Final Flashcards
- AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards
Obtain reasonable assurance about whether the financial statements as a whole are free of material misstatements, whether due to error or fraud, thereby enabling the auditor to express an opinion on whether the financial statements are fairly presented in accordance with an applicable financial reporting framework
Ethical framework: AICPA Code of Professional Conduct and Rules of State Boards of Accountancy and applicable regulatory agencies that are more restrictive
Professional skepticism: trust but verify
Professional judgment: The auditor should exercise professional judgment in planning and performing an audit. Professional judgment is developed by the auditor through relevant:
Knowledge
Training
Experience
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
Risks of material misstatement consist of two components: (.A40-.48)
Inherent risk
Control risk
Detection risk relates to the nature, timing, and extent of the auditor’s procedures
- AU-C 210, Terms of Engagement
Auditor should agree upon the terms of the engagement with: management or those charged with governance.
Terms documented in engagement letter
Agreed-upon terms should include:
1) Objective and scope of audit
- Express an opinion
2) Auditor’s responsibilities
- Conduct audit in accordance with GAAS
3) Management’s responsibilities
- Financial statements
- Internal control
- Access to information and people
Before accepting an engagement . . . the auditor should request management to authorize the predecessor to respond fully to the auditor’s inquiries about matters that will assist the auditor in determining whether to accept the engagement
If the predecessor decides not to fully respond to the auditor’s inquiries, the predecessor should clearly state that the response is limited.
Ethical and professional requirements provide that both predecessor auditor and the auditor hold in confidence information obtained from each other.
Auditor may inquire about
- Integrity of management
- Disagreements with management about
Accounting
Auditing
Other significant matters
- Entity’s relationships and transactions with related parties and significant unusual transactions
- Reasons for the change in auditors
When more than one auditor is considering accepting the engagement, the predecessor is not expected to be available until an auditor has been selected by the entity
- AU-C 240, Consideration of Fraud in a Financial Statement Audit
Appendix A, Fraud Risk Factors, Know key categories
Fraudulent Financial Reporting
Misappropriation of Assets
The primary responsibility for the prevention and detection of fraud rests with: Those charged with governance of the entity or Management
Significant transactions that are outside the normal course of business for the entity or that otherwise appear to be unusual due to their timing, size, or nature.
requires a discussion among the key engagement team members, including the engagement partner, and a determination by the engagement partner of which matters are to be communicated to those team members not involved in the discussion.
The discussion should include an exchange of ideas or “brainstorming” , known external and internal factors affecting the entity, the risk of management override of controls
Fraud triangle: incentive, opportunities, rationalization
- AU-C 250, Consideration of Laws and Regulations in an Audit of Financial Statements
Direct Effect- Determine amounts and disclosures in the financial statements
Indirect effect- Noncompliance may result in fines and litigation
Management responsibility - ensures that an entity’s operations are conducted in accordance with the provisions of laws and regulations
Auditor responsibility- Obtain reasonable assurance that the financial statements are free of material misstatements, whether caused by error or fraud. Because of inherent limitations of an audit, a risk exists that some material misstatements may not be detected
Direct effect - obtain sufficient and approbate evidence. Indirect effect - perform specified procedures
REQUIREMENTS
1) Consideration of compliance with laws and regulations
2) Audit procedures for noncompliance
3) Reporting to those charged with governance of noncompliance
4) Documentation
- AU-C 315, Understanding the Entity and Its Environment
The risk assessment procedures should include the following:Inquiries of management, Analytical procedures, Observation and inspection
The auditor should perform risk assessment procedures to obtain an understanding of
- The entity’s organizational structure
- Industry, regulatory, and other external factors
- Measures used, internally and externally, to assess the entity’s financial performance
Control environment
risk assessment
control activities
monitoring
information and communication
- AU-C 320, Materiality in Planning and Performing an Audit
o Read standard, focusing on the requirements and application paragraphs .A15-.16.
No PPT
- AU-C 500, Audit Evidence
Application paragraphs .A22-A27 (reliability) and .A43-.A44 and .A51-.A64 (procedures and evidence)
NO PPT
- AU-C 505, External Confirmations
Audit evidence in the form of external confirmations received directly by the auditor from confirming parties may be more reliable than evidence generated internally by the entity because it reduces bias or manipulation that may exist with evidence generated internally by the entity.
The auditor is required to consider whether external confirmation procedures are to be performed as substantive audit procedures and is required to use external confirmation procedures for accounts receivable unless the auditor determines that the risk of material misstatement is low and that other audit procedures alone provide sufficient appropriate audit evidence
When using external confirmation procedures, the auditor should maintain control over external confirmation requests, including
1) determine the information to be confirmed
2) Selecting the appropriate confirming party
3) Designing the confirmation requests
4) Sending the requests
If management refuses to allow the auditor to perform external confirmation procedures, the auditor should
- a. Inquire about management’s reasons. some reasons include negative impact on customer relationships or belief that audit procedures provide sufficient evidence
c. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence such as
Positive confirmation request: asks the confirming party to respond directly to the auditor, confirming the accuracy of the information provided.
b. Negative confirmation request: asks the confirming party to respond only if they disagree with the information provided. If the confirming party does not respond, it is assumed that they agree with the information.
negative confirmations provide less persuasive audit evidence than positive confirmations. Therefore, the audit should not rely solely on negative confirmation requests as the substantive audit procedure to address an assessed risk of material misstatement unless all of the following conditions are present:
a. The assessed risk of material misstatement is low.
b. The population of items is composed of a large number of small account balances or transactions.
c. A combination of other substantive procedures, including the use of positive confirmations, provides sufficient appropriate audit evidence.
d. The auditor’s expectation is that recipients of the requests will be likely to report misstatements.
- AU-C 540, Auditing Accounting Estimates
Definitions .11 (accounting estimate)
Requirements .17-.18 (responsiveness to the assessed risks)
Application .A1 (examples of accounting estimates)
NO PPT
- AU-C 580, Written Representations
A written representation is a statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
Written representations do not include financial statements, the assertions therein, or supporting books and records.
Written Representations About Management’s Responsibilities:
- preparation and fair presentation of the financial statements in conformity with GAAP
- design, implementation, and maintenance of internal control
- All transactions have been recorded and are reflected in the financial statements
The Auditor Should Request Management to Provide Written Representations:
1) Fraud (.12)
2) Illegal Acts (noncompliance with laws) (.13)
3) Misstatements (uncorrected, immaterial) (.14)
4) Litigation and Claims (.15)
5) Estimates (.16)
6) Related Party Transactions (.17)
7) Subsequent Events (.18)
The date of the written representations should be as of the date of the auditor’s report on the financial statements.
If management does not provide one or more of the requested written representations (limitation of scope), the auditor should
- Discuss the matter with management
- Reevaluate the integrity of management
- Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report
- AU-C 570, Going Concern
MCQ
When performing risk assessment procedures . . ., the auditor should consider whether there are conditions or events . . . that raise substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time.
There are four categories of conditions and events:
1. Negative financial trends
2. Other indications of possible financial difficulties
3. Internal matters
4. External matters
- AU-C 700, Forming an Opinion and Reporting on Financial Statements
Form an opinion on the financial statements based on an evaluation of the audit evidence obtained
That conclusion should take into account the:
- sufficient appropriate audit evidence has been obtained
- uncorrected misstatements are material
- evaluations about financial reporting framework required
There may be cases when the financial statements, although prepared in accordance with the requirements of a fair presentation framework, do not achieve fair presentation
When this is the case:
Include additional disclosures in the financial statements beyond those specifically required by the framework
Depart from a requirement in the framework (justified departure)
Auditor’s Report - Elements
Title
Addressee
Opinion
Basis for Opinion
Responsibilities of Management
Auditor’s Responsibilities
Other Information
The auditor’s report should have a title that includes the word “independent”
- AU-C 705, Modifications to the Opinion in the Independent Auditor’s Report
Three types of modified opinions:
Qualified
Adverse
Disclaimer
Type of modified opinion depends on:
Nature of the matter (GAAP Departure or Scope Limitation)
Pervasiveness of the effects (GAAP Departure) or possible effects (Scope Limitation)
The auditor should modify the opinion when:
(GAAP Departure)
- appropriateness of the selected accounting policies
(Scope Limitation)
The auditor should express a qualified opinion when the auditor:
Has evidence
misstatements are material but not pervasive
The auditor should express an adverse opinion when the auditor:
Has evidence
misstatements are material and pervasive
The auditor should disclaim an opinion when the auditor:
Does not have evidence
Concludes that possible effects are material and pervasive
When the auditor expresses an adverse opinion or disclaims an opinion, the auditor’s report should not include a Key Audit Matters section (AU-C 701)
When the auditor disclaims an opinion, the auditor’s report should not include an Other Information section (AU-C 720)
- AU-C 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs
Emphasis-of-Matter Paragraph .07 and Other-Matter Paragraph.07 required by GAAS or included at the auditor’s discretion
When the auditor includes an emphasis-of-matter paragraph in the auditor’s report, the auditor should:
Include the paragraph in a separate section with an appropriate heading, Include in the paragraph a clear reference to the matter being emphasized, Indicate that the auditor’s opinion is not modified
If the auditor considers it necessary to communicate an other matter, the auditor should:
Include an other-matter paragraph (provided its not a key audit matter)
Do so in a paragraph in the auditor’s report with the heading “Other Matter” or other appropriate heading
If the auditor expects to include an emphasis-of-matter or other-matter paragraph, the auditor should communicate with those charged with governance regarding:
this expectation
the wording of the paragraph.
- ET section 0.300 Principles of Professional conduct
o Former ET 52, Responsibilities
o Former ET 53, The Public Interest
o Former ET 54, Integrity
o Former ET 55, Objectivity and Independence
o Former ET 56, Due Professional Care
o Former ET 57, Scope and Nature of Services
- ET section 1.210.010, Conceptual Framework for Independence (threats and safeguards)
o Adverse Interest
o Advocacy
o Familiarity
o Management Participation
o Self-Interest
o Self-Review
o Undue Influence
Quality Control (QC 10A or QM 10A). The six elements of quality control are:
- Leadership Responsibilities for Quality
- Relevant Ethical Requirements
- Client Acceptance and Continuance of Client
- Human Resources
- Engagement Performance
- Monitoring
- AU-C 550, Related Parties
MCQ Doc
