Chapter 6: Planning the Audit/ Designing Audit Plans

Question 1

Plan the audit

Answer 1

establish an understanding with the client as to the nature of the engagement. develop:

1. strategy
2. plan
3. program

Question 2

obtain understanding of client, its environment, and internal control

Answer 2

perform risk assessment procedures, including:

1. inquiries of management and others within entity
2. analytical procedures
3. observation and inspection of activities, operations, etc.
4. inquiries of others outside the company (legal counsel, valuation experts, etc.)
5. review info from external sources

Question 3

assess risks of material misstatement and design further audit procedures

Answer 3

identify and assess risks of material misstatement for account balances, classes of transactions, and disclosures, consider:
1. what can go wrong
2. the magnitude involved
3. likelihood of a material misstatement
design futher audit procedures

Question 4

perform further audit procedures

Answer 4

approaches:
1. tests of controls
2. analytical procedures
3. tests of detail of transactions and balances
audit procedures:
1. inspection
2. observation
3. inquiry
4. confirmation
5. recalculation
6. reperformance

Question 5

complete the audit

Answer 5

audit procedures:

1. search for unrecorded liabilities
2. review minutes of meetings
3. perform final analytical procedures
4. perform procedures to identify loss contingencies
5. perform review for subsequent events
6. obtain representation letter
7. evaluate audit findings

Question 6

form an opinion and issue the audit report

Answer 6

public company reporting requires reporting on internal control and on the financial statements
nonpublic company reporting ordinarily involves reporting on the financial statements

Question 7

engagement risk

Answer 7

(of auditors) is the overall risk to the CPA firm of association with a particular audit client (risk the client could potentially damage the firm’s reputation and or cause litigation)

Question 8

bad client to audit

Answer 8

(not auditable) poor reputation, integrity, internal controls
near bankruptcy, poor record keeping

Question 9

Predecessor Auditor

Answer 9

(either terminated or discharged) must attemot to get in touch with (required) ask client for permission first (refuse-drop engagement) ask about management integrity, conflicts, why left, disagreements, etc.

Question 10

management responsibility

Answer 10

1. financial statements
2. effective internal control over financial reporting
3. compliance with laws and regulations
4. providing representation letter to auditor at conclusion of audit
5. adjusting financial statements for material misstatements

Question 11

engagement letter

Answer 11

contract between client and auditor includes:

1. timing, client assistance
2. assurance per GAAS
3. arrangements with predecessor auditor
4. fees and billing arrangements (lowballing?)
5. specialists to be used
6. limitations of liability
7. other services

Question 12

understanding clients

Answer 12

1. business strategy
2. customers
3. suppliers
4. investors
5. regulators
6. other external and internal parties

Question 13

materiality

Answer 13

must plan the audit to obtain reasonable assurance of detecting misstatements that auditor believes could be large enough individually or in the aggregate to be quantitatively material to the financial statements, helps determine sample sizes and audit scope

Question 14

tolerable misstatements

Answer 14

materiality threshold disaggregated into smaller amounts for individual accounts

Question 15

lower materiality

percentage of quantity

Answer 15

more work and you have to make work more precise

Question 16

evaluation

Answer 16

used for determining opinion at the end of the audit. an auditor aggregates misstatements to determine whether there is a material misstatement of the financial statements

Question 17

responding to material misstatements

Answer 17

financial statement level risks
1. use audit staff with more experience and specialized skills
2. increased supervision of staff
3. increased emphasis on professional skepticism
4. unpredictable audit procedures
5. increase scope of audit procedures
relevant assertion level risks:
1. adjust nature, timing, and extent of audit procedures in the identified risk area

Question 18

assessing risks of misstatement due to fraud

Answer 18

an audit should be planned and performed to obtain reasonable assurance of whether the financial statements are free of material misstatements, whether caused by error or fraud

Question 19

brainstorming

Answer 19

a group discussion designed to encourage auditors to creatively assess client risks, particularly those relevant to the possible existence of fraud in the organization

Question 20

social loafing

Answer 20

not doing your fair share of the group work

Question 21

professional skepticism

Answer 21

a state of mind that is characterized by appropriate questioning and critical assessment of audit evidence and not assuming honest or dishonest management

Question 22

audit trail testing: backwards

Answer 22

going from ledger to source documents tests for existence and occurrence
overstatements of assets, revenues
vouching

Question 23

audit trail testing: forwards

Answer 23

going from source documents to ledger tests for completeness
understatements of liabilities, expenses
tracing

Question 24

PERCCV

Answer 24

Presentation and disclosure
Existence and occurrence
Rights and obligations
Completeness
Cutoff
Valuation

Question 25

Presentation and disclosure

Answer 25

accounts are described and classified in accordance with GAAP and financial statement disclosures are complete, appropriate, and clearly expressed

• -notes to the financial statements
• -related party transactions
• -subsequent events

Question 26

Existence and occurrence

Answer 26

assets, liabilities, and equity interests exist and recorded transactions and events have occurred

• -more important for assets and revenues
• -gets more at overstatements
• -vouching

Question 27

Rights and obligations

Answer 27

the company holds rights to the assets, and liabilities are the obligations of the company
–titles, deeds, lease agreements, consignments, etc.

Question 28

Completeness

Answer 28

all assets, liabilities, equity interests, and transactions that should have been recorded have been recorder

• -more important for liabilities and expenses
• -gets more at understatements
• -tracing

Question 29

Cutoff

Answer 29

transactions and events have been recorded in the correct accounting period

Question 30

Valuation, allocation and acuracy

Answer 30

all transactions, assets, liabilities, and equity interests are included in the financial statements at proper amounts

• -fair market values
• -specialists