Engagement Acceptance, Planning and Risk Assessment

Question 1

Risk Assessment Procedures

Answer 1

Used to obtain an understanding of the entity and its environement. RIsk assessment procedures do not alone provide audit evidence sufficient to support an audit opinion.

Question 2

Test of Controls

Answer 2

Are necessary when:

1) The auditor’s risk assessment is based to some extent on the effectiveness of the operating effectiveness of internal control.
2) Substantive procedures along are deemed to be insufficient.

Question 3

Timing of Audit Procedures

Answer 3

When testing at interim date an auditor must assess the incremental risk involved and determine whether sufficient alternative procedures exist to extend the interim conclusions to year-end

If IT is used significantly in the environment, an auditor will need to considered testing to coincide with the availability of information.

Question 4

Financial Statement Assertions

Answer 4

Claims and assertions made implicitly or explicitly by management about the recognition, measurement, presentation and disclosure of information.

Question 5

Name of Financial Statement Assertions

Answer 5

Completeness
Cutoff, 
Valuation, Allocation and Accuracy
Existence and Occurrence
Rights and Obligations
Understand ability and Classification.

Question 6

Audit Plan

Answer 6

Should include the nature, extent and timing of procedures performed.

Question 7

Role of Client’s Internal Auditors

Answer 7

May aid an auditor in obtaining an understanding of internal control, assessing risk, and performing substantive procedures. For high risk areas, testing performed by an internal auditor will not eliminate the need for testing by an external auditor. For low risk areas, it can eliminate the need. If an external auditor uses an internal auditor’s work, an external auditor must assess the competence and objectivity of an internal auditor.

Question 8

Work of a Specialist

Answer 8

Must assess a specialists competence, capabilities and objectivity. If an opinion is modified as a result of the work of a specialist, the auditor may refer to his work in the report, but may need permission from specialist before making reference in the opinion to his work.

Question 9

Audit RIsk

Answer 9

Risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated.

Question 10

Audit Risk Model

Answer 10

Audit Risk=Risk of Material Misstatement (assessed by auditor) * Detection Risk (controlled by auditor)

Question 11

Risk of Material Misstatement

Answer 11

Divided into the following:

Inherent Risk- the suspectibility of a relevant assterion to a material misstatement assuming there are no related controls. (ex. technology developments that may render a product obsolete, a lack of working capital or decline in industry).

Control Risk- RIsk that Material Misstatement that could occur in a relevant assertion that will not be prevented or detected on a timely basis by the entity’s internal control.

These exist independently in audit and cannot be changed.

Question 12

Detection Risk

Answer 12

RIsk that auditor will not detect a material misstatement that exists in an assertion. Inverse relationship between RMM and Detection RIsk.

Question 13

Procedures to assess the risk of material misstatement

Answer 13

1) Understand the entity and its environment.
2) Assess risks of material misstatement
3) Respond to the assessed level of risk by designing further audit procedures.
4) Test internal controls to evaluate operating effectiveness.
5) Perform substantive procedures
6) Evaluate audit evidence.

Question 14

Components of Internal Control

Answer 14

1) Control Environment
2) Risk Assessment by Management
3) Information and Communication Controls
4) Monitoring
5) Existing Control Activitites