Who initiates the communications between the predecessor auditor and successor auditor?
The successor auditor initiates the communication with the predecessor by requesting that the client authorize the predecessor auditor to allow the successor auditor to review the predecessor auditor's working papers.
What is meant by the term preconditions for an audit?
The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management to the premise on which an audit is conducted.
What matters should be covered in the (successor) auditor's inquiry of the predecessor auditor?
1. Facts related to management's integrity; 2. Significant accounting or auditing disagreements; 3. Any communications with the audit committee (or others charged with governance) about fraud, illegal acts, and significant deficiencies in internal control matters; and 4. Predecessor's understanding of the reason(s) for the client's change in auditors.
What is meant by the term initial audit?
The prior year's financial statements have been audited by a predecessor auditor.
What matters are typically addressed in an engagement letter?
1. The objective and scope of the audit; 2. The auditor's responsibilities; 3. Management's responsibilities; 4. A statement about the inherent limitations of an audit; 5. A statement identifying the applicable financial reporting framework; 6. Reference to the expected content of any reports to be issued; and 7. Other matters, as warranted (e.g., fees, etc.).
List the audit procedures that should occur during the planning phase of an audit.
1. Review client records 2. Inquire of client personnel 3. Coordinate client assistance 4. Determine if specialists are needed 5. Coordinate staffing requirements.
List several circumstances that impact the extent of planning activities.
Size and complexity of the entity Auditor's experience with that entity Auditor's understanding of the entity and its environment, including its internal control.
What is the auditor's basic audit planning responsibility?
The auditor should plan the audit (and design the required written audit program or plan) to be responsive to the auditor's assessment of the risk of material misstatement.
Identify factors relevant to establishing an overall audit strategy.
1. Identify characteristics of the engagement affecting its scope; 2. Identify the reporting objective of the engagement and required communications; 3. Consider the factors relevant to utilizing the audit team; 4. Consider the results of preliminary engagement planning activities; and 5. Determine the nature, timing, and extent of necessary resources for the engagement.
What is the difference between an overall audit strategy and an audit plan?
An audit strategy deals with higher level issues, such as allocating audit resources, whereas an audit plan is more detailed and deals more specifically with the nature, timing, and extent of audit procedures to be performed.
Identify 3 planning-related issues that should be included in the auditor's documentation.
1. The overall audit strategy; 2. The audit plan; and 3. Any significant changes made to the audit strategy or the audit plan during the engagement, along with the reasons for any such changes.
Identify some activities associated with pre-engagement activities.
1. Perform appropriate procedures to address the quality control issues associated with the acceptance/continuance of the audit engagement; 2. Evaluate the audit team's compliance with relevant ethical requirements (especially independence issues); and 3. Establish an understanding in writing of the terms of the engagement.
Prior auditing standards referred to evaluation stage materiality. What did the term evaluation stage materiality mean?
The determination of whether the financial statements were fairly stated in all material respects at the completion of field work.
What 4 matters should be documented with respect to materiality considerations?
1. Materiality for the financial statements as a whole; 2. Materiality level(s) for applicable transactions, account balances, or disclosures; 3. Performance materiality; and 4. Any revision of those considerations during the audit engagement.
What is meant by the term tolerable misstatement?
The application of performance materiality to a particular sampling procedure or application.
What is the basic meaning of the concept of materiality?
An understanding of what is important.
The clarified auditing standards introduced the term performance materiality. What does that term mean?
The amount(s) set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
Prior auditing standards referred to planning stage materiality. What did the term planning stage materiality mean?
The size of the misstatements that the audit program was designed to detect.
The terms planning stage materiality and evaluation stage materiality in prior auditing standards has been replaced by what single concept in the clarified auditing standards?
Define "control risk."
The probability that a material misstatement, that occurred in the first place, would not be detected by applicable internal controls.
Define "inherent risk."
The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures.
Define "audit risk."
The probability that the auditor fails to modify the opinion on financial statements that contain a material misstatement.
Define "detection risk."
The probability that a material misstatement, that was not prevented or detected by internal control, was not detected by the auditor's substantive audit procedures.
What risk is within the auditor's control?
List the variables of planned audit procedures that can be adjusted to change detection risk.
1. Nature 2. Timing 3. Extent of substantive testing.
Define "risk of material misstatement."
The risk that the financial statements contain one or more material misstatements prior to the audit. (Note: RMM = IR x CR)
What is the audit risk model that is applicable to classes of transactions or to account balances?
Audit Risk = inherent risk x control risk x detection risk.
What is the purpose of analytical procedures in audit planning?
To aid in understanding client activities and in targeting risky areas where material misstatements are more likely to occur.
Define "analytical procedures."
Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.
What is the purpose of analytical procedures in the overall review?
To verify the conclusions reached in the audit.