Flashcards in Becker AUD 3.1 - Engagement Acceptance and Understanding the Assignment Deck (34):
What would the successor auditor INQUIRE ABOUT with the predecessor auditor BEFORE accepting an audit engagement?
1) Predecessor auditor's understanding of the reasons for the change of auditors.
2) Disagreements between predecessor auditor and management as to SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES.
3)Information on MGT's INTEGRITY
4) Communication to MGT and charged with Governance (board of directors / audit committee) on Noncompliance laws and regulations and matters related to FRAUD.
What would the successor auditor ask the predecessor auditor AFTER accepting an audit engagement?
Matters to facilitate the evaluation of Financial reporting consistency between current years and prior years.
Understanding with client on FINANCIAL STATEMENT AUDIT consists of 2 matters - what are they?
1) Understand Auditor's responsibilities to the Audit on F/S
2) Understand MGT's responsibilities (preconditions to Audit) in giving all the information the auditor needs to audit the F/S, such as Applicable financial framework, acceptable accounting principles, nature of the entity (like is it a for-profit entity or non profit or government), F/S purpose and its nature (complete set or 1-F/S, AND laws or regulations.
True or False
1) Contingent fees are allowed when performing F/S audits.
2) When developing an AUDIT STRATEGY in the planning process, the auditor will make preliminary assessment of materiality using his or her professional judgment.
1) False. contingent fees are not allowed for performing F/S audits.
2) True. During the planning stage, the auditor engagement team comes up with Fraud brainstorming, plan the audit strategy, to focus on where to apply their audit work in order to provide reasonable assurance to client that F/S are free from material misstatements due to error or fraud in order to give an honest opinion.
Developing audit strategy is not used in Understanding client.
During an initial audit or 1st time audit on a new client, what does the CPA / auditor do first before accepting a new client to audit?
Get permission from client to discuss with the predecessor audit.
* Before acceptance,
* at the date of acceptance, or
* after acceptance:
On the following:
1) Prospective client's permission to inquire with predecessor auditor
2) Get the new (prospective) client's signature to written engagement letter
3) Understand new client's (prospective) industry and business
4) Assess fraud risk factors likely to cause material misstatements.
1) before acceptance
2) At date of acceptance
3) After the acceptance and during the planning phrase
4) After the acceptance of new client.
What would cause a big risk in accepting new audit client?
Client company's imposed scope limitation that would result in a Disclaimer on opinion on F/S as a whole.
In accepting a new audit client or not, what does this tell you about the client:
"Client's financial reporting system has been in placed for 10 years."
This means that whatever computer system the client company has, it is working just fine (not too many errors will creep into the F/S). So this is a indicator that the audit client can be accepted to get audited.
When would it be okay for an auditor to accept an audit engagement after Close of Fiscal year?
When such an audit can result in remedying limitations from accepting such a engagement (after year-end closing) such as those relating to physical inventory's confirmed existence.
Is it sensible to accept an audit that would result in a disclaimer of opinion at year-end closing?
No, not really. This because the purpose of an audit is to render an opinion of any kind.
The only time an auditor is permitted do an audit after closing of year-end is when:
a) It is required by Law and regulation where it is okay to issue a disclaimer of opinion.
b) When the auditor is auditing an client company where the limitations on the audit is caused by circumstances that is beyond the auditor's control.
For example, the management lost all of its records, therefore Auditor can give a Qualified opinion or disclaimer of opinion.
1) Can control risk and inherent risk assessments be used to accept an engagement after close of fiscal year?
2) Can you rely on previous auditor's assessment in determining whether to accept new audit engagement or not?
1) No because at close of fiscal year, control risk and inherent risk is Irrelevant.
2) No, because previous auditor's assessment cannot be used due to lack of time to determine if a new engagement after close of fiscal year.
Yes or no on the following items that can be used by Successor Auditor's inquiries with Predecessor auditor:
1) Predecessor's evaluation of audit risk and judgment about materiality
2) Discuss with predecessor on reason for change of auditors
3) Information on MGT's integrity.
4) Subsequent events that occurred after the Predecessor's audit report date (or since the auditor's report date)
5) Predecessor's knowledge of accounting matters of continuing significations.
6) Disagreements between auditor and MGT on accounting principles used in F/S and auditing procedures.
7) Communication to MGT, audit committee and those charged with governance regarding fraud, noncompliance with laws and regulations, and matters relating to internal controls.
8) Opinion on subsequent events that have occurred after the previous audit's balance sheet date.
9) Methodology used in sampling techniques in the prior audit.
10) Perception of competency and reliance on client's internal control.
9) No, because inquiring on prior audit methodologies would be irrelevant and not applicable to current audit since the current audit may have different situations that the current auditor may consider.
What is an engagement letter?
What are the 6 required contents to be included in engagement letter?
Engagement letter = Terms of an agreement agreed between Auditor and Client management on how the Audit is going to be carried out and outlines responsibilities between Auditor and management.
This includes fees to be paid for Audit service.
IT IS ALSO CONSIDERED AS A CONTRACT.
1) Objectives and scope (what's going to be audited on) of audit
2) Auditor's Responsibilities
3) Managements responsibilities (Preconditions for the audit)
4) Statement that because of inherent limitations of an audit together with inherent limitations of internal controls there is still going to be Unavoidable risks of NOT able to detect MATERIAL ERRORS OR FRAUD no matter how well planned the audit was in accordance with GAAS.
5) Identify the applicable financial reporting framework
6) Reference to the expected form and content of any reports to be issued by the auditor and a statement that circumstances may arise in which a report may differ from its expected from and content.
What are the 11 contents that MAY BE included on the engagement letter?
1) ELABORATION on the SCOPE of the audit including reference to applicable legislation, regulations, GAAS, or ethical requirements. More details on what areas the audit is going to be on.
2) For of any other COMMUNICATION OF RESULTS on audit engagement
3) Arrangements regarding learning and audit performance, including composition of audit team
4) Expectation that MGT will PROVIDE WRITTEN REPRESENTATIONS
5) MGT agreed to PROVIDE INFO AVAILABLE to auditor in TIMELY manner.
6) Agreement of MGT to inform auditor about SUBSEQUENT EVENTS.
7) FEES and BILLINGS arrangements.
8) Arrangements concerning involving OTHER AUDITORS (PRIOR auditors), SPECIALISTS, INTERNAL AUDITORS or OTHER STAFF of client company entity
9) Arrangements to be made with the predecessor auditor
10) Any RESTRICTION on auditor's liability (when NOT prohibited)
11) Additional services to be provided or REFERENCES to further agreements between auditor and entity.
What items the Engagement letter will not say?
1) List of potential significant deficiencies discovered in prior audit. This because Engagement letter does not get into specifics nor gets into details about prior year items that are NOT relevant to the current year's audit.
2) Specific auditor's responsibilities like evaluating going concerns. The letter briefly describes what the AUDIT does generally. It will not go into specific detail.
3) No explanation on analytical procedures that is going be used in the audit. This because this is too specific and the Auditor's Engagement letter only covers a general idea (not specific idea) on what the audit is going to do.
* Before commence field work
* After commence fieldwork
1) Coordination with assistance in client personnel on timing and available of documents (data preparation)
2) Control weaknesses to be included in communication with those charged with governance
3) Determine fraud risk factors that exist in client's operations
4) Appropriateness of entity's plans for dealing with adverse economic conditions.
5) Auditor and Client company agreeing on what Schedules and Analysis should be prepared by the company's staff.
6) Auditor determining the effects of inadequate internal controls over safeguarding assets.
1) Before commence fieldwork
2) After commence fieldwork
3) After commence fieldwork
Note: fraud risk factors are assessed by Auditors. It's not done by having an agreement between Auditor and Management.
4) After commence fieldwork
Note: this appropriateness of entity's plans for adverse economic conditions may be considered as part of Evaluating going concern issues.
5) Before commence field work
6) After commence fieldwork
When is the successor auditor does its inquiries/communication with the predecessor auditor?
Before accepting the engagement.
This deals with:
Inquire with Previous Auditor,
--Before accept engagement
--Before performing any audit tests.
What is another word for proposal for audit engagement?
Bidding for the client company to accept this particular Auditor to audit the company's F/S.
Yes or No
Understanding with a client regarding SERVICES includes:
1) Auditor's responsibility for determining preliminary judgement about materiality and audit risk factors
2) Auditors' responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditor's attention.
1) No, this because understanding with client consists of having a general understanding on the overall audit. Also, determining preliminary judgments on materiality and audit risk sis not obtained in using audit procedures or specific audit procedures (audit plans/programs).
2) Yes. Understanding between client and auditor includes Auditor's responsibility, management responsibility along with those charged with governance (board of directors or audit committee) in significant deficiencies to internal controls.
Preliminary measure of materiality is:
matter of auditing judgement
audit procedure (in an audit plan or program)
Preliminary measure of materiality is:
matter of auditing judgement to be used along with determining Control risk and Detection Risk and fraud risk before designing and implementing Audit procedures in audit plans/programs to conduct the audit.
True or False:
1) Auditor is likely to be aware of specific matters to be included in communications with Audit committee / board of directors before starting the fieldwork.
2) Prior to starting fieldwork in the audit, the auditor would unlikely to have identified inadequate controls or evaluated their possible effects.
1) False. Auditors is NOT AWARE of any specific matters to be talked about with the Board of directors / audit committees.
2) True. Auditor would know about inadequate controls or evaluated their possible effects AFTER starting the fieldwork and during the fieldwork.
Are the following Before accepting new audit engagement or AFTER accepting new audit engagement:
* Making inquires with predecessor auditor regarding matters that may affect the conduct of the audit
* Understanding the prospective client's business and industr which it operates.
AFTER accepting new audit engagement.
This because these items occurs after the acceptance where the auditor now dives in to get data needed to design and execute audit programs/plans/procedures.
FYI - For Before accept new audit engagement:
Auditor talks with predecessor auditor on the following:
1) Consult with MGT integrity.
2) Any DISAGREEMENTS on ACCTG. PRINCIPLES and AUDITING PROCEDURES between Auditors and MGT.
3) Predecessor auditor's understanding of the reasons for the change of auditors.
4) Communication to MGT and charged with Governance people (board of directors / audit committee) on NONCOMPLIANCE with LAWS and REGULATIONS and MATTERS related to FRAUD.
In the understanding between Auditor and client company (as found in engagement letter):
1) Is the management responsible for correcting Internal Controls identified by Auditors?
2) Is the management responsible for adjusting F/S as per identified MATERIAL Misstatements identified by auditor?
1) No, to correcting internal controls. This because Management may choose not to due to cost-benefit considerations. This part is not included int he Understanding between auditor and client.
Also, the understanding between Auditor and MGT mainly deals with the responsibility to help the audit process to focus more on F/S to be free of material misstatement caused by error or fraud and the Auditor's express an opinion on the F/S.
2) Yes, because the goal of an audit is to ensure reasonable assurance on F/S be free of material error due to error or fraud and express an opinion on the F/S.
Should the following items be inquired with the predecessor auditor before accepting a new audit client
* Perception of competency and reliance on client's internal audit function
* Methodology used in applying sampling techniques
* Opinion on subsequent events that have occurred since the balance sheet date.
This because any information on past audit like how was the audit function last year, the prior year's audit methods, and subsequent events after the prior period's balance sheet date is irrelevant and not applicable in figuring out whether or not to ACCEPT NEW AUDIT CLIENT.
However, the only time to inquire on prior year's audit materials is when it is after the ACCEPTING NEW CLIENT. Review prior audit's documentation is appropriate and customary to facilitate the auditor's audit.
Audit is required to establish understanding with client. This understanding is documented in what kind of document?
Engagement letter that lists auditor's responsibilities (generally not specific details on audit procedures) and management's responsibilities including giving a rep letter to audit to begin auditor's fieldwork.
Is the auditor on the current audit allowed to review
Past audit's Engagement Letter (of prior auditor)
Prior auditor's work papers (audit work papers)
with permission from current auditor of course?
No on past engagement letter because this is ONLY between prior auditor and the client company
Yes, on prior audit papers to help facilitate the current audit procedures.
Why is management's integrity being suspect is considered very serous for the auditor not able to audit the client's F/S?
Management's integrity (honesty and ethically) is utmost importance because without this there is no trust in being able to confirm and verify how much of the F/S is NOT materially misstated due to deliberate fraud or numerous intentional errors.
1) What would caused F/S to be no longer audit-able?
2) What two factors that would not prevent the auditor from being able to audit the F/S?
3) True or false. A client not willing to provide financial records raises the concern that the clients lacks strong internal controls and lacks adequate records.
4) True or False.
Auditor ordinarily request to review predecessors' audit documentation relating to contingencies and internal control.
1) Inadequate accounting records.
Records that do not exist or are so poor that they are not reliable.
2) Complexity of accounting systems and the existence of related party transactions.
3) True. Auditor can only accept audit engagements with clients that have adequate internal control systems and adequate financial records. This so the auditor would be able to express an opinion on the F/S.
Note: Auditor does not express opinion on internal controls nor is responsible for MGT not taking auditor's recommendations to improve internal controls (due to cost-benefit considerations).
4) True. This because documentations relating to matters of continuing ACCOUNTING and AUDITING significance would be permitted for review by current auditor. This includes contingencies and internal controls that can have major impact on presentation and disclosure of F/S.
Who should initiate communications between the Predecessor auditor and the client company?
The successor auditor with permission granted by the client company.
ALSO: the client company authorizes the predecessor company to answer the successor auditor's inquires.
The client company or the predecessor does NOT STARTS the inquiries with the successor auditor.
What does the auditor do when he/she discovered that the prior F/S needs substantial revisions?
The auditor requests the client company to hold a meeting between the auditor, client company, and prior auditor to resolve the issue on getting the Prior F/S to be revised or found why or how come the Prior F/S is presented the way it is presented.
FYI -- The Auditor does not notify this issue to the shareholders. The auditor does not notify directly to previous auditor to go over the prior F/S for possible revisions.
What are the components that make up Client Management's integrity?
Hint: reputation, attitude, nature, environment, applying rules.
The Reputation of the Owners, Board of Directors / audit committee (charged with Governance personnel), key managers, related parties, to apply accounting principles correctly and properly.
The nature of the Client's operations
Client's attitude towards Internal controls (and control environment)
Client's attitude and intention in use of aggressive application on accounting principles OR misapplying accounting principles.
Does Management's disregard (attitude) towards its responsibility to maintain an adequate internal control environment a sign to not accept this audit client?
Yes, this will be a sign to NOT accept the audit client. This because a clients' messed up internal control environment leads to manipulation and falsification on the F/S.
Which one should be considered as NORMAL, Reason for reject the audit engagement?
1) Management's integrity is suspect
2) The internal control environment has too pervasively and materially damaged
3) MGT has reputation to consult with signification accounting firms on significant accounting principles
4) Lack of sufficient and appropriate audit evidence needed to express opinion on F/S
5) Details of most recorded transactions are NOT available after a specified period of time.
6) Internal controls requiring segregation of duties are subject to MGT override.
1) Reason to reject the audit engagement
2) Reason to reject the audit engagement.
If internal control is very damaged, then that means the F/S are MATERIALLY MISSTATED.
3) Normal - it is okay for a business to consult with various accounting firms on significant accounting issues. This because the MGT is consult with accounting firms to get feedback on how to apply a GAAP rule so the F/S will not be materially misstated.
4) Reason to reject the audit engagement.
this because Auditor needs Sufficient and appropriate audit evidence in order to express opinion. Without it, then there is no opinion to express.
5) Normal - in this situation, the auditor uses other procedures to verify the numbers on the missing documents
6) Normal - it's given that MGT override exists on internal control activities.