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Audit > SU 04 Audit Planning > Flashcards

SU 04 Audit Planning Flashcards

1
Q

What factors should be considered in determining if a client should be accepted/ retained

A
  • integrity of management
  • firm competence to perform audit services
  • potential independence issues
  • existence of special circumstances and usual risks
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2
Q

What factors rated in the client evaluation form

A
  • 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
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3
Q

What steps happen before audit planning even begins

A
  • 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
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4
Q

What components are required for the engagement letter

A
  • 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
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5
Q

Why is an engagement letter a contract that must be in writing

A

usually audits are high dollar value

makes the four corners rule pertinent

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6
Q

what is the four corners rule

A

everything in the contract is as written down, nothing implied

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7
Q

What are some main considerations for audit planning

A
  • need for increased work if issues exist
  • the appropriate nature, extent, and timing of procedures
  • any significant risks to be considered
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8
Q

What is likely to create a significant risk

A
  • potential for fraud
  • recent & significant business developments
  • complex transactions
  • related party transactions
  • highly subjective or non-routine transactions
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9
Q

Potential audit plan responses to risks

A
  • tests of controls
  • substantive procedures
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10
Q

what are audit tests of controls

A

tests that assess the controls over processes
- weak control environment requires more substantive procedures. strong control environment reduces RMM

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11
Q

What are audit substantive procedures

A

audit procedures that produce appropriate evidence (that could potentially be used in court)

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12
Q

How to determine which audit approach to use

A

Combined approach (with tests of controls and substantive procedures) is now required. cannot do just one or the other

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13
Q

What are the types of tests of controls

A
  • inquiry
  • inspection
  • observation
    -re-performance
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14
Q

Can inquiry ever be used on it’s own

A

no

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15
Q

What is one of the most common problems with internal controls

A

Management override of controls

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16
Q

what are the two types of substantive procedures

A
  • tests of details (usually using sampling)
  • analytical procedures (compare expected to actual)
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17
Q

What is vouching

A

Starting with the financial statements and tracing transactions backwards to records

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18
Q

What is tracing

A

starting with transaction records and tracing them forward to statements

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19
Q

What is the purpose of the preliminary risk assessment

A

Gaining an understanding of the client. includes:
- accounting and business practices
- industry and business environment
- compliance with laws and regulations

20
Q

What aspects of the audit procedure does the preliminary risk assess affect

A

nature, timing, and extent of audit procedures

21
Q

Requirements for the audit planning meeting

A
  • 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
22
Q

Internal Audit audit planning considerations

A

Can provide evidence regarding internal controls

must assess competence and objectivity

NEVER shares responsibility with auditor

23
Q

What is an auditor’s specialist

A

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

24
Q

What is a management’s specialist

A

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

25
Q

Auditor’s specialist audit planning considerations

A
  • must consider qualifications/ reputation of the specialist
  • must not be related to client
  • must document scope of work
  • auditor must understand specialist’s methods
26
Q

What happens if auditor’s specialist’s results are questionable

A
  • 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

27
Q

Can you reference a specialist in an unmodified audit opinion

A

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

28
Q

How can an auditor utilize a management specialist?

A

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

29
Q

What is the primary issue for related party transactions

A

Adequate disclosure

30
Q

What transaction types tend to be affected by related party existance

A
  • borrowing
  • sales
  • exchanges
  • loans without specific terms
31
Q

Which management assertion is involved in related parties considerations

A

Existence

requires research to address

32
Q

what is the result if questionable related-party transactions exist

A
  • 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
33
Q

What is estimation uncertainty

A

the susceptibility of an accounting estimate to an inherent lack of precision in its measurement

34
Q

What is the primary goal in auditing estimates

A

to assure the reasonableness of the estimates

35
Q

what should auditors consider in investigating estimates

A
  • 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/
36
Q

What management assertions are involved in estimates

A

Presentation
Disclosure

37
Q

How do auditors test estimates

A
  • 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)
38
Q

What is the major concern for audits of estimates

A

Fair value of estimates

39
Q

Hierarchy of fair value

A

1) observed market prices for exact item
2) observed market prices for comparable item
3) valuation models creating “fabricated” prices

40
Q

Fair value audit planning considerations

A
  • 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
41
Q

Omitted Procedures Audit planning considerations

A

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

42
Q

Assessment required for omitted procedures

A

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

43
Q

Basic audit opinion types

A

Unmodified: all okay (no RMM)
Qualified: okay except for a given item, typically a scope limitation
Adverse: not okay
Disclaimed: no opinion offered

44
Q

Scope limitation

A

auditor unable to complete some part on audit

45
Q

audit planning to plan documentation

A
  • 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
46
Q

Why is it important to pre-plan audit documentation

A

Because some information is impossible to recreate unless it is documented as it happens

47
Q

When is an assumption considered significant?

A

if a reasonable variation materially affects the measurement of the estimate

Audit (13 decks)

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