An examination of financial statements for the purpose of giving an objective opinion as to the fairness of financial statement presentation
What is best describe as Generally Accepted Auditing Standards?
Measure of the quality of the auditors work and the audit performed
Define RMM
Risk of Material Misstatement - IR * CR (Inherent risk * Control risk)
Describe the relationship between Internal Control reliance and substantive testing
When reliance on Internal control is high, control risk is low and we will accept a higher detection risk, which means less substantive testing is needed.
How does an auditor increase substantive testing?
By lowering their materiality to increase the scope of the audit
Why do auditors have to look at internal control for all audit engagements?
Private: Auditors must determine reliance on internal control in order to gauge the level of substantive testing needed OR in order to express an opinion on internal control if engaged to do so
Public: Auditors are required to express an opinion on internal controls AND on the financial statements as a whole
The audits of financial statements are performed in accordance with what standards of accounting?
Public: PCAOB - Public Company Accounting Oversight Board
Private: GAAP - Generally Accepted Accounting Principles
Name the four main assurance (attestastion) services:
Hint ERAS
Examinations
Reviews
Agreed Upon Procedures
Special Reports
What are the two keys components to determining whether to accept a new client?
1) The audit-ability of the financial statements
2) Mangement's integrity
If the client has been audited by a prior auditor, what inquiries are the successor auditor required to make?
Hint: RID-C
RID-C
Reasons for the change
Integrity of Management
Disagreements with Management
Communications with regulatory agencies or audit committee
What does an auditor need to communicate to those charged with governance?
Hint: DISAPPROVE
Disagreements w/ mgmt
Illegal acts
Significant accounting policies changed by Mgmt
Adjustments proposed by the auditor
Prior discussions w/ mgmt
Problems that arose
Responsibilities under GAAP
Other information
Views of any other accountants
Estimates
What written communication needs to be addressed in an auditor's engagement letter to a client?
Hint: FACSIMILE
Fees
Auditors responsibility with respect to ILE
Confirm the engagement
Scope and Intro paragraph
Internal control improvements - LOR (SAS 115)
Mgmt's responsibility with respect to ILE
Irregularities
not Legal
Errors
Define Materiality
The magnitude of an ommission or misstatement of accounting information that in the light surrounding circumstances makes it probable that the judgement of a reasonsable person relying on the information would have changed or been influenced by the ommission or misstatement.
Define:
Inherent Risk
Control Risk
Detection Risk
IR - The natural risk of a material error in an audit area assuming that there are no related internal controls
CR - The risk that a material error would not be detected by the client's internal control
DR - The risk that an audit area is materially misstated and is not detected by the auditor
List the common planning procedures in an audit
Hint: BRAINSTOPS
Basic discussions w/ client - nature, timing, and extent
Review of documentation
Ask about recent developments
Interim information
Non-audit personnel - contacts
Staffing (budget)
Timing of your audit
Outside assistants - (specialists)
Pronouncements
Scheduling w/ client
During the initial planning phase of an audit, a CPA most likely would:
B) discuss the timing of audit procedures with the client's management