Audit Ch 3 Engagement Planning


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Side ASide B
1.Client Acceptance or Continuance 2. Communication between predecessor and prospective...
pre engagement activities
responsibilities principle
•principle requires auditors to comply with appropriate ethical requirements for each...
independence in appearance
•relates to perceptions of auditors’independence 
engagement letter
when a new client is accepted or when an audit engagement continues -contract between auditor...
engagement letter
•Serves as a means of reducing the risk of misunderstandings with the client and as...
obj of engagement, mgmt & auditors responsibilities, any limitations of engagement
engagement letter should include
audit plan
•A comprehensive list of the specific audit procedures that the audit team needs to...
audit plan
•describes the procedures to be performed to assess the risk of material misstatement...
audit plan
•plan the nature, timing and extent of control tests and substantive tests that are...
–Audit engagement partner –Audit manager –IT audit specialist –Tax...
audit engagement teams usually consist of
objectivity and competence
•Prior to using the work of internal auditors, external auditors should consider internal...
professional judgment
Internal auditors should not be delegated tasks that require extensive 
•persons skilled in fields other than accounting and auditing who are not members of...
•professional qualifications, experience and reputation and methods and assumptions
auditors must know about the specialist's
should be unrelated to the company being audited
•are not referred to in the audit report unless the findings cause the auditors’report...
IT auditors
•Specialized skills are often needed to evaluate the effect of computerized processing...
IT auditors
•are members of the audit team and are called in when the need for their skills arises
time budget
•Used to maintain control of the audit by identifying problem areas early in the engagement,...
interim audit work
refers to procedures performed several weeks or months before the balance sheet date
year end audit work
refers to procedures performed shortly before and after the balance sheet date
time reports
•Everyone who works on the audit engagement is required to report the time taken to...
time reports
help in evaluating the efficiency of the audit team member
time reports
•Compiling a record for billing the client •Compiling a record for planning the...
refers to an amount (or transaction) that would influence the decisions of users(i.e., an amount...
–Absolute size –Relative size –Cumulative effects
quantitative criteria of materiality
–Nature of the item or issue –Circumstances –Uncertainty
qualitative criteria of materiality
professional judgment
ultimately materiality is a matter of
using materiality on the audit as a guide to planning substantive procedures
•directing attention and audit work to those items or accounts that are important, uncertain,...
performance materiality
Auditors use ____________  to make sure that the aggregate of uncorrected and undetected...
performance materiality
evaluate evidence
decisions about the audit report
use materiality for (3)
risk assessment procedures
To gain an understanding of the client and the risks associated with the client 
test of controls
To test the operating effectiveness of client internal control activities 
substantive procedures
To produce evidence about management’s assertions related to the amounts and disclosures...
substantive audit plan
•Should contain a list of audit procedures for gathering evidence related to the relevant...
–Substantive analytical procedures –Tests of details
two ways to conduct substative tests
substantive analytical procedures
more efficient
tests of details
more effective
1.Inspection of records and documents 2.Inspection of tangible assets 3.Observation 4.Inquiry 5.Confirmation 6.Recalculation 7.Reperformance 8.Analytical...
types of audit procedures
vouching, tracing, scanning
3 types of inspection of records and docs
existence or occurence (top down)
competeness -start iwth pmt and trace up to journal entry then to finc stmts
were all shipments actually recorded as sales?
CAATs -computer assisted audit tools and techniques
the auditor is able to access and extract client information without disrupting data processing
–Calculate field statistics (totals, high, low and average value) –Perform...
CAAT procedures
audit documentation
The written record of the basis for the auditor’s conclusions that provides the support...
–Improve audit quality –Enhance public confidence
objectives of audit documentation
CAAT cannot perform
CAAT cannot perform
*record of everything you have done on the engagement •Integral part of audit quality •Documents...
purposes of audit documentation
*auditor pulls out each year –Information of continuing audit significance –For...
permanent files (audit documentation)
current files
everything for this year –Includes the entire engagement administration file for the...
–Understand the nature timing, extent and results of procedures, evidence obtained...
audit doc should be prepared to enable auditor having no previous connection to the engagement...
–Name, date, purpose, page number –Procedures performed and conclusions  •Evidence...
info on each workpaper
7 years, report release date
documentation must be retained ____ from ________
45 days
all documentation must be finalized within _____ of the audit reports realase date
planning materiality (materiality)
–Applicable to overall financial statements
performance materiality (tolerable error/ misstatement)
–Applicable  to individual populations •The maximum error that the auditor...
indivdually significant items
–Threshold for examining individual transactions or line items
trivial amounts (posting scope)
–Errors that are ignorable
–An account balance –A class of transactions (e.g. purchases)
performance materiality is usually ____________ or materiallity
individually significant items
•These are transactions or accounts that are significant due to: –Size –High...
trivial amounts (posting scope)
•A threshold at which misstatements below this amount need not be accumulated •Usually...
performance materiality and posting scope
changes to materiality will also affect
1.Determine the appropriate benchmark 2.Determine planning materiality 3.Determine performance...
steps for calculating materiality

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