ACC 442 Lecture Notes - Lecture 6: Engagement Letter, Preliminary Ruling, Audit Risk

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describe the standard on communications between predecessor and successor auditor.

Successor is required by auditing standards to communicate with the predecessor auditor. Due to

confidentiality the client must consent to this communication and the purpose is to determine if the

client lacks integrity or if there were disputes about accounting principles.

What kind of inquires should be made to the predecessor?

Did you have any disputes about accounting principles? What types of problems did you have

communicating with the client?

Describe purpose of engagement letter

Provides the engagements objective so the client knows exactly what they are agreeing to.

Describe contents of engagement letter

details of the services the auditor is going to perform, when they will be performed, and the cost of

performing them.

Define related party

...

what is the related parties importance to the auditor

...

Describe how an auditor obtains knowledge of the clients industry and business

Determine risks of specific industry, familiarity with industry risks, familiarity with accounting reqs of

certain industries.

Auditor identifies major sources of revenue, key customers, tours clients facilities, and identifies related

parties.

Define materiality

the magnitude of misstatements that individually or when aggregated with other misstatements could

reasonable influence decision of users i.e. (Is something relevent enough to influence the decision of the

statement users)

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describe the process of obtaining preliminary judgement about materiality

using professional judgement to create a judgement about materiality that can be changed throughout.

It is a judgement by an auditor that is the most an audit could be mistated by and still not affect

materiality of the audit.

Discuss the relationship of materiality to audit evidence-not as important

...

what qualitive factors affect materiality-not as important

...

what are the different types of risk assessment procedures?

Inquires of management and others

Analytical procedures

Observation and Inspection

Discussion among team members

Other risk assessment procedures

Role of risk assessment

Provide input for understanding entity-Help auditor id and assess risk-Used to develop audit strategy

plan in response to assessed risks.

Describe the audit risk model***

PDRIRCR=AAR.

Figure 9-2

Figure 9-3

Define inherit risk

suceptability of an assertion to material misstatement

define control risk

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Document Summary

Describe the standard on communications between predecessor and successor auditor. Successor is required by auditing standards to communicate with the predecessor auditor. Due to confidentiality the client must consent to this communication and the purpose is to determine if the client lacks integrity or if there were disputes about accounting principles. Provides the engagements objective so the client knows exactly what they are agreeing to. Describe contents of engagement letter details of the services the auditor is going to perform, when they will be performed, and the cost of performing them. Define related party what is the related parties importance to the auditor. Describe how an auditor obtains knowledge of the clients industry and business. Determine risks of specific industry, familiarity with industry risks, familiarity with accounting reqs of certain industries. Auditor identifies major sources of revenue, key customers, tours clients facilities, and identifies related parties.

Related Questions

Audit standards require that successor auditors communicate withpredecessor auditors prior to accepting an engagement. Predecessorauditors, however, cannot share confidential client informationwithout the permission of the client. Once permission is granted,communication can begin and includes conversations about the clientto help the successor auditor determine if client acceptanceappears appropriate. For example, conversations will includediscussion about management integrity, any disagreements withmanagement, communication with those charged with governance, andthe reason for the auditor change. Smith Jones, CPA, was thepredecessor auditor for Awesome Adventures, Inc. Jones was toldthat the firm was terminated and Awesome Adventures was to retainRich Fortune, CPA. Rich Fortune contacted Smith Jones in order tohave a predecessor-successor conversation. Smith Jones indicatedthat Awesome Adventures was a long-time client of the firm and thatthe dispute which led to the termination of its servicessignificantly revolved around audit fees. Jones indicated thatmanagement put unusual time deadlines on the CPAs, and theysometimes felt rushed to complete the audit. 1. What step did RichFortune fail to perform? 2. Rich Fortune appears to have askedSmith Jones about management integrity, disagreements withmanagement, and the reason for the auditor change. What did RichFortune fail to ask Smith Jones? 3. What should Rich Fortune dowith the information about the unnecessary time pressure?

1â28. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following best describes the relationship between assurance services and
attest services?
(1) While attest services involve fi nancial data, assurance services involve nonfi nancial data.
(2) While attest services require objectivity, assurance services do not require objectivity.
(3) Both attest and assurance services require independence.
(4) Attest and assurance services are different terms referring to the same types of services.
b. Which of the following has primary responsibility for the fairness of the representations
made in fi nancial statements?
(1) Clientâs management.
(2) Independent auditor.
(3) Audit committee.
(4) AICPA.
c. The most important benefi t of having an annual audit by a public accounting fi rm is to:
(1) Provide assurance to investors and other outsiders that the fi nancial statements are reliable.
(2) Enable offi cers and directors to avoid personal responsibility for any misstatements in
the fi nancial statements.
(3) Meet the requirements of government agencies.
(4) Provide assurance that illegal acts, if any exist, will be brought to light.
d. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board
(PCAOB). Which of the following is not one of the responsibilities of that board?
(1) Establish independence standards for auditors of public companies.
(2) Review fi nancial reports fi led with the SEC.
(3) Establish auditing standards for audits of public companies.
(4) Sanction registered audit fi rms.
e. Which of these organizations has the responsibility to perform inspections of auditors of
public companies?
(1) American Institute of Certifi ed Public Accountants.
(2) Securities and Exchange Commission.
(3) Financial Accounting Standards Board.
(4) Public Company Accounting Oversight Board.
f. Governmental auditing, in addition to including audits of fi nancial statements, often
includes audits of effi ciency, effectiveness, and:
(1) Adequacy.
(2) Evaluation.
(3) Accuracy.
(4) Compliance.
g. In general, internal auditorsâ independence will be greatest when they report directly to the:
(1) Financial vice president.
(2) Corporate controller.
(3) Audit committee of the board of directors.
(4) Chief executive offi cer.
h. Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002
to regulate public accounting fi rms:
(1) Disclosures related to accounting irregularities at Enron and WorldCom.
(2) Restatements of fi nancial statements by a number of public companies.

(3) Conviction of the accounting fi rm of Arthur Andersen LLP.
(4) Ethical scandals at the AICPA.
i. Which of the following organizations establishes accounting standards for U.S. government
agencies?
(1) The Financial Accounting Standards Board.
(2) The Governmental Accounting Standards Board.
(3) The Federal Accounting Standards Advisory Board.
(4) The Public Company Accounting Oversight Board.
j. Which of the following is correct about forensic audits?
(1) All audit engagements are forensic in nature.
(2) Forensic audits are performed by law fi rms; they are not performed by CPA fi rms.
(3) Forensic audits are equivalent to compliance audits.
(4) Forensic audits are usually performed in situations in which fraud has been found or is
suspected.
k. What best describes the purpose of the auditorsâ consideration of internal control in a
fi nancial statement audit for a nonpublic company?
(1) To determine the nature, timing, and extent of audit testing.
(2) To make recommendations to the client regarding improvements in internal control.
(3) To train new auditors on accounting and control systems.
(4) To identify opportunities for fraud within the clientâs operations.
l. Which of the following is an example of a compliance audit?
(1) An audit of fi nancial statements.
(2) An audit of a companyâs policies and procedures for adhering to environmental laws
and regulations.
(3) An audit of a companyâs internal control over fi nancial reporting.
(4) An audit of the effi ciency and effectiveness of a companyâs legal department.

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ACC 442 Lecture Notes - Lecture 6: Engagement Letter, Preliminary Ruling, Audit Risk

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