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44 Cards in this Set
- Front
- Back
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A3 Who is responsible for selection and appointment of the independent external auditor? |
The audit committee of the clients board of directors is responsible for selection and appointment of the independent external auditor. |
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A3 Name the 4 main reasons not to accept a client. |
1. Integrity of client management -- lacks integrity 2. Lack of available evidence 3. Audit firm lacks staff 4. Lack of independence |
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A3 Can an auditor accept audit engagement if management impose a scope of limitation that will result in the auditor disclaiming an opinion? |
The auditor should not accept the audit. |
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A3 Can auditor accept audit engagement if an audit is required by law or regulation but management impose a scope limitation that would result in a disclaiming of opinion by the auditor on the f.s as a whole? |
Auditor permitted but not required to accept the engagement |
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A3 Can an auditor accept the audit engagment if 1. management imposed scope limitation would result in a qualified opinion or 2. the scope limitation is imposed by circumstances beyond the managements control? |
Auditor may still accept the engagement. |
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A3 What is the purpose of an audit engagement letter? |
Engagement letter reduces the risk that either the auditor or the client misinterprets the needs or expectations of the engagement. Set for the term of the engagement. |
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A3 What 4 things should be included in the engagement letter? |
A. objective and scope of the audit B. the responsibility of the auditor C. the responsibility of management D. the inherent limitations of the audit to no detect all misstatements. |
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A3 What should an auditor assess before performing a recurring audit? |
Auditor should assess if the terms of the new engagement need to be revised. |
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A3 List 3 examples where in a recurring audit the engagement letter needs to be revised? |
1. significant change in ownership 2. significant change in the nature or size of the entity. 3. change in legal or regulatory requirements. |
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A3 If the terms in a recurring audit needs not to be revise, what should an audit do? |
auditor should remind management of the terms of the preceding engagement by means of a new engagement letter, or a written remainder. Reminder can be written or oral, but it needs to be documented. |
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A3 what are initial audits? |
Audits where the fin. statements were audited not audited or audited by a predecessor auditor. |
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A3 What is mandatory of the successor auditor before engaging to an initial audit or a reaudit engagement? |
Successor audit must make inquires of the predecessor auditor with client's permission. |
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A3 What are 4 inquires successor auditor should communicate with predecessor before accepting engagement? |
1. information about management integrity 2. disagreements with management 3. reasons why change in auditor from predecessor 4. communication to management, audit committee, board regarding fraud, noncompliance with laws and regulations, |
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A3 In reviewing the opening balance for material misstatements, the successor auditor should request what?? |
Request management to allow review of predecessor auditor's audit documentation to the most recently completed audit. |
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A3 What should current auditor do if they believe the fin statements audited by the predecessor contains material misstatements that requires revision? |
Request management to setup a meeting btw both auditors and client to find a resolution. |
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A3 What should current auditor consider if management refuses to address the required revision on prior fin statements? |
Auditor should consider withdrawing from the engagement. |
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A3 4 things auditor is required to do for the planning stage of auditing. |
1. obtain knowledge about the business and industry 2. develop audit strategy 3. develop audit plan 4. perform risk assessment procedures |
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A3 Audit strategy outlines the scope of the audit engagement, the reporting objectives, and timing. What else (4) does it include? |
1. preliminary assessment of materiality and 2. tolerable misstatements 3. audit risk and 4. internal control |
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A3 What are the 3 levels of materiality are established in the audit strategy? |
A. Materiality of the fin state. as whole. B. performance materiality C. (if necessary) materiality levels for particular classes of transactions, account balances, or disclosures. |
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A3 What must be considered when using professional judgement to set materiality for fin. statements as a whole? |
Should consider both qualitative and quantitative factors for expressing a specific amount for materiality of the whole f.s. |
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A3 What is performance materiality? |
Performance materiality is the amt. or amounts set by the auditor at less than materiality for the fin. statments as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the fin. state. as whole. |
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A3 Can the materiality level for particular classes of transactions, account balances, disclosures be different than the materiality of the fin. state. as a whole? |
Yes, in some circumstances the materiality of parts of the fin. state. can be lower . |
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A3 What is an audit plan? |
Audit plan is based on the audit strategy and outlines the nature, extent, and timing of the procedures to be performed during the audit. A written plan is required. |
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A3 What are the two steps of audit procedures? |
1. Risk assessment procedures (aka obtaining and understanding phase, always do this in all audits) 2. Further Audit Procedures (test of details phase, sometimes perform) |
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A3 What is the purpose of the Risk assessment procedure? |
procedure is used to obtain an understanding of the entity and its environment, including internal control in order to assess the risk of material misstatement and determine the nature, extent, timing of further audit procedures. |
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A3 What is include in Further Audit procedures? |
1. Test of operating effectiveness of internal controls, 2. andsubstantive procedures |
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A3 What is substantive procedures? And what are the 2 components? |
procedures used to detect material misstatements. They included: 1. test of details. 2. substantive analytical procedures |
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A3 What are the 6 main financial assertions? and the memonic? |
COVERU C Completeness O Cut off V Valuation, allocation, accuracy E Existence and Occurence R Rights and obligations U Understandability and Classification |
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A3 What are the relevant assertions to Transactions and events? (current year journals [sales]) |
completeness, cutoff, accuracy, classification, and occurrence |
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A3 What are relevant assertions to account balances [all year ledgers {general}]? |
completeness, allocation, valuation, righst and obligations, existence |
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A3 Relevant assertions for presentation and disclosures? [footnotes] |
completeness, understandability and classification, rights and obligations, and valuation and accuracy |
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A3 Why cant independent external audit share the responsibility for audit decisions, judgments, or assessements with the internal auditor? |
Internal auditor are not independent of the client, their employer. |
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A3 In general a specialist use to help with an audit should be independent from the client. However, in some circumstances it is acceptable to enlist the help of a specialist that is not independent of the client. What must the auditor do in this circumstance? |
Auditor should perform additional procedures. |
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A3 T or F An auditor should make reference to the report of a specialist when issuing an unmodified opinion. |
False. No referenence should be made to the work of the specialist. |
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A3 What is audit risk? |
Audit risk is the risk that the auditor did not catch all materially misstatements therefore not modifying the opinion appropriately. |
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A3 What are the 3 types of misstatements? |
1. factual misstatements (misstatements which there is no doubt? 2. judgemental misstatements (accounting estimates differences btw management and auditor) 3. Projected misstatements (sampling applied to population) |
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A3 What is audit risk Model? Formula for Audit risk model? |
Audit risk is the risk that the f.s are materially misstated and that the auditor did not detect the misstatements. Audit risk = Risk of material misstatement * Detection risk AR = RMM * DR (should be low) = (assessed by auditor) * (controlled by auditor) |
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A3 How is the RMM composed? |
RMM = IR * CR RMM = inherent risk * control risk |
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A3 what is control risk? |
Risk that material misstatement could not be detected or prevented through internal controls. |
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A3 Can an auditor change the risks of IR or CR? |
No. IR and CR exist independent of the audit and can not be change by the auditor. |
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A3 |
Detection risk is a function of the effectiveness of the audit procedures and the application to detect material misstatements. |
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A3 What is the relationship between RMM to DR? |
The relationship is inverse. When RMM is high, detection risk should be set a low level. When RMM is low, detection risk can he higher. |
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A3 How can detection risk be changed if the acccpetable level of detection risk decrease? |
1. change nature of the substantive test from less effective to more effective. 2. change extent, increase to larger sample size 3. change timing, sample at year end instead of interim. |
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A3 What is the relationship between audit risk and materiality? |
audit risk and materiality have an inverse relationship. ex. the high the risk the lower the materiality to catch misstatements |
