AUD 2 - Risk Assessment: Part 1

Question 1

Why does CPA test internal controls?

Answer 1

CPA tests internal control in order to adequately plan the “NET” audit procedures

Nature
Extent
Timing

Question 2

What is the purpose of risk assessment?

Answer 2

Identify and assess the risks of material misstatement FOR audit planning

Question 3

What are the risk assessment procedures (always required in financial statement audit)?

Answer 3

1) Obtain an understanding of the entity and its environment
2) Obtain an understanding of internal control
3) Inquire of the audit committee, management, and others about the risks of material misstatement
4) Perform analytical procedures
5) Discussion among engagement team

Question 4

What are the PCAOB standards for risk assessment?

Answer 4

PCAOB Guidance:

1) Read public information
2) Read transcripts of earnings call
3) Compensation arrangements with management
4) SEC filings

Question 5

When are analytical procedures required? What are analytical procedures?

Answer 5

Analytical procedures are required during:

1) Planning stage (Preliminary analytics)
2) Final review stage (Final analytics)

Analytical procedures are evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data

Question 6

Summarize: Are the following required?

1) Analytical procedures
2) Risk assessment procedures
3) Test of operational effectiveness of controls

Answer 6

1) Analytical procedures - Required
2) Risk assessment procedures - Required
3) Test of operational effectiveness of controls - Not required