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43 Cards in this Set
- Front
- Back
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Three main reason why the auditor should plan engagements properly?
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1.Obtain sufficient appropriate evidence for the circumstances
2.To keep audit costs reasonable 3. To avoid misunderstandings with the client |
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Why does the CPA firm want to obtain sufficient evidence?
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To minimize legal liability and maintain a good relationship with the business community.
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why is assessing acceptable audit risk and inherent risk an important part of audit planning?
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It helps determine the amount of evidence that will need to be accumulated and staff assigned to the engagement.
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What are the 4 Essential activities in planning the audit?
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1.Auditor decides weather to accept the client or not
2. Auditor identifies why the client needs an audit. The remainder of the planning may be impacted by the clients reasoning. 3. Obtain an understanding with the client to avoid missunderstandings. It has to be written (engagement letter) 4. Develop an overall audit strategy. Should consider reasons for the audit, engagement staffing, and required specialists. Auditor should identify place where there is the greatest misstatement. |
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Comunication with the predecessor auditor is required. who is required to initiate the communication?
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The successor auditor.
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Why are auditors very selective on clients who have integrity and go with the flow of the audit?
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clients who lack integrity or aruge constantly about the proper conduct of the audit and fees cause more problems than they are worth.
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What are some high risk industries to audit?
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savings and loans, health, and casualty insurance companies
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What are the 3 parts to a new client investigation?
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1. They investigate the new clients standing in its business community
2. Its financial stability 3. its relation with its previous CPA firm |
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According to the code of professional conduct what does the predecessor auditor have to obtain before giving information out to the successor auditor?
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Permission from the client.
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What can prevent a CPA firm to continue an audit once a client is accepted?
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1. the client owes the auditor money.
2. the client files a lawsuit against the CPA firm or Vice versa. |
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if the acceptable audit risk is too low or pretty low, the auditor
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can choose to not accept the client or choose to accept the engagement but at a high fee.
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The more statement users the _______ evidence is needed.
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More
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How does an auditor document the understanding between itself and a client?
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Using an Engagement letter.
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What is stated in the Engagement letter?
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includes an agreement to rpovide other services such as tax returns or consulting, it should sinclude deadlines, restrictions,assistance to be provided by the clients personnel and schedules to be prepared for the auditor. it often includes an agreement on fees. the engagement letter says the auditor cannot guarantee all fraud will be discovered.
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who signs the engagement letter in a private company?
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Management
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Who signs the engagement letter in a public company
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the audit committee
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Why is engagement letter information important in planning the audit?
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It affects the timing of tests and total amount of time the audit and other services will take.
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What does the overall audit strategy consider?
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The nature of the client, including areas where there is greater risk of significant misstatements.
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Client business risk
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The reisk that eh client will fail to achieve its objectives.
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how can client business risk arise?
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it can arise from any of the factors affecting the client and its environment, such as new technology eroding a clents competitive advantage. Or competitors.
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What is the auditors primary concern
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the risk of material misstatements in the financial statement due to clients business risk.
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What could be impaired on the financial statements if the combining of 2 companies dont work out
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the fixed assets and goodwill recorded could affect the fair presentation in the financial statements.
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Residual risk
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The remaining risk after considering the effectiveness of top management controls.
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Factors that may impact business risk include:
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•General economic conditions,
•Extent of competition within an industry, •Changing regulatory requirements, •Competence of management, •Ability to maintain sufficient cash flows and secure financing, and •Successful implementation of business strategies. •These factors also affect acceptable audit risk and inherent risk. |
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What is managements responsibility in classifying business risk?
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IN a public company, managment should conduct evaluations of relevenet business risks that affect financial reporting to be able to certify quarterly and annual financial statements, and to evaluate the effectiveness of disclosure controls and procedures.
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why does SOX require management to certify that it has designed disclosure controls and procedures?
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To ensure that material information about business risks are communicated to management. These procedures cover more than an issuers internal controls for financial reporting.
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Why does management have to inform the auditor about material weakness in internal control?
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so it will let the auditor better evaluate internal control and focus on those key areas.
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What are the three stages that analytical procedures can be executed?
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Plannning, Testing, and Completion.
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Ratios
Short-Term Debt-Paying Ability |
Cash Ratio
Quick Ratio Current Ratio |
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Ratios
Liquidity Activity Ratios |
Accounts receivable turnover
Days to collect accounts receivable Inventory turnover Days to sell inventory |
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Ratios
Ability to Meet Long-Term Obligations |
Debt to equity
Times interest earned |
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Ratios
Profitability Ratios |
Gross profit percent
Profit Margin Return on assets Return on common equity |
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What does the profitability measure
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How the company is performing
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What does liquidity measure
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the company's financial condition
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what do leverage ratios indicate?
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The company's additional borrowing capacity.
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What ratios are going to be assessed as the highest inherent risk?
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The collectabilty of accounts recievable and inventory obsolescence.
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When are analytical procedures required to be done?
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In the planning and the completion stage
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Analytical procedures in the Planning stage.
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Required.
to assist in determining the nature, extent and timing of audit procedures. Helps auditor determine significant matters requiring special consideration. . |
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Purpose of Analytical procedures in the Planning stage of the audit.
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The primary purposes are to understand the client’s business and industry and indicate areas of possible misstatements. The secondary purposes are to assess going concern and reduce the extent of detailed tests
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Analytical procedures in the testing phase of the audit.
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done as a substantive test in support of account balances. These tests are often done in conjunction with other audit procedures.
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Purpose of Analytical procedures in the testing phase of the audit.
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The primary purpose is to reduce the extent of detailed tests, while the secondary purpose is to indicate areas of possible misstatements
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Analytical Procedures in the Completion stage of the audit.
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REQUIRED. Such tests serve as a final review for material misstatements or financial problems and help the auditor take a final "objective look" at the audited financial statements.
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Purpose of Analytical procedures in the completion stage of the audit.
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The primary purpose is to indicate areas of possible misstatements, while the secondary purpose is to assess going concern.
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