Module 4

Front 1

What is the required understanding of the entity and environment?

Back 1

1. understanding of relevant industry, regulatory, and external factors

2. nature of entity - operations, ownership, and gov't structures, types of investments, how entity is structured and financed

3. Entity's selection & application of accounting policies. Auditor evaluate whether accounting policies are appropriate for its business & consistent

4. Entity's objectives & strategies & related business risks that may result in risks of material misstatement

5. Measurement & review of entity's financial performance

Hint 1

U

N

S&A

O&S

M&R

Front 2

What is the required understanding of the Entity's Internal Control?

Back 2

obtain an understanding of internal control relevant to the audit - professional judgement to determine whether a control individually or in combination with others is relevant to audit

Front 3

What is the nature and extent of understanding relevant controls?

Back 3

Auditor shall evaluate the design of those controls and determine whether they have been implemented by performing procedures in addition to inquiry of the entities personnel

Front 4

How does adequate planning of audit benefit the audit of financial statements?

Back 4

1. helps the auditor devote appropriate attention to important areas of audit

2. helps the auditor identify and resolve potential problems on a timely basis

3. helps the auditor properly organize and manage the audit engagement so it is performed in effective & efficient manner

4. assists in selection of engagement team members w/ appropriate levels of capabilities & competence

5. Facilitates the direction & supervision of engagement team members & review of their work

Front 5

What are the planning requirements for involvement of key engagement team members?

Back 5

all shall be involved in planning the audit, including planning and participating in discussion among team members

Front 6

What are the planning requirements for preliminary engagement activities?

Back 6

1. perform procedures required by CAS 220 regarding the continuance of the client relationship & specific audit engagement

2. evaluating compliance with relevant ethical requirements including independence

3. establishing an understanding of the terms of the engagement

Front 7

What are the planning requirements for Planning activities?

Back 7

1.the auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit and that guides the development of the audit plan

2.auditor shall update and change overall audit strategy and plan as necessary

3. auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work

Front 8

What are the steps to establishing an overall audit strategy?

Back 8

1. identify the characteristics of the engagement that define its scope

2. ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required

3. consider the factors that are significant in directing the engagements team efforts

4. consider the results of preliminary engagement activities and whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant

5. ascertain the nature, timing and extent of resources necessary to perform the engagement

Front 9

What should the audit plan include descriptions of?

Back 9

1. the nature, timing and extent of planned risk assessment procedures

2. the nature, timing, and extent of planned further audit procedures at the assertion level

3. other planned audit procedures that are required to be carried out so that the engagement complies with CAS

Front 10

What should the audit documentation include?

Back 10

1. overall audit strategy

2. audit plan

3. any significant changes made during audit engagement to overall strategy or plan and reasons for change

Front 11

What activities should be completed prior to start of initial audit?

Back 11

1. performing procedures required by CAS 220 regarding acceptance of the client relationship and the specific audit engagement

2. communicating with the previous auditor in compliance with relevant ethical requirements

Front 12

What is the reason the an audit plan is developed and what does it include?

Back 12

Reason - developed to reduce the audit risk to a level that is low enough to be acceptable

Includes - planning the nature, timing. extent of audit procedures that will be performed in order to ensure that audit evidence obtained will be sufficient to support audit opinion

Front 13

Why is understanding a client's business and its risks important?

Back 13

-it helps the auditor to assess the risk of potential material misstatements the financial statements

-helps design appropriate audit programs that will address all of the significant risks of misstatements in the F/S.

Front 14

What 6 questions should an auditor be able to answer after a business risk analysis?

Back 14

1. What is the clients strategy?

2. Is it sustainable?

3. What are the business risks/threats to the client?

4. What business processes, information systems and internal controls does the client use to manage those risks?

5. What are the gaps and weaknesses in the client's risk management approach?

6. Do those gaps affect the financial statements?

Front 15

What are the two types of analyses auditors can use to assess business risk?

Back 15

1. Strategic Analysis - gain understanding from senior client management about business objectives, key strategies employed to achieve objectives, & risk that threaten the achievement of those objectives

2. Business Process Analysis - study of the structured set of activities within an entity designed to produce a specific output in accordance with the business strategy

Front 16

What controls may management use to ensure efficient and effective functioning of key business processes?

Back 16

1. budget systems

2. forecasting systems

3. physical measures of process performance

4. quality enhancement programs

5. performance indicators

6. process monitoring activities

7. traditional accounting internal control methods

Front 17

What methods are used to obtain knowledge of clients business?

Back 17

1. Enquiry - review prior years working papers and discuss matters with previous audit staff, interview client, personnel, Mt etc,

2. Observation - tour business to provide initial understanding of personnel, operations and facilities

3. Study - read accounting periodicals, trade magazines and general publications

All may provide insight and information of clients business operations

Hint 17

E

O

S

Front 18

What are 5 types of analytical procedures?

Back 18

1. comparison of current year account balances to one or more comparable periods

2. comparison of current year account balances to budgets/forecasts

3. evaluation of relationships of current year account balances to other current year balances for conformity

4. comparison of current-year account balances and financial relationships with similar info for business' industry

5. study of relationships of current year account balances with relevant non financial info

Front 19

What is the criteria for qualitative materiality judgement?

Back 19

any quantitatively small misstatement that results from intentional misstatement, intentional violation of law or intentional earnings management is considered material

Front 20

What is the criteria for quantitative materiality judgement?

Back 20

- 5% of income from continuing operations

-5% of net income before bonus for an owner managed enterprise with a tax minimization objective net income

-NFP entity - .5% - 2% of total expenses or total revenues

-Mutual fund industry - .5% - 1% of net asset value

-Real Estate industry - 1% of revenue

Front 21

What are the 5 different types of misstatements?

Back 21

1. Identified misstatement - detected by auditor

2. Likely misstatement - most likely exists based on audit evidence obtained

3. Likely aggregate misstatement (LAM) - identified misstatements in other samples plus likely ones and any adjusted ones from prior years

4. Further possible misstatements (FPM) - made up of sampling and non sampling risk

5. Maximum possible misstatement - sum of LAM & FPM

Front 22

What are the four types risks for audit purposes?

Back 22

1. inherent risk

2. control risk

3. detection risk

4. audit risk

Front 23

What is inherent risk?

Back 23

-probability that material misstatements have occurred

-relates to risk attached with overall company

-relates to specific assertions made in the account balances & note disclosures

-sound knowledge of business needed to identify and assess inherent risk

-factors affecting: integrity of mmgt, client motivation, results of previous audits, initial vs. repeat engagement and make up of population

Front 24

What is control risk?

Back 24

-risk that material misstatement is not prevented and detected by internal control system

-effective internal controls applied consistently throughout the period will reduce control risk

Front 25

What is detection risk?

Back 25

- risk that an auditor's procedures will fail to find a material misstatement that exists in accounts

-level of detection risk ultimately determines the amount of evidence needed to support assertions contained in the F/S

Front 26

What is Audit Risk?

Back 26

- probability that auditor will give an inappropriate opinion on the F/S. Audit risk is a function of inherent risk, control risk and detection risk.

Front 27

What is the final step in audit planning?

Back 27

Audit Programs - details the planned audit procedures for all sections of the audit. Program integrates all concepts covered in audit planning module and applies to each section of audit.

-composed of two categories - internal control program and balance sheet program