Becker AUD 5.3 - Communication with those Charged with Governance Flashcards Preview

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Flashcards in Becker AUD 5.3 - Communication with those Charged with Governance Deck (19):
1

(1) "Those charged with governance" refers to those who do what?

(2) "Those charged with governance" is a broad term that includes what two groups inside a company?

(1) Bear responsibility to oversee the obligation and strategic direction of an entity.

(2) Board of directors and audit committee

2

Those charged with governance MAY include what 4 types of people?

(1) Company directors (members of entity's legal structure)

(2) PARTIES EXTERNAL to entity, i.e. GOVERNMENT AGENCIES

(3) Board of Directors or a Single person (i.e. Owner-Manager)

(4) Personnel with MANAGEMENT RESPONSIBILITIES.

3

What is the Audit Committee?

(1) Committee sub-group in the board of directors

(2) Has 3 to 5 members of board..

(3) Audit committee members = Outside directors that are NOT employees NOR part of MGT and who has NO material interest in company.

4

What is the purpose of Audit Committee?

Audit Committee's purpose is to be an independent sub-group in the company to strengthen the public's sense of independence of public accountant.

Audit committees (an independent body of outside members, outside the company's employees, MGT, and directors) is supported by:

(a) Many large accounting firms and leading accountants

(b) The SEC that strongly recommend the Audit committees

(c) And NYSE that requires all companies to have an Audit Committee.

5

What is the Main function of the Audit committee?

Main function =
* It's part of Company's INTERNAL CONTROL
* It enhances the internal control by being the Direct communication between "Outside directors" and "Independent auditor."

6

What are the typical specific functions of the Audit committee?

Please state the first 4 of the 10 functions.

(1) Selects / appoints Independent Auditor and set Audit fee

(2) Assures that the External Auditor is INDEPENDENT of company

(3) Review Nature & Details of audit engagement

(4) Reviews Auditor's work's quality

7

What are the typical specific functions of the Audit committee?

Please state the the next 4 of the 10 functions.

(5) Reviews of SCOPE of AUDIT

(6) Ensures that any auditors' RECOMMENDATIONS are given PROPER ATTENTION.

(7) Maintains LINES OF COMMUNICATION between the Auditor and the Board of Directors.

(8) Help RESOLVE DISAGREEMENTS over accounting treatment of any MATERIAL ITEMS in F/S.

8

What are the typical specific functions of the Audit committee?

Please state the the last 2 of the 10 functions.

(9) Evaluates the INTERNAL CONTROL of company with help of Independent Auditor.

(10) Makes reports to BOARD OF DIRECTORS and STOCKHOLDERS when necessary.

9

True or False

Communication with the audit committee is the key element in auditor's communication with those charged with governance.

True.

This because the Audit committee is an independent body / sub group in the board of directors to help communicate issues that needs to be fixed in the company.

10

In communicating with those charged with governance,

The Auditor should do what 3 things?

(1) Have appropriate access to Audit committee periodically

(2) Meet with Audit committee without MGT present at least once a year

(3) Consider whether communication with Audit committee is Sufficient or whether there is also a NEED to communicate with others charged with governance.

11

What are the requirements listed in Sarbanes Oxley Act (SOX Act 2002) in regards to Audit committee and the external auditors?

Audit committee is required:

(1) to APPROVE the engagement of the auditor

(2) To pre-approve the services to be performed

(3) To have ON-GOING communications with the auditor.

12

True or false:

Audit committee oversees the external auditor. Not MGT

True

13

True or False: Required communications about auditors responsibilities to those charged with governance:

(1) The auditor is responsible for forming and expressing an opinion about whether the F/S are prepared, in all material respects, in conformity with the applicable financial reporting framework.

(2) The audit does relieve management or those charged with governance of their responsibility.

(3) The auditor is responsible for performing the audit in accordance with GAAP.

(4) The audit is designed to provide reasonable, rather than absolute, assurance about whether the F/S are free from material misstatements.

(5) The audit of F/S includes consideration of internal control over financial reporting as a basis for designing audit procedures that a are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls over financial reporting (nonissuers only).

(6) The auditor is responsible for communicating significant and insignificant matters to the F/S audit.

(7) When applicable, the auditor is responsible for communicating particular matters required by law or regulation, by agreement with entity, or by additional requirements applicable to the engagement.

(8) In certain situations, the auditor may determine that it is appropriate to communicate circumstances or relationships that, in the auditor's professional judgement, may reasonably be thought to bear on independence, and to which the auditor gave significant consideration, in reaching the conclusion that independence has not been impaired.

(1) True.
That is the purpose of external auditor assigned to audit F/S. Express an opinion on F/S that is in conformity with applicable financial reporting framework.

(2) False.
The audit does NOT relieve management or those charged with governance of their responsibility.

The auditors' are not allowed to do any or all of the work the MGT and/or those charged with governance have in maintaining the company. The Auditor's job is to provide reasonable assurance in testing to see F/S are free of material misstatements and express an opinion on it. Now do MGT and governance people's job.

(3) False.
The auditor is responsible for performing the audit in accordance with GAAP.

(4) True

(5) True

(6) False
Auditor is responsible for only communicating SIGNIFICANT matters. Not both significant and insignificant. Just significant

(7) True.
Always communicate any matters required by law / regulation or by agreement with entity or additional requirements applicable to the audit engagement.

(8) True.
Auditor's independence is very important. In the issue that auditor engagement team (its members) have an independence impairment problem. This must be communicated in order to be resolved and if so, the person or persons not independent should leave the engagement.

14

The Auditor's responsibility that is required to be communicated with those charged with governance can have these communicated through what two kinds of paper documents?

(1) Engagement letter

or

(2) Contract

If one of these are given to those charged with governance.

15

True or False: Auditor communicate with those charged with governance regarding the planned scope and timing of audit.

(1) The auditor may communicate how significant risks of material misstatements will be addressed, the planned approach toward internal control, factors affecting materiality and any potential use of internal audit itself.

(2) The communication may also include discussion of attitudes, awareness, and actions of those charged with governance with respect to internal control, fraud, relevant changes (e.g. changes to financial reporting, accounting standards, laws, etc.) and matters previously communicated by the auditor.

(1) True

(2) True

16

True or False:

(1) Auditor can communicate with Those Charged with Governance (TCWG) on specific audit procedures and when they are going to happen.

(2) Communication between Auditor and those charged with governance should be two-way.

(3) Inadequate two-way communication may be indicative of an Unsatisfactory control environment, which may affect the auditor's assessment of the risk of material misstatement.

(4) Auditor's preliminary judgement on materiality, risk assessments (fraud, control, inherent, detection), justification to do conduct audit procedures at interim or at year-end is only of auditor's to know and not be communicated with Those charged with governance.

(1) False.
The Auditor can only communicate on the Planned Scope and Timing of the Overall Audit engagement. The Auditor cannot disclose any specific audit procedures (esp. when it's going to happen) since it'll make the audit too predictable for the MGT and company personnel to know when Audit is going to happen and where, so the company's personnel knows how to manipulate things before the Audit finds out about it.

(2) True
This because the Auditor should inform the Those charged with governance about form, timing, and expected content on establishing further communication to gather further audit evidence on additional issues.

Doing so will allow the Board of directors to communicate relevant to auditors.

(3) True
Two-way communication is important between Auditors and T.C.W.G. in order to get all information in order to do proper assessment on risk of material misstatements.

(4) True
These are only for the auditors to know and keep within the auditors. These are not to be communicated with T.C.W.G. in order to prevent T.C.W.G to communicate such info within the company to manipulate things and to cover items that the Audit may not find.

17

(1) Generally, the auditor may discuss matters with ____ prior to communicate with _____.

(2) Explain why it might not be appropriate to discuss with management on what was discussed with those charged with governance (TCWG) on management integrity and competent.

(1) Management

those charged with governance

The reason for this is that: MGT is the ones that are going to make adjustments to F/S in order to make R/S reasonably free from material misstatements.

(2) Anything in regards to MGT incompetnence, lack of integrity (possible fraud activities done by MGT) must not be communicated with MGT. This because the MGT may get angry about it, they are going to be alarmed and try to cover it up.

If auditor seeks to get something resolved with MGT's possible fraudulent activities, get those charged with governance (BoD, Audit committee, external government agencies) involved to question the MGT on their possible fraudulent activities and get it resolved.

18

Which of the following:

* Communicated with those charged with governance
* Not need to be communicated with those charged with governance - Auditors' only issue

(a) Internal control related matters

(b) Fraud, illegal acts

(c) Compliance related matters in government audits

(d) Going concern issues

(e) Corrected misstatements (adjustments) made by management

(f) Disagreements with MGT whether resolved or not

(g) preliminary judgment on materilaity level

(h) Assessing risk, such as fraud, control, inherent, detection risk

(i) Justification for performing substantive procedures on doing them at year-end or at interim

(j) Process used by management in formulating accounting estimates

(k) Management's application of accounting principles in areas of no authoritative guidance

(l) Disputes with management's application of accounting principles in certain areas

(m) Significant deficiencies in internal control previously reported to those charged with governance that have not been corrected

(n) Max dollar amount on misstatements that could exist without causing the financial statements to be materially misstated

(o) Auditor's justification for selection on sampling methods.

(a) Communicated with those charged with governance

(b) Communicated with those charged with governance

(c) Communicated with those charged with governance

(d) Communicated with those charged with governance

(e) Communicated with those charged with governance

(f) Communicated with those charged with governance

(g) Not need to be communicated with those charged with governance - Auditors' only issue

(h) Not need to be communicated with those charged with governance - Auditors' only issue

(i) Not need to be communicated with those charged with governance - Auditors' only issue

(j) Communicated with those charged with governance

(k) Communicated with those charged with governance

(l) Communicated with those charged with governance

(m) Communicated with those charged with governance
This because if something that was not something fixed in prior period and it's still not fixed, get the TCWG informed about it during the current audit in writing, so it can be fixed at a certain time.

(n) Not need to be communicated with those charged with governance - Auditors' only issue

19

(1) Another word for "significant audit adjustments"

(2) True or false:
Written correspondence to those charged with governance is always specific use (limited use)

(3) True or false:
The auditor is REQUIRED to make communication before auditor's report on the F/S is finalized.

(1) Corrections to F/S

(2) TRUE

(3) FALSE.
The auditor is NOT required to make communications before Auditor's report on F/S is finalized, as long as the communications occurs on a timely basis.

NOTE: For auditing issuer companies (public companies), Communication MUST be made BEFORE filing auditor's report to the SEC.