AUD 1 - Audit Engagements

Question 1

Define sufficient appropriate audit evidence as it relates to auditor’s responsibilities?

Answer 1

Auditor should obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level

• Weak internal control DOES NOT EQUAL adverse opinion - it means you need to do more NET (nature, extent, and timing)

Question 2

Define compliance with GAAS it relates to auditor’s responsibilities?

Answer 2

The auditor should not represent compliance with GAAS in the auditor’s report unless the auditor has complied with ALL GAAS relevant to the audit.

The auditor may conduct the audit in accordance with GAAS and:

1) auditing standards issued by the PCAOB
2) International Standards on Auditing (ISAs)
3) government auditing standards (GAGAS)
4) auditing standards of a specific jurisdiction or country

Question 3

Define reasonable assurance and inherent limitations of an audit?

Answer 3

• Some financial statement items are subject to an inherent level of variability because they involve judgement by management

A/R - bad debt
Inventory - obsolete
PP&E - life and salvage value
Intangible - cash flow
Impairment - warranties
Contingency - lawsuits / chargebacks

• Timeliness of financial reporting and the balance between cost and benefit - it is impracticable to address all the information that may exist

Question 4

What is the difference between fraud and error?

Answer 4

Fraud = intentional
Error = unintentional

Question 5

Define the choice of audit nonissuers (private company) have?

Answer 5

Have the choice of:

1) Financial statement audit - one opinion rendered on the fairness of financial statement

OR

2) Integrated audit - two opinions: one opinion rendered on the fairness of financial statement AND on the operating effectiveness of internal controls over financial reporting

Question 6

Define the choice of audit issuers (public company) have?

Answer 6

Only allowed:

Integrated audit - two opinions: one opinion rendered on the fairness of financial statement AND on the operating effectiveness of internal controls over financial reporting

Question 7

What is the objective of a financial statement audit?

Answer 7

1) To obtain reasonable assurance about the financial statements (no misstatement)

AND

2) To report on the financial statements and communicate as required by GAAS based on the auditor’s findings

Question 8

What is the objective of an integrated audit (internal control over financial reporting)?

Answer 8

1) Express an opinion on the effectiveness of the company’s internal control over financial reporting
2) Plan and perform the audit to obtain appropriate evidence that is sufficient to obtain reasonable assurance about whether material weaknesses exist