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27 Cards in this Set

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What are the goals of engagement planning?
1. Obtain (or Update) an understanding of IMPORTANT EVENTS that have affected the client and its operations
2. Identify areas of the engagement that may represent SPECIAL RISKS to the public accounting firm.
3. Ensure that the engagement can be completed in a TIMELY FASHION.
ch. 5
What is the process in communicating between Predecessor and Successor Auditors?
1. ATTEMPT TO communicate is required (request permission from the client)
** If client does not permit, why not?
** Should we take the client?
CH. 5 - PRE-ENGAGEMENT ACTIVITIES
What issues should you discuss if client permits communication with predecessor auditors?
1. Disagreements about accounting principles or audit procedures (opinion shopping?)
2. Communications the predecessor auditors gave the former client about fraud, illegal acts, and internal control recommendations.
3. The predecessor auditors' understanding about the reasons for the change of auditors (esp. if auditors were terminated)
CH. 5 - PRE-ENGAGEMENT ACTIVITIES
What is the Engagement letter for?
It acts as a CONTRACT between CLIENT AND AUDITOR.
CH. 5 - PRE-ENGAGEMENT ACTIVITIES
What is in the Engagement Letter?
1. Issues addressed:
-- Engagement objectives
-- Responsibilities of management/auditor
-- Engagement limitations (reasonable assurance)
-- Fees
-- Conflict resolution procedures
2. Other issues that might be addressed:
-- Arrangements for use of specialists
-- Arrangement for use of internal auditors
-- Provision limiting auditor/client liability
-- Other services to be performed (SEC doesn't like)
CH. 5 - PRE-ENGAGEMENT ACTIVITIES
When is the work of internal auditors allowed?
1. If conclusion is reached that Internal Auditors are OBJECTIVE and COMPETENT, external auditors may use some of their work to support their own work.
2. Cannot completely substitute External auditors' own procedures and evidence.
3. External auditors CANNOT SHARE RESPONSIBILITY for audit decisions with Internal auditors and MUST SUPERVISE, REVIEW, EVALUATE, AND TEST the work performed by IA.
4. Internal Auditors should never be given tasks that require the external auditors' PROFESSIONAL JUDGMENT (e.g., reasonableness of the allowance for doubtful accounts)
CH. 5 - INTERNAL AUDITORS WORK
In judgment calls, when is the objectivity and competence changed in considering the work of Internal Auditors?
1. When judgment or risk is high and objectivity and competence is low or high, then the EA should not rely on the internal auditors' work.
2. When judgment or risk is low, if objectivity and competence is low, then EA should reperform 50% of IA work.
3. When judgment or risk is low and objectivity and competence is high, then EA should reperform 30% of IA work.
CH. 5 - INTERNAL AUDITORS WORK
What are the roles of the audit committee as outlined by SOX Section 301?
1. Consist of members of board of directors and independent auditors.
2. Responsible for overseeing work of any registered public accounting firm employed by the company.
3. Must pre-approve all audit and non-audit services provided by the auditors.
4. Must establish procedures to follow for complaints.
5. Must have authority to engage independent counsel.
CH. 5 - AUDIT COMMITTEE INVOLVEMENT IN PRE-ENGAGEMENT ISSUES
Who makes up the Audit Committee and what do they do?
Members of the Board of Directors of a corporation. They oversee the Internal and External Auditing work done for the organization.
CH. 2
What are the steps in Engagement planning?
1. Assess business risks and establish materiality
2. Identify related parties (assume transactions are arms-length)
3. Perform Preliminary Analytical Procedures
CH. 5 - ENGAGEMENT PLANNING
How are risks assessed in Engagement planning?
The ARM (Audit Risk Model) is used for this.
CH. 5 - ENGAGEMENT PLANNING
What are the related party transactions and how are they identified in Engagement Planning?
Related parties include individuals or organizations that are closely tied to the client (through family) ties or investment relationships.
** Historical cost assumes that transactions are valued at prices agreed to by 2 objective parties, so valuation of related-party transactions could be a problem.
** These transactions need to be identified early so that we can obtain sufficient evidence to ensure proper accounting and disclosure.
CH. 5 - ENGAGEMENT PLANNING
Explain Preliminary Analytical Procedures.
Comparisons of a company's reported balances to a benchmark. They provide a relatively simple test of REASONABLENESS of a given balance.
** Used to Identify potential problem areas; Unusual changes in account relationships; Unusual trends
** They ensure that subsequent audit work targets high-risk areas
CH. 5 - ANALYTICAL PROCEDURES
When are Analytical Procedures required?
They are REQUIRED during the PLANNING AND FINAL REVIEW STAGES of the audit.
CH. 5 - ANALYTICAL PROCEDURES
What are common types of Preliminary Analytical Procedures?
1. Comparison of current-year account balances to those of one or more comparable periods (horizontal, vertical)
2. Comparison of the current-year account balances to anticipated results found in the company's budgets and forecasts
3. Evaluation of the relationships of current-year balances to other current-year balances for conformity with predictable patterns based on company's experience (ratio analysis)
CH. 5 - ANALYTICAL PROCEDURES
What is the purpose of Substantive Analytical Procedures?
Used to obtain evidential matter about particular assertions related to account balances or classes of transactions. (OPTIONAL)
CH. 5 - ANALYTICAL PROCEDURES
What are the steps in Substantive Analytical procedures?
1. Develop an Expectation
2. Define a tolerable difference
3. Compare the expectation to recorded amount.
4. Is Difference greater than tolerable difference?
------------------------
If YES...
5. Investigate Difference
6. Are explanations and corroborative evidence adequate?
If Yes..... Accept amount.
If No... Conduct other audit procedures, then Document results
------------------------------
If NO...
5. Accept amount -- then Document results.
CH. 5 - ANALYTICAL PROCEDURES
Explain the various methods used to develop an expectation.
Auditing standards require the auditor to have an expectation whenever analytical procedures are used:
1. Financial and Operating Data
2. Budgets and Forecasts
3. Industry publications
4. Competitor Information
5. Management's analyses
6. Analyst's Reports
CH. 5 - ANALYTICAL PROCEDURES
What is Precision of the Expectation?
Precision is a measure of how closely the expectation APPROXIMATES the "correct" but unknown amount.
** The level of precision that is necessary varies with the LEVEL OF DETECTION RISK
** If Detection risk is low, Need GREATER Precision Risk.
CH. 5 - ANALYTICAL PROCEDURES
What are the factors that affect the precision of the expectation?
1. Disaggregation
2. PLAUSIBILITY AND PREDICTABILITY of relationship studied
3. DATA RELIABILITY
4. TYPE OF PROCEDURE used to develop the expectation
CH. 5 - ANALYTICAL PROCEDURES
What are Dual Purpose Tests?
These are tests that perform 2 separate tests at the same time.
** Can Improve the Efficiency of the Audit**
Test of Controls AND Substantive Test - A procedure that shows an agreement on sales invoices to shipping documents and customer orders.
CH. 5 -
Explain the Assurance Bucket.
The assurance bucket must be filled with sufficient appropriate evidence to obtain the level of assurance necessary to support the auditor's opinion.
CH. 5
What is the order of procedures needed to fill the Assurance Bucket?
1. Follows the top-down audit testing hierarchy - begin filling the bucket with evidence from the RISK ASSESSMENT PROCEDURES.
2. TESTS of CONTROLS
3. SUBSTANTIVE ANALYTICAL PROCEDURES (optional)
4. Remaining ASSURANCE needed from TESTS OF DETAILS
CH. 5
What is the result if the assurance bucket is filled with Risk Assessment Procedures and Tests of Controls?
Detection risk is Zero
CH. 5
When would the assurance bucket need to be entirely filled only with Tests of Controls and Substantive Analytical Procedures?
For Lower-risk, Well-controlled accounts.
CH. 5
What is a tolerable difference?
In Substantive Analytical Procedure - size of the tolerable difference depends on:
1. Significance of the account
2. Desired degree of reliance on the substantive analytical procedures
3. Level of disaggregation in the amount being tested
4. Precision of the expectation
CH. 5
Name the steps in performing a Substantive Analytical Procedure.
1. Calculate the expectation for current year revenues (Actual Curr Yr - Actual Previous Yr) = Difference
2. If Diff is Greater than the Tolerable Difference, then the Actual CY should not be accepted.
3. Calculate Diff between the Expectation and the Actual amount
(Avg growth % x Actual Previous Year) = Expected growth
4. Subtract Expected growth amount from Actual Current year = Expected Growth Difference
5. Subtract Exp Growth Diff from Tolerable Diff. --> if Tolerable diff is higher, then the Expected growth amount is acceptable.
6. Benchmark -- same as 4 & 5, except you will use the Industry's % to figure the expected growth amount.
CH. 5