Pre-engagement planning issues

Question 1

Auditor’s Objective under AU 210

Answer 1

The auditor’s objective is to accept an audit engagement involving a new or existing audit client only when the basis for the audit has been agreed upon by (1) establishing when the preconditions for an audit are present; and (2) confirming that a common understanding of the terms of the engagement exists between the auditor and management (and those charged with governance, as applicable).

Question 2

Preconditions for an Audit:

Answer 2

The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management to the premise on which an audit is conducted.

Question 3

True or False

If the preconditions are not present, the auditor should not accept the engagement; instead, the auditor should discuss the matter with management.

Answer 3

True

Question 4

True or False

If management imposes a limitation on the scope of the audit that the auditor believes would result in a disclaimer of opinion (called a limited engagement), the auditor normally should not accept the engagement. If such an entity is required by law or regulation to have an audit, the auditor is then allowed to accept the limited engagement, so as long as a disclaimer of opinion is acceptable under the applicable law or regulation.

Answer 4

True

Question 5

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

Answer 5

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

Question 6

Initial audits

Answer 6

Initial audit refers to when the prior year’s financial statements have been audited by a different auditor (referred to as the predecessor auditor).

Question 7

The auditor’s communication with the predecessor auditor may be written or verbal. Typical matters expected to be addressed include the following:

Answer 7

1) Information that might bear on the integrity of management
2) Any disagreements with management about accounting or auditing issues
3) Communications involving those charged with governance with respect to fraud and/or noncompliance with applicable laws or regulations
4) Communications involving management and those charged with governance regarding significant deficiencies in internal control
5) The predecessor’s understanding about the reasons for the entity’s change in auditors

Question 8

Recurring Audit Engagements

Answer 8

If the auditor concludes that the terms of the preceding engagement are still applicable to the current engagement, the auditor should remind management of the terms of the engagement (and document that reminder).

Question 9

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s

Answer 9

A successor auditor should communicate with the predecessor auditor about matters that will assist the successor auditor in deciding whether to accept the engagement. These would include the integrity of management, disagreements with management, and the predecessor’s understanding of the reason for the change in auditors.

Question 10

Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor’s working paper analyses relating to;

Answer 10

The successor auditor normally reviews the predecessor’s audit documentation relating to planning, internal control, audit results, balance sheet accounts, and contingencies. Thus, this is the correct answer. The successor auditor would request a review of contingency and balance sheet documentation.

Question 11

Which of the following factors most likely would cause an auditor not to accept a new audit engagement?

Answer 11

Management integrity via the control environment sets the tone of an organization and provides the foundation for all other components of internal control. An inherent limitation of an internal control structure is the possibility of management override. Thus, the lack of management integrity can impact the audit in terms of the occurrence of both employee and management errors and irregularities. If the auditor believes that management lacks integrity, the risk that material misstatements might not be discovered becomes unacceptably high. As a result, the auditor would probably decide not to accept the engagement.

Question 12

Professional standards require that the auditor establish an understanding with the client regarding the services to be performed. The understanding would generally include:

Answer 12

1) the objective of the audit;
2) management’s responsibilities with regard to the financial statements, internal control, compliance with laws and regulations, availability of records, and the management representation letter;
3) the auditor’s responsibilities for GAAS and reportable conditions;
4) a description of an audit; and

5) management’s responsibilities regarding correction of material misstatements and evaluation of immaterial adjustments.