aud study notes

AUDITING

AUDITING STANDARDS RELATE TO THE QUALITY OF CPAS WORK
AUDITING PROCEDURES ARE ACTS OF THE CPA DURING AN AUDIT

THE GENERAL STANDARDS
1. MUST HAVE ADEQUATE TECHNICAL TRAINING AND PROFICIENCY TO PERFORM THE AUDIT
2. MUST MAINTAIN INDEPENDENCE IN MENTAL ATTITUDE
3. MUST EXHIBIT DUE PROFESSIONAL CARE AND DUE DILIGENCE

THE STANDARDS OF FIELDWORK
1. MUST PLAN AND SUPERVISE
2. MUST UNDERSTAND ENTITY AND ENVIRONMENT, INTERNAL CONTROLS, RISK OF MISSTATEMENT (ERROR OR FRAUD), DESIGN AUDIT PROCEDURES (NATURE / TIMING AND EXTENT)
3. MUST OBTAIN EVIDENCE FOR OPINION OF FINANCIAL STATEMENTS

THE STANDARDS OF REPORTING
1. MUST STATE IN ACCORDANCE WITH GAAP?
2. MUST IDENTIFY IN THE REPORT THE CIRCUMSTANCES UNDER WHICH GAAP HAS NOT BEEN USED IN THE CURRENT PERIOD AND RELATE TO THE PRECEDING PERIOD
3. MUST STATE IN REPORT WHEN INADEQUATE DISCLOSURES ARE MADE
4. MUST STATE THE OPINION OF FINANCIAL STATEMENTS AS A WHOLE AND / OR REASONS THAT AN OPINION CANNOT BE MADE

NATURE AND SCOPE OF ENGAGEMENT
THINGS THAT MUST BE CONSIDERED
1. BASIS OF REPORTING USED IN THE FINANCIAL STATEMENTS
2. INDUSTRY REPORTING REQUIREMENTS
3. EXPECTED “AUDIT COVERAGE”
4. PARENT AND SUBSIDIARY RELATIONSHIP FOR CONSOLIDATION PURPOSES
5. WHICH LOCATIONS ARE AUDITED BY OTHERS
6. SPECIALIZED KNOWLEDGE NEEDED?
7. CURRENCY TO BE USED – ANY TRANSLATION NEEDED?
8. NEED FOR STATUTORY OR REGULATORY REQUIREMENTS
9. AVAILABLE AND RELIABLE INTERNAL AUDIT INFO?
10. USE OF SERVICE ORGANIZATIONS AND HOW TO GET INFORMATION ABOUT THEIR CONTROLS AND OPERATIONS
11. HOW TO USE PRIOR AUDIT REPORT EVIDENCE
12. EFFECT OF IT ON AUDIT PROCEDURES
13. COORDINATION / TIMING OF PROCEDURES IN CONJUNCTION WITH INTERIM REVIEWS
14. DISCUSSION OF AUDIT CONCERNS WITH FIRM PERSONNEL
15. CLIENT RESOURCES (PEOPLE AND DATA)

SPECIFICALLY TO AUDITS
1. MATERIALITY – FOR PLANNING, COMMUNICATING, RECONSIDERING, ID’ING THE LOCATIONS AND ACCOUNTING BALANCES
2. ID HIGHER RISK AREAS
3. EFFECT OF ASSESSED RISK OF MATERIAL MISSTATEMENT ON SCOPE, SUPERVISION, AND REVIEW
4. SELECTION OF AUDIT TEAM
5. ENGAGEMENT BUDGETING – MORE TIME FOR HIGHER RISK AREAS
6. EMPHASIS ON ATTITUDE OF QUESTIONING AND SKEPTICISM
7. RESULTS OF INTERNAL CONTROL FIXES FROM PRIOR AUDITS
8. MANAGEMENTS COMMITMENT TO INTERNAL CONTROL (DESIGN AND OPERATION)
9. VOLUME OF TRANSACTIONS – AS RELATED TO INTERNAL CONTROL
10. REPEAT OF 8. (STAFF INCLUDED)
11. BUSINESS DEVELOPMENTS AFFECTING THE ENTITY – CHANGES IN IT, MANAGEMENT, ORGANIZATION, OR PROCESSES
12. SIGNIFICANT INDUSTRY CHANGES (REGULATIONS / REPORTING REQUIREMENTS)
13. SIGNIFICANT ACCOUNTING CHANGES (CHANGES IN GAAP)
14. OTHER – SUCH AS LEGAL ENVIRONMENT

WHAT AFFECTS THE REPORTING OBJECTIVES, TIMING OF PROCEDURES, AND COMMUNICATION REQUIRED?
1. ENTITY’S TIMETABLE
2. TIME FOR MEETING WITH MANAGEMENT AND ENTITY GOVERNANCE TO DISCUSS NATURE, EXTENT, AND TIMING = NET
3. EXPECTATIONS BY MANAGEMENT FOR TYPE AND TIMING OF REPORTS / COMMUNICATIONS OF STATUS AND DELIVERABLES
4. AUDIT TEAM ORGANIZATION
5. OUTSIDE PARTIES

THE CPA FIRM REGARDING CLIENT ACCEPTANCE AND CONTINUANCE
WHAT DO CPA FIRMS CONSIDER?
THE BARE MINIMUM
1. INTEGRITY AND REPUTATION OF CLIENT AND ITS EMPLOYEES
2. CAN CPA PERFORM THE ENGAGEMENT WITH ADEQUATE RESOURCES?
3. CAN CPA FIRM ADHERE TO ETHICAL AND LEGAL REQUIREMENTS
4. AGREEMENT BETWEEN CPA FIRM AND CLIENT

EVEN MORE
1. CPA FIRM PERSONNEL HAVE THE INDUSTRY KNOWLEDGE / REGULATORY REQUIREMENTS / REPORTING REQUIREMENTS / REQUIRED OR CAN BE LEARNED
2. SPECIALISTS ARE AVAILABLE WHERE NEEDED
3. CPA FIRM CAN MEET REPORTING DEADLINE

CPA FIRM’S ABILITY TO MEET REPORTING DEADLINES
1. MAY ACCEPT ENGAGEMENT AFTER CLOSE OR NEAR END OF YEAR
2. BEFORE ACCEPTING THE ENGAGEMENT CPA NEEDS TO DECIDE IF THE AUDIT CAN BE PERFORMED AND IF AN UNQUALIFIED OPINION CAN BE EXPRESSED
3. IF THAT IS UNLIKELY THEN CPA NEEDS TO DISCUSS POSSIBILITY OF QUALIFIED OR DISCLAIMER OPINION WITH CLIENT
4. EARLY APPOINTMENT WILL ALLOW EXTENT OF AUDITING PROCEDURES CAN BE DETERMINED BEFORE THE BALANCE SHEET DATE
5. WHEN THE CPA CANNOT VERIFY OPENING INVENTORIES => SHOULD QUALIFY OR DISCLAIM THE OPINION

INTEGRITY OF CLIENT’S MANAGEMENT
1. INTEGRITY MEANS CAN A PERSON BE TRUSTED?
2. THE AMOUNT OF TESTING DURING AN AUDIT CAN BE CHANGED IF MANAGEMENT CAN NOT BE TRUSTED
3. ALSO THE STATEMENTS THAT MANAGEMENT MAKES CAN BE QUESTIONABLE IF THERE IS NO INTEGRITY
4. AUDITOR MAY BE UNWILLING TO CONTINUE WITH THE ENGAGEMENT IF THERE ARE SIGNIFICANT INTEGRITY ISSUES

APPROPRIATENESS OF THE SCOPE OF THE ENGAGEMENT
1. MANAGEMENT MAY BE UNAWARE OF ADDITIONAL REGULATORY OR STATUTORY REQUIREMENTS FOR THE AUDIT
2. EXAMPLE = THE SINGLE AUDIT FOR A NON PROFIT REQUIRES MORE SCHEDULES AND TESTING THAT INCREASE THE SCOPE OF THE AUDIT

COMMUNICATION WITH THE PREDECESSOR AUDITOR
1. THE SUCCESSOR AUDITOR MUST COMMUNICATE WITH THE PREDECESSOR AUDITOR TO GET INFORMATION REGARDING DISAGREEMENTS – ALSO MAY INFLUENCE THE WHETHER THE SUCCESSOR AUDITOR WILL ACCEPT THE ENGAGEMENT
2. SUCCESSOR AUDITOR – CAN BE INVITED TO MAKE A PROPOSAL OR ACCEPTED THE ENGAGEMENT
3. PREDECESSOR AUDITOR – REPORTED ON THE MOST RECENT FINANCIAL STATEMENTS OR WAS ENGAGED (DID NOT COMPLETE), RESIGNED OR TERMINATED
4. CLIENT MUST AUTHORIZE THE DISCLOSURE OF INFORMATION TO THE SUCCESSOR AUDITOR – IF CLIENT DOES NOT CONSENT THEN ASK FOR REASONS AND THE DECIDE WHETHER TO ACCEPT THE ENGAGEMENT
5. ONCE ENGAGEMENT HAS BEEN ACCEPTED A SECOND INQUIRY CAN BE MADE FOR VIEWING THE WORKING PAPERS
6. SUCCESSOR SHOULD ASK THE FOLLOWING QUESTIONS: INTEGRITY OF MANAGEMENT, DISAGREEMENTS ABOUT ACCOUNTING PRINCIPLES AND AUDITING PROCEDURES, REASONS FOR CHANGE OF AUDITOR, COMMUNICATIONS TO AUDIT COMMITTEE REGARDING FRAUD, ILLEGAL ACTS AND INTERNAL CONTROLS
7. AUDITOR CAN TENTATIVELY ACCEPT AN ENGAGEMENT AS LONG AS THE CLIENT KNOWS THAT IT CANNOT BE FINALIZED UNTIL THE COMMUNICATION HAVE BEEN COMPLETED
8. PREDECESSOR MAY CHOSE TO LIMIT THE RESPONSE TO THE INQUIRY
9. ONE THE ENGAGEMENT IS ACCEPTED THEN CPA MAY MAKE INQUIRIES REGARDING CONDUCT OF THE AUDIT, REVIEW WORKING PAPERS
10. REVIEW OF WORKING PAPERS MAY AFFECT N,E,T OF PROCEDURES WITH RESPECT TO OPENING BALANCES AND CONSISTENCY OF ACCOUNTING PRINCIPLES
11. CPA SHOULD NOT MAKE REFERENCE TO THE WORKING PAPERS OR REPORT OF PREDECESSOR AUDITOR IN THE AUDIT REPORT
12. SHOULD SPECIFY IN COMMUNICATIONS WITH PREDECESSOR AUDITOR IF TRYING TO DECIDE WHETHER A REAUDIT NEEDS TO BE PERFORMED
13. REAUDIT RESULTS CANNOT BE USED FOR THE BASIS OF AN AUDIT OPINION AND THE N, E, T OF PROCEDURES MUST BE THE SOLE RESPONSIBILITY OF THE SUCCESSOR AUDITOR PERFORMING THE REAUDIT
14. SUCCESSOR AUDITOR SHOULD: PLAN AND PERFORM REAUDIT IN ACCORDANCE TO GAAS, NOT ASSUME RESPONSIBILITY FOR THE PREDECESSORS WORK, AND NOT ISSUE A REPORT THAT REFLECTS DIVIDED RESPONSIBILITY
15. RESULTS OF CURRENT AUDIT CAN INFLUENCE THE PLANNING AND PERFORMANCE OF THE REAUDIT
16. SUCCESSOR AUDITOR SHOULD QUALIFY OR DISCLAIM AN OPINION WHEN: UNABLE TO OBTAIN ENOUGH EVIDENCE OR UNABLE TO PERFORM NECESSARY PROCEDURES
17. GENERALLY DURING A REAUDIT CPA CANNOT OBSERVE INVENTORY OR MAKE PHYSICAL COUNTS AT THE REAUDIT DATES – IN SUCH CASES INQUIRE TO PREDECESSOR AUDITOR AND REVIEW HIS WORKING PAPERS, OBSERVE OR PERFORM PHYSICAL COUNTS OF INVENTORY AT A LATER DATE OF THE REAUDIT, APPLY TESTS OF INTERVENING TRANSACTIONS
18. SUCCESSOR AUDITOR SHOULD ASK THAT THE CLIENT LET THE PREDECESSOR AUDITOR KNOW IF THE PRIOR FINANCIAL STATEMENTS NEED REVISION
19. IF CLIENT REFUSES TO DO THAT THEN SUCCESSOR AUDITOR SHOULD EVALUATE IMPLICATIONS ON CURRENT ENGAGEMENT, WHETHER TO RESIGN FROM THE ENGAGEMENT, WHETHER TO CONSULT WITH LEGAL COUSEL

ESTABLISH AN AGREEMENT WITH CLIENT AND DOCUMENT IT THROUGH AN ENGAGEMENT LETTER OR OTHER WRITTEN COMMUNICATION
1. AUDITOR SHOULD ESTABLISH AN UNDERSTANDING ABOUT SERVICES TO PERFORMED BEFORE THE EVERY ENGAGEMENT
2. AGREEMENT SHOULD INCLUDE OBJECTIVES, MANAGEMENT RESPONSIBILITES, AUDITORS RESPONSIBILITIES, AND LIMITATIONS OF ENGAGEMENT
3. AUDITOR SHOULD DOCUMENT THE UNDERSTANDING OF THE WORKING PAPERS THROUGH WRITTEN COMMUNICATION WITH CLIENT
4. SHOULD DECLINE THE AUDIT IF THERE IS NO AGREEMENT
5. AGAIN, THE AGREEMENT SHOULD INCLUDE THE FOLLOWING MATTERS – OBJECTIVE OF THE AUDIT IS THE EXPRESSION OF AN OPINION OF THE FINANCIAL STATEMENTS, MANAGEMENT IS RESPONSIBLE FOR THE FINANCIAL STATEMENTS, FOR INTERNAL CONTROL, FOR PREVENTING AND DETECTING FRAUD, FOR THE COMPLIANCE WITH LAWS AND REGULATIONS, WILL PROVIDE AUDITOR WITH FINANCIAL RECORDS, WILL PROVIDE REPRESENTATION LETTER AT THE END OF AUDIT
6. AUDITOR IS RESPONSIBLE FOR CONDUCTING AUDIT IN ACCORDANCE WITH GAAS
7. AUDIT INCLUDES OBTAINING UNDERSTANDING OF ENTITY AND ENVIRONMENT, INTERNAL CONTROLS, SUFFICIENT TO DETERMINE THE N, E, T OF PROCEDURES AND TO ASSESS RISK OF MATERIAL MISSTATEMENT TO FINANCIAL STATEMENTS
8. MANAGEMENT IS RESPONSIBLE FOR CORRECTING MATERIAL MISSTATEMENTS AND AFFIRMING THAT ANY UNCORRECTED MISSTATEMENTS ARE IMMATERIAL WHEN FINANCIAL STATEMENTS ARE TAKEN AS A WHOLE
9. OTHER MATTERS MAY INCLUDE: THE OVERALL AUDIT STRATEGY, INVOLVEMENT OF SPECIALISTS, INVOLVEMENT OF PREDECESSOR AUDITOR, FEES AND BILLING, LIMITATIONS TO LIABILITY OF AUDITOR OR CLIENT, CONDITIONS APPROPRIATE FOR WORKING PAPER ACCESS, ADDITIONAL SERVICES
10. THE ENGAGEMENT LETTER IS A CONTRACT WRITTEN BY THE CPA SIGNED BY THE CLIENT SHOULD BE ADDRESSED AND DATED AS SOON AS AGREEMENT IS REACHED

OTHER PLANNING MATTERS (AUDIT STRATEGY AND PLAN)
1. OVERALL AUDIT STRATEGY
2. SCOPE = BASIS OF REPORTING, INDUSTRY REPORTING REQUIREMENTS, LOCATIONS OF THE ENTITY
3. FIND OUT REPORTING OBJECTIVES SO THAT TIMING OF AUDIT INCLUDING DEADLINES AND DATES FOR MANAGEMENT COMMUNICATIONS CAN BE DETERMINED
4. FIND OUT FACTORS THAT WILL INFLUENCE FOCUS OF EFFORTS SUCH AS MATERIALITY LEVELS, AREAS OF HIGHER RISK OF MATERIAL MISSTATEMENT, FINANCIAL REPORTING DEVELOPMENTS, ETC
5. AUDIT STRATEGY HELPS DETERMINE TYPE AND AMOUNT OF HUMAN RESOURCES NEEDED, TIMING OF RESOURCES AND MANAGEMENT DUTIES
6. AUDIT STRATEGY AND DETAILED AUDIT PLAN CAN HAPPEN CONCURRENTLY
7. AUDIT PLAN REDUCES AUDIT RISK TO LOW LEVELS INCLUDES N, E, T OF PROCEDURES
8. AUDIT PLANNING PROCEDURES INCLUDE: REVIEWING PRIOR YEAR’S DOCUMENTS, DISCUSSIONS WITH FIRM PERSONNEL, INQUIRING ABOUT BUSINESS DEVELOPMENTS, READING INTERIM FINANCIAL STATEMENTS, DISCUSS N, E, T OF AUDIT WITH MANAGEMENT, BOD, OR AUDIT COMMITTEE, CONSIDERING NEW PRONOUNCEMENTS, DATA PREPARATION WITH ENTITY PEOPLE, EXTENT OF INVOLVEMENT OF CONSULTANTS, TIMING, AND STAFFING REQUIREMENTS
9. AUDIT PLAN SHOULD INCLUDE

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