Audit Engagements, Terms, Requirements & Communications

Question 1

What are the 9 elements of engagement letters?

Answer 1

F.A.C.S.I.M.I.I.E.
1. fees
2. auditors responsibilities
3. confirmation of engagement
4. scope of objectives
5. internal controls
6. management responsibilities
7. irregularities (fraud)
8. illegal act
9. errors

Question 2

what are 5 responsibilities of auditors in relationship to the engagement letter?

Answer 2

1. provide reasonable assurance about whether the F/S are free of material misstatements caused by error or fraud
2. adhere to auditing standards
3. understand the regulatory environment
4. assess I/C
5. audit is not designed to detect error or fraud that is immaterial to the F/S

Question 3

what are 6 responsibilities of management in relationship to the engagement letter?

Answer 3

1. preparation and fair presentation of F/S in accordance with applicable framework (GAAP)
2. comply with laws & regulations
3. design, implementation and maintenance of internal controls over financial reporting (ICFR)
4. providing the auditor with relevant information and resources
5. will include on each page of F/S “no assurance was provided”
6. correct misstatements prior to issuing report

Question 4

what are the two types of fraud?

Answer 4

1. misappropriation of assets
2. fraudulent financial reporting

Question 5

what is misappropriation of assets?

Answer 5

when an EE steals or misuses company assets

Question 6

what is fraudulent financial reporting?

Answer 6

when managers make false entries intended to deceive users

Question 7

What are the factors affecting the decision to separate engagement letters from a parent and component entity?

Answer 7

1. who engages the component auditor
2. legal requirements relating to the appointment of the auditor
3. whether a separate audit report will be issued on the component
4. degree of parent ownership of component
5. component’s independence from the parent

Question 8

how do you downgrade from an audit to a review?

Answer 8

if reasonable justification exists, a standard review report is issued stating a review is substantially smaller in scope than an audit

if reasonable justification doesn’t exist, the accountant should consider withdrawing

Question 9

What 3 things should the new report in a downgrade not include?

Answer 9

1. original audit engagement
2. description of the auditing procedures completed before the original engagement was changed unless GASS indicates those procedures should be included in
3. reason for the change

Question 10

if the auditor compiles a company’s F/S notes, independence…..

Answer 10

is impaired

Question 11

if an other-matter paragraph is added to the successor’s report, what 4 things does it include?

Answer 11

1. that the F/S of the prior period were audited by another auditor (whose name is not presented)
2. the date of the predecessor’s report
3. the type of report issued by the predecessor
4. if the report was modified, the substantive reasons therefor

Question 12

internal control documentation can be determined by an auditor through these 4 common methods

Answer 12

1. yes and no questions only
2. flow chart
3. narrative
4. decision tree

Question 13

internal controls must be reviewed and documented even if…

Answer 13

an opinion on I/C is not issued

Question 14

during initial planning, an auditor focuses on what 3 components?

Answer 14

1. details of audit strategy
2. nature, timing and extent of testing
3. procedures to comply with GAAS

Question 15

what does the auditor base their assessment on when determining the nature, timing and extent of testing?

Answer 15

the control risk and inherent risk of material misstatement

Question 16

after the risk assessment phase, the control risk and inherent risk affects what 3 components of documentation?

Answer 16

form, content and extent

Question 17

What 5 types evidence is provided through the auditors documentation (auditor’s property) and gets reviewed by a supervisor or manager?

Answer 17

1. work performed
2. evidence evaluated (who performed the work)
3. conclusions drawn
4. provide primary support for the opinion expressed in the audit report
5. provide evidence of compliance with GAAS

Question 18

what 3 things does the quantity and content of audit documentation depend on?

Answer 18

1. the condition of the client’s records
2. the assessed level of control risk
3. the type of report being issued

Question 19

working papers should provide sufficient documentation to reflect work performed and support audit opinions. this includes what 3 components?

Answer 19

1. audit program
2. reconciliations of client accounting records to financial statements
3. an assessment of risk based on the client’s I/C structure

Question 20

what are 4 components found on the working trial balance?

Answer 20

1. account
2. balance per client records
3. reclassifications/adjustments
4. F/S amount

Question 21

what is the deadline for the completion of audit documentation?

Answer 21

within 60 days after report release date for non-issuers which is retained for 5 years

within 45 days after report release date for issuers which is retained for 7 years

Question 22

what are the two types of audit work paper files?

Answer 22

current file
permanent file

Question 23

What is the current file and some examples?

Answer 23

contains information related only to a specific year’s audit engagement

exs: audit program, trial balance, lead schedules, auditor reconciliations/analysis, responses to info requests

Question 24

What is the permanent file and some examples?

Answer 24

contains documentation that has ongoing significance and applies to multiple years

exs: company bylaws, articles of incorporation, minutes, control flowcharts, long-term debt agreements, equit account analyses

Question 25

auditors should communicate what 6 things to those charged with governance any significant observations that are relevant to the financial statements?

Answer 25

1. fraud
2. disagreements with management (even if resolved)
3. accounting methods
4. planned scope and timing of audit at general strategic level
5. their responsibilities with respect to the audit
6. timely observations about significant findings from the audit

Question 26

all audit engagements require the auditor issue a report to management outlining any….

Answer 26

material weaknesses and significant deficiencies in internal controls

Question 26

non-issuer client I/C are identified during a financial audit to design appropriate audit procedures, but not for…*

Answer 26

the purpose of expressing an opinion on controls

Question 27

fraud involving material amounts or perpetrated by senior management should be reported to who?

Answer 27

those charged with governance; (regardless of amount)

Question 28

within _________ of the discovery of an illegal act, the auditor of an issuer must inform the board of director. if the board does not provide proof on informing the SEC within ________, the auditor should ________ OR _____________

Answer 28

one business day; one business day;
withdraw; notify the SEC

Question 29

What is a cognizant agency for audit and how is it assigned?

Answer 29

a federal agency (like US dept. of treasury) that has primary audit responsibilities for a nonfederal entity

the federal agency that provides the MOST FUNDING to the nonfederal entity is usually assigned as the cognizant agency for the audit