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A2- Engagement Acceptance Flashcards

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1
Q

M2-Engagement Quality

What are the 6 quality control elements a CPA firm needs to adopt?

A

1.Human resources
2.Engagement/client acceptance and continuance
3. Leadership responsibilities
4. Performance of the engagement
4a. Review of audit documentation and engagement reports.
5. Monitoring
6. Ethical requirements
6. Requires personnel to adhere to applicable independece rules

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2
Q

M2-Engagement Quality

The nature and extent of a CPA firms quality control policies and procedures depend on?

A
  1. Size of the firm
  2. The nature of the CPA firms practice
  3. Cost benefit consideration
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3
Q

M2-Engagement Quality

A CPA firm must perform a __________
before issuing the audited financial statement.

A

Perform a quality control review

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4
Q

M3- Documentation

What should audit documentation proof?

A

That the accounting records agrees or reconciles to the FS.

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5
Q

M3- Documentation

Why should audit documentation be prepared with enough detail?

A

So that an EXPERIENCE AUDITOR with no previous connection with the audit can understand the procedures performed and evidence obtained

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6
Q

M3- Documentation

What is the primary purpose of audit documentation?

A

To support that the audit was performed in accordance with GAAS (Generally Accepted Auditing Standards).

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7
Q

M3- Documentation

What actions are not allowed for an auditor to performed on the audit documentation after the completion date?

A

The auditor is not allowed to delete any audit documentation before the retention period. However, the auditor is allowed to add or modify the audit documentation before the retention period.

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8
Q

M3- Documentation

What is the retention period of audit work papers for an issuer and a non issuer?

A
  1. The retention period for an issuer is 7 years from the audit report date.
  2. The retention period for a non-issuer is 5 years from the audit report date.
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9
Q

M3- Documentation

What is the documentation completion date for an issuers and a non-issuer?

A
  1. An issuers 14 days after the report release date.
  2. A non-issuers is 60 days after the report release date.
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10
Q

M3- Documentation

What type of information is included in the permanent file

A
  1. Debt agreements
  2. Pension plan contracts
  3. Articles of incorporation
  4. Flowchart of the internal control
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11
Q

M4- COSO Internal Control Framework

What are the principles of effective internal control over financial reporting?

A

1.Accountability
2. Commitment to competence
3. Board independence and oversight
4. Commitments to ethics and integrity
5. External communications
6. Obtain and use information
7. Internal communication

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12
Q

M4- COSO Internal Control Framework

What are the 3 objectives of an entity?

A
  1. Reliability of financial reporting
  2. The effectiveness and efficiency of operations, and
  3. Compliance with laws and regulations.
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13
Q

M4- COSO Internal Control Framework

What are the 5 components of the COSO internal control Framework?

A
  1. Control environment (foundation of the other components. The tone at the Top)
  2. Risk assessment (What could go wrong”)
  3. Information and communication system.
  4. Control activities
  5. Monitoring
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14
Q

M4- COSO Internal Control Framework

What are the factors that the control environment component of the COSO internal Framework will include?

A
  1. Human resources policies and practices
  2. Participation of the audit committee
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15
Q

M4- COSO Internal Control Framework

What are the factors that the Monitoring component of the COSO internal Framework will include?

A
  1. Internal audit function as part of monitoring.
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16
Q

M4- COSO Internal Control Framework

The Risk assessment component of the COSO internal framework address?

A

Identifies / analyze risks, and consider fraud and control changes.

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17
Q

M4- COSO Internal Control Framework

The Control activities component of the COSO internal framework address?

A

Deployment of policies and procedures and development of control around IT. (i.e segregation of duties)

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18
Q

M4- COSO Internal Control Framework

The Information and communication component of the COSO internal framework address?

A

Internal and external communications as well as obtaining and using the information. This component is usually related to the periodic reporting on the effectiveness of controls.

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19
Q

M4- COSO Internal Control Framework

The control environment component of the COSO internal framework address?

A

Commitment to competency, accountability, and organizational structure (i.e Management philosophy and operating style help set the tone “Tone at the top”.

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20
Q

M4- COSO Internal Control Framework

What is the term Tone at the top refer to?

A

Represents the culture of an organization on doing the right thing. This is part of the control environment in the COSO Framework.

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21
Q

M4- COSO Internal Control Framework

What is the primary criteria that should be considered in designing a system of internal control?

A

The cost-benefit relationship

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22
Q

M4- COSO Internal Control Framework

What is the primary function of the monitoring component?

A

Asses the quality control of performance over time

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23
Q

M4- COSO Internal Control Framework

Which management control would improve management ability to supervise the company’s activities?

A

The use of budgets and forecast to use to identify potential problems.

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24
Q

M4- COSO Internal Control Framework

Segregation of duties (Control activity in COSO) should be applied to?

A
  1. Custody of assets
  2. Record keeping
  3. Authorization
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25
M5 - Planning What is the initial step in planning phase that the auditor most likely do:
1. Discuss the timing of the audit procedures with the client's management.
26
M5 - Planning In developing an overall audit strategy the auditor should consider?
Preliminary evaluation of materiality, audit risk, and controls.
27
M5 - Planning What are the key activities an auditor will performed during the planning phase?
1. Obtain knowledge of the client's business and industry 2. Develop an audit strategy 3. Perform risk assessment procedures 4. Determine the involvement of the client's internal auditors. 5. Make a preliminary assessment of materiality.
28
M5 - Planning Who has the primary responsibility of the audit?
The engagement partner. The Supervising senior is only in charge of the field work.
29
M5 - Planning How should a dispute in an opinion between auditors from the same engagement be treated?
1.The dispute on the opinion should be documented 2. Should be consulted with the engagement partner.
30
M5 - Planning What are the primary objectives of the audit strategy?
1. Provide a preliminary assessment of materiality and tolerable misstatement 2. Provide scope of the audit 3. Outline reporting objectives
31
M5 - Planning What is the required documentation to be documented in an audit in accordance with GAAS?
An audit plan along with the documentation of the nature, timing and extent of risk assessment procedures.
32
M5 - Planning What are the 6 financial statement assertions?
1. Completeness 2. Cutoff 3. Valuation, allocation, and accuracy 4. Existence and occurrence 5. Rights and obligations 6. Understandability of presentation and classification
33
M5 - Planning What would happen if an auditor performs interim procedures instead of year end procedures?
The incremental audit risk will increase
34
M5 - Planning What is the primary objective of the audit plan
1. Establishing audit objectives that relate primarily to the financial statements assertions.
35
M4- COSO Internal Framework What is the purpose of internal control?
1. Establishing to provide reasonable assurance 2. Affected by people and their actions 3. Adaptable to the structure of the entity 4. Provides support to the achievements of goals for operations, reporting and compliance.
36
M6- Using the work of others Can an external auditor allow the internal auditor make professional judgement calls in an audit?
No that is the responsibility of the external auditor. Internal auditor are not considered to be independent even if they report to audit committee or the BOD.
37
M6- Using the work of others What is the most common circumstance that an external auditor will use the work of the internal auditor?
In procedures determine by the external auditor that require little or no subjectively evaluated audit evidence and does not involve in professional judgement calls.
38
M6- Using the work of others When using the work of the internal auditor the external auditor procedures may be affected in the nature, timing and extend of audit procedures related to?
1.Obtaining an understanding of the system of internal control. 2. Assessing the risk of material misstatement 3. Evidence obtain through substantive procedures
39
M6- Using the work of others How would an external auditor assess the competency of the internal audit function?
1.By reviewing the audit plan and auditing procedures 2. Assessing the quality of audit documentation
40
M6- Using the work of others According to GAAS who will be considered an specialist?
A specialist is a person who has skills in a field other than accounting or auditing (ie. actuaries, appraisers, attorneys, or engineers) they may or may not be directly employed by a CPA firm.
41
M6- Using the work of others What are the 2 characteristics that the internal audit function must have in order for the independent auditor use their work?
1. The internal auditor must have objectivity (They only report to the audit committee or the BOD) 2. The internal auditor must be competent.
42
M7- Materiality What are the factors used when determining materiality for the financial statements taken as whole.
1. Quantitative and qualitative factors are considered 2. Materiality is calculated based on the smallest level of misstatement for any one financial statements. 3. Professional judgement is used when assessing materiality.
43
M7- Materiality When determining materiality the auditor determines the level of materiality for?
1.Certain classes of transactions 2. Financial statements as a whole 3. Performance materiality
44
M7- Materiality What would be a good starting point to determine a preliminary materiality?
The prior years financial statements.
45
M7- Materiality When determining a tolerable misstatement threshold and auditor should?
Take into account the amount of misstatements that were accumulated in prior periods.
46
M7- Materiality When making a preliminary assessment of materiality in a group audit the group auditor should?
1. Determine the materiality for the component auditor 2. Develop a threshold at which anything above it will be consider trivial to the group financial statements. 3. Determined materiality levels for specific classes of transactions, balances or disclosures at the group level.
47
M8- Audit Risk Why Inherent risk and controls risk is different from detection risk ?
Inherent and control risk exist independently of the audit of FS. While Detection risk can be changed at the auditors discretion.
48
M8- Audit Risk What is the formula for Audit risk?
Audit Risk = Risk of material misstatement * Detection risk Risk of material misstatement = Inherent risk * Controls risk Inherent risk = The risk of material misstatement without considering internal controls Control risk = The risk that a material misstatement will not be prevented or detected by the the Company’s internal controls.
49
M8- Audit Risk What are the components of risk of material misstatement?
Inherent risk * Control Risk
50
M8- Audit Risk How is audit risk recognized in the auditors report?
By including the paragraph that the auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.
51
M8- Audit Risk What type misstatement exist?
1. Factual misstatements 2. Judgmental misstatements (i.e. review of management estimates) 3. Projected misstatements
52
M8- Audit Risk What is inherent risk?
The susceptibility of materially misstated assuming there are no related internal controls, policies, or procedures in place
53
M8- Audit Risk What is control risk?
The risk that a material misstatement will not be prevented or detected on a timely basis by the client's system of internal control.
54
M8- Audit Risk What is the relationship between detection risk and assurance obtained from substantive testing?
They are inversely related: Lower detection risk = Higher evidence obtained from substantive procedures Higher detection risk = Less evidence obtained from substantive procedures
55
M8- Audit Risk What is the relationship between fraud risk and detection risk
They are inversely related: Higher fraud risk = Lower detection risk Lowe fraud risk = higher detection risk
56
M8- Audit Risk What are the 3 common actions that an auditor will do when the acceptable level of detection risk decreases?
1. Obtain more substantive evidence 2. Change the timing of the substantive procedures from interim to year end. 3. Increase the sample size.
57
M8- Audit Risk What is the relationship between control risk and substantive testing?
They are directly related: Control risk is low = Less substantive evidence is required (Reduce sample size) Control risk is high = More substantive evidence is required (Increase sample size)
58
M8- Audit Risk What is the relationship between Risk of material misstatement and detection risk?
They are inversely related: RMM High = Lower detection risk RMM Low = Higher detection risk
59
M9- Fraud Risk What factors would heighten the auditors concern about the risk of fraudulent financial reporting?
1. Complex organization structure involving unusual lines of authority. 2. Inability to generate cash flows from operations while reporting substantial earnings growth. 3. Management is being pressured to maintain high earning trend by the use of aggressive accounting practices. 4. A high turnover of senior management
60
M9- Fraud Risk What type of fraud risk exists?
1. Misappropriation of assets. 2. Fraudulent financial reporting.
61
M9- Fraud Risk What factors would heighten the auditors concern about the risk of misappropriation of assets?
1. A lack of independent checks
62
M9- Fraud Risk What are the 3 fraud risk factors?
1. Incentive and pressure 2. Rationalization and attitude 3. Opportunity
63
M9- Fraud Risk At what stage of the audit should the auditor discussed the 3 fraud risk factors?
1. At the planning stage the auditors are required to discuss with management the potential material misstatements due to the fraud.
64
M9- Fraud Risk What type of attitude should and auditor maintain during an audit?
An attitude of professional skepticism (Questioning mind and critical assessment of evidence)
65
M9- Fraud Risk What are some examples of fraud risk due to incentive and pressure?

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