Who is responsible for the selection and appointment of the independent external auditor?
The Audit Committee
When considering an entity for an engagement, what aspects of the firm (not the entity) should be considered?
Firm's ability to meet reporting deadlines
Firm's ability to staff the engagement with personnel who have the appropriate experience and availability
The firm's Independence
If a group audit, does the firm have or can they contract sufficient resources to obtain signficant appropriate evidence
When considering an entity for an engagement, what aspects of the entity (not the firm) should be considered?
Integrity of the client's management, owners, related parties and those charged with governance
Determine the applicable financial reporting framework in connection with the
** nature of the entity
** the purpose and nature of the FS (ie., one user, a subset of FS)
** whether law or regulation prescribes the framework
Whether management understands and adheres to their responsibilities
Whether management imposes a scope limitation
When is it appropriate for an auditor to accept an engagement when management imposes a scope limitation?
If it is acceptable that the audit result in a qualified or disclaimer of opinion, OR
If the limitation is imposed due to circumstances beyond mgmt's control (such as a fire destroying documentation)
What are management's responsibilities prior to and during the audit?
The preparation and fair presentation of the FS in accordance with the applicable financial reporting framework.
The design, implementation, and maintenance of internal controls relative to the FS
To provide the auditor with
** access to all info relevant to the FS
** additional info that the auditor may request
** unrestricted access to persons within the entity from whom the auditor determines it is necessary to obtain audit evidence
True / False: Lack of records = scope limitation.
True
True / False: The engagement should be verbally agreed-upon in detail and approved by the entity and the firm prior to any audit work being performed
False
The engagement is a contract and should be written and treated as such
True / False: The auditor is responsible to protect the entity against certain risks
False
True / False: The engagement letter should include specific audit procedures to ensure no misunderstanding of the work to be performed.
False
What items should be included in the engagement letter?
overall audit strategy
objective and scope of the audit
responsibilities of the auditor
responsibilities of management
fees and billing arrangements
but not specific audit procedures
What is a recurring audit?
An audit engagement for an existing audit client for whom the auditor performed the preceding audit.
True / False: A new engagement letter is required annually, even with recurring clients.
False
A new engagement letter is not required for nonissuers, but is strongly recommended.
A new letter is required for issuers.
Define initial audit.
The first audit performed for this client by your firm.
It may be the first audit ever performed for this client, OR it may be the first audit by your firm who had a predecessor auditor for last year's FS.
What types of information should be requested from the predecessor auditor?
Information that might bear on management's integrity
Disagreements between the auditor and mgmt, their content and resolution
The predecessor's understanding as to the reasons for the change in auditor
Access to the auditor's workpapers
The client wants to change the engagement from a review to a compilation. In the auditor's report, should the auditor mention the change in the original engagement, or procedures performed on behalf of the original engagement?
No
What are the acceptable and unacceptable reasons a client may request an engagement change from (1) an audit to a compilation or review, or (2) a review to a compilation?
Acceptable
** change in client requirements
** misunderstanding as to the nature of the service to be rendered
Unacceptable
** the original engagement would uncover errors or fraud
** the client is attempting to create misleading or deceptive FS
Unacceptable Reasons for Change AND Compilation/Review Report Not Permitted
** the client refuses to allow correspondence with legal counsel
** the client refuses to provide a signed representation letter
What is the inherent risk that occurs with every audit?
Some errors and/or fraud will not be detected.
What are the 3 types of fraud
FS fraud (lie)
asset misappropriation (steal)
corruption (cheat)
The client has requested a change in the engagement from an audit to a compilation. Their reason for the change is unacceptable. What should the auditor's response be?
To withdraw from the engagement
True / False: The auditor must have prior experience with the client's business or industry prior to accepting the engagement so that the auditor understands the full extent of the work to be involved.
False
When considering the contents of an annual report - what is considered "other information" and what is the auditor's responsibility?
Information presented in the same document containing the audited FS that is voluntarily presented.
The auditor is to read the other information to ensure no inconsistencies between it and the FS.
When considering the contents of an annual report - what is considered "basic financial statements" and what is the auditor's responsibility?
Basic FS include the acual FS and all disclosures / notes.
The auditor is to audit this information.
When considering the contents of an annual report - what is considered "required supplementary information" and what is the auditor's responsibility?
Information that a designated accounting standards setter, such as the SEC, requires to accompany the entity's basic FS.
The auditor is to apply limited procedures to this information
When considering the contents of an annual report - what is considered "required supplementary information" and what is the auditor's responsibility?
