What is the overall audit strategy; audit plan. What is RAMP? Planning activities: a) Auditors identification and assessment of risk of material misstatement, including Analytical procedures as risk assessment procedures, determine materiality, understand legal and regulatory framework b) Establish an overall audit strategy that sets the scope, timing and direction of the audit, including: c) Develop an audit plan, including: The nature, timing and extent of planned risk assessment procedures and further audit procedures 6. Briefly explain the joint risk model and more specifically what is ‘R, CRY, DRY and AR. In relation to these terms, what is the inverse relationship?
Audit Risk -? Inherent Risk x Control Risk x Detection Risk a) Inherent Risk: material misstatement arises due to error or omission as a result of factors other than the failure of controls. B) Control Risk: due to absence or failure in he operation of relevant controls of the entity. C) Detection Risk is the risk that the auditors fail to detect a material misstatement in the financial statements. D) Where the auditor’s assessment of inherent and control risk is high, the detection risk is set at a lower level to keep the audit risk at an acceptable level. Lower detection risk may be achieved by increasing the sample size for audit testing.
Conversely, where the auditor believes the inherent and control risks of an engagement to be low, detection risk is allowed to be set at a relatively higher level. 7. Auditor must consider the laws and regulations that impact their clients. Why and what type of work would be necessary. Provide three examples of procedures that may apply. A) Procedures to identify non-compliance Inquire of MGM Inspect correspondence with regulatory authorizes b) Request written representation from MGM that all have been disclosed to auditors 8. Describe the types of procedures that an auditor uses to assess risk. Risk assessment procedures: Inquires of MGM and internal audit to assist in identifying risks of material misstatement Observation and inspection Analytical procedures .
Describe how the auditor obtains an understanding of the entity and its environment and the relevance of this understanding to the audit plan/work ANSWER: Denser CASE 315 10. Does an auditor need to consider the going concern assumption in planning and completing an audit? Provide 5 examples of factors that may indicate a going concern issue. Events or Conditions That May Cast Doubt about Going Concern Assumption: Net liability or net current liability position. Management intentions to liquidate the entity or to cease operations. Loss of key management without replacement. Loss of a major market, key customer(s), franchise, license, or principal supplier(s). Labor difficulties. Shortages of important us plies 1 1 . Briefly explain if the auditor has any responsibility for fraud while conducting an audit.
Provide 5 examples of factors that may indicate fraud; provide S examples of the types of procedures an auditor may do to identify fraud and examples of a response to fraud. A) Examples: High degree of competition or market saturation, accompanied by declining High vulnerability to rapid changes, such as changes in margins. ; technology, product obsolescence, or interest rates. ; Sign efficient declines in customer demand and increasing business failures in either the industry or overall economy. ; Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent Need to obtain additional debt or equity financing to stay competitive -? including financing of major research and development or capital expenditures. Marginal ability to meet exchange listing requirements or debt repayment or other debt covenant requirements. B) Procedures: Inquire of MGM of any actual , suspected fraud Inquire of MGM of the process for identifying risks of fraud Inquire of MGM f mast’s communication to employees regarding ethical behaviors Evaluate if unusual relationship have been identified in performing analytical procedures Inquire of internal audit 12. Define materiality and explain the relevance of this concept to the audit/ audit report. Describe two relevant qualitative and two quantitative considerations in the determination of materiality. Explain performance materiality and whether this amount is higher, lower or the same as materiality. ) Misstatement are considered to be material if they, individually or in the aggregate can reasonably be expected to influence the economic session of users b) Qualitative: users, items on which users tend to be focused, the nature of entity, how the entity finance c) Quantitative: profit- oriented entities – 5% of profit before tax; NP – 1% of revenue or expense d) Performance materiality: at less than materiality for the f/s as a whole 13. What are the objectives of internal control? Optimizing the use of resources Preventing and detecting error and fraud Safeguarding assets Maintaining reliable control system 14. Provide examples (7) of case facts that are specific to evaluating risk on an audit (e. G.
High risk industry) Lawsuit, new technology, new business model, expanded foreign operations, new personnel, MGM bias, cash flow problems 15. Explain in simple terms how the auditor’s assessment of risk impacts how the auditor responds. Specifically relate this to items such as staffing, supervision, nature, extent, and timing. Overall response: Assigning more experienced staff Providing more supervision Marking general changes to timing, extent or nature of audit procedures (performing substantive procedures at the period end instead of an interim date) 16. Explain the impact on tests of controls of the following – a repeat audit; a control relating to significant risk. Repeat audit: Assess effectiveness of control Determine if any significant changes If no changes, test control at least once in every 3 audits and test some control each year b) Control relates to significant risk, test each year 17. What are some examples of limitations of internal control? If a member of the audit committee stated that “internal controls are strong and therefore no substantive tests are necessary’ a) Examples: Breakdown: employee input error; errors result from complex computer system Collusion: collusion of systems MGM override behaviors for personal gain ) Combined approach can be used when internal control is strong.
The approach uses tests Of control as well as substantive procedures 18. Briefly explain: What an auditor considers/does at an inventory count; what is a legal letter and the general structure of it? A) Consideration: Evaluate mast’s procedure of inventory count Observe inventory count Inspect the inventory (existence and condition) Perform test count (sheet to floor, floor to sheet) 19. What is ART and how are they used in an audit. What are some basic considerations that an auditor should consider when using ART. Provide five examples of ART used in an audit. A) Analytical procedures: evaluation of financial info through analysis of plausible relationship among financial and non-financial data. ) Consideration: used near the end of audit to help in forming an overall conclusion on f/s c) Example: Evaluate reliability of data used Develop an expectation of amount or ratios and determined the difference of recorded amount from expected value Investigate significant fluctuation the at inconsistence with other relevant info 20. Briefly explain: why sampling is supported in conducting an audit; preference between sampling and non-sampling risk; considerations (i) designing a sample; (ii) dealing with deviations found in a sample. If you were writing a case that included mistakes an auditor may make in doing samples, provide two examples/situations of such a mistake. ) Sampling risk: auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. Non- sampling risk: reaches an erroneous conclusion for any reason not related to sampling risk. B) Design a sample: Define source of deviation or misstatement Sample size affected by level Of sampling risk and tolerable misstatement c) Dealing with deviation Investigate nature and source of deviation If anomaly, perform additional audit procedures to make it is not representative d) Mistakes: selection of items for testing: not representative; sample size too small 21 . Provide five (5) common examples of the use of confirmations on an audit; Link confirmations to audit objectives/assertions. Explain when negative confirmations can be used. ) Examples: confirm with account balance (cash, AR AP); confirm with agreement terms b) Negative information: cannot be the sole substantive audit procedure to address an assessed risk, unless all: The risk of material misstatement is low and has obtained sufficient appropriate audit evidence regarding the operating effectiveness of controls The auditor is not aware of circumstances or conditions that would cause recipients to disregard requests. A very low exception rate is expected; and The population comprises a large number of small, homogeneous account balances and transactions 22. An audit client uses a service organization extensively. The service organization uses their systems, including computerized systems.
Explain the impact on the audit and what the considerations to the external auditor of an entity using a service organization are. A) Impact on audit: Should obtain an understanding of the services provided by a service org, including internal control (type 1 and 2 report can be obtained) b) Consideration: fraud, non-compliance with laws and regulations, and uncorrected misstatement in relation to service org -? should inquire MGM of user entity 23. Define sufficiency and appropriateness. Provide 3 examples of factors that impact reliability. If in a case you noted an auditor extensively relying on he representations Of management, would you have any concerns and why? ) Sufficiency, affected by: The risk of assessment Quality of audit evidence Measure the quantity of evidence b) Appropriate Measure the quality of evidence (relevance and reliability) Relevance: consider purpose of audit procedures and assertion Reliability: affect by evidence nature and source c) Concern: Internally generated evidence may not be reliable if intern control is weak. Not obtained directly by auditor, not from independent SOL_Ceres 24. Would an auditor ever look at 100% of all items (e. G. Not take a sample). Selecting all items (1 00% examination) if: Population including small # of high value items There is significant risk related Low cost to do 100% examination due to automatic process 25. What does an auditor consider when he/she reviews misstatements that are encountered while conducting the audit. Any obligation to communicate this to a client or other? ) Should consider: May wish to distinguish between misstatement that are factual, judgmental or projected May revise the overall audit strategy and audit plan b) Communicate on a timely basis all misstatement accumulated and ARQ guest the MGM to correct 26. What the purpose is of audit documentation and the standards associated with audit documentation? What is the magic of the number “60 days after the date of the audit report”. A) Purpose: provides: Evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives Evidence that the audit was planned and performed in accordance with Caws and applicable legal and regulatory requirements b) Standard: Prepare audit documentation on a timely basis Document audit procedures performed and audit evidence obtained c) Assembly and completion of the final audit file within 60 days after the date f the audit report 27.
Format of an unmodified report Title (independent auditor’s report); addressee; introductory paragraph; mast’s responsibilities; auditors responsibilities; auditor’s opinion; signature of auditor; date of auditor’s report; 28. Date of the auditor report Dated no earlier than the date on which the auditor has obtained sufficient and appropriate audit evidence 29. Modification of the audit report Material but not pervasive Material and pervasive F/S materially misstated Qualified opinion Adverse opinion Inability to obtain S&A evidence Disclaimer Of opinion 30. Use of emphasis of matter paragraph A paragraph that refers to a matter appropriately presented or disclosed in the f/s, in the auditor’s judgment, is fundamental to user’s understanding of f/s. E. G. Uncertainty relating to litigation or regulatory action, early application of a new accounting standard 31 . SE of other matter paragraph A paragraph that refers to a matter other than those appropriately presented or disclosed in the f/s, in the auditor’s judgment, is relevant to user’s understanding of the audit, the auditor’s responsibilities. 32. Provide two examples of when a special purpose framework would be elevate and what type of work an auditor needs to do. S . 800 – audit off’s prepared in accordance with special purpose framework apply: a) Example: Tax basis of accounting for a set of f/s Cash receipts and disbursements basis of accounting for cash flow info c) Determine the acceptability of financial reporting framework: for purpose for f/s; intended users 33. Provide two examples of when an audit of financial information would be relevant and what type of work an auditor needs to do.
Is materiality on this type of report the same as when doing a financial statement audit? S. 805 apply: ) Examples: Audit on specific B/S account; schedule of net tangible assets b) CAWS relevant to audit applies c) Materiality is higher on this type of report 34. Provide a general overview of the types of reports that may be issued in this section (CASE 3416) AND provide five (5) procedures or considerations that an auditor may have e. G. Independence. A) Types of report: CASE 3416 -? reporting on controls at a service organization Type 1 report: Management’s description of the service organization’s system; a written assertion by management Of the service organization about whether: i)
Mist description that the internal control that was designed suitably and implemented as of a specified date; ii) A service auditor’s report that expresses an opinion on (i) iii) No assurance provided on the operating effectiveness of the controls Type 2 report: i) contains everything a type 1 report has ii) Written representation by MGM that the controls operated effectively throughout the specified period to achieve control objectives; iii) The service auditor’s opinion express whether the controls operated effectively through the specified period and includes a description of the tests of controls and the exults b) Procedures or considerations: Service auditor independence: must be independent from service organization but not user organization Obtain service org description of control Assess service orgy’s control objective for reasonableness Evaluate whether org control were suitably designed Evaluate whether org control have been in place 35. Where S. 5025 applies in the practice of public accounting and provide an overview of the level of assurance and the standards that govern the work completed. A) S. 5025 establishes – standards for assurance engagements, other than audits of financial statements and other historical financial information b) Apply to: Engagements designed to provide a high (i. E. , audit) level of assurance; Engagements designed to provide a moderate (i. E. Review) level of assurance c) Assurance Engagement = an engagement (other than an audit of financial statements or others historical financial information) where, pursuant to an accountability relationship between two or more parties, a practitioner is engaged to issue a written communication expressing a conclusion concerning a subject matter for which the accountable party is responsible d) Standards: General standards: ensure engagement can be completed; seek MGM acknowledge of responsibilities; develop criteria that are suitable for evaluating the subject matter Performance standards: Adequately planned and supervised; consider materiality and risk; sufficient and appropriate evidence; 36. SASSY – Audit reports on compliance with agreements, statutes and regulations Type of issue/problem will you test on: e) Identify agreement/statutes/regulations f) Significant interpretations g) Changes in interpretations 37.