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AUD > Engagement Planning > Flashcards

Engagement Planning Flashcards

1
Q

Audit

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

Audit

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

Audit

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

Audit

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

Audit

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

Audit

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

Audit

How can analytical procedures be performed in audit planning?

A

The auditor can compare actual versus forecasted numbers.

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8
Q

Audit

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

Audit

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

Audit

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

Audit

What are the foundations of Generally Accepted Audit Standards (GAAS)?

A

Materiality and Audit Risk

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12
Q

Audit

What are the General Standards for auditing?

A

Training and Proficiency (Education and Audit Experience)

Independence

Due Professional Care

(TIP)

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13
Q

Audit

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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14
Q

Audit

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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15
Q

Audit

List the Standards of Field Work

A

Planning and Supervision
Internal Control
Evidence

(PIE)

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16
Q

Audit

List the Standards of Reporting

A

Consistency
Disclosures
Opinion
GAAP

(CDOG)

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17
Q

Audit

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)

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18
Q

Audit

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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19
Q

Audit

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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20
Q

Audit

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
21
Q

Audit

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

22
Q

Audit

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

23
Q

Audit

Describe Control Risk

A

Risk that internal control will not detect error or fraud

Auditor cannot control this.

24
Q

Audit

Describe Inherent Risk.

A

Which transactions have a higher level of risk?

Auditor cannot control

25
Q

Audit

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

26
Q

Audit

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)

27
Q

Audit

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

28
Q

Audit

Whose responsibility is it to FIND and PREVENT fraud?

A

It is Management’s responsibility.

29
Q

Audit

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)

30
Q

Audit

What are the three factors that affect/influence fraud?

A

Fraud is born out of:

Rationalization
Incentive
Opportunity

(RIO)

31
Q

Audit

What is the difference between fraud and errors?

A

Errors are unintentional- fraud is intentional.

32
Q

Audit

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.

33
Q

Audit

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

34
Q

Audit

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

35
Q

Audit

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

36
Q

Audit

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.

37
Q

Audit

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

38
Q

Audit

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)
39
Q

Audit

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.

40
Q

Audit

Which literature governs Compilation services?

A

SSARS - Statements on Standards for Accounting and Review Services

These govern reporting for non-public entities only

41
Q

Audit

What is the independence requirement for Compilations?

A

Independence NOT required for Compilations

No Internal Control work allowed

No assurance given

42
Q

Audit

What type of assurance is provided by a Compilation?

A

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

43
Q

Audit

What type of assurance is provided by Review services?

A

Reviews provide NEGATIVE assurance.

44
Q

Audit

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

45
Q

Audit

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

A

Must have an understanding of the client industry.

46
Q

Audit

What are attestation services?

A

CPA expresses a conclusion about an assertion - Compliance with laws

NOT considered a Consulting engagement

Independence Required

47
Q

Audit

What is the independence requirement for consulting services?

A

Independence is not required for consulting services.

48
Q

Audit

Describe the limitations on Prospective Financial Statements?

A

Report is restricted to specified users.

Agreed-upon procedures are implemented.

AUD (17 decks)

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