A2 Audit Flashcards
M1- Quality Control
AICPA Code of professional Conduct requires firms providing auditing, attestation, and accounting and review services to adopt a system of quality of control. Statement on Quality Control Standards (SQCS) are issued by the Auditing Standards Board to provide guidance with respect to quality control. There six interrelated elements of QC called HELPME 1. Human Resources: the firm should establish and policy and procedure (p&p) designed to provide it with reasonable assurance that it has sufficient; -competent personnel how do you know that you have competent staff ; annual performance reviews -personnel with the capabilities to do the work -commitment to ethical principles The firm must have personnel with these qualification to perform engagements in accordance to profession standards GAAS or PCAOB and applicable legal and regulatory requirements. As well as issuing reports that are appropriate for the circumstances ( what is the opinion) In addition all person must undergo background checks, all professional will participate in goal setting&annual evaluation by the manager. will be evaluate on goals agreed upon and demonstrate the skills,behavior and adherence to the firms values. 2. Engagement/client acceptance and continuance: the firm should establish p&p for the acceptance of continuance of client relationships and specific engagement designed to provide the firm with REASONABLE ASSURANCE THAT: -undertake or continue relationship with clients only when firm is competent to perform the work and capable and as the resources to perform the engagement. -can comply wit legal and ethical requirements -has considered the integrity of the client and believes the client does not lack integrity. Do an evaluation of client and business with background check, newspaper articles, industry information, networking,credit check, continual assessment of client annually and risk assessment. Make sure that our firm gets the okay from upper management before moving forward with the relationship. then find how much work you can and can not do. 3. Leadership responsibility: establish p&p designed to promote an internal culture based on recognition that quality is essential in performing engagements. The CEO, managing partners or equivalent will assume the ultimate responsibility to create p&p for the firms systems of QC and communicate via webcast , memo, adverting, email blast. will hire a Chief compliance officer (CCO) who is responsible for the entire audit practice and QC system. CCO will be supported by a manager of audit quality, who is responsible for developing, communicating, and supporting QC system, updating the Audit QC handbook via showing documentation and disseminate infor via web training or email 4. Performance of the engagement: establish p&p designed to provide the firm with REASONABLE ASSURANCE that firm can perform the engagement in accordance with profession standards via GAAS or PCAOB and applicable legal and regulatory requirements and issue reports that are appropriate in the circumstances via unmodified, qualified, adverse, disclaimer opinions Firm personnel must understand AICPA and firm rules on confidential client information and workpaper on an annually base if personnel is involved in audit and are unable to resolve and issue, they must know to involve or elevate via chain command to CCO or CEO, Chairman or managing partner. 5. Monitoring: firm should establish a monitoring process designed to provide it with reasonable assurance that the p&p relating to the system of QC are relevant, adequate and operating effectively. This will be done through : peer review, internal review, where you can select 5% of engagements for internal review and see if it is in compliance with P&P and other standard. When there are findings, firm will provide the proper training, guidance for the audit improvement 6. Ethical requirements: firm establish p&p designed to provide reasonable assurance that the firm and its personnel comply with relevant ethical requirement for independence All personnel will complete forms related to independence via disclosing all potential conflict of interest, personal investments, loans, immediate family members employment.
Elements of QC
- Personnel will receive an annual evaluation = Human resources 2. At least annual, all firm personnel (that are subject to independence requirements) will confirm independents in writing= Ethical requirements 3. A peer review or internal review will be conducted at least once every three years= monitoring 4. All new hire must undergo a background check= human resources 5. Audit partner will review the financial statements and credit rating of new client= engagement/client acceptance and continuance. 6. Engagement documents will be filed with doc control and doc control will release doc to approved personnel due to confidentiality of information= performance of engagement. 7. Chair, CEO or managing partner leads will create a video on importance of QC.= leadership responsibility
M1: MCQs: what is not true about the relationship between QC standard and GAAS professional standards
A firm failure to establish or comply with QC standards implies that the firm also failed to follow GAAS professional standards not true even though you fail to follow qc you can still have follow GAAs standards. However, you must have qc to be in compliance with GAAS.
Does the nature and extent to which a firm QC p&p depend on : size, nature of practice and cost-benefit consideration
yes; due operations and autonomy ( lee way) given to personnel and its nature of what is practice specialize in and how the cost benefit would be to do QC.
Is assigning personnel to engagement and/or complying with laws and engagement in the consideration with establishing qc
QC is established through HELPME The H is human resources; one the the area is assigning qualified and vetted personnel to engagements. Where as complying with law and reg is not a qc. it falls under Code of Professional Conduct, Do not get confused with the E engagment where you perform engagement under laws and regulations.
M2 Documentation
Document ; supports auditors opinion and not clients f/s. Documention = working papers or workpapers (wp) Exam trick: wp belong to auditors. auditors may not disclose wp without -clients permission - court order. -investigation by state board - by cpa firm attorney if client is suing cpa firm wp shows; evidence on the basis on auditors report and conclusion on achievement of overall objective and evidence that an audit was conducted in accordance to GAAS and applicable legal and regulatory requirements
Audit requirements:
overall requirement on wp: indicates accounting records = f/s audit documentation should: -plan, conduct and supervise the audit -reconcile with f/s to be in compliance with standards -accumulated evidence showing procedures performed , evidence examine and conclusion reached - use in qc review and inspections for internal and peer reviews - be a record of matter of continuing significance to future audits of same entity -assist with predessor audit documentation -used with experience auditor who was not involved to review and understand audit performed with 1. nature, extent and timely of audit 2. results of procedures performed 3. significant findings or issues arising during the audit 4. conclusion reached 5. show who performed the work and date completed 6 show who 1st reviewed the work and date of reviewed 7. abstract or copies of significant contracts or agreements. 8. documented findings 9. did auditor address any inconsistent information 10. justification of departures 11. performance and review of additional audit procedures or new conclusions after the date of the auditor reports.
Retention and completion of wp
Reporting release date on which the auditor grants client permission to use report. Document (wp) retention: SAS non issuer must retain wp 5 yrs and documention completion of audit 60 days to maker changes PCAOB: retain 7yrs due to criminal procedures and 45 documents can be revised after an adult report Nature and extent of audit documentation; the objective of detailed substantive testing is to detect material misstatements.specify quantity, type and content of audit doc. are based on auditors judgement in determining nature and extent of documentation for a specific area. the auditor should consider: - size and complexity of co. -nature of specific audit procedures -risk of material misstatement -significance of evidence -nature and extent of any exceptions id. -need to document conclusion may not be obvious -extent to which judgement was required performing work and evaluating results
Special Con contents of Wp
Permanent files; carryfwd from yr ot yr Current files include; audit plan f/s and audit reprt working tb je’s and reclass je’s letter of confirmation and rep letteri/s summary of findings Test of control; 1. controls= design i/c and effects on i/c 2. substantive: test of $ balances : cash, a/r, inventory
Significants audit findings
audit docs should include significants audit findings, action taken, and conclusion reached. - related to the selection of application and accounting principles and consistency or reason for switch from lifo to fifo. -matters that give rise to significant risks -material misstatements in f/s -cause of significant difficulty -modification of auditors opinion or the inclusion of EOM in audit report or om
Other documentation requirements
auditor often use tickmarks or symbols, indicating the work that has been performed checks : agree to ye bank bal ^= agree to deposit ticket foot : to agree to deposit ticket total a sign to agree to voucher register x: agreed to cahs balance in g/l
practice sim m1 how to crosst foot fixed asset and dep balances for accuracy
Try to match beg bal + addition - disposal = ending bal (BADE) to exhibits. The audit objective would be to test the accuracy of the FA and depr balance the testing approach; would be to select all items in population for footing.
M2 mCQ; what is of the following statements is most accurate regarding audit documentation; 1. auditor should document findings that could mod. the audit report. 2. oral explanation serve as sufficient support if explanation is documented
Correct: 1. auditor should document findings that could mod. the audit report. this is one of the purposes Incorrect 2. oral explanation serve as sufficient support if explanation is documented. oral may be used to explain or clarify information.
Auditor use working TB resembling f/s w/out footnotes to
Reclass and adjust
Reconcile and tickmark are used for
are used for the audit documentation
The audit current and permanent files would include
Current; bank recs and bank statement; attorney letters, lead schedules, working TB audit plan f/s and audit reprt working tb je’s and reclass je’s letter of confirmation and rep letteri/s Permanent files: article of incorp pension plan contract flowchart of i/c debt agreements lease agreement bond indenture stock option agreements board and committee minutes
Are workpapers the use to as the document used in the procedures that applied and the conclusion reached in an audit engagement
yes.
M3 Terms of the Engagement Letter
the engagment letter consist of the following 1. Addressee: the CEO, COO, CFO, or governance. they are going to be signing the letter 2. Objection and scope of the Audit: what is being audited at y-e b/s, statement of income, Stockholder equity, state of CF, and related notes to f/s. will accept to audit with the objecive of expressing an opinion. 3.Responsibility of the Auditors: audited will be conducted under auditing standard (GAAS) accepted in the US. Standards require we plan and perform audit to obtain REASONABLE ASSSURANCE about co. f/s are free from material misstatements. Perform procedures to obtain evidence about amounts and disclosed in the f/s. procedure involved using auditing judgement. assesement of risk whether due to fraud or error. audit also the appropriateness of accounting policies and procedures and REASONABLE OF SIGNIFANT ACCOUNTING EST. made by mgmnt. there is a unavoidble risk event with i/c. 4. Responsibility of Mangement mr dims, management of i/c, provide access on info. unrestricted access. 5. Other Relevant Information (optional): fees placed here, 6. Reporting writtent report on opinion. eOM, om or withdrawal could be done. 7. Signature
M3 MCQ: will the cpa firm involve IT specialist in the audit
Yes. there can be IT specialist used in the audit.
Is one the matters successor auditors communicate with new clients is predecessor auditors
Yes.
would management’s responsibility to correct deficiency in i/c id by auditors be a required part of the understanding between auditor and client
No. there may be a cost benefit of not doing i/c deficiency.
Before accepting a new client, would an auditor what to know management integrity
Yes.
a successor conversation with a predessor auditor should include before audit is engaged is
the predecessor knowing the reason for the change in auditors
If management has a disregard for i/s would this cause a auditor in not taking the client
Yes.
In the engagement letter would there be a statement on “ management responsibility to provided certain written representation letters to the auditors
Yes. this give the auditors understanding and documention on how the audit will be conducted.
Part of the audit planning process with client would to
find out the timing of inventory observation procedures to be performed and when can schedule time to see it. Never: will auditor meet with client about evidence gathering.
will there any specific discussion on procedures or auditors communicating with predecessor in the audit
not on procedures but the auditor can put something about commuicating with prior auditors.
If auditor is auditng and was asked to change the engagement to a review of a restricted scope and there was reasonable justification for the change. In the accountant review report what should it NOT REPORT
should be not mention of : Scope limitation, orignal engagment or aduting procedures performed.
If an audit client is requested to change the engagement from an audit to a compilation he should consider the
effort to complete the audit cost to complete the audit reason for clients request
would the factors of adequacy of accouting records and operating effectiveness of i/c influence an auditor that a client is auditable
adequacy of accounting records would but not ops. effectiveness of I/c maybe for IT expert field work
When predessor is terminated who should initiate communication about new auditors
New auditors with permission from client.
If an audit client is requested to change the engagement from an audit to a review due to scope limitation. the auditor should consider the following info in the report
A statment about the review is substantially less in scope than an audit.
If the predessor review to give new audit wp what should the new do
review the risk assessment of opening balances of f/s. can not seek legal counsel due to know law says he has to give them to you.
what would the success auditor ask the prior auditor after the accepting the audit
ask about matters to eval consistency of current and prior years financial reporting
would turnover in board be a factor in an engagement letter that has auditors auditing parent and a component
no.
Can internal auditor be used in assistance of audit by auditors
yes. but they can not make significant decisions.
Who is responsible for part of the audit: management of auditors
- obtaining an understanding of i/c: auditor must understand to lead to opinion 5. Following GAA: management follow to do f/s 6. detection of immaterial errors: management responsibe for free material errors f/s; audit job is to detect material errors. So no one is responsible 8. Provision of representation letter:auditors provides the template but management job is to sign it. management is responsible 10. compliance of laws & regs: of f/s management responsible being audited 11. Coordinating client assistance: both sides. mangagement assist with staff and audit assist with statf
M4 Planning
Audit planning with PCAOB standards consist of planning activities depending of the size and complexity of the co., previous experienceir with the co, and changes in circumstance during the audit.
auditor plan
Auditor plans the audit to the initial assessment of the risk of material misstatement. however, must be prepared to revised the audit strategy and the plan based on audit procedures.
key. engagement team members
the engagement partner and other key personnel should be involved in the audit and responsible for: -planning the audit -supervising the work -compliance with relevant audit standard Supervising the assistants; the objective is to document evidence to support the express opinion on f/s key supervising items -communicating with audit on all audit maters -informing assistant of their responsibilties -staying inform on all audit matters -reviewing assistant work -dealing with difference of opinion amongst audit team. the final resolution should be documented Audit is done through nature, extent and timing of supervision of assistance because; audit uses clients records (assertions and claims) and i/c to form basis of opinion.
Knowledge of the client’s business and industry
auditor is not required to have prior experience in client business or industry. however, once the audit begin auditors should have understanding of client business and industry. -knowledge of clients industry; helps to highlight pracitce used in industry that may effect clients f/s. The most common sources are; -AICPA accounting and audit guides -trade publications and professional trade associations -govt publications -AICPA accounting trends and technique (annual surveys of accounting practices) -knowledge of client business: tour the facilities - meet the staff -review prior year audit report -annual and permanent files -prior yr and interim f/s -BoD and stockholders minutes -communication w/ third parties -SEC filings -D&B reports -tax returns -understand co. accounting methodology -know there business development
Develop the audit strategy
overall audit strategy; written with nature ,extent and timing Nature-Factors that determine the focus of the audit= na *premlin on the evaluation of materiality, audit risk, and internal control, *material location and account bal. *areas with higher risk and material misstatement *significant accounting changes *significant business and industry develoment, legal or regulatory matter that co. is aware *management committment to design and ops of i/c Extent- define the scope of the audit based in the size and complexity of the co. extent and scope include: * from the engagement, what is the basis of reporting, reporting of currency and location of co. *industry specific *size and complexity of audit and co. *effect on iT *knowledge gain from prior experience on this co audit *use of service organization by co. *recent changes in co. ops and i/s over fin reporting *extent to evidence on effectiveness on i/c Timing: determining the audit reporting objectives, timing and required communication. *deadlines for interim and final reportin *key dates for meeting with managment and BOD *expecting type and timing of reports and communications *timing of audit team communication, including audit team meeting and review of audit work *communication with third parties ; legal, vendors and customers Strong i/c = more work can be done at interim weak i/c = more work done at year end.
Developing the audit plan written with NET
The audit plan is based on audit strategy outline on NET procedures. written audit plan with specifit audit procedure is required. Risk Assessment Procedures= Required in all f/s audits: that are used to obtain an understanding of co. environment, i/c in order to assess risk of material misstatments and determine NET of further audit procedures Further audit procedures; -test controls of i/c due understand i/c and reliable of i/c overall management is in charge of i/c so auditors with test ob checks and bal. of segregation of duties. and review the desing of i/c -test $ubstantive bal -control -sending letters to attorneys test timing of audit work -effect of IT’;how is iT used and what processes are in place.
Consideration of f/s assertions
Further test of control and $substance are performed at relevant assertion for each material account bal., transaction class, and disclosure item in the f/s. f/s are not facts but claims and assertions made explicity and implicity by management about recognition, measurement, presentation and disclosure on information in f/s There are 6 main assertion (claims) on the f/s : COVER U 1. Completeness: account bal , transactions, and disclosure that should have been recorded are recorded 2. cutOff; trans record in the proper accounting period 3. Valuation, allocation and accuracy; account bal , transactions, and disclosure record fairly and valuation a and allocation are recorded accurately. 4. Existance and occurence;account bal exist, transactio recorded and disclosed 5. Rights and obligation; entity hold control over assets and liab ar obligation 6. Understandability and classification trans have been record in right spots and clearly expressed.
Use of assertions (claims)
relevant assertion form a basis for assessing risk for the design and performance of further audit procedures examples include Assertion; inventories included in b/s physically exist Potential misstatement or risk assessment: physical bal include some amounts that don’t exist. Audit procedure: examine physical inventory
Writing Audit plan
Drafting the audit plan= required (written) sufficient planning info has been gathered, an audit plan should be drafted listing audit procedures ;NET nature= type both control and substance: perform specific procedures ( count/vouch/trace/ compare/calculate/ confirm/examine extent; scope - is it a little test or a lot of testing information; what are the specifi number of records from the specified population timing; what year or accounting period. some interim period, either the entire year or from the date of the interim fieldwork Group audit paln; different audit do different location; and audit responisbilties
List needed for the audit
In addition to the regular items we receive, we may need to get new stuff from the list to auditor. auditors will audit new stuff as well New Stuff 1. purchase investment @10% in a company. There is no signifcant influence so i would use the fv method and not equity method. Company would give auditors the Avail for sale invest documentation 2. if co security are sold to public to finance building, audit would want look at transfer agent statement with board minutes that shows sale of stock plus APIC 3. For tax purpose; Revenue sold by product line.
M4 MCQs: The audit plan can not be finalized until
auditor has obtain a sufficient understanding of i/c. through consideration that i/c has been completed
When an auditor is review co. accounting p&p in considering the audit planning matters to
get an understanding of ops and business
in developing audit procedures through ; nature, extent and timing. Would an audit want to know the extent of involvement internal auditors would have
yes; it will help with audit procedures via NET
A decrease in the amount of misstatement that an auditor could tolerate would say that
that is a lot of issue with assertions give by management and audit will have to work harder so he will perform audit procedures closer to b/s
Before applying substantive test to details in asset accounts at an interim date, the auditor should
assess the difficulty in controlling the incremental audit risk. Because he may have to harder that mean move procedures to b/s or not work harder means procedure test at interim date.
What is one the procedures that an audit would perform in the planning stage
make preliminary judgement about materiality.
If an audit plan is to sustantive test at interim date and not b/s date he is saying that
the potential increase in risk of errors that exist at b/s date will not be detected
Would an auditor obtain an understanding of the entity’s risk assessment process in the planning phase of a financial statement audit
yes. during the planning stage, an auditor wants to obtain a sufficient understanding of each of the five component of i/s and risk assessement is one of them
If an audit is engage to examine management assertions on a investment schedule what provision would he comply with
Statement of standards for attestation engagements (SSAE) it does examination, reviews and agreed upon procedurers
An audit would use which procedures to determine material misstatement
Sustantive procedure $$ testing of accounts detail and analytical procedures and not Risk assessement which do an understanding of the entity environment
Which one of the following would not have an impact on the scope of the existing audit: current reg and statutory reporting requirments prelim eval of materiality and audit risk audit knowledge gain from prior work on entity effect of iT
prelim eval of materiality and audit risk will have impact on the audit and not the scope
Which procedure would an auditor use to test clients f/s assertions at the account, trans and disclosure
substantive procedure for $$ account and trans and test of control for disclosure or control testing.
What are audit strategy and what are audit plan
Audit strategy; provide the scope of the audit, outline the reporting objectives, provide preliminary assessment of materiality and tolerable misstatement Audit planning ; NET, risk assessment
Would a cpa make a decision on whether to perform test at the interim date or wait to start of audit b/s date and whether to rely on the work of IA for audit planning
yes, interim date and b/s dates testing are use and whether to rely at what extent of ia are used in audit planning
A2 M4 Sim: What is included and excluded from audit strategy and planning
- Has management agreed to the preliminary materiality amount; EXCLUDE THIS IS DONE IN THE AUDIT PROCESS 5. Document the deadlines of the interim and final reporting; INCLUDE WOULD DEVELOP THIS AUDIT PLANNING AND STRATEGIES 9. Will the audit utilize the clients internal auditor for direct assistance: Include would what to in the planning stages to what extent will IA will be used. 10. Does the work on Deferred credits support conclusion; exclude this done with audit 11. Document the areas where there is a higher risk of material misstatement; include this is done in the Risk assessment phase when we are knowing the co. environment. 12. Was the mangement rep letter obtain; exclude done at the end of the audit 13. Document if any additional reg. reporting requirements that the entity must adhere to: include ; would want to know what is need to plan for the audit.
M6- Materiality
When the audit strategy is established, the auditor will determine materiality for the f/s as a whole, performance , classes of trans., account bal, and disclosures. All for a qualititative and quantitative judgement.
By law what is materiality in an audit
a substantial likelihood that the fact would have been viewed by the reasonable investor as having significantly altered the total mix of information available.
Needs for users
Auditors view how materiality is influenced and can altern the users perspective; Users assume: knowledge of business,economy and accounting f/s may have some levels of inherent and include uncertanty understand how materiality can affect prep of audited f/s willingness and an ability to properly analyze f/s
Factors to be considered in materiality
profession judgement quantitative and quantitative facts the materiality levels in the f/s need to be expressed as a specific amount when assesing auditor should use the smallest( amount that will hurt co.) in level of missistate that lead to materiality
