Chapter 6 Flashcards
(53 cards)
1
Q
Reasons to plan engagement properly (3)
A
- To obtain sufficient appropriate audit evidence
- Keep audit cost reasonable
- Avoid misunderstanding with client
2
Q
Client business risk
A
Risk that client will fail to achieve its objectives or execute its strats
3
Q
Engagement risk
A
Extent of risk that audit firm are willing to tolerate
4
Q
Preliminary engagement activities (4)
A
- Perform procedure to decide to continue the audit for the client (experienced auditor do the decision)
- Consider ethical requirement, like independence
- Identify purpose of FS
- Obtain understanding with client about terms of engagement
5
Q
What type of client to accept
A
Client that don’t cause problems
6
Q
Quality management of firms (3)
A
- Competent to perform
- Comply with ethical requirement
- Consider integrity of client
7
Q
Engagement risk factors
A
- Reliance on FS
- Going concern
- Integrity of management
8
Q
Degree to which external users rely on statement
A
More reliance on FS -> more risk
9
Q
Indicator of FS reliance (2)
A
- Distribution of ownership
- Nature and amount of liabilities
10
Q
Ability to continue as a going concern (2)
A
- More likelihood of financial failure -> more risk
- Hard to predict
11
Q
Indicator of going concern (5)
A
- Liquidity position (do they have cash on hand?)
- Profits/losses in previous years
- Method of financial growth (do they rely on debt for financing?)
- Nature of client’s operations (ex: tech start-up is risky)
- Competence management
12
Q
Management low integrity (3)
A
- Conflicts with shareholders, regulators, customers
- Frequent turnover of audit personnel
- Conflict with labor union and employees
13
Q
New Client investigation (4)
A
- To avoid potential problems
- Consider client’s standing in business community, financial stability, and meting the client in person
- Communicate with previous auditor (need permission)
- Do a thorough investigation
14
Q
Continuing Client (3)
A
- Evaluate to decide to continue with them or not
- Don’t do audit if they file a lawsuit
- Don’t continue if too much engagement risks
15
Q
Relevant ethical requirement (2)
A
- Competence
- Independence
16
Q
Competence assessment
A
Does the staff have the capabilities and time to perform the audit?
17
Q
Independence assessment (3)
A
- Is there threats to independence?
- Is there ways to counter these threats?
- If there is threat and no safeguard, we don’t continue with the audit
18
Q
Terms of the Engagement (3)
A
- Summarize understanding in an engagement letter
- Important to time the audit, and plan the audit accordingly
- If client impose restrictions that can affect the audit, decline the audit
19
Q
Audit Strategy (3)
A
- Type and allocation of resources deployed in specific areas
- Timing of audit procedure
- Materiality
20
Q
Outside Experts (2)
A
- For company that you have less experience in
- The final word is still you, don’t mention them so that there’s no blame on them
21
Q
Internal auditor contribution (2)
A
- For low risk area
- No the best if they have different documentation
22
Q
Reliance on Other Auditors
A
- Needed if client has multiple locations/subsidiaries
- Need to know how much work is needed at each location
23
Q
Timing Engagement (3)
A
- Depends on the client reporting deadline
- Depends on practical matter (ex: when are the inventory count done?)
- Depends on client internal control and RMM
24
Q
Engagement Team Discussion (2)
A
- Share insight on the entity and its environment
- Discuss on business risk and RMM on FS
25
Entity and its Environment focus (5)
- Industry, regulator and other factors
- Organizational structure and ownership
- Governance
- Entity's business model
- Performance measure
26
Industry factor (3)
- Competitive environment
- Supplier and customer relationship
- Technological development
27
Regulatory factors (3)
- Legislation/regulation that greatly affect client operation
- Tax law
- Environmental law
28
Other external factor (4)
- General economic condition
- Interest rate and availability of financing
- Inflation or currency revaluation
- Climate-related events and conditions
29
Organizational structure and ownership
- Complexity of entity's structure
- Ownership
30
Complexity of entity's structure
- Consider complexity from a accounting and internal control perspective
- Increase RMM
31
Ownership
- Need to understand owner relationship with other people and entities
- Identify the related parties
32
Management and Governance (2)
- Does management's philosophy, operating style, and ability to respond to risk influence the RMM of FS?
- Assess the BOD
33
Business Model (3)
- Where does the money come from, how the company is financed
- Better you know the client business model the better you can do the audit
- Can have business risks that increase RMM
34
Performance Measure
Benchmark the org's performance measure to identify potential RMM
35
Understanding the Applicable Accounting Framework
Know well IFRS, ASPE,FASB
36
Inquiries of Management and Others Within the Entity (2)
- Can help identify more RMM
- Good insight on overall governance oversight (quality of internal control)
37
Key info when auditing a past client (3)
- Past misstatement
- Significant change in operation
- Particular complex transaction
38
Preliminary Analytical Review (3)
- Ratios
- Horizontal Analysis
- Vertical Analysis
39
Important liquidity ratios
- Inventory turnover
- Account receivable turnover
40
Horizontal Analysis
Account balance is compared to previous period
41
Vertical Analysis
FS items are converted to a % of a common base (ex: sales)
42
Income from continuing operations before taxes materiality % (Profit)
3-7%
43
Total assets materiality % (Profit)
1-3%
44
Shareholder equity materiality % (Profit)
3-5%
45
Revenue materiality % (Profit)
1-3%
46
Revenue materiality % (NFP)
1-3%
47
Expenses materiality % (NFP)
1-3%
48
Total asset materiality % (NFP)
1-3%
49
Factor that suggest lower materiality (10)
- Risk of fraud
- Non-compliance with law
- Misstatement identified in prior audits
- Significant related party transactions
- Changes in accounting methods
- Major change in operations
- Deficiencies in internal controls
- Nature of business (regulation)
- New client
- Public client
50
Performance Materiality (3)
- Reduce aggregation risk (that misstatement exceed materiality)
- Provide a "safety buffer" against risk of undetected misstatement
- Usually between 50(high risk)-75%(low risk)
51
Factor decreasing performance materiality (10)
- Overall high engagement risk
- Fraud risk
- History of identified misstatement in prior audit
- High risk of misstatement within account balance
- Increasing number of accounting issue requiring judgement or estimates
- Insufficient misstatement indicating possible undetected misstatement
- Deficient control environment
- History of material weakness
- High turnover of senior management
- Entity operate in many locations
52
Specific Materiality (3)
- Based on specific group of users or accounts of concerns,
- Not always used
- Equal or less than performance materiality
53
Exception of materiality (2)
- Difference between profit and losses
- Debt covenant (meeting the debt or not)
