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Engagement Planning Flashcards

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1
Q

What is the primary duty of an auditor?

A

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

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2
Q

What is the auditor’s responsibility for detecting theft or fraud?

A

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.

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3
Q

When should an auditor be hired in relation to the balance sheet date for optimum audit planning and efficiency?

A

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

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4
Q

When can audit procedures be performed at interim dates?

A

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.

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5
Q

When can an auditor accept an engagement offered after the year is already closed?

A

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

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6
Q

For what does an auditor use professional skepticism?

A

To plan the scope of the audit

To plan the objectives of the audit

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7
Q

How can analytical procedures be performed in audit planning?

A

The auditor can compare actual versus forecasted numbers.

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8
Q

What must an auditor have in order to discuss issues relating to a predecessor auditor’s work?

A

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.

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9
Q

What questions must an auditor ask with respect to procedures carried out by assistants?

A

Were they adequately performed? (Review the working papers)

Are the results consistent with the audit report?

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10
Q

How is audit strategy mapped out?

A

Auditor determines what the reporting objectives are.

Auditor determines the scope of the audit.

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11
Q

Describe the key components of maintaining auditor independence.

A

Auditor must be independent in fact and appearance

Honesty

No direct financial interest

No indirect material financial interest

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12
Q

Describe Due Professional Care

A

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

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13
Q

What should an auditor do prior to accepting an audit engagement?

A

Review the previous financial statements

Speak to third parties

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

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14
Q

What questions should be asked by an auditor prior to taking an engagement?

A

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

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15
Q

What should be included in an audit engagement agreement?

A

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

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16
Q

What is management’s responsibility with respect to the financial statements?

A

Management is responsible for financial statements and adequacy of disclosures.

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

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17
Q

What is the purpose of the Audit Committee?

A

Responsible for Hiring AuditorOversees Internal ControlMust Agree with Auditor on: Responsibility of the Parties- Audit Fee- Timing of the Audit- Audit PlanActs as Liaison Between Auditor and the BoardAuditor Communicates Concerns about: Internal Control Deficiencies- Errors- Fraud- Illegal Activities

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18
Q

How is Audit Risk calculated?

How is it significant?

A

Inherent Risk x Control Risk x Detection RiskRisk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit reportBased on Auditor JudgmentMeasured in both Qualitative and Quantitative

What would be a reason for mgmt to cheat and make financial statements inaccurate

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19
Q

Describe Control Risk

A

Risk that internal control will not detect error or fraud

Auditor cannot control this.

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20
Q

Describe Inherent Risk.

A

Which transactions have a higher level of risk?

Auditor cannot control

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21
Q

Describe Detection Risk.

A

Will the auditor fail to detect a material misstatement?

Auditor CAN control

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

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22
Q

What responses should an auditor take based on different levels of acceptable detection risk (DR)? What type of tests should be performed?

A

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)

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23
Q

What are quantitative measurements versus non-quantitative measurements with respect to risk?

A

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

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24
Q

Whose responsibility is it to FIND and PREVENT fraud?

A

It is Management’s responsibility.

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25
What is the auditor's responsibility with respect to fraud and illegal acts?
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)
26
What are the three factors that affect/influence fraud?
Fraud is born out of: Rationalization Incentive Opportunity (RIO)
27
What is the difference between fraud and errors?
Errors are unintentional- fraud is intentional.
28
What red flags may indicate higher risk in an audit?
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.
29
Describe the characteristics of a Fraud Risk Factor.
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
30
What does an examination of internal control accomplish with respect to illegal acts?
Internal control analysis can result in the conclusion that IC is weak- but probably won't identify illegal acts
31
What is the purpose of adjusting audit procedures in light of fraud risk factors identified during an audit?
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
32
What should be documented with respect to fraud risk factors in an audit?
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.
33
What was the effect of the SOX Act of 2002?
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
34
What is the Hierarchy of Authoritative Literature?
1. Statements on Auditing Standards (SAS) 2. Auditing Interpretations- AICPA Guides & SOPs 3. Industry Articles (no authority)
35
What quality control activities are undertaken by CPA firms with audit practices?
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.
36
Which literature governs Compilation services?
SSARS - Statements on Standards for Accounting and Review Services These govern reporting for non-public entities only
37
What is the independence requirement for Compilations?
Independence NOT required for Compilations No Internal Control work allowed No assurance given
38
What type of assurance is provided by a Compilation?
Compilations are not an assurance service. No assurance is provided.
39
What type of assurance is provided by Review services?
Reviews provide NEGATIVE assurance.
40
What is the independence requirement for a Review?
Reviews require independence. No Internal Control work allowed Performs analytical procedures No material indirect financial interest allowed No immaterial direct financial interest allowed
41
For compilations and reviews- what knowledge must a service provider have?
Must have an understanding of the client industry.
42
What are attestation services?
CPA expresses a conclusion about an assertion - Compliance with laws NOT considered a Consulting engagement Independence Required
43
What is the independence requirement for consulting services?
Independence is not required for consulting services.
44
Describe the limitations on Prospective Financial Statements?
Report is restricted to specified users. Agreed-upon procedures are implemented.
45
What is the role of the Group Engagement Team?
Develop Audit Strategy; Communicate with Component Auditors; Perform work on the Consolidation Process; Evaluate Audit Conclusions; Understand work of Component Auditors;
46
Who is on the Group Engagement Team?
Firm Partners; Group Engagement Partner; Audit Staff
47
Who establishes the Materiality threshold for the Component Auditor?
The Group Engagement Team; The Materiality threshold must be lower than the Group Materiality threshold
48
What is the Group Engagement Partner responsible for?
Group Audit Engagement Direction - Supervision - Performance and the Audit Report
49
What is the role of a Component Auditor
Audit a component of the entity
50
What should the Group Engagement Team do if a Component Auditor audits a Significant Component due to Financial Materiality?
Audit the Financial Information
51
What should the Group Engagement Team do if a Component Auditor audits a Significant Component due to Risk of Material Misstatement?
Perform Audit Procedures
52
What should the Group Engagement Team do if a Component Auditor audits a Non-Significant Component?
Analytical Procedures performed at Group Level
53
Why does an Auditor do if they suspect legal proceedings could contribute to a Material Misstagement?
Contact Client external counsel through a Letter of Inquiry
54
What would a CPA most likely perform in the risk assesment stage of a financial statement audit?
Compare recorded information with anticipated results from budgets and forecasts
55
Name the two types of fraud | Pg. 2-16
Misappropriation of assets and fraudulent financial reporting
56
Is an engagement letter required to establish an understanding with an audit client?
No, but written communication is required
57
Management Assertions: Classes of Transactions & Events | Pg. 5-6
``` Completeness Period Cutoff Accuracy Classification Occurrence ```
58
Management Assertions: Account Balance | Pg. 5-6
Rights and Obligations Allocation and Valuation Completeness Existence
59
Management Assertions: Presentation & Disclosure | Pg. 5-6
Rights and Obligations Accuracy and Valuation Completeness Understandability
60
Engagement Letter Pg. 2-9
An auditor is required to establish an understanding with the client through a written communication with the client ``` Fees Auditor's responsiblilty Confirmation of Engagement Scope and Nature of Engagement (Intro and Scope paragraph) Internal Control (commuicating signficant deficiencies in IC) Mgmt's Responsibility Irregularitites Illegal acts Errors ```
61
Steps In Planning Pg. 2-13 Not finalized until?
``` Basic discussions with the client Review of audit documentation Ask about recent developments Interim financial statements Non-Audit personnel Staffing Timing Outside assistance Pronouncements Scheduling with the client ``` Consideration of Environment including its internal control
62
Matters that must be communicated to those charge with governance Pg. 2-8
``` Disagreements with management Illegal acts, significant errors, and fraud involving senior managment Significant accounting policies Adjustments Prior discussions with management before accepting engagement Problems from getting evidence Responsibilities of auditor Other information regarding responsibilities View of other accountants contacted by mgmt Estimates ```
63
How does an auditor test the reasonableness of dividend income?
Look at dividend record books produced by investment advisory services
64
What is channel stuffing?
Marketing practice that suppliers sometimes use to boost sales by inducing distributors to buy substanially more inventory than they can resell; therefore will be an increase in sales returns
65
Journal Entries a) How to increase/decrease asset accounts b) How to increase/decrease expense accounts c) How to increase/decrease liability accounts d) How to increase/decrease equity accounts e) How to increase/decrease revenue accounts
a) debit/credit b) debit/credit c) credit/debit d) credit/debit e) credit/debit
66
Journal Entries a) How to record a credit sale b) How to record a customer payment c) How to record a credit purchase d) How to pay a bill to a vendor
a) debit AR / credit Sales Revenue b) debit Cash / credit AR c) debit Office Supplies / credit AP d) debit AP / credit Cash
67
Who does the internal auditor report to?
They report to the audit committee
68
When does auditor risk increase?
New method since it is prone to mistakes When a lot of work is involved When there is an unusual transaction taking place When there is an aggressive atttitutde toward reporting a transaction
69
What is a characteristic of an attestation engagement?
Provide an opinion or conclusion | Provides some form of assurance
70
Financial statement assertions should relate to only?
Internal Control testing and sub testing to corroborate manangements assertions
71
When a high ranking official leaves the company, what does the auditor have to consider?
RMM will increase due to fraud if there is no explanation of the nature of the disagreement that led to the resignation
72
Is accured liability considered a current or non-current liability?
Current
73
What does the Litigation Reform Act of 1995 detect?
R Related party transactions I Illegal acts G Going concern doubt
74
The independent auditor may allow the internal auditor to audit what?
They can audit the client's test of control, but not substantive tests
75
What is considered materially indirect?
A mutual fund because you dont pick the investments directly
76
Are prospective financial statements considered attestation engagments?
Yes, think agreed-upon procedures
77
Define a) Assets b) Liability c) Equity d) Revenue e) Expenses f) Cost of goods sold
a) What you own: cash, inventory, office equip b) What you owe: bills, credit card debt, taxes, loans c) Book value of company, entity or individual (asset): retained earnings, common stock, and addt'l paid-in capital d) What business takes in e) Cost of doing business f) Direct cost related to revenue
78
What is the difference between Human resources in Control Environment and in Quality control
In quality control it includes personnel management In control environment it includes policies and practices
79
What is included in a voucher package?
Voucher, PO, and receiving report

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