SU 04 Audit Planning Flashcards
What factors should be considered in determining if a client should be accepted/ retained
- integrity of management
- firm competence to perform audit services
- potential independence issues
- existence of special circumstances and usual risks
What factors rated in the client evaluation form
- job risk/ complexity
- job recovery/ profitability (if hours worked will be billed for)
- client’s position as a referral source/ ties to other clients
- additional potential services to offer
- timeliness of payment
- client satisfaction
What steps happen before audit planning even begins
- determining whether or not to take the client
- communication with predecessor auditor
- communication with client’s legal counsel
- appointment by client’s audit committee
- production of engagement letter
What components are required for the engagement letter
- objective and scope of the audit
- responsible of the auditor and client management
- inherent limitations of audit and internal controls
- financial reporting framework to be referenced
- expected form and content of audit reports
Why is an engagement letter a contract that must be in writing
usually audits are high dollar value
makes the four corners rule pertinent
what is the four corners rule
everything in the contract is as written down, nothing implied
What are some main considerations for audit planning
- need for increased work if issues exist
- the appropriate nature, extent, and timing of procedures
- any significant risks to be considered
What is likely to create a significant risk
- potential for fraud
- recent & significant business developments
- complex transactions
- related party transactions
- highly subjective or non-routine transactions
Potential audit plan responses to risks
- tests of controls
- substantive procedures
what are audit tests of controls
tests that assess the controls over processes
- weak control environment requires more substantive procedures. strong control environment reduces RMM
What are audit substantive procedures
audit procedures that produce appropriate evidence (that could potentially be used in court)
How to determine which audit approach to use
Combined approach (with tests of controls and substantive procedures) is now required. cannot do just one or the other
What are the types of tests of controls
- inquiry
- inspection
- observation
-re-performance
Can inquiry ever be used on it’s own
no
What is one of the most common problems with internal controls
Management override of controls
what are the two types of substantive procedures
- tests of details (usually using sampling)
- analytical procedures (compare expected to actual)
What is vouching
Starting with the financial statements and tracing transactions backwards to records
What is tracing
starting with transaction records and tracing them forward to statements
What is the purpose of the preliminary risk assessment
Gaining an understanding of the client. includes:
- accounting and business practices
- industry and business environment
- compliance with laws and regulations
What aspects of the audit procedure does the preliminary risk assess affect
nature, timing, and extent of audit procedures
Requirements for the audit planning meeting
- required to be done pre-audit
- must have at least audit partner and manager - ideally whole team
- must be documented & notes included in audit file
- Concerns that MUST be addressed:
- Internal audit
- related parties
- fair value
- specialists
- estimates
- omitted procedures
Internal Audit audit planning considerations
Can provide evidence regarding internal controls
must assess competence and objectivity
NEVER shares responsibility with auditor
What is an auditor’s specialist
individual or organization possessing expertise in a field other than accounting or auditing. Work is used to assist the auditor in obtaining sufficient appropriate evidence
may be an internal or external specialists to an auditor’s firm
What is a management’s specialist
individual or organization possessing expertise in a field other than accounting or auditing. Work is used by the entity to assist the entity in preparing financial statements
Auditor’s specialist audit planning considerations
- must consider qualifications/ reputation of the specialist
- must not be related to client
- must document scope of work
- auditor must understand specialist’s methods
What happens if auditor’s specialist’s results are questionable
- get second specialist
if there are unresolved issues this creates a scope limitation
- ONLY a qualified or disclaimed opinion is allowed
If the second specialist finds negative results
- ONLY qualified or adverse opinion allowed
Can you reference a specialist in an unmodified audit opinion
No (limited exceptions)
can reference specialist if you issue a less than unmodified report.
A qualified report can cite what audit specialist was unable to do
How can an auditor utilize a management specialist?
can get information from management specialists but cannot split responsibilities and management specialists cannot be referenced in auditor’s report
auditor should evaluate their competence & objectivity, understand their work, and assess the appropriateness of the work as audit evidence
What is the primary issue for related party transactions
Adequate disclosure
What transaction types tend to be affected by related party existance
- borrowing
- sales
- exchanges
- loans without specific terms
Which management assertion is involved in related parties considerations
Existence
requires research to address
what is the result if questionable related-party transactions exist
- If management asserts are unsubstantiated: auditor issues a qualified or adverse opinion
- generally management can fix or reverse questionable entries to avoid the auditor issuing a negative opinion
What is estimation uncertainty
the susceptibility of an accounting estimate to an inherent lack of precision in its measurement
What is the primary goal in auditing estimates
to assure the reasonableness of the estimates
what should auditors consider in investigating estimates
- what factors were used?
- are the assumptions made reasonable ones?
- were the estimates done by qualified personnel?
- is there a review process (internal control process) in place/
What management assertions are involved in estimates
Presentation
Disclosure
How do auditors test estimates
- test the processes used to develop the estimates
- develop own estimates and compare
- review estimates after subsequent events/ transactions (after balance statement date but before report date)
What is the major concern for audits of estimates
Fair value of estimates
Hierarchy of fair value
1) observed market prices for exact item
2) observed market prices for comparable item
3) valuation models creating “fabricated” prices
Fair value audit planning considerations
- basically the same issues as estimates
- specific management representations are required
- if FV based on 3rd level hierarchy there are many inherent problems and a high RMM
Omitted Procedures Audit planning considerations
Have to decide what should be done if omitted procedures are discovered after the report date
1) create a preventative plan to avoid omissions
2) have a backup plan if omission happens
Assessment required for omitted procedures
1) Does omission affect the opinion
2) if no: determine if other procedures already performed compensate for the oversight?
3) if yes: if possible find a way to perform procedures, if not: legal counsel
Basic audit opinion types
Unmodified: all okay (no RMM)
Qualified: okay except for a given item, typically a scope limitation
Adverse: not okay
Disclaimed: no opinion offered
Scope limitation
auditor unable to complete some part on audit
audit planning to plan documentation
- overall responses selected to RMMs
- nature, timing, extent of procedures (which assertions were being assessed)
- the results of the audit procedures
- whether previous control information was used in assessing operating effectiveness of controls
Why is it important to pre-plan audit documentation
Because some information is impossible to recreate unless it is documented as it happens
When is an assumption considered significant?
if a reasonable variation materially affects the measurement of the estimate
