Unit 5 - ENGAGEMENT PLANNING

Question 1

When developing engagement objectives, what other factors must internal auditors consider?

Answer 1

The probability of Significant errors
Fraud
Noncompliance
Other exposures

Question 2

Engagement scope defines

Answer 2

What will or will not be included in the engagement.

Question 3

When establishing engagement scope, what factors do internal auditors generally consider?

Answer 3

Boundaries, subprocesses, and components of the area or process under review
In-scope versus out-of-scope locations
Time frame

Question 4

Internal auditors must determine appropriate and sufficient resources to achieve engagement objectives. Define appropriate and sufficient.

Answer 4

Appropriate
Refers to the mix of knowledge, skills, and other competencies needed to perform the engagement.
Sufficient
Refers to the quantity of resources needed to accomplish the engagement with due professional care.

Question 5

Engagement resource allocation is the responsibility of

Answer 5

Internal auditors.

Question 6

Evidence is gathered during an audit engagement. What is the most persuasive form of evidence? What type of evidence is the least persuasive?

Answer 6

Most persuasive – Auditor’s physical examination

Least persuasive – Client oral testimony

Question 7

Who makes assertions about the recognition, measurement, presentation, and disclosure of information in the financial statements?

Answer 7

Management.

Question 8

Who performs procedures that test the validity of assertions made and assesses the risks of material misstatement?

Answer 8

Internal auditors.

Question 9

List and define: Assertions about classes of transactions and events for the period.

Answer 9

Occurrence – recorded transactions and events actually occurred
Completeness – all transactions and events that should have been recorded were recorded
Accuracy – amounts and other data were recorded appropriately
Cutoff – transactions and events were recorded in the proper period
Classification – transactions and events were recorded in the proper accounts

Question 10

List and define: Assertions about account balances at period end.

Answer 10

Existence – assets, liabilities, and equity interest exist
Rights and obligations – entity holds or controls the rights to assets, and liabilities are its obligations
Completeness – all assets, liabilities, and equity interests that should have been recorded were recorded
Valuation and allocation – assets, liabilities, and equity interests are included at appropriate amounts, and any adjustments appropriately recorded’

Question 11

Match the assertion with the correct statement(s).

Assertion
Statement
Presentation and disclosure
Balance Sheet
Account balances
Income

Statement
Transactions and events
Statement of Cash Flows
Notes to the financial statements

Answer 11

Assertion
Statement

Presentation and disclosure
Notes to the financial statements

Account balances
Balance Sheet

Transactions and events
Income Statement and Statement of Cash Flows

Question 12

Explain why risk assessment procedures are performed.

Answer 12

To obtain an understanding of the entity and its environment, including internal control.

Question 13

Define tests of controls as an audit procedure.

Answer 13

Tests the operating effectiveness of controls in preventing, or detecting and correcting, instances of noncompliance.

Question 14

When are tests of controls required?

Answer 14

When the auditor’s risk assessment is based on an expectation of the operating effectiveness of controls
or
Substantive procedures alone do not provide sufficient appropriate evidence

Question 15

What are substantive procedures used for?

Answer 15

To detect material misstatements at the relevant assertion level (transaction class, account balance, disclosure).

Question 16

What are the three basic procedures performed by internal auditors to gather information?

Answer 16

Observing conditions
Interviewing people
Examining records

Question 17

The internal auditors procedure of observation is effective for verifying whether

Answer 17

Particular assets exist

A certain process or procedure is being performed appropriately at a moment in time

Question 18

For what purpose is interviewing especially helpful?

Answer 18

To obtain an understanding of client operations.

Question 19

What are some of the predominant methods used to examine or inspect records in the audit activity?

Answer 19

Inspection of records or documents
Inspection of tangible assets
Verification

Question 20

A direct, written response to the auditor from a third party used for audit evidence is called

Answer 20

Confirmation.

Question 21

Explain the difference between a positive confirmation and a negative confirmation.

Answer 21

Positive confirmation – used when the amounts being confirmed are material. The recipient is asked to sign and return the letter with a positive assertion that the amount is either correct or incorrect.
Negative confirmation – used when the amounts being confirmed are immaterial or when controls are deemed to be functioning extremely well. It requires no response from the recipient unless the amount is disputed.

Question 22

Describe tracing and vouching, and for which assertion it is used to gain assurance.

Answer 22

Definition
Assertion
Tracing
Follows a transaction forward from the triggering event to a resulting event, ensuring that the transaction was accounted for properly.
Completeness assertion

Vouching
Tracks a result backward to the originating event, ensuring that a recorded amount is properly supported.
Existence assertion

Question 23

Define reperformance/recalculation.

Answer 23

Consists of duplicating the client’s work and comparing the results.

Question 24

Define analytical procedures.

Answer 24

Evaluations of financial information made by an analysis of relationships among financial and nonfinancial data.

Question 25

Why are analytical procedures used in the planning phase of an audit?

Answer 25

To identify the (1) existence of unusual transactions and events, (2) amounts, (3) ratios, and (4) trends that might indicate matters which require further investigation.

Question 26

List common analytical procedures.

Answer 26

``` Analysis of common-size financial statements Ratio analysis Trend analysis Analysis of future-oriented information Internal and external benchmarking ```

Question 27

Describe maturity models.

Answer 27

Maturity models provide the criteria for assessing the current state of a business process by establishing a systematic basis of measurement for describing the ‘as is’ state of a process.

Question 28

A primary result of engagement planning is the preparation of the engagement work program. What is an engagement work program?

Answer 28

A document that lists the procedures (methods) to be followed during an engagement, designed to achieve the engagement plan.

Question 29

What matters should be considered in preparing the engagement work program?

Answer 29

``` Engagement scope Management’s operating goals and objectives Means of achieving objectives A risk and control matrix Availability of essential resources Sample sizes Conclusions and judgments during planning Prior engagement communications ```

Question 30

An internal auditing engagement consists of

Answer 30

Planning Performing procedures Communicating results Monitoring progress

Question 31

Describe Performance Standard 2200, Engagement Planning.

Answer 31

Internal auditors must develop and document a plan for each engagement, including the engagement’s objectives, scope, timing, and resource allocations. The plan must consider the organization’s strategies, objectives, and risks relevant to the engagement.

Question 32

Describe Performance Standard 2201, Planning Considerations.

Answer 32

In planning the engagement, internal auditors must consider The strategies and objectives of the activity being reviewed and the means by which the activity controls its performance. The significant risks to the activity’s objectives, resources, and operations and the means by which the potential impact of risk is kept to an acceptable level. The adequacy and effectiveness of the activity’s governance, risk management, and control processes compared to a relevant framework or model. The opportunities for making significant improvements to the activity’s governance, risk management, and control processes.

Question 33

List components of a survey.

Answer 33

``` Input from stakeholders Analytical procedures Questionnaires Interviews Observations Prior audit reports Other relevant documentation Process mapping Checklists ```

Question 34

Why is input from stakeholders a survey component?

Answer 34

Stakeholders may be sources of information for the formulation of engagement objectives.

Question 35

List some disadvantages of using checklists.

Answer 35

Providing a false sense of security that all relevant factors are addressed Inappropriately implying that equal weight is given to each item The difficulty of translating the observation represented by each item Treating a checklist as a rote exercise rather than part of a thoughtful understanding of the unique aspects of the audit

Question 36

Describe engagement objectives.

Answer 36

Broad statements developed by internal auditors that define intended engagement accomplishments.

Question 37

How do objectives differ between assurance and consulting engagements?

Answer 37

Engagement Objectives Assurance Must reflect the results of the preliminary assessment of risks relevant to the activity under review. Consulting Must address governance, risk management, and control processes to the extent agreed upon with the client.