Planning Activities Flashcards
What specifics does the audit “engagement letter” address
a. The objective and scope of the audit;
b. The auditor’s responsibilities;
c. Management’s responsibilities;
d. A statement about the inherent limitations of an audit;
e. A statement identifying the applicable financial reporting framework;
f. Reference to the expected content of any reports to be issued; and
g. Other matters as warranted in the auditor’s judgment.
What are the 5 matters the successor auditor should inquire of the predecessor auditor?
(1) information that might bear on the integrity of management; (2) disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters; (3) communications to those charged with governance regarding fraud and illegal acts by clients; (4) communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control; and (5) the predecessor auditor’s understanding as to the reasons for the change of auditors.
A successor auditor ordinarily should request to review the predecessor’s audit documentation relating to
The successor auditor normally reviews the predecessor’s audit documentation relating to planning, internal control, audit results, balance sheet accounts, and contingencies.
List the audit procedures that should occur during the planning phase of an audit.
- Review client records
- Inquire of client personnel
- Coordinate client assistance
- Determine if specialists are needed
- Coordinate staffing requirements.
List several circumstances that impact the extent of planning activities.
- Size and complexity of the entity
- Auditor’s experience with that entity
- Auditor’s understanding of the entity and its environment, including its internal control.
An auditor considers materiality for planning purposes in terms of the (A) SMALLEST or (B) LARGEST aggregate level of misstatements that could be material to any one of the financial statements.
A. Smallest
The amount(s) set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
performance materiality.
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
Audit Risk
Inherent risk (IR)
The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures.
Control risk (CR)
The probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls that are applicable.
Detection risk (DR)
The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditor’s substantive audit procedures (that is, an undetected material misstatement exists in a relevant assertion).
The only component risk that is specifically the auditor’s responsibility
Detection risk
The two risks that exist independently of the financial statement audit.
Inherent risk and control risk are environmental risks pertaining to the client.
Detection risk is inversely related to the assurance provided by this
substantive tests. The lower the detection risk, the more assurance needed from substantive testing.
Why are tests of control performed
Tests of controls are performed to reduce substantive testing.
What does it mean when an auditor increases the assessed level of control risk because certain control procedures were determined to be ineffective.
An increase in the assessed level of control risk means that the risk of a material misstatement occurring and not being detected has increased. To offset that increased risk, the auditor should make decisions that decrease the level of detection risk. Increasing the emphasis on tests of details would decrease detection risk.
What is the relationship between control risk and detection risk
The relationship between control risk and detection risk is inverse.If control risk is increased, detection risk must decrease to achieve the same audit risk as originally planned.
What is the audit risk model that is applicable to classes of transactions or to account balances?
Audit Risk = inherent risk x control risk x detection risk.
Define “risk of material misstatement.”
The risk that the financial statements contain one or more material misstatements prior to the audit. (Note: RMM = IR x CR)
List the variables of planned audit procedures that can be adjusted to change detection risk
- Nature
- Timing
- Extent of substantive testing.
For all audits of financial statements made in accordance with GAAS, the use of analytical procedures is required when?
Required in planning and in the overall review. They may be used but are not required as substantive tests.
AICPA Professional Standards state, “The expected effectiveness and efficiency of an analytical procedure in identifying potential misstatements depends on, among other things,
(a) nature of assertion,
(b) plausibility and predictability of the relationship,
(c) availability and reliability of data used to develop the expectation, and
(d) the precision of the expectation.”
What matters must be documented in connection with analytical procedures?
- The auditor’s expectation and the factors considered in developing it;
- The results of the comparison of the recorded amounts (or ratios) with the expectations; and
- Any additional auditing procedures performed to investigate significant differences identified by that comparison.
What is the auditor required to communicate to the audit committee or those charged with governance
Significant accounting policies, management judgments and accounting estimates, significant audit adjustments, disagreements with management, consultation with other accountants, and difficulties encountered in performing the audit.
