Audit 3: Engagement acceptance & understanding the assignment

Question 1

What does auditor need to assess before accepting the audit?

Answer 1

Ability to meet reporting deadlines

Ability to staff engagement

Independence Integrity of client mgmt

Group Audit work to be done

Question 2

Required Contents of Engagement letter

Answer 2

The Objective and Scope of the Audit

The Responsibilities of the Auditor,

The Responsibilities of Mgmt

Stmt about inherent limitations of audit

ID of applicable framework

Reference form and content of reports

Question 3

For Recurring audits when do changes need to be made

Answer 3

Significant changes in ownership or nature or size of business

Changes in mgmt, legal, reporting framework etc

Question 4

PCAOB Nature, Extent and Timing (NET) rules are based on… A3-10

Answer 4

Size and complexity of client

Previous experience with client

Changes in circumstances during audit

Question 5

The Nature, Extent and Timing of Supervision depend on..

Answer 5

Size and complexity of entity

Nature of the work

Assessed risk of material misstatement

Qualifications of assisstants

Question 6

Performance materiality is…

Answer 6

Amount less than material for fin stmts as a whole to reduce the level of misstatement of aggregate undetected or uncorrected misstatements

Question 7

Tolerable misstatement is…

Answer 7

the maximum error in a population that the auditor is willing to accept

Question 8

Substantive procedures are… what do they include

Answer 8

procedures used to detect material misstatement include Test of details Analytical procedures

Question 9

What are the main assertions of financial stmts

Answer 9

COVERU

Completeness

CutOFF

Valuation, accuracy and allocation

Existence and Occurrence

Rights and Obligations

Understandibility and Classification

Question 10

Audit plan is

Answer 10

Written plan that is required for every audit Says what procedure are necessary to complete the audit

Procedures:

1. Risk assessment req- obtain understanding of compan and IC
2. Further audit procedures- test of controls (effectivness of IC), substanctive procedures (detect mat miss test of details)
3. other procedures (letter to attorney)
4. Timing: MGMT discussion about NET

Question 11

Internal auditors…

Answer 11

Cannot share responsibility or be depended upon items with high risk of material misstatements or high degree of subjectivity

Question 12

Use of work of Internal Auditor depends on their

Answer 12

Competence Objectivity Application of disciplined approach

Question 13

Audit Risk Model Shows what..

Answer 13

The risk that the auditor will issue the wrong opinion–> SHOULD BE AS LOW AS POSSIBLE

Question 14

Audit Risk Equation …

Answer 14

Audit Risk= Risk of Material Misstatement (Inherent x Control Risks) x Detection Risk

Question 15

Risk of Material Misstatement =

Answer 15

Inherent Risk x Control Risk

Question 16

Inherent Risk is

Answer 16

the chance of a material misstatement assuming no controls (based on judgment - detection)

Question 17

Control Risk is..

Answer 17

the chance a material misstatement would not be caught by the internal controls in a timely bases (prevention).

Question 18

Detection Risk is…

Answer 18

the chance that the auditor doesnt catch a material misstatement in assertion, the only risk controlled by the auditor!

Question 19

What should auditor do if risk of material misstatement (RMM) is judged to be high?

Answer 19

Detection Risk should be set low

–> MORE WORK–>LESS RISK ACCEPTED

Question 20

How can the auditor change detection risk?

Answer 20

By changing the Nature Extent Timing of Audit Procedures

Question 21

Fraud versus Error

Answer 21

Error=unintentional

Fraud=Intentional

Question 22

Fraud Risk Factors

Answer 22

POR

Pressure

Opportunity

Rationalization

Question 23

What needs to be done communication wise if fraud suspected?

Answer 23

Communicate at least one level above mgmt where fraud is suspected, if no higher authority –> get legal advice. It is not auditor’s responsability to report to regulatory and enforcement authorities

Question 24

Auditor’s responsibility with compliance to laws and regulations?

Answer 24

Provide Reasonable assurance that the financial stmts are free from Material misstatement due to non-compliance NOT responsible for prevent noncompliance and not supposed to detect all of it

Question 25

Procedures related to Noncompliance

Answer 25

Get Mgmt Rep letter Understand: 1. Legal and Regulatory Framework 2. How entity is complying with that framework

Question 26

Noncompliance issue has effect on fin stmts what sort of opinion?

Answer 26

GAAP So Except for or Adverse

Question 27

How to Assess the Risks of Material Misstatement?

Answer 27

I'M A CPA Internal control unsderstanding- assess Material misstatement assessment Asses level of risk respond- other procedures Control test Perform substantive procedures Audit evidance - evaluate sufficiency and appropriatness

Question 28

What are the components for the COSO framework for Internal Control

Answer 28

CRIME Control Environment, overall tone Risk Assessment by Mgmt Information and Communication Systems Monitoring of internal control Existing control activities

Question 29

Strong Control System has what

Answer 29

PAIDTIPS Prenumbered documents Authorization of transactions Independent Checks Documentation Timely performance reviews Information Processing Controls Physical Controls for guarding assets Segregation of Duties

Question 30

Segregation of duties sections

Answer 30

ARC Authorization Record Keeping Custody of Assets

Question 31

IC Documentation may include

Answer 31

FIND 1. **F**lowchart 2. **I**nternal control questionnaire or checklist 3. **N**arrative 4. **D**ocumentation from the client (including copies of the entity’s procedures manuals and organizational charts).

Question 32

Auditor Evidence Hiearchy

Answer 32

AEIOU Auditor Knowledge External evidence Internal Evidence Oral Evidence U Know it

Question 33

Substantive Procedures include

Answer 33

Acct balances Analytical Procedures Ratios

Question 34

Financial House for vouching and tracing

Answer 34

Financial Stmts Trial Balance General Ledger Sub-ledgers Books Documents Events

Question 35

For Vouching and Tracing what do you need to do?

Answer 35

Vouching go from top to bottom of financial house Tracing the bottom to top of the house

Question 36

When does current auditor need to talk to prior auditor?

Answer 36

Before ACCEPTING engagement

Question 37

Other items in engagement letter

Answer 37

Arrangement with predecessor auditor Fees and billing Further discussions with mgmt

Question 38

What should auditor do if they discover opening account balance is wrong?

Answer 38

Get mgmt to have 3 party meeting with predecessor auditor

Question 39

New auditor should ask old auditor... A3-8

Answer 39

About Mgmt integrity Disagreements with mgmt Reason for the change in auditors Communication to mgmt, audit committee

Question 40

How to assess the objectivity of Internal Auditors

Answer 40

use standards developed by The Institute of Internal Auditors

Question 41

Can internal auditors help with any or all understanding internal control performing test of controls performing substantive tests

Answer 41

Yes to all

Question 42

When to mention a specialist in auditor's report?

Answer 42

**ONLY** When giving less than unmodified opinion if unmodified dont mention

Question 43

If an assistant has disagreement with opinion reached what should they do?

Answer 43

Document the details of the disagreement with the conclusion reached

Question 44

An auditor should obtain sufficient knowledge of info system to understand?

Answer 44

Process used to prepare significant accounting estimates

Question 45

When should an auditor determine whether internal controls are operating effectively?

Answer 45

Should be determined AFTER obtaining an understanding of internal control Should only be determined for specific controls upon which auditor is going to rely

Question 46

Management directives are part of what group?

Answer 46

Control Activities Not Info and Communication

Question 47

Types of Service Organization Reports

Answer 47

Type 1= Report on Design and implementation Gives No Evidence to Reduce Risk Type 2=Report on Design and Operating Effectiveness Does Give Evidence to Reduce Risk

Question 48

Can a primary auditor refer to service organization auditor in audit report?

Answer 48

No

Question 49

What sort of information that noncompliance may occur with laws and regulations may be occuring?

Answer 49

Checks made to cash Bearer bonds Transfers to numbered accounts

Question 50

Communication with predecessor before acceptance

Answer 50

Mandatory! Mgmt integrity disagreements reasons for the change communication req fraud

Question 51

Communication with predecessor after acceptance

Answer 51

matters that may facilitate the evaluation of fin rep consistency between current and prior years

Question 52

Assessing internal auditor objectivity

Answer 52

1. previous experiance 2. level to which ia reports (mgmt or committee) 3. external quality reviews 4. professional internal auditing standards

Question 53

Assessing competence of internal auditor

Answer 53

1. education 2. profesional certification 3. experiance performance evaluation 4. quality of audit documentation

Question 54

Risk assessment required documentation

Answer 54

discussion amont team key elements of understanding assessment of RMM ID of risks and related controls (the more complex--\> the more doc)

Question 55

Preventive controls

Answer 55

designed to provide reasonable assurance that only valid transactions are recognized, approved and submitted for processing.

Question 56

Control environment

Answer 56

overall tone of the organization (integrity, competence, and participation of those charged w/governance, mgmt., philosophy, organizational structure, and assignment of responsibility, human resource responsibility.

Question 57

Risk assessment

Answer 57

identification and analysis of risks (by mgmt.) to achievement of its objectives.

Question 58

Information and communication system

Answer 58

support the identification, capture and exchange of information in a timely and useful manner_. Accounting processing_- from initiation of transaction to inclusion in the FS,. _The accounting records_- supporting information, and specific accounts involved in initiating, authorizing, recording, processing and reporting transactions. _Financial reporting process -_ includes the development of significant accounting estimates and the inclusion of appropriate disclosures.

Question 59

Monitoring

Answer 59

assess the quality of internal control over time.

Question 60

Existing and control activities

Answer 60

policies and procedures that help to ensure that management directives are carried out and the necessary steps to address those risk are taken. (Authorization, segregation of duties, safeguard of assets, assets accountability) Control activities relative to an audit include (**PAID TIPS)**

Question 61

Detective controls

Answer 61

designed to provide reasonable assurance those errors or irregularities are discovered and corrected on a timely basis

Question 62

Under IT system segregation of duties should be:

Answer 62

**COPAL** 1. **C**ontrol Group (internal auditor) 2. **O**perators (Employee who input data) 3. **P**rogrammers (person who wrote/design the program) 4. **A**nalysts (System analyst, who set up the system/ flow of item) 5. **L**ibrarian (person who hold the keys or access to the various programs) Note: When one person oversees/ supervise another are OR working in another IT area in the IT system, is a “Weakness”