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Flashcards in Engagement Planning Deck (53)
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What is the primary duty of an auditor?

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


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

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.


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

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


When can audit procedures be performed at interim dates?

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.


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

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


For what does an auditor use professional skepticism?

To plan the scope of the audit

To plan the objectives of the audit


How can analytical procedures be performed in audit planning?

The auditor can compare actual versus forecasted numbers.


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

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.


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

Were they adequately performed? (Review the working papers)

Are the results consistent with the audit report?


How is audit strategy mapped out?

Auditor determines what the reporting objectives are.

Auditor determines the scope of the audit.


Describe the key components of maintaining auditor independence.

Auditor must be independent in fact and appearance


No direct financial interest

No indirect material financial interest


Describe Due Professional Care

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


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

Review the previous financial statements

Speak to third parties

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


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

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


What should be included in an audit engagement agreement?

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


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

Management is responsible for financial statements and adequacy of disclosures.

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


What is the purpose of the Audit Committee?

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


How is Audit Risk calculated?

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


Describe Control Risk

Risk that internal control will not detect error or fraud

Auditor cannot control this.


Describe Inherent Risk.

Which transactions have a higher level of risk?

Auditor cannot control


Describe Detection Risk.

Will the auditor fail to detect a material misstatement?

Auditor CAN control

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


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

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)


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

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


Whose responsibility is it to FIND and PREVENT fraud?

It is Management's responsibility.


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)


What are the three factors that affect/influence fraud?

Fraud is born out of:




What is the difference between fraud and errors?

Errors are unintentional- fraud is intentional.


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.


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


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


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


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.


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


What is the Hierarchy of Authoritative Literature?

1. Statements on Auditing Standards (SAS)

2. Auditing Interpretations- AICPA Guides & SOPs

3. Industry Articles (no authority)


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.


Which literature governs Compilation services?

SSARS - Statements on Standards for Accounting and Review Services

These govern reporting for non-public entities only


What is the independence requirement for Compilations?

Independence NOT required for Compilations

No Internal Control work allowed

No assurance given


What type of assurance is provided by a Compilation?

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


What type of assurance is provided by Review services?

Reviews provide NEGATIVE assurance.


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


For compilations and reviews- what knowledge must a service provider have?

Must have an understanding of the client industry.


What are attestation services?

CPA expresses a conclusion about an assertion - Compliance with laws

NOT considered a Consulting engagement

Independence Required


What is the independence requirement for consulting services?

Independence is not required for consulting services.


Describe the limitations on Prospective Financial Statements?

Report is restricted to specified users.

Agreed-upon procedures are implemented.


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;


Who is on the Group Engagement Team?

Firm Partners; Group Engagement Partner; Audit Staff


Who establishes the Materiality threshold for the Component Auditor?

The Group Engagement Team; The Materiality threshold must be lower than the Group Materiality threshold


What is the Group Engagement Partner responsible for?

Group Audit Engagement Direction - Supervision - Performance and the Audit Report


What is the role of a Component Auditor

Audit a component of the entity


What should the Group Engagement Team do if a Component Auditor audits a Significant Component due to Financial Materiality?

Audit the Financial Information


What should the Group Engagement Team do if a Component Auditor audits a Significant Component due to Risk of Material Misstatement?

Perform Audit Procedures


What should the Group Engagement Team do if a Component Auditor audits a Non-Significant Component?

Analytical Procedures performed at Group Level


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