Session 3

Question 1

What are the 3 phases related to an audit planning

Answer 1

1. Client acceptance and continuance
2. Preliminary engagement activities
3. Plan the audit

Question 2

What are the 3 things the accounting firm must determine before accepting a new client?

Answer 2

1. They have the capabilities to perform the engagement
2. It complies with legal and ethical requirements (e.g., independence)
3. The integrity of the client has been considered (sometimes hard to do)

Question 3

What must be determined to see if an accounting firm has the capabilities to perform an engagement for a new client (5)?

Answer 3

• Has the necessary technical skills and knowledge of relevant industry or subject matters
• Has personnel that have experience with relevant regulatory or reporting requirements
• Has sufficient personnel with necessary competence and capabilities
• Has specialists, if needed
• Is able to complete the engagement within the reporting deadline

Question 4

What are the 2 compliance requirements with legal and ethical requirement (when engaging with a new client)

Answer 4

The accounting firm:
* Is independent of the entity
* Can accept the entity without violating any applicable regulatory agency requirements or the Rules of Professional Conduct

Question 5

What are the 6 things to look for when considering the integrity of a new client?

Answer 5

• The identity and business REPUTATION of the client’s principal owners, key management, and those charged with governance
• The NATURE of the client’s operations, including its business practices
• Information concerning the ATTITUDE of the client’s principal owners, key management, and those charged with governance toward such MATTERS as internal control or aggressive interpretation of accounting standards
• Indications of an inappropriate limitation in the scope of the work
• Indications that the client might be involved in money laundering or other CRIMINAL activities
• The REASONS for the proposed appointment of the firm and nonreappointment of the previous firm

Question 6

Can you resign as an auditor?

Answer 6

Yes, but not in a way that is a lack of due care, or negligence

If you do so during the engagement phase, you can be sued, unless you’ve detected something suspicious such as fraud (the client could still make your life hard)

Question 7

When do you evaluate client retention?
What conflicts may arise (2)?

Answer 7

When the audit is near completion or after a significant event.
Conflicts regarding accounting and auditing issues, and dispute over fees

Question 8

The auditor should establish an understanding with the entity about the terms of the engagement. In doing so, 3 topics should be discussed:

Answer 8

1. The engagement letter
2. Using the work of the internal audit function
3. The role of the audit committee

Question 9

What does the engagement letter do?

Answer 9

It documents the terms of the engagement, which should include the objectives of the engagement, management’s responsibilities, the auditor’s responsibilities, and the limitations of the engagements.

Question 10

What are the 3 factors for evaluating the reliability of the internal audit function

Answer 10

1. Objectivity
2. Competence
3. Systematic and disciplined approach

Question 11

What are the 3 tasks (MUST) the members of the audit committee is responsible for?

Answer 11

• Must preapprove all audit and non-audit services provided by its auditors
• Must establish procedures to follow for complaints
• Must have authority to engage independent counsel

Only for public companies
No specific requirements for privately held companies

Question 12

What information can an auditor get from a predecessor auditor? (5)

Answer 12

• Predecessor’s understanding of why they parted ways
• Concerns regarding integrity of the entity’s management
• Disagreements with management regarding accounting and auditing principles
• Communication to those charged with governance regarding fraud or noncompliance with laws/regulations
• Communication to management and governance regarding issues requiring special attention or presenting business or audit risks (litigation or going concern issues)

Question 13

What are 4 things that should be on the engagement letter?

Answer 13

• Arrangements regarding the use of other specialists or internal auditors
• Any limitations to the auditor or to the client, regarding misrepresentations made by management or dispute resolution procedures
• Additional services provided relating to regulatory requirements
• Arrangements regarding other services (tax, consulting, assurance)