Before the auditor accepts an engagement, what communication between teh predecessor and the auditor should be made?
Obtain client’s permission to make inquiries of the predecessor auditor
Specific inquiries include:
- Information that might bear on management intergrity;
- Disagreements with managment over accounting principles, auditing procedures, or similarly significant matters;
- The predecessor’s understanding as to the reasons for the change of auditors, and
- Communication to managment, the audit committee, and those charged with governance regarding fraud, illegal cats by clients, and matters relating to internal control
After accepting the engagement, what communication between the auditor and the predecessor can be made?
The auditor may:
- Make specific inquiries regarding matters that may affect the conduct of the audit (e.g., audit problems)
- Review the predecessor’s audit documentation related to matters of continuing accounting and auditing significance
Note that the auditor should notmake reference to teh work of the predecessor as the basis for the opinion
What should the auditor assess when considering the firm’s client acceptance and continuance policies?
The auditor should assess:
- The firm’s ability to meet reporting deadlines
- The firm’s ability to staff the engagement
- Independence
- Integrity of client management
- The group engagement’s team ability to obtain sufficient appropriate audit evidence
What topics should be included in the agreement to audit engagement terms? What is the purpose of establishing such an understanding?
An understanding should include:
- Objectives and the scope of the audit
- Management’s responsibilities
- The auditor’s responsibilities
- The limitations of the engagement
- Other matters such as timing, client assistance, fees and billing, etc.
The purpose of the agreement is to reduce the risk of misunderstanding. Note that an engagement letter documenting the understanding is a requirement under PCAOB standards.
Name the six main financial statement assertions for nonissuer and issuers
COVERU and CEO APPROVED
Nonissuer:
COMPLETENESS; CutOFF; VALUATION, allocation and accuracy; EXISTENCE and occurence; RIGHTS and obligations; UNDERSTANDABILITY and classification (COVERU)
Issuer:
COMPLETENESS; EXISTENCE, OCCURENCE (CEO)
ALLOCATION; PRESENTATION, RIGHTS, OBLIGATIONS, VALUATION; E; DISCLOSURE
(APPROVED)
Name the relevant assertinos for “transactions and events”
- Completeness
- (Prior period) Cutoff
- Accuracy
- Classification
- Occurence
Name the relevant assertions for “account balances”
- Completeness
- Allocation and Valuation
- Rights and Obligations
- Existence
Name the releveant assertions for “presenation and disclosure”
- Completeness
- Understandability and Classification
- Rights and Obligations, and Occurence
- Valuation and Accuracy
What is the audit strategy?
The audit strategy outlines the scope of the audit engagement, the reporting objectives, timing of the audit, and required communications, and the factors that determine the focus of the audit. The audit strategy also includes a preliminary assessment of materiality and tolerable misstatement
Define materiality and tolerable misstatement
Materiality is the amount of error or omission that would affect the judgment of a reasonable person. The auditor uses judgment to set the initial levels of materiality (including materiality for the F/S as a whole, performance materiality, and materiality for particular classes of transactions, account balances, and disclosures), and to revise them appropriately throughout the audit
Tolerable misstatement is the maximum error in a population that the auditor is willing to accept. Tolerable misstatement is the application of performance materiality to a particular sampling procedure.
What is an audit plan?
A written audit plan (required for every audit) is a listing of audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. The audit plan typically follows development of the audit strategy.
What should be included in each step of the audit plan?
“We cast out NET over the audit!”
Each step of the audit plan should set out the procedure in detail, specifying the nature, extent and timing of the work to be performed and including a reference to the assertion under consideration.
N - NATURE
E - EXTENT
T - TIMING
List the 3 types of audit procedures and tell why each is used
Risk assessment procedures - To obtain an understanding of the entity and its environment, including its internal control
Tests of control - To evaluate the operating effectiveness of internal control in preventing or detecing material misstatements
Substantive procedures - To detect material misstatements in the F/S
What are the responsibilities of assistants when there are disagreements?
Assistants have a responsibility to exercise due professional care and to observe standards of fieldwork. They should bring any disagreements with the conduct of the audit to the attention of the auditor-in-charge
The assistant also has the right to document the disagreement and, if necessary, to disassociate from the opinion
What factors determine the amount of reliance an independent auditor may place on the work of internal auditors?
The following factors affect the amount of reliance:
- The objectivity of internal auditors (level of reporting within the organizational structure)
- The competence of internal auditors
- An evaluation of the work performed by internal auditors
Note that the external auditor remains soley responsible for the audit report, and mya not share judgment responsibility with the internal auditor
Should an auditor refer to the work of a specialst in the auditor’s report?
Generally, in the case of an unmodified opinion, no reference is made to the work of a specialist. If, however, the auditor decides to express a modified opinion due to the work of the specialst, reference to the specialist may be made. The auditor may need the permission from the specialist before making reference to the specialist.
Under the ISAs, the auditor is required to obtain permission from the specialist before making reference to the specialist in the report
Under PCAOB standards, what facotrs affect the nature and extent of necessary planning activities?
- The size and complexity of the company
- The auditor’s previous experience with the company
- Changes in circumstances that occur during the audit
According to PCAOB standards, what factors indicate less complex operations?
- Fewer business lines
- Less complex business processes and financial reporting systems
- More centralized accounting functions
- Extensive involvement of senior managment in day to day operations
- Fewer levels of management
The engagement partner is responsible for:
- Planning the audit
- Supervising the work of engagement team members
- Complying with relevant audit standards
What factors determine the nature, extent, and timing of supervision?
- The size and complexity of the entity
- The nature of the work assigned to each engagement team member
- The assessed risk of material misstatement
- The qualifications of the assistants
Distinguish between the 3 types of material misstatements
The 3 types of material misstatements are:
- Factual misstatements: There is no doubt
- Judgmental misstatements: Management and the auditor have material judgment differences on accounting estimates or the application of accounting policies
- Projected misstatements: This represents the auditor’s best estimate of misstatements in populations, by projecting misstatements in an audit sample to the population that the samples were drawn.
What is audit risk? List and define the two elements of audit risk
Audit risk is the risk that the auditor may unknowingly fail to modify appropriately the opinion on financial statements that are materially misstated. It is comprised of:
- Risk of material misstatement - The risk that the financial statements are materially misstated
- Detection risk - The risk that the auditor will not detect a material misstatement that exists in a relevant assertion
State the audit risk model including the relationship of detection risk to substantive tests
AR = RMM x DR
Where
RMM = Risk of material misstatement
DR = Detection risk
Note that as the acceptable level of detection risk increases, the assurance required from substantive tests decreases. As the acceptable level of detection risk decreases, the assurance required from substantive testing must increase
What are the two components of the risk of material misstatement?
Inherent risk:
The susceptibility of a relevant assertion to a material misstatement assuming there are no related controls.
Control risk:
The risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected (and corrected) on a timely basis by the entity’s internal control
