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Flashcards in Engagement Planning Deck (48):

To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.

Engagement Planning


Auditors are *not* responsible for detecting theft or fraud.

Instead- they are responsible for providing REASONABLE ASSURANCE that the financial statements are not materially misstated.

Engagement Planning


The earlier the auditor is hired- the better for audit planning and efficiency.

Engagement Planning


If Control Risk for the accounts and/or transactions is low- audit procedures can be performed at interim dates.

The auditor then reviews changes in the balances at year-end.

Engagement Planning


The auditor can take the engagement if they are able to overcome the limitations of the engagement.

Engagement Planning


To plan the scope of the audit

To plan the objectives of the audit

Engagement Planning


The auditor can compare actual versus forecasted numbers.

Engagement Planning


If issues relating to predecessor auditor's work on previous Financial Statements come up during the current audit- Auditor must have client's permission to discuss the issue.

Engagement Planning


Were they adequately performed? (Review the working papers)

Are the results consistent with the audit report?

Engagement Planning


Auditor determines what the reporting objectives are.

Auditor determines the scope of the audit.

Engagement Planning


Materiality and Audit Risk

Engagement Planning


Training and Proficiency (Education and Audit Experience)


Due Professional Care


Engagement Planning


Auditor must be independent in fact and appearance


No direct financial interest

No indirect material financial interest

Engagement Planning


Technical abilities mirror those held by peers in the profession
Follow GAAS Standards
Obtain a Reasonable Level of Assurance
Maintain Reasonable Level of Skepticism
Supervise Audit Staff
Review judgment at every level

Engagement Planning


Planning and Supervision
Internal Control


Engagement Planning




Engagement Planning


Review the previous financial statements

Speak to third parties

Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)

Engagement Planning


Note: must have permission of client to contact predecessor auditor (no permission = no engagement)

Why the Auditor Change?
Any Serious Discussions with Audit Committee?
How is Management Integrity? Disagreements?
How was Internal Control?
Understand Industry or Be Willing to Learn
Consider Scope Limitation - Limited evidence available = no engagement

Engagement Planning


Note: must be written

Objectives of Engagement
Limitations of Engagement
Responsibilities of Management - Provide written assertions
Responsibilities of Auditor - Limited error/fraud responsibility
Expectations of Access to Records
Financial Statements (and Disclosures) are Management's Responsibility
Compliance with Laws
Internal Control

Engagement Planning


Management is responsible for financial statements and adequacy of disclosures.

Presentation & Disclosure
Existence (Tests Overstatements)
Rights & Obligations
Completeness (Tests Understatements)
Valuation & Allocation

Engagement Planning


Responsible for Hiring Auditor

Oversees Internal Control

Must Agree with Auditor on: Responsibility of the Parties- Audit Fee- Timing of the Audit- Audit Plan

Acts as Liaison Between Auditor and the Board

Auditor Communicates Concerns about: Internal Control Deficiencies- Errors- Fraud- Illegal Activities

Engagement Planning


Inherent Risk x Control Risk x Detection Risk

Risk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit report

Based on Auditor Judgment

Measured in both Qualitative and Quantitative

Engagement Planning


Risk that internal control will not detect error or fraud

Auditor cannot control this.

Engagement Planning


Which transactions have a higher level of risk?

Auditor cannot control

Engagement Planning


Will the auditor fail to detect a material misstatement?

Auditor CAN control

Do testing at year-end
Increase substantive testing
Run more effective tests

Engagement Planning


Less Acceptable DR = Run More Substantive Tests

More Acceptable DR = Run Less Substantive Tests

More Substantive Tests (DR down) = Less Audit Risk; (AR = IR x CR x DR)

Less Substantive Tests (DR up) = More Audit Risk; (AR = IR x CR x DR)

Engagement Planning


Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of percentages

Non-Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of acceptable ranges

Engagement Planning


It is Management's responsibility.

Engagement Planning


Assess the RISK that such things will lead to material misstatements

Design the audit to provide reasonable assurance against fraud- illegal acts that directly and materially affect the financial statements

Report ALL management fraud to the audit committee (minor fraud by low-level employees not reported to committee)

Perform required inquiries and procedures (management inquiries- analytical procedures- discussions with audit personnel about fraud)

Engagement Planning


Fraud is born out of:



Engagement Planning


Errors are unintentional- fraud is intentional.

Engagement Planning


Management compensation tied to stock
Aggressive financial forecasting
Former auditor disagreed with Management
Records not available for audit

Current audit procedures may need to be reconsidered if red flags exist.

Engagement Planning


Has been observed in similar situations

Does NOT necessarily mean that there is a material weakness in internal control

Leads to an auditor taking action

Engagement Planning


Internal control analysis can result in the conclusion that IC is weak- but probably won't identify illegal acts

Engagement Planning


Strives to make audit engagement procedures less patterned and predictable

Re-evaluates management's application of accounting procedures

Finds and assigns audit personnel with relevant skills in this area

Engagement Planning


Any fraud risks identified that could lead to material misstatement

Audit procedures performed to assess risks

Nature of communication made to audit committee and company management

Disclosure to third parties regarding fraud not normally the auditor's responsibility

Fraud by management should normally be reported to the audit committee- NOT the SEC.

Engagement Planning


Created PCAOB

Designates Officer responsibility for internal control

Must disclose significant internal control weaknesses to auditor and audit committee

Must disclose any level of fraud discovered by employees with internal control responsibilities

Engagement Planning


1. Statements on Auditing Standards (SAS)

2. Auditing Interpretations- AICPA Guides & SOPs

3. Industry Articles (no authority)

Engagement Planning


Firm Leadership exhibits quality and leads by example and sets the tone for the organization

Firm should Monitor and document that its policies and procedures are being followed

Firm should have Relevant Ethical Requirements

Acceptance and continuance of client engagements should continue to be evaluated for client integrity- auditor competency- and legality

Firm should have competent and ethical personnel

Firm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.

Engagement Planning


SSARS - Statements on Standards for Accounting and Review Services

These govern reporting for non-public entities only

Engagement Planning


Independence NOT required for Compilations

No Internal Control work allowed

No assurance given

Engagement Planning


Compilations are not an assurance service. No assurance is provided.

Engagement Planning


Reviews provide NEGATIVE assurance.

Engagement Planning


Reviews require independence.

No Internal Control work allowed
Performs analytical procedures
No material indirect financial interest allowed
No immaterial direct financial interest allowed

Engagement Planning


Must have an understanding of the client industry.

Engagement Planning


CPA expresses a conclusion about an assertion - Compliance with laws

NOT considered a Consulting engagement

Independence Required

Engagement Planning


Independence is not required for consulting services.

Engagement Planning


Report is restricted to specified users.

Agreed-upon procedures are implemented.

Engagement Planning