Flashcards in Becker AUD 3.2: Planning and Supervision Deck (33):
Which of the following items go into:
Work-papers or Engagement Letters or N/A
a) Identify working capital deficiency
b) Fees and billing arrangements
c) Management general responsibilities to prepare and fair presentation
d) Indications of negative cash flows from operating activities
e) Analtical procedures the auditor PLANS TO DO.
b) Engagement letter
c) engagement letter
Analytical procedures auditor plans to do (are specific audit procedures) not mentioned in engagement letter. This because engagement letter only states overall audit strategy, not the specific audit procedures / analytical procedures.
What kind of items that the external auditor look at to assess the Objectivity of INTERNAL AUDITOR?
1) The organization level (management, board of directors, or audit committee) that the internal auditor reports to, including those who oversee employment decisions related to to the internal auditor
2) Policies that prohibit internal auditor from auditing areas where their relatives are employed. This is done to prevent collusion.
3) Reporting status of the internal auditor within the company/organization.
How does the External auditor (CPA) assess the competence of internal auditor?
Assess the internal auditor's educational level and professional experience.
True or false.
1) Audit committee communications only limited at the planning stage.
2) Written representation letters are obtained at the end of the audit not during the planning stage.
3) Confirmation procedures are NOT substantive procedures.
4) Confirmation procedures are performed during the stage of the planning.
5) During the planning stage of the audit the auditor makes a preliminary assessment of materiality, inherent risk, control risk and detection risk.
6) Confirmation procedures are typically used to test a sample of A/P with creditors.
7) Quality of work done by internal auditor (internal auditor's work papers and audit recommendations) guarantees the Internal auditor's objectivity in the audit.
8) Internal auditor's Objectivity is reflected by the organizational level to which internal auditor reports ALONG with policies prohibiting audits of areas where internal auditor lacks independence.
9) Internal control's assessment of control risk matches the external auditor's assessment therefore this can be used to measure the internal auditor's objectivity.
Communications with the audit committee is a continuous process esp. at the scenario of the management does not budget to make revisions to F/S, talk with the audit committee.
Written rep letter by management are obtained when the audit is ended. It is not given during the planning stage.
FYI - Planning stage comes AFTER accepting the engagement and BEFORE commencing the actual fieldwork (COME BACK HERE W/ MORE DATA LATER).
Confirmation procedures ARE substantive procedures
Confirmation procedures are performed AFTER planing stage.
Make preliminary assessments during Planning stage before beginning fieldwork to do the audit plans/programs.
Confirmations are NOT typically used on testing a sample of A/P with creditors.
Internal auditory's quality in their work paper documentation and audit recommendations does not measure the objectivity in internal auditors.
This because such matching of internal auditor's assessment with external auditor can either be a coincidence or the internal auditor did that on purpose just so the audit does not go to a certain audit area. Therefore, such situation is IRRELEVANT to evaluate the internal auditor's objectivity.
External Auditors should consider the extent of involvement of the client's internal auditors in the performance.
The internal auditors can be involved in the tests of controls (Internal control testing) and Substantive testing (tests of details), however the internal auditors' involvement should be generally _____
The internal auditors that are OBJECTIVE and have INTEGRITY can be used to assist the external auditor.
Internal auditors lack this one trait and are not required to have it to assist the External auditor in routine tasks. What is this trait?
Internal auditors lack independence because they are working for their employer, so they could potentially have bias.
What three things the External auditor (CPA) does not share with the internal auditor to assist in the audit?
1) Audit decisions (only the external audit makes decisions)
2) Judgments (only the External auditors make judgment calls in the audit)
3) Assessments like on Materiality and accounting estimates
4) Responsibility on what to put on the Auditor's report (External auditor does this. Not the internal auditor).
The work of the internal auditor may aid the external auditor in obtaining an what 4 things.
1) Understand the company's internal control
2) Assessing risk
3) Performing substantive test
4) test of controls
Reviewing internal auditor's conclusions is part of:
Assessing internal auditor's objectivity
Supervision and review function (of external auditor)
Supervision and review function (of external auditor)
Per PCAOB standards: what situations would require a revaluation of Established preliminary levels or tolerable misstatements?
1) Materiality levels and tolerable misstatements were originally based on ESTIMATED or PRELIMINARY financial statement amounts that differ significant from ACTUAL amounts.
2) Events or changes that occurred after mateirlaity levels and tolerable misstatements were established are likely to affect investors' perceptions about the company's F/S.
Events or changes examples: changes in laws, regulations, financial reporting framework or contractual agreements.
If the misstatements of an amount are below the current materiality level would influence judgment of a reasonable investor then by definition materiality is
at its correct level
Not at its correct level
Not at its correct level.
This because materiality is the level at which information begins to influence the judgment of a reasonable person. Other words, materiality level should be at a proper position in order for a reasonable person to make proper decisions.
True or false on these Materiality situations:
1) Information is material when it influences the users' decision about any part often F/S
2) Materiality is determined only by quantitative thresholds.
3) Information is material when it is likely to influence a reasonable investor's decision.
4) Per US Supreme court, information is material if there is a substantial likelihood that the info would be viewed by a reasonable investor has having significantly altered the total mix of available information.
Use quantitative and non-quantitative thresholds to measure materiality
Which of the following would be:
Taken into consideration to determine how much supervision is need for the audit staff.
Not taken into consideration.
a) Size and complexity of company
b) Risk of material misstatement (inherent risk x control ris) in audit
c) Knowledge, skill and ability of each engagement member
d) Fee to be paid by client company
e) The nature of work assigned to each audit engagement team member
f) Nature of the company (like is it for-profit, non-profit, or government)
a) Taken into consideration to determine how much supervision is needed.
b) Taken into consideration to determine how much supervision is needed.
c) Taken into consideration to determine how much supervision is needed.
d) Not taken in to consideration
e) Taken into consideration to determine how much supervision is needed.
Under PCAOB standards - Give examples that should indicate that the company has a complex operations?
a) Multiple business lines
b) Several levels of management
c) Lack of involvement by senior management in day-to-day operations (meaning there is middle management and low management in handling all operations)
A centralized accounting function is considered
Less complex operation structure
Complex operations structure
Lack complex operation structure as per PCAOB standards.
Which of the following should influence the nature and extent of necessary planning activities:
Use: Influence nature and extent of planning activities
or No influence to answer this question:
a) Size and complexity of the company
b) Auditor's previous experience with the company
c) Size of auditing firm and number of auditors assigned to audit
d) Change in circumstances that occur during the audit.
a) Influence nature, extent on planning activities
b) Influence nature, extent on planning activities
c) No influence
d) Influence nature, extent on planning activities
True or False.
Obtaining information about entity's ability to be going concern can be used to measure the competence of internal auditors.
Getting information on whether the entity can be going concern or not has nothing to deal with the internal auditor's competence in doing its job.
FYI - Internal auditor's competence consists of
b) professional certification,
d) performance evaluation,
e) audit plan,
f) audit procedures, and quality of audit documentation.
Which item goes with objectivity or competence of the internal auditor:
b) Influence of management on scope of internal audit's duties
c) Professional certification
d) Performance evaluations
e) Limitations placed on communications between internal auditor and audit committee
f) the Organizational level the internal auditor can report to
g) Quality of audit documentation
h) Policies that does not allow the internal auditor to audit areas where they lack independence.
i) internal audit conclusions
j) Consistency of internal audit reports with results of work performed.
k) compliance with professional internal auditing standards.
Do you make a reference to a specialist in an unmodified opinion auditor report?
When auditor is going to express an Unmodified opinion, no reference is made to a specialist.
FYI - It's only when issuing a Modified Report to report about a difference between the client's and specialist's valuations. To explain this situation, you add an explanatory paragraph and use this explanatory paragraph to make a reference to specialist work.
1) A modified auditor's report is used to include a reference to specialist. Which paragraph is added to refer to a specialist?
2) Is getting permission from auditor's required to make reference to the specialist in a modified report?
3) True or false: An auditor adds explanatory language to or departs from an unmodified opinion when referring to specialist work in the auditor's report.
1) Explanatory paragraph.
2) yes, permission is needed to make a reference to a specialist in an explanatory paragraph in a modified auditor report.
3) True. An auditor's report would be MODIFIED to refer to specialist work that has information that is different from the client's information. Such a report would include an explanatory paragraph to make reference to specialist work.
Questions on the actuary:
1) Can the auditor still use the actuary's work even though the actuary has a relationship with the client company?
2) Does the client required to consent the auditor to use the actuary's work?
3) True or false. Auditor obtain an understanding of the nature of actuary's work, including its objectives scope.
4) Reasonableness of the actuary's assumptions is the responsible of the actuary or the auditor.
1) Yes, the auditor can still use the actuary's work, but need to do additional procedures to verify the objectivity.
2) No requirement exists for the auditor to get consent to use actuary's work.
4) The actuary, not the auditor.
1) Interim testing may be performed on material accounts as long the auditor asses what kind of risk involved and determines whether what type of sufficient procedures exist to extend the interim conclusion to year-end?
2) Are immaterial accounts tested?
3) When audit procedures are performed before year-end, the auditor assess the incremental risk at a maximum level or no?
4) The risk of incorrect rejection relates to ____ of audit testing.
5) The likelihood of assessing this risk lower than it should be does not affect the auditor's decision regarding the ____ ____ of audit work.
1) Incremental risk. Sufficient alternative procedures.
3) Do not assess incremental risk at the maximum level.
4) Efficiency of audit testing. This because when an auditor initially and by error reject an item, more substantive testing should be done to correct error.
5) appropriate timing.
1) In a financial statement audit, materiality levels are generally considered in terms of the _____ aggregate level of misstatement that could be considered to any interrelated items across the F/S.
2) Analytical procedures are performed during which stage of the audit to evaluate the overall F/S presentation and to assess conclusions reached?
3) Are analytical procedures used to change materiality levels?
4) The auditor should consider the audit plan to be modified when the materiality from the planning stage throughout the audit is increased or decreased?
5) Increase in materiality levels result in _____ n audit risk thus less substantive testing.
2) Review stage
5) decrease in audit risk.
When an entity transmits, processes, maintains, or accesses significant information ELECTRONICALLY, some accounting data and source documents may be available only in electronic form, or only at a certain point in time.
The auditor performs test of controls
several times a year
Several times of year on testing controls on electronic transactions because it is hard to test controls at year end when all the documentation on these electronic transactions may not be available at year end.
When apply substantive tests of details of assets or liability accounts as of interim date increases risk or decreases risk of errors between date of interim testing and balance sheet date?
Therefore the auditor selects for interim examination ONLY ACCOUNTS that are REASONABLY PREDICTABLE with respect to amount, relative significance, and composition, and must also IDENTIFY PROCEDURES SUFFICIENT to EXTEND INTERIM CONCLUSIONS to YEAR-END.
True or false:
Auditor must assess the competency of both internal auditor and specialist in assisting the audit.
What are the 6 traits to assess the Objectivity of Internal Auditors?
1) Information from previous experience of the internal auditor
2) Discussions with Management
3) External quality reviews of internal auditors
4) Professional international auditing standards (i.e. The Institute of Internal Auditors
5) International Auditor reports to which organizational level (middle management, senior management, board of directors, and audit committee)
6) Policies that prohibit internal auditors to audit areas where they do not have independence.
To get knowledge of the client company's industry,
the external auditor (independent auditor) can look up some Documents that gives a General overview on how the client operates in that industry.
Name the 4 documents on this.
1) AICPA accounting and auditing guides
2) Trade Publications and professional trade associations
3) Government publications
4) AICPA Accounting Trends and Techniques (an annual survey of accounting practices i.e. how many companies compiled disclosures
During the planning of the audit:
The auditor is required to do 4 things:
1) Obtain knowledge of client's business and industry
2) Develop Audit Strategy (nature, extent, and timing on audit procedures, preliminary assessment of Materiality of F/S as a whole and Tolerable misstatement amount and Performance materiality and )
3) Develop the Audit Plan (specific procedures / programs): Test of Internal controls, tests of details (substantive details)
4) Perform Risk Assessment procedures to obtain an understanding of the entity and its environment, including:
* its internal controls,
sufficient to assess risk of material misstatement (inherent risk x control risk)
* Design further audit procedures
* Whether to Extend the audit engagement beyond the "date of auditor's report" (last day of audit work)
1) Internal auditor's work may affect the 3 traits of an audit - what are they?
Internal auditor's work may affect the independent's auditor's
1) nature, extent, and timing of independent auditor's work
2) Independent auditors:
* Procedures to understand client's internal control
* Procedures to assess Risk of Material misstatement (inherent risk x control risk)
* Substantive procedures performed in gathering direct audit evidence (tests of details)
External auditor preliminary judgement's on materialiy is based on
Both Annualized interim F/S and Annual F/S of prior period
Annualized interim F/S -or- Prior period's annual F/S
Annualized interim F/S -or- Prior period's annual F/S
1) True or false:
When subjectivity goes up THEN: need the test assertions also GOES UP
2) Internal Auditors "CAN DO" or "CAN'T DO" on the following to aid the External auditors:
a) Audit judgement
b) Understand internal control
c) Perform tests
e) Audit decisions
f) Perform tests of details (substantive testing)
2) Internal auditors can do or can't do the following:
a) Audit judgement: CAN'T DO
b) Understand internal control: CAN DO
c) Perform tests: CAN DO
d) Audit Assessments: CAN'T DO
e) Audit decisions: CAN'T DO
f) Perform tests of details (substantive testing): CAN DO