Engagement Planning 3

Question 1

Information that may suggest the possibility of illegal acts

Answer 1

• Unauthorized, improperly recorded, or unrecorded transactions
• Investigation by a governmental agency
• Reports of regulatory agencies citing law violations
• Large payments for unspecified services to consultants, affiliates, or employees
• Excessive sale commissions
• Unusually large payment to cash, bearer, transfers to numbered bank accounts
• Unexplained payments to government officials or employees
• Failure to file tax returns or pay other fees

Question 1

Describe the limitations on Prospective Financial Statements?

Answer 1

Report is restricted to specified users.

Agreed-upon procedures are implemented.

Question 2

What are the overall responses to the risk of material misstatement due to fraud

Answer 2

The overall responses to the risk of material misstatement due to fraud include

(1) assigning personnel with particular skills relating to the area and considering the necessary extent of supervision to the audit,

(2) increasing the consideration of management’s selection and application of accounting principles, and

(3) making audit procedures less predictable.

Question 3

What is the independence requirement for Compilations?

Answer 3

• Independence NOT required for Compilations
• No Internal Control work allowed
• No assurance given

Question 3

Attest Function

Answer 3

In an attest engagement a CPA is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party.

The attestation standards apply to engagements that involve subject matter other than historical financial information, whereas the generally accepted auditing standards apply to the performance of services related to historical financial statements.

Question 4

What is the independence requirement for a Review?

Answer 4

• Reviews require independence.
• No Internal Control work allowed
• Performs analytical procedures and Inquiries
• No material indirect financial interest allowed
• No immaterial direct financial interest allowed

Question 5

What was the effect of the SOX Act of 2002?

Answer 5

• 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

Question 5

What type of assurance is provided by Review services?

Answer 5

Reviews provide NEGATIVE or Limited assurance

Question 5

Assurance services

Answer 5

The Special Committee on Assurance Services (the Elliott Committee), defined assurance services as independent professional services that improve quality of information, or its context, for decision makers.

Question 7

What is the Hierarchy of Authoritative Literature?

Answer 7

1. Statements on Auditing Standards (SAS)
2. Auditing Interpretations- AICPA Guides & SOPs
3. Industry Articles (no authority)

Question 9

when assessing the internal auditors’ competence

Answer 9

when assessing the internal auditors’ competence, the auditor should obtain or update information from prior years about such factors as:

• educational level and professional experience of internal auditors.
• professional certification and continuing education.
• audit policies, programs, and procedures.
• practices regarding assignment of internal auditors.
• supervision and review of internal auditors’ activities.
• quality of working-paper documentation, reports, and recommendations.
• evaluation of internal auditors’ performance.

Question 10

What is the independence requirement for consulting services?

Answer 10

Independence is not required for consulting services.

Question 11

Effect of specialist’s work on the auditor’s report

Answer 11

Effect of specialist’s work on the auditor’s report

1. If the specialist’s findings support the related financial statement assertions, the auditor may conclude that sufficient competent evidential matter has been obtained, and no reference should be made to the specialist’s work in the audit report
2. If the specialist’s findings do NOT support the related financial statement assertions

• *a**. The auditor should (1) apply additional procedures and (2) if necessary, obtain the opinion of another specialist (unless it appears that the matter cannot be resolved)
• *b**.If the difference cannot be resolved, the auditor will ordinarily qualify the opinion or disclaim an opinion because the inability to obtain sufficient competent evidential matter is a scope limitation
• *c**.If the financial statements are incorrect, the auditor should express a qualified or adverse opinion due to a departure from GAAP

NOTE: Only in b. and c. may the specialist be referred to.

Question 13

Evaluation of the work of specialist by CPA

Answer 13

• An auditor should obtain an understanding of the nature of the work performed by the specialist, including the objectives and scope.
• The auditor should also understand the specialist’s relationship to the client, the methods or assumptions used (including a comparison with the preceding period), the appropriateness of using the specialist’s work, and the form and content of the specialist’s findings.

Question 14

The auditor’s communication with those charged with governance

Answer 14

The professional standards require that a communication (orally or in writing) of certain information occur between the auditor and those charged with governance of the company being audited (e.g., the board of directors, audit committee).

1. Qualitative aspects of the entity’s significant accounting practices
2. Significant difficulties encountered during the audit
3. Uncorrected misstatements
4. Disagreements with management
5. Management’s consultations with other accountants
6. Significant issues discussed, or subject to correspondence with management
7. Auditor independence issues
8. If those charged with governance are not involved in managing the entity, the following should also be communicated

• Material corrected misstatements resulting from audit
• Representations requested from management
• Other significant issues

Question 14

SSAE, SSARS, SAS , SSCA

Answer 14

• Statements on Standards for Attestation Engagements (SSAE) are issued by senior technical bodies of the AICPA. They apply to practitioners engaged to perform an examination or a review; or issue an agreed-upon procedure report on subject matter, or an assertion about the subject matter that is the responsibility of another party (these are called “attest engagements”). Examining and reporting on management’s assertion that the entity’s schedule of investment returns is presented in accordance with specific criteria would fall under these standards. SSAEs can be found in the back of the Codification of Statements on Auditing Standards publication, and they are referenced as “AT.”
• Statements on Standards for Accounting and Review Services (SSARS) are issued by the Accounting and Review Services Committee of the AICPA. They describe the professional requirements imposed on accountants performing a compilation or review. They can be found in the codification of these standards, and they are referenced as “AR-C.”
• Statements on Auditing Standards (SAS) are issued by the Auditing Standards Board of the AICPA. They contain the generally accepted auditing standards with which an auditor is expected to comply. SASs are arranged in a codification published by the AICPA, which groups and references them as “AU-C” sections.
• Statements on Standards for Consulting Services (SSCS), issued by the AICPA, supersede the Statements on Standards for Management Advisory Services (SSMAS). They provide standards of practice for practitioners performing consulting services (defined broadly as consultation, advisory, implementation, transaction, support, and product services). The standards are contained in Rules 201, 202, and 102 of the AICPA Code of Professional Conduct.

Question 16

Fraud risk factors

Answer 16

Fraud risk factors. Events or conditions that indicate an incentive or pressure to perpetrate fraud, provide an opportunity to commit fraud, or indicate attitudes or rationalizations to justify a fraudulent action.

Question 17

Relationship among IR, CR , DR

Answer 17

• IR and CR exist independently of the audit
• DRrelates to the effectiveness of the auditor’s procedures
• Inverse relationship

Question 18

Elements of quality control activities

Answer 18

• 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 - Human ressource
• Firm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.

Question 20

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

Answer 20

Must have an understanding of the client industry

Question 21

Which literature governs Compilation services?

Answer 21

• SSARS - Statements on Standards for Accounting and Review Services
• These govern reporting for non-public entities only

Question 22

the purposes of the quality control element on accepting/continuing a client relationship

Answer 22

The quality control element on accepting or continuing a client relationship has the purposes of

(1) considering the integrity of the client,

(2) determining that the CPA firm is competent to perform the engagement, and

(3) determining that the CPA firm can comply with legal and ethical requirements

Question 23

The attestation standards (AT) include the following standards:

Answer 23

The attestation standards (AT) include the following standards:

• Work shall be adequately planned and assistants, if any, properly supervised (the first Fieldwork Standard, AT 101.42).
• Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report (the second Fieldwork Standard, AT 101.51).
• The report shall identify the assertion being reported on and state the character of the engagement (the first Reporting Standard, AT 101.63).