AUD 2 - Planning

Question 1

What are the PCAOB standards that planning depends on?

Answer 1

PCAOB standards for planning state that the nature and extent of necessary planning activities depend on:

1) The size and complexity of the company
2) The auditor’s previous experience with the company

Question 2

What is the engagement partner responsible for?

Answer 2

1) Planning the audit
2) Supervising the work of engagement team members
3) Compliance with relevant auditing standards

Question 3

What is the overall audit strategy? Is it required?

Answer 3

The WRITTEN overall audit strategy (NET) is REQUIRED.

• The following are what is in the written audit strategy:

1) Nature (factors that determine the focus of the audit)
- focus on areas with major material misstatement (revenue recognition)

2) Extent (scope of the audit)
- size and complexity of the business

3) Timing (reporting objectives, audit timing, and required communications

• Strong internal control = more interim
• Weak internal control = more year-end

Question 4

Is risk assessment required?

Answer 4

Risk assessment is REQUIRED

Question 5

What is test of controls?

Answer 5

• Strong internal controls = less testing, can rely more on controls
• Weak internal controls = more testing, can’t rely on controls

Question 6

What is substantive procedures?

Answer 6

Auditor tests account balances (think of dollar balances)

• Testing dollars
• Analytical procedures

Question 7

What are assertions?

Answer 7

Assertions - Financial statements are NOT facts. They are claims and assertions, made implicitly or explicitly by management, about the recognition, measurement, presentation, and disclosure in the financial statements.

Question 8

What are the six main financial statement assertions?

Answer 8

1) Completeness
- all account balances, transactions, and disclosures that should have been recorded have been recorded and included in the financial statements

2) CutOff
- transactions have been recorded in correct (proper) accounting period

3) Valuation, Allocation, and Accuracy
- account balances, transactions, and disclosures are recorded fairly

4) Existence and Occurence
- account balances and transactions exist

5) Rights and Obligations
- the entity holds or controls the rights to assets and liabilities

6) Understandability and Classification
- Financial information is appropriately presented and described, AND disclosures are clearly expressed