Engagement Planning

Front 1

Can audit risk be assessed in nonquantitative terms?

Back 1

Yes

Front 2

Audit risk is the risk that:

Back 2

An account and its related assertions contains material misstatements & the risk that the auditor will not detect such misstatements

Front 3

The likelihood of material misstatement of an assertion, assuming no related internal control

Back 3

Inherent risk

Front 4

The likelihood that a material misstatement will not be detected or prevented on a timely basis by internal control

Back 4

Control risk

Front 5

The likelihood that an auditor's procedures lead to an improper conclusion that no material misstatements exists in an assertion when in fact such a misstatement does exist

Back 5

Detection risk

Front 6

What is the relationship among Inherent risk, control risk, and detection risk?

Back 6

Inverse

Front 7

The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement

Back 7

Materiality

Front 8

When must an auditor consider materiality?

Back 8

Planning the audit and designing audit procedures & evaluating audit results

Front 9

What are the 5 assertions made by management that are embodied in the accounts?

Back 9

1) Presentation & Disclosure
2) Existence or Occurence
3) Rights & Obligations
4) Completeness
5) Valuation

Front 10

List 2 types of fraud

Back 10

1) Fraudulent financial reporting
2) Misappropriation of assets

Front 11

An attitude that includes a questioning mind and a critical assessment of audit evidence

Back 11

Professional skepticism

Front 12

What 3 conditions are generally present when individuals commit fraud?

Back 12

1) Incentive/pressure
2) Opportunity
3) Attitude/rationalization

Front 13

All fraud involving management must be communicated to:

Back 13

Audit Committee

Front 14

All material fraud should be communicated to:

Back 14

Audit Committee

Front 15

What is the auditor's responsibility for direct effect illegal acts?

Back 15

Same as for errors and fraud (provide reasonable assurance of detection of material misstatements)

Front 16

What is auditor's responsibility for indirect effect illegal acts?

Back 16

No assurance, however if a possibility is detected, the auditor should apply audit procedures to determine whether an illegal act has occurred

Front 17

What should an auditor do if he discovers an act that MIGHT be illegal?

Back 17

Inquire of management a a level above those involved & if satisfactory information is not provided the auditor should consult with the client's legal counsel and apply additional procedures such as confirmations, examinations, and authorizations

Front 18

If the auditor believes an illegal act has or is likely to have occurred, he should:(4)

Back 18

1) Consider its financial statement effect
2) Consider its implications to other aspects of the audit (reliability of management)
3) Communicate it to audit committee
4) Consider the need to modify the audit report

Front 19

What are 3 types of modifications of an audit report relating to illegal acts?

Back 19

1) Lack of disclosure is a departure from GAAP and either an adverse or qualified opinion may be appropriate.
2) Client imposed scope restrictions will generally lead to a disclaimer of opinion
3) Circumstance-imposed scope restrictions may lead to either a qualified opinion or a disclaimer of opinion

Front 20

What should the auditor do if senior management is involved in an illegal act?

Back 20

Communicate it directly to the audit committee

Front 21

What should an auditor consider when a client refuses to give appropriate consideration to handling an illegal act?

Back 21

Whether the refusal affects his ability to rely on managements representations and whether resignation is desireable

Front 22

Who should the auditor attempt communication with prior to acquiring a client? Why?

Back 22

Predecessor auditor
Obtain a general understanding of the nature of the organization and industry

Front 23

Who is responsible for initiating communication with the predecessor auditor

Back 23

Sucessor auditor

Front 24

If the prospective client refuses to permit the predecessor auditor to respond or limits his response, the sucessor should:

Back 24

inquire as to the reasons and consider the implications in deciding whether to accept the engagement

Front 25

The sucessor's inquiries to the predecessor should include: (4)

Back 25

1) Information bearing on the integrity of management
2) Disagreements with management as to accounting principles, auditing procedures or other similarly significant matters
3) Communications to audit committee regarding fraud, illegal acts, and internal control related matters.
4) Predecessor's understanding of the reasons for the change in auditors

Front 26

Can an understanding with the client regarding the services to be performed be obtained orally?

Back 26

Yes but it is preferred that it is in writting

Front 27

The engagement letter must include four general topics:

Back 27

1) Objectives of engagement
2) Management's responsibilities
3) Auditor's responsibilities
4) Limitations of the audit

Front 28

What is the objective of an engagement?

Back 28

Expression of an opinion on the financial statements

Front 29

What are management's responsibilities? (6)

Back 29

1) Establishing & maintaining effective internal control over financial reporting
2) Identifying & ensuring compliance with laws & regulations
3) Making financial records & related information available to the auditor
4) Providing a representation letter
5) Adjusting financial statements to correct material misstatements
6) Affirming in representation letter that effect of uncorrecsted misstatements aggregated by auditor is immaterial

Front 30

What are the auditor's responsibilities? (2)

Back 30

1) Conduct audit IAW US GAAP
2) Ensuring that audit committee is aware of any reportable conditions which came to auditors attention

Front 31

What are the 3 limitations of the audit?

Back 31

1) Obtain reasonable, rather than absolute assurance
2) Material misstatements may remain undetected
3) If auditor is unable to form or has not formed an opinion, auditor may decline to express an opinion or decline to issue a report

Front 32

To develop an overall audit strategy, the auditor may consider the following 5 client considerations:

Back 32

1) Business & Industry
2) Accounting policies & procedures
3) Methods of processing accounting information
4) Financial statement items likely to need adjustment
5) Considerations requiring extension of audit procedures

Front 33

To develop an overall audit strategy, the auditor may consider the following 3 audit considerations:

Back 33

1) Planned assessed level of control risk
2) Preliminary judgements about materiality levels
3) Nature of reports to be issued by CPA

Front 34

Obtaining a level of knowledge of the client's business helps the auditor: (5)

Back 34

1) Identify areas that may need special consideration
2) Assess conditions under which accounting data are produced, processed, reviewed, and accumulated
3) Evaluate accounting estimates for reasonableness
4) Evaluate the reasonableness of management representations
5) Make judgements about the appropriateness of the accounting principles applied and the adequacy of disclosures

Front 35

Is it required to communicate with the predecessor auditor after the accepting a new client?

Back 35

No

Front 36

A second communication with the predecessor is with regard to working papers. Areas generally examined include: (4)

Back 36

1) Documentation of planning
2) Internal control
3) Audit results
4) Other matters of continuing accounting and auditing significance

Front 37

In reviewing the predecessor's working papers the sucessor find financial statement misstatements. What should he do?

Back 37

Request that the client inform the predecessor and arrange a meeting of the 3 parties

Front 38

AU 329 requires analytical procedures to be performed when?

Back 38

Planning and completion phases of audit

Front 39

What is the objective of analytical procedures performed during the planning stage of the audit?

Back 39

Determine the nature, timing, & extent of audit procedures that will be used to obtain evidence for specific accounts

Front 40

In all audits, the CPA must obtain sufficient understanding of this to plan the audit

Back 40

Internal control

Front 41

Knowledge of internal control during the planning stage should incude knowledge about:

Back 41

The design of controls and whether they have been placed in operation by the client

Front 42

The understanding of Internal Control in the planning stage must be sufficient to allow the auditor to: (3)

Back 42

1) Identify types of possible misstatements
2) Consider factors affecting the risk of misstatements
3) Design substantive tests

Front 43

What must be developed and used in every audit?

Back 43

A written audit program

Front 44

The work of each assistant should be reviewed to: (2)

Back 44

1) Determine whether it was adequately performed
2) Evaluate whether the results are consistent with the conclusions to be presented in the audit report

Front 45

The auditor who intends to apply audit tests at an iterim date should consider whether the accounting system will provide information on remaining period transactions that is sufficient to investigate: (3)

Back 45

1) Significant unusual transactions
2) Other causes of significant fluctuation
3) Changes in the composition of the account balances

Front 46

List the 5 General Attestation Standards

Back 46

1) Training & Proficiency
2) Adequate knowledge of subject matter
3) Practitioner shall perform an engagement only if he or she has reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users.
4) Independance in mental attitude
5) Due professional care

Front 47

List the 3 General Auditing Standards

Back 47

1) Training & Proficiency
2) Independance in mental attitude
3) Due professional care

Hint 47

TIP

Front 48

List the 2 Attestation fieldwork standards

Back 48

1) Work shall be adequately planned and assistants, if any, shall be properly supervised
2) Suffivcient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report

Front 49

List the 3 Auditing fieldwork standards

Back 49

1) Adequately planned & supervsed
2) A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed
3) Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.

Front 50

List the 4 Attestation reporting standards

Back 50

1) Report shall identify subject matter or assertion being reported on and state the character of the engagement
2) Report shall state practitioner's conclusion about the subject matter or the assertion in relation to the criteria against which the subject matter was evaluated
3) Report shall state all of the practitioner's significant reservations about the engagement, subject matter, & assertions
4) Report shall state the use of the report is restricted to specified parties, in certain circumstances

Front 51

List the 4 Auditing reporting standards

Back 51

1) Report shall state whether the financical statements are presented iaw GAAP
2) Report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.
3) Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report
4)Report shall contain an expression of opinion regarding financial statements, or an assertion to the effect that an opinion cannot be expressed.

Front 52

Requires each individual to observe the fieldwork and reporting standards, including a critical review at every level of supervision of work done and the judgement exercised

Back 52

Due professional care

Front 53

To whom does quality control standards apply to?

Back 53

CPA Firms

Front 54

What is the major function of quality control standards?

Back 54

Provides criteria for evaluating peer reviews

Front 55

List 4 benefits of peer reviews

Back 55

1) Prevent poor accounting & auditing procedures
2) Detect poor audit procedures
3) Peer reviewers may learn from the process
4) Self-regulation by profession may be more cost effective than governmental regulation

Front 56

List 2 limitations of peer reviews

Back 56

1) Cost
2) Evaluating an audit's adequacy is difficult

Front 57

Quality control policies and procedures applicable to a firm's accounting & auditing practices should encompass: (5)

Back 57

1) Independance, integrity, objectivity
2) Personnel management
3) Acceptance & continuance of clients & engagements
4) Engagement performance
5) Monitoring