Lec 4

Question 1

what are the steps in the prospective client acceptance

Answer 1

1. obtain and review financial info (drafts)
2. inquire of third parties (banks, lawyers, suppliers)
3. communicate with the predecessor auditor
4. consider unusual business
5. determine if firm is independent
6. determine if firm has the necessary skills and knowledge
7. determine if acceptance violates code of prof conduct

Question 2

what does it mean when considering unusual business

Answer 2

e.g. IPO (increase in litigation), client gets business from unstable country, client gets majority of business from one company

Question 3

what else should be considered besides the necessary skills and knowledge

Answer 3

should be considered if there is enough staff, evaluate if the client is auditable

Question 4

what should be looked at when considering if a client is auditable

Answer 4

natural disaster or management imposed scope limitation, not using applicable reporting framework, weak internal control, if management does not want to take responsibility

Question 5

what are some issues with 1st time audit

Answer 5

scope limitation in the income statement because of COGS and if there is a beg. balance in inventory (does not give chances of assurance)

Question 6

when is there a scope limitation in the balance sheet

Answer 6

when its a 1st time audit and the client gets audited late

Question 7

what is the engagement letter and how often should it be done

Answer 7

its a letter that forms the contract of the audit and it should be done every time (even if its a continuing client)

Question 8

what are some important things the engagement letter contains

Answer 8

• specify type of engagement
• exceptions to confidentiality rule
• audit fees

Question 9

what are managements most important responsibilities

Answer 9

• preperation of F/S
• design and implement internal controls
• F/S does not contain fraud

Question 10

What is the planning workflow

Answer 10

• perform risk assessment procedures and identify risks
• determine audit strategy
• determine planned audit approach

Question 11

why is a performance risk assessment important

Answer 11

it helps you find out which accounts are riskier and what accounts to spend more time on

Question 12

why is the audit plan important

Answer 12

help determine what resources are needed to perform the engagement

Question 13

what are the three planning documents in increasing level of complexity

Answer 13

audit strategy - most general
audit plan
audit program - list of audit procedures and when you do them - most specific

Question 14

what are some important activities in the audit planning stage

Answer 14

• assess need for specialist
• assess possibility of illegal acts
• identify related parties (will be disclosed in notes of F/S)
• conduct preliminary analytical procedures
• document audit strategy and plan

Question 15

why must we have a preliminary understanding of auditee’s business

Answer 15

• helps understand F/S risks
• helps establish overall audit strategy, plan, and program

Question 16

why are preliminary analytical procedures used for

Answer 16

• to understand client’s business and transactions
• to identify F/S accounts that are more prone to error

Question 17

what stages can the analytical procedures be done in, what can they be used for, and are they required

Answer 17

• planning stage - required - used to identify riskiest accounts
• implementation stage - optional
• conclusion stage - required - asses overall reasonableness of AUDITED F/S

Question 18

list the general analytical procedures

Answer 18

• compare current year balances to prior year
• compare current year numbers with industry numbers
• compare current year numbers with budgeted amounts
• calculate ratios to compare accounts within the year