Engagement Planning Flashcards
What matters must be communicated to those charged with goverance and how should these matters be communicated?
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)
What are the objectives of a firm’s system of quality control?
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
Planning and Supervision (GAAS)
The auditor must adequately plan the work and must properly supervise any assistants.
Under what standards does a CPA firm use as the framework for establishing a system of quality control and for which type of services?
Statements on Quality Control Standards (SQCS), issued by ASB, for auditing, accounting and review services.
6 Elements of Quality Control
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)
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?
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.
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?
To ensure that the firm only associates with clients whose management have integrity.
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
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.
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.
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.
After accepting the engagement, what procedures does the audtior use for planning the audit?
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)
After the initial planning of the audit, what is the auditor required to do?
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
What is the objective of risk assessment procedures?
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
What must the auditor perform after completing the risk assessment?
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
Can the auditor omit substantive testing from the audit plan?
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. **
What are audit procedures, how are they used, and what are the types of audit procedures?
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)
Distinguish the objective of the audit procedures used for Risk Assessment, Tests of Controls, and Substantive testing.
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.
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.
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.
What is the auditor required to provide to the client to ensure an understanding of the services to be rendered?
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.
Do all practioners have to provide engagement letters to their clients to establish an understanding of services to be rendered?
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.
What should be identified in the understanding of services to be rendered to clients?
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”
What is an audit program and what is its purpose?
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
When developing the audit program, what does the auditor take into consideration?
Materiality
**Results of the final assessment on RMM (IR x CR) **
Business and Industry
What level of materiality is the auditor concerned with when planning the audit?
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.
What is materiality and how does it apply to obtaining reasonable assurance?
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.
