OTHER PLANNING MATTERS

Question 1

Overall Audit Strategy

Answer 1

The overall audit strategy involves:

• a. determining the characteristics of the engagement that define its scope, such as the basis for reporting, industryspecific reporting requirements, and the locations of the entity;
• b. ascertaining the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required, such as deadlines for interim and final reporting, and key dates for expected communications with management and those charged with governance;
• c. considering the important factors that will determine the focus of the audit team’s efforts, such as determination of appropriate materiality levels, preliminary identification of areas where there may be higher risks of material misstatement, financial reporting developments, etc.; and
• d. ascertaining the nature, timing, and extent of resources necessary to perform the engagement.

Question 2

Initial Audit Planning

Answer 2

• Developing a preliminary outline for conducting the audit.
• Develop a general idea of which tests of internal controls and which substantive tests will be performed.
• Prior years’ workpapers are reviewed,
• general business and economic conditions are examined,
• interim financial statements are studied,
• scope of the engagement is discussed with the client.
• The timing of the audit is set both with the client and with audit personnel

Question 3

Detailed Audit Plan

Answer 3

The auditor must develop an audit plan for the audit in order to reduce audit risk to an acceptably low level.

The audit plan is more detailed than the audit strategy and includes the nature, extent, and timing of audit procedures to be performed by audit team members

Question 4

Audit Plan

Answer 4

The audit plan should include a description of:

• the nature, extent, and timing of planned risk assessment procedures sufficient to assess the risks of material misstatement.
• the nature, extent, and timing of planned further audit procedures at the relevant assertion level for each material class of transactions, account balance, and disclosure.
• other audit procedures to be carried out for the engagement in order to comply with GAAS.

Question 5

Considering the Work of Other Independent Auditors

Answer 5

• A CPA may rely on the work and reports of other CPAs who have examined one or more components that are part of the financial statements being audited.
• The CPA must decide whether the CPA’s participation is sufficient to be the principal auditor. In making this decision, consideration of the following must be given
  
  • Materiality of the auditor’s portion of the financial statements audited as compared to the portion audited by other auditors
  • Extent of the auditor’s knowledge of the overall financial statements
  • Importance of the components audited by the auditor to the company taken as a whole

Question 6

Work of Component Auditor.

Answer 6

The principal auditor must decide whether to accept responsibility for the work of the component auditor.

• a. If so, no mention of the component auditor is made in the opinion.
• b. If not, the work of the component auditor is mentioned and responsibility is divided

If no reference is to be made of the component auditor, the principal auditor must be satisfied as to the component auditor’s:

• a. independence,
• b. professional reputation
• c. audit examination.

No reference would usually be made when:

• a. the component auditor is an associated or correspondent CPA,
• b. the component auditor is retained by the principal CPA,
• c. the principal auditor is satisfied as to the component auditor’s work, and
• d. the portion of the financial statements examined by the component auditor is immaterial.

Question 7

Reliance on Work of Component Auditor

Answer 7

After deciding to rely on the work of the component auditor, the following should be done:

a. Discuss with the component auditor the appropriate audit procedures to be carried out.
b. Review the component auditor’s audit program and workpapers

If the principal auditor determines that it is not possible to rely on the work of the component auditor, a qualification or disclaimer of the financial statements taken as a whole would be appropriate. The reasons for the qualification or disclaimer should be stated

Question 8

Component Auditor

Answer 8

When reference is made to the work of the component auditor, the report must clearly indicate the division of responsibility by stating the magnitude of the component auditor’s examination in dollar amounts or percentages of total assets, revenues, or other measures.

The division of responsibility should also be referred to in the opinion paragraph

Reference to the report of another CPA reflects division of responsibility and is not a qualification of opinion.

Question 9

Component Auditor

Answer 9

In either case (reference or no reference to component auditor), the following procedures should be followed:

• a. Inquire of professional organizations, other CPAs, banks, and creditors as to the reputation of the other auditor.
• b. Obtain a letter of representation from the component auditor stating their independence.
• c. Ascertain that the component auditor:
  
  • knows that the component financial statements and the reports will be used by the principal CPA,
  • is familiar with GAAP and GAAS (and will conduct the audit in accordance with GAAS),
  • is familiar with SEC rules, if applicable
  • knows a review of intercompany transactions will be made by the principal auditor.

Question 10

Reliance on Work of Specialist

Answer 10

• AU-C 620 requires the auditor to reach an understanding with the specialist about the objectives and scope of the specialist’s work and the methods or assumptions used by the specialist.
• The purpose of using a specialist is to obtain sufficient appropriate evidence about items material to the financial statements of which the auditor does not have knowledge

Question 11

Reliance on Work of Specialist

Answer 11

The auditor responsibility:

• a. obtaining an understanding of the methods and assumptions used by the specialist;
• b. making appropriate tests of data provided to the specialist, taking into account the auditor’s assessment of control risk
• c. evaluating whether the specialist’s findings support the related assertions in the financial statements.

Use of findings:

• a. The CPA should accept the findings of the specialist unless the auditor’s procedures determine that the findings are unreasonable.
• b. If there is a material difference between the specialist’s findings and the assertions in the financial statements, the auditor should apply additional procedures.
• c. If the auditor is unable to resolve the matter, the auditor should obtain another opinion, if possible. If the difference cannot be resolved, the auditor should issue a qualified opinion or disclaimer.
• d. If an unmodified opinion is issued, do not mention the use of a specialist. In a qualified or adverse opinion, mention the use of a specialist only if it will help readers understand the reason of the qualification

Question 12

Engagement Letter

Answer 12

The engagement letter should contain:

• the objective of the audit-an expression of an opinion on the financial statements
• the fact that management is responsible for:
  o the financial statements,
  o establishing and maintaining effective internal control over financial reporting,
  o identifying and ensuring that the entity complies with laws and regulations,
  o adjusting the financial statements to correct material misstatements,
  o making all financial records and related information available to the auditor, and
  o providing the auditor with a letter that confirms certain representations made during the audit;
• the scope of the audit work to be performed -in accordance with GAAS
• the fact that the purpose of the audit is not to detect fraud but to enable the auditor to express an opinion as to the fairness of the financial statements
• mention that an audit includes obtaining an understanding of internal control and that the audit committee will be made aware of any discovered significant deficiencies
• additional work to be performed, such as tax, consulting, or other services (if applicable)
• any limitations or restrictions on the scope of the study
• work to be performed by the client’s staff (if applicable)
• the basis of the auditor’s fee
• the audit work schedule and estimated date of completion

Question 13

Auditor Responsibility

Answer 13

• Financial information with reasonable assurance
• Free from Material Misstatement - Due to Error or Fraud
• Express an Opinion
  
  • Prepared in accordance with Applicable Financial Reporting Framework
    
    • All Material Respects
• Appropriateness of Going Concer

Question 14

Fraud Responsibility

Answer 14

• Auditor is not responsible to detect theft or fraud
• Reasonable assurance free from material missatement

Question 15

Timing of Audit Proceedures

Answer 15

• Audit procedures can be carried out at interim dates if Control Risk is LOW
• Changes s/b reviewed at year end

Question 16

Professional Skepticism

Answer 16

Auditor uses professional skepticism:

• Plan Scope of Audit
• Plan Objectives of Audit

Question 17

Audit Plan

Answer 17

• Role and Involvement of Internal Auditors decided when planning
• Analytical procedures performed
  
  • Actual vs Forcast Data compared

Question 18

Prececessor Auditor Work

Answer 18

• Need client permission to discuss issues with predecessor auditor

The inquiries should include specific questions to management on:

1. disagreements with management as to auditing procedures and accounting principles
2. facts that might bear on the integrity of management
3. the predecessor’s understanding as to the reasons for the change of auditors.

Question 19

Use of Assistants

Answer 19

• Audit Procedures carried out by assistnats:
  
  • were they adequately performed
  • w/p need to be reviewed

Question 20

Audit Strategy

Answer 20

Audit strategy should be mapped out:

• What are reporting objectives
• What is scope of audit

Question 21

AUTHORITATIVE LITERATURE HIERARCHY

Answer 21

In Order:

1. Statements on Auditing Standards (SAS)
2. Auditing Interpretations, AICPA Guides & SOPs
3. Industry Articles (no authority)

Question 22

QUALITY CONTROL FOR CPA FIRMS

Answer 22

• Firm Leadership exhibits quality and leads by example and sets the tone for the organization
• Firms should Monitor and document that its policies and procedures are being followed
• Firms should have Relevant Ethical Requirements

Question 23

Acceptance and continuance of client engagements

Answer 23

Should continue to be evaluated for:

• Client Integrity
• Client Integrity
• Legality

Question 24

Firm Engagements

Answer 24

• Firm engagements are performed, supervised, and reviewed in accordance with professional standards and regulations
• Firm should have Competent and Ethical personnel

Question 25

Availability of Criteria

Answer 25

The criteria should be available to users in one or more of the following ways:

• Available publicly
• Available to all users through inclusion in a clear manner in the presentation of the subject matter or in the assertion
• Available to all users through inclusion in a clear manner in the practitioner’s report
• Well understood by most users, although not formally available (for example, “The distance between points A and B is twenty feet;” the criterion of distance measured in feet is considered to be well understood)
• Available only to specified parties; for example, terms of a contract or criteria issued by an industry association that are available only to those in the industry

If criteria are only available to specified parties, the practitioner’s report should be restricted to those parties who have access to the criteria

Question 26

Assertions - Account Balances

Answer 26

Assertions related to account balances:

• existence
• rights and obligations
• completeness
• valuation and allocation

Question 27

Engagement Letter

Answer 27

The agreement of the terms of the engagement should be documented in an audit engagement letter and address the following:

• The objective and scope of the audit;
• The auditor’s responsibilities;
• Management’s responsibilities;
• A statement about the inherent limitations of an audit;
• A statement identifying the applicable financial reporting framework;
• Reference to the expected content of any reports to be issued; and
• Other matters as warranted in the auditor’s judgment.