33

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s

• Opinion of any subsequent events occurring since the predecessor’s audit report was issued.
• Understanding as to the reasons for the change of auditors.
• Awareness of the consistency in the application of GAAP between periods.
• Evaluation of all matters of continuing accounting significance.

Answer 33

Understanding as to the reasons for the change of auditors (RID-C)

All the other answer choices are not required to be discussed before accepting an engagement.

Question 34

After accepting the engagement, what procedures does the audtior use for planning the audit?

Answer 34

Hold Basic discussions with the client on nature of the enegagement and clien’ts business and industry

Review the prior audits

Ask about recent developments since the last audit report issuance

Analyze Interim F/S (Analytical Procedures = MANDATORY)

Talk to Non-audit personnel of the accounting firm, i.e. tax prep

Decide on Staffing for the audit team

Timeline for audit procedures to be done

Outside assistance - need a specialist? Client’s internal auditor’s and how involved? (usually low risk area only)

Study the Pronouncements, accounting principles, and audit guides

Schedule with client to coordinate activities and give deadlines for submitting info, books, and records

(BRAINSTOPS)

Question 35

After the initial planning of the audit, what is the auditor required to do?

Answer 35

Perform a Risk Assessment to identify and assess risks of material misstatements at the financial statement level and at the relevant assertion level for transactions, accounts, and disclosures

Includes consideration of fraud risk factors and client’s internal control

Question 36

What is the objective of risk assessment procedures?

Answer 36

Enables the auditor:

• To obtain an understanding of the entity and its environment, including the entity’s internal control
• To identify and assess RMM, whether due to fraud or error, at the F/S or assertion levels

Question 37

What must the auditor perform after completing the risk assessment?

Answer 37

The auditor finish planning the audit by using the results of the risk assessment to identify what testing needs to be expanded or scaled down in order to reduce the DR to an acceptable level –> design the nature, timing, and extent of further audit procedures

Question 38

Can the auditor omit substantive testing from the audit plan?

Answer 38

NO, we simply modify the scope of the substantive testing in order to adjust the Detection Risk to an acceptable level. **No audit is done without including substanative tests of details. **

Question 39

What are audit procedures, how are they used, and what are the types of audit procedures?

Answer 39

Acts to be performed

Used as risk assessment procedures, tests of controls, and substantive procedures

Types of procedures are I-CORRIIA

Inquiry

Confirmation

Observation

Recalculation

Reperformance

Inspection of tangible assets

Inspection (Examination) of records or documents

Analytical Procedures (AP)

Question 40

Distinguish the objective of the audit procedures used for Risk Assessment, Tests of Controls, and Substantive testing.

Answer 40

Risk Assessment = to obtain an understanding of the entity and its environment, including its I/C, and assess RMM at the F/S and assertion levels.

Tests of Controls = test the operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertions level. Performed after auditor’s Risk Assessment presumes the controls are operating effectively or if substanative testing will not provide sufficient apporpriate audit evidence

Substantive procedures = to detect material misstatements through tests of details and analytical procedures. We never, ever perform an audit without substanative tests of details.

Question 41

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

• Inquiring of the client’s legal counsel concerning pending litigation
• Comparing the financial statements to anticipated results
• Examining computer generated exception reports to verify the effectiveness of internal control
• Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

Answer 41

Comparing the financial statements to anticipated results = high level AP

Recall “I” in BRAINSTOPS

Note the question asks about the PLANNING phase of the audit, so we do not get into substantive testing just yet. We need to gather information and “design the nature, extent, and timing of further audit procedures” (substanative testing phase) before we can do any testing for material misstatements. The objective of the Planning phase is to determine the scope of the audit based on the results of our risk assessment.

Question 42

What is the auditor required to provide to the client to ensure an understanding of the services to be rendered?

Answer 42

The auditor must establish the understanding of services to be rendered with the client through written communication. (Must be in WRITING)

The recommended form of written communication is an engagement letter. Note that the engagement letter is only RECOMMENDED, not a requirement. The engagement letter is simply a suggested format/template for the CPA to use.

Question 43

Do all practioners have to provide engagement letters to their clients to establish an understanding of services to be rendered?

Answer 43

NO, the engagement letter itself is simply a recommended form or template to use for establishing an understanding of services to be rendered.

The practioner, however, must obtain an understanding through a written communciation with the client. Written communication can be in any kind of form as long as it is in writing, i.e. e-mail, memorandum, letter, fax.

Hence, the engagement letter is simply a suggested way of fulfilling the requirement of having the communication with the client on paper.

Question 44

What should be identified in the understanding of services to be rendered to clients?

Answer 44

Confirm our understanding of services being rendered

Auditor’s Responsibility

GAAS ► Reasonable assurance

Scope ► Communicate I/C issues that come up

Management’s responsibility on I/C

Limitations due to I/C failure

**List of schedules **

Fees

“Confirm to GAS the MILF”

Question 45

What is an audit program and what is its purpose?

Answer 45

A detailed audit plan that is a step-by-step list of audit procedures

Required for every GAAS audit

Designed to ensure that the procedures will achieve specific audit objectives related to management’s assertions and support auditor’s conclusions

Gives the NTE of the procedures for the auditor to follow

NTE - Nature, Timing, and Extent

Question 46

When developing the audit program, what does the auditor take into consideration?

Answer 46

Materiality

**Results of the final assessment on RMM (IR x CR) **

Business and Industry

Question 47

What level of materiality is the auditor concerned with when planning the audit?

Answer 47

smallest aggregate level by which the financial information can be misstated without the financial statements being considered materialy misstated, which would preclude the issuance of an unqualified opinion. ► represents how _small_ of a misstatement the auditor willing to _tolerate_

NOTE - Materiality can change when the auditor makes the final assessment on the risk of material misstatement.

Question 48

What is materiality and how does it apply to obtaining reasonable assurance?

Answer 48

Materiality represents the magnitude of an ommission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person (users) relying on the information would have been changed or influenced by the omission or misstatement.

The auditor uses the preliminary materiality (smallest aggregate level) to obtain reasonable assurance for detecting misstatements that could be large enough, _individually or aggregate, to be material TO the financial statements. _

NOTE - we are NOT concerned with the materiality of the financial statement as a whole. We’re concerned with the materiality of the misstatements that could have an effect TO the financial statements.

Question 49

As a lower level of acceptable level of materiality is established, the auditor should plan more work on individual accounts to:

• Increase the tolerable mistatement in the accounts.
• Find smaller misstatements.
• Decrease the risk of assessing control risk too low
• Find larger misstatements.

Answer 49

Find smaller misstatements.

The question shows that the auditor has set the preliminary materiality because the auditor not yet done any testing on the accounts. Thus, the auditor is still in the middle of planning the audit.

Recall that the auditor uses the preliminary materiality (smallest aggregate level) to obtain reasonable assurance for detecting misstatements that could be large enough, individually or aggregate, to be material TO the financial statements.

The auditor would need to find the smaller misstatements in these accounts and aggregate them to see if they exceed the preliminary materiality then adjust it as needed. Bottom line is the auditor has to test his own preliminary materiality to prove whether it will enable him or her to obtain sufficient appropriate audit evidence. Basically, the auditor is testing the water before getting into the audit boat.

Additional notes:

• A decrease in materiality will lead to a decrease in tolerable misstatement for an account, not an increase. Tolerable misstatement is a planning concept and is related to the auditor’s preliminary estimates of materiality levels in such a way that tolerable misstatement combined for the entire audit plan, does not exceed those estimates.
• The risk of assessing control risk too low pertains to the planned reliance on specific internal control policies and procedures, not work on individual accounts.
• Larger misstatements must be discovered in any sampling plan regardless of materiality levels. (WTF does this mean???)