Planning an Engagement Flashcards
(7 cards)
The main objective of a review of interim financial information of a public entity is to provide the accountant with a basis for
A. Determining whether the prospective financial information is based on reasonable assumptions.
B. Expressing a limited opinion that the financial information is presented in conformity with the applicable financial reporting framework.
C. Deciding whether to perform substantive audit procedures prior to the balance sheet date.
D. Reporting whether material modifications should be made for such information to conform with generally accepted accounting principles.
D. Reporting whether material modifications should be made for such information to conform with generally accepted accounting principles.
The SEC requires that an independent accountant review a public company’s interim financial information according to PCAOB auditing standards before the company files required quarterly reports (eg, Form 10-Q, Form 10-QSB). A written review report is required only when the company references an independent accountant review.
The main objective of this review is to provide the accountant with a basis to communicate any material modifications needed for the interim financial information to conform with GAAP. The review consists principally of performing analytical procedures and making inquiries of those responsible for financial and accounting matters. It does not result in an opinion about the F/S.
(Choice A) Interim financial information summarizes historical events rather than prospective (ie, estimated future) events.
(Choice B) A review engagement does not result in a written report expressing an opinion. It does not require the risk assessments, tests of controls, or tests of details that provide evidence for expressing an opinion on financial information.
(Choice C) An audit, not a review engagement, may use interim financial information to determine substantive procedures to be performed prior to the balance sheet date. No substantive tests are performed for a review engagement.
Things to remember:
The main objective of a review of public company interim financial information is to provide the accountant with a basis to communicate any material modifications needed for the information to conform with GAAP.
The audit program usually cannot be finalized until the
A. Consideration of the entity’s internal control structure has been completed.
B. Engagement letter has been signed by the auditor and the client.
C. Internal control deficiencies have been communicated to the audit committee.
D. Search for unrecorded liabilities has been performed and documented.
A. Consideration of the entity’s internal control structure has been completed.
An audit program, required for every GAAS audit, is a step-by-step list of audit procedures. The procedures are designed to achieve specific audit objectives (eg, detect material misstatements) related to management assertions (claims). The program describes the nature, timing, and extent of:
Risk assessment procedures sufficient to assess the risk of material misstatement (eg, test of controls)
Further audit procedures at the relevant assertion level for each material class of transactions, account balances, and disclosures
Other procedures needed to comply with GAAS (eg, the use of specialists)
Auditors should consider key factors such as materiality, the risk of material misstatement (RMM), and business and industry factors before the audit program can be finalized. Understanding an entity’s internal control structure helps the auditor assess the risk of material misstatement.
(Choice B) The engagement letter is delivered and usually signed by the client during the client acceptance phase of an audit. Client acceptance should have already been completed by the time the auditor begins work on the audit program and is not part of the process needed to finalize it.
(Choice C) Internal control procedures and discovered deficiencies are communicated to the audit committee after the audit program is finalized.
(Choice D) A search for unrecorded liabilities is listed in the audit program and is performed after the program is finalized.
Things to remember:
An audit program is a step-by-step listing that describes the nature, timing, and extent of audit procedures used to detect material misstatements during field work. The audit program should be completed after the auditor has assessed the risk of material misstatement, which includes consideration of an entity’s internal controls.
In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan?
A. Procedures performed to assess independence and the ability to perform the engagement.
B. The understanding of the terms of the engagement, including scope, fees, and resource allocation.
C. Other audit procedures to be performed to comply with generally accepted auditing standards.
D. Issues with management integrity that could affect the decision to continue the audit engagement.
B. The understanding of the terms of the engagement, including scope, fees, and resource allocation.
Audit planning is performed after the client acceptance phase is completed and is used to develop an audit strategy for risk assessment procedures, test of controls, and substantive procedures. The auditor should consider information obtained during the acceptance phase to develop a strategy that is appropriate to the client. The strategy should establish the timing, scope, and direction of the audit.
The audit plan provides details about how the strategy will be executed. The auditor should document the nature (eg, type of procedures), timing, and extent (ie, the area covered) of the audit procedures. Other procedures needed to comply with GAAS should also be documented. For example, if the auditor is engaged to audit an insurance company, the auditor may need an external actuary (a specialist) to help with the audit. The auditor should specify what actuarial firm will be used and the timing of their services in the audit plan.
(Choice A) Procedures performed to assess independence and the ability to perform the engagement are done during the client acceptance phase of an audit. This procedure should be completed before accepting the audit engagement.
(Choice B) The understanding of the terms of the engagement, including scope, fees, and resource allocation, is completed during the client acceptance phase of an audit and should be done before the audit plan. The terms are usually included in an engagement letter that serves as a contract between the auditor and the client.
(Choice D) Issues with management’s integrity should be addressed prior to client acceptance. The auditor should not accept an audit engagement if management lacks integrity because doing so may compromise the audit firm’s reputation.
Things to remember:
Audit planning is performed after the client acceptance phase is completed. During planning, the auditor will develop an audit strategy and document how that strategy will be executed in the audit plan. The audit plan should provide details about the nature, timing, and scope of audit procedures and any requirements needed to comply with GAAS.
Which of the following would be least likely to be considered an audit planning procedure?
A. Use an engagement letter.
B. Develop the overall audit strategy.
C. Perform risk assessment.
D. Develop the audit plan.
C. Perform risk assessment.
(Choice A) An engagement letter is used to establish an understanding with the client, and this is a planning procedure.
(Choice B) Auditors develop the overall audit strategy during audit planning.
(Choice C) Performing the risk assessment occurs subsequent to audit planning.
(Choice D) The audit plan is developed during planning.
When designing a written audit program, an auditor must establish specific audit procedures that relate primarily to
A. The timing for the procedures.
B. The cost/benefit of gathering evidence.
C. Selected audit techniques.
D. Management’s assertions.
D. Management’s assertions.
The objective of a F/S audit is to express an opinion on the fairness of the entity’s F/S. Management makes assertions about the F/S, and the auditor must test the accuracy of those assertions before expressing the opinion.
An audit program, which is required for all audits, is a list of audit procedures to be performed to support the audit opinion. Even when audit risk is low, GAAS requires that the audit program includesubstantive procedures that test management’s F/S assertions related to material account balances, classes of transaction, and disclosures. The assertions to be tested will determine the nature, timing, and extent of the procedures.
(Choice A) To ensure sufficient evidence is gathered to express an opinion, the audit procedures must relate primarily to management’s F/S assertions. For some assertions, the audit program should include the time when substantive procedures must be performed (eg, inventory counts at year end).
(Choices B and C) The audit techniques selected and the cost/benefit of gathering the needed evidence should be considered when developing the audit program. However, the auditor’s primary consideration must be to perform substantive procedures that provide sufficient appropriate evidence for conclusions on all relevant management assertions.
Things to remember:
When designing a written audit program, an auditor must establish specific audit procedures that relate primarily to management’s assertions on the F/S.
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs
A. Analytical procedures for property and equipment balances at the end of the year.
B. Tests of controls and extensive tests of property and equipment balances at the end of the year.
C. Analytical procedures for current year property and equipment transactions.
D. Tests of controls and limited tests of current year property and equipment transactions.
D. Tests of controls and limited tests of current year property and equipment transactions.
Control risk (CR) is the risk that an entity’s controls will not prevent or detect (and correct) a material misstatement. CR affects the overall risk of material misstatement (RMM). If controls are unreliable, there is a greater chance that a misstatement will occur (ie, CR is high). In contrast, reliable controls reduce the RMM (ie, CR is low).
To set CR low, auditors must plan and perform tests of controls on the design and the operating effectiveness of the control. If the test results indicate that the control is effective, CR can be reduced. Because effective controls reduce the RMM, the amount of audit work can also be reduced. This is useful when there are numerous transactions because reducing CR permits the auditor to limit, not extend, substantive testing (Choice B).
(Choices A and C) To justify setting the CR low, controls must be tested. Substantive analytical procedures would then be performed in addition to control testing.
Things to remember:
When auditors consider reducing the level of control risk (CR), they perform tests of controls. If the control is considered effective, auditors can reduce CR and limit the amount of additional substantive testing.
Holding other planning considerations equal, a decrease in the number of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to
A. Apply the planned substantive tests prior to the balance sheet date.
B. Perform the planned auditing procedures closer to the balance sheet date.
C. Increase the assessed level of control risk for relevant financial statement assertions.
D. Decrease the extent of auditing procedures to be applied to the class of transactions.
B. Perform the planned auditing procedures closer to the balance sheet date.
(Choice A) Performing substantive auditing procedures before the balance sheet date reduces their ability to detect material misstatements. Remember that the auditor is expressing an opinion on the financial statements as of year end (not an interim date). A decrease in the amount of tolerable misstatements would require stronger evidence, not weaker evidence.
(Choice B) When the level of tolerable misstatements decreases, the auditor will have to increase substantive testing to ensure that all material misstatements are detected. Performing the planned auditing procedures closer to the balance sheet date increases the effectiveness of substantive procedures and thus increases substantive testing.
(Choice C) The auditor’s assessment of control risk in the client’s environment would not be changed as a result of the auditor’s decision to decrease the level of tolerable misstatements. Instead, the reverse might be true. The auditor might decide to decrease the level of tolerable misstatements as a result of a higher control risk assessment.
(Choice D) Decreasing auditing procedures reduces substantive testing and a decrease in the amount of tolerable misstatements would require additional substantive testing.
