Auditing Procedures and Internal Control Concepts
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What is one method an auditor might use to select documents for testing?

  • Selecting the most recent documents only
  • Selecting documents based on their volume
  • Choosing documents randomly without a specific criterion
  • Identifying documents by their dates and unique purchase order numbers (correct)

How does an auditor systematically sample documents from a population?

  • By selecting the first document and choosing every second document thereafter
  • By choosing documents based on personal judgment
  • By recording the source, starting point, and sampling interval (correct)
  • By using the last document in the population as the starting point

What information should an auditor record when making inquiries of specific entity personnel?

  • The time taken for each inquiry made
  • Only the job designations of the personnel involved
  • The results of the inquiries only
  • The inquiries made, dates, and names and job designations of the personnel (correct)

What must an auditor document when conducting an observation procedure?

<p>The process or matter being observed and relevant individuals along with when and where the observation took place (C)</p> Signup and view all the answers

According to Section 220A, what is required of the auditor regarding the review of audit work performed?

<p>To document who reviewed the audit work and the extent of the review (A)</p> Signup and view all the answers

What must management acknowledge in the terms of engagement for an audit of special purpose financial statements?

<p>Its responsibility for appropriate informative disclosures (D)</p> Signup and view all the answers

Why is management's responsibility for internal control significant in an audit?

<p>It helps achieve reasonable assurance about preparing fair financial statements (A)</p> Signup and view all the answers

What does the term 'internal control' encompass according to the content?

<p>Components including risk assessment and communication (C)</p> Signup and view all the answers

When should a predecessor auditor limit their response to an auditor's inquiries?

<p>If there are concerns of potential litigation. (D)</p> Signup and view all the answers

What is the inherent limitation of internal control mentioned in the content?

<p>It can only provide reasonable assurance regarding financial reporting objectives (A)</p> Signup and view all the answers

What is required of the auditor regarding the internal control maintained by management?

<p>To obtain management's acknowledgement of its responsibility (D)</p> Signup and view all the answers

What responsibility does management have concerning the predecessor auditor?

<p>To authorize the predecessor auditor to respond to inquiries. (B)</p> Signup and view all the answers

What does the independent audit conducted in accordance with GAAS imply regarding internal control?

<p>It does not substitute for management's maintenance of internal control (D)</p> Signup and view all the answers

What should the auditor do if the predecessor auditor provides no response to inquiries?

<p>Evaluate the implications of the absence of a response. (B)</p> Signup and view all the answers

Which document should be created when an engagement is accepted after inquiries?

<p>Documentation of the inquiries and their results. (C)</p> Signup and view all the answers

What is one responsibility of management related to the internal control system?

<p>To monitor the effectiveness of internal control processes (C)</p> Signup and view all the answers

How should the auditor approach terms from a previous engagement during recurring audits?

<p>Assess if the terms need to be revised and document any reminders. (C)</p> Signup and view all the answers

What is not implied by the agreement obtained from management regarding internal control?

<p>The internal control will be free from deficiencies (B)</p> Signup and view all the answers

What is expected of the predecessor auditor’s response regarding known facts?

<p>Responses should be prompt and factual unless unusual circumstances exist. (C)</p> Signup and view all the answers

What does SAS No. 147 specifically address regarding audits of financial statements?

<p>Guidelines for matters relating to management and predecessor auditor communications. (C)</p> Signup and view all the answers

What factors can lead to a 'limited response' from a predecessor auditor?

<p>Threatened litigation or disciplinary proceedings. (B)</p> Signup and view all the answers

What must an auditor document regarding significant findings or issues discussed with management?

<p>The nature of the findings and when discussions took place. (A)</p> Signup and view all the answers

When documenting audit procedures performed, which of the following is NOT required?

<p>The personal opinions of the auditor regarding the findings. (D)</p> Signup and view all the answers

What should an auditor include in audit documentation related to significant contracts or agreements?

<p>Abstracts or copies of the contracts. (A)</p> Signup and view all the answers

In cases of departure from a mandatory requirement, what must an auditor document?

<p>Justification for the departure and alternative procedures performed. (C)</p> Signup and view all the answers

What must be documented if an auditor finds information inconsistent with their final conclusion?

<p>How the inconsistency was resolved. (B)</p> Signup and view all the answers

What two aspects must the auditor document when performing additional procedures after the audit report date?

<p>The circumstances encountered and the new procedures performed. (A)</p> Signup and view all the answers

Who is responsible for documenting the review of the audit work performed?

<p>The review should be documented by whoever reviewed the work. (D)</p> Signup and view all the answers

What information does an auditor NOT typically need to include in audit documentation?

<p>The signatures of all team members involved. (C)</p> Signup and view all the answers

What is necessary for auditors to obtain during the audit process?

<p>Written confirmation from management (D)</p> Signup and view all the answers

Which action may an auditor take if the audit results are not as expected?

<p>Modify their opinion accordingly (B)</p> Signup and view all the answers

What must be acknowledged and agreed to by ABC Company regarding the audit process?

<p>The arrangements including responsibilities (A)</p> Signup and view all the answers

What might be included in an auditor's report if there are unusual circumstances?

<p>An emphasis-of-matter paragraph (D)</p> Signup and view all the answers

Which part of the audit letter is signed to indicate agreement?

<p>The acknowledgment section (C)</p> Signup and view all the answers

What is expected upon completion of the audit of financial statements?

<p>A written report addressed to the board of directors (A)</p> Signup and view all the answers

What occurs if the auditor discovers discrepancies during the audit?

<p>They may withdraw from the engagement (B)</p> Signup and view all the answers

What is one of the key responsibilities of the auditor related to other information?

<p>To issue a report complying with specific sections (A)</p> Signup and view all the answers

What is the primary objective of the auditor concerning documentation?

<p>To prepare a sufficient and appropriate record for the auditor's report (C)</p> Signup and view all the answers

What does the term 'audit documentation' refer to?

<p>The record of audit procedures performed and evidence obtained (B)</p> Signup and view all the answers

What is meant by 'documentation completion date'?

<p>The date by which a final set of documentation must be retained (C)</p> Signup and view all the answers

Who qualifies as an 'experienced auditor'?

<p>An individual with practical audit experience and understanding of relevant issues (B)</p> Signup and view all the answers

What must the auditor's documentation enable an experienced auditor to do?

<p>Understand the nature, timing, and extent of audit procedures (A)</p> Signup and view all the answers

Which of the following is NOT a required aspect of audit documentation according to GAAS?

<p>Documentation of the auditor's personal opinions and insights (A)</p> Signup and view all the answers

What does 'GAAS' stand for?

<p>Generally Accepted Auditing Standards (A)</p> Signup and view all the answers

What is the purpose of an audit file?

<p>To contain the records that form the audit documentation for an engagement (B)</p> Signup and view all the answers

Flashcards

Unrestricted access to personnel

The auditor must have access to all individuals within the company who they deem necessary to obtain audit evidence.

Written confirmations from management

Management and those charged with governance (like the board of directors) must provide written confirmation of representations made to the auditor during the audit process.

Auditor's report

The auditor will issue a written report after completing the audit of the financial statements.

Modifications to the auditor's report

The auditor may modify their opinion, add an emphasis-of-matter paragraph, or even withdraw from the engagement if circumstances warrant.

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Other auditor's reports

The auditor may issue additional written reports related to other aspects of the audit.

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Acknowledgement and agreement

Both the auditor and the company acknowledge and agree to the terms of the audit engagement.

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Appropriate terminology

The auditor is expected to use appropriate terminology in their communication with the company and in their reports.

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References to auditing standards

The auditor may need to refer to specific sections of the auditing standards in their engagement letter or reports.

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Audit Documentation

A record that includes the details of audit procedures performed, including the specific items tested, the auditor's name, the date of completion, and the reviewer's information.

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What items were tested?

The identifying characteristics of the items or matters tested during the audit.

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Who performed the audit work?

The auditor's name and the date the audit work was completed.

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Who reviewed the audit work?

The name of the person who reviewed the work, the date of the review, and the extent of the review.

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Contractual evidence

Abstracts or copies of significant contracts or agreements should be included in the audit documentation.

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Documentation of discussions

A record of any discussions held with management, those charged with governance, and others regarding significant findings or issues.

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Addressing inconsistencies

If there's information that contradicts the auditor's final conclusion, the auditor should clearly document how they addressed the inconsistency.

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Departing from a requirement

When the auditor departs from a mandatory requirement, they must document the justification, alternative procedures, and how they achieved the requirement's intent.

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Audit file

One or more folders (physical or electronic) containing all the documents related to a specific audit.

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Documentation completion date

The date when the auditor has collected all the necessary documentation and finalized the audit file.

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Experienced auditor

An individual (internal or external to the firm) with practical audit experience and a strong understanding of essential audit topics, GAAS, relevant laws, and the business environment.

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Documenting the scope of entity-generated purchase order testing

The auditor should identify the documents selected for testing by their dates and unique purchase order numbers, as well as by any other relevant criteria.

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Report release date

The date when the auditor authorizes the entity to use the auditor's report in connection with the financial statements.

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Documenting the scope of procedures requiring review of items over a specific amount

The auditor should record the scope of the procedure, the specific amount threshold, and the population being reviewed (e.g., journal entries over a specific amount).

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Documenting the scope of procedures requiring systematic sampling

The auditor should record the source of the documents, the starting point, and the sampling interval used to identify the documents selected for testing.

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Timely preparation of audit documentation

The auditor should create audit documentation in a timely manner.

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Sufficiency of audit documentation

Audit documentation should be sufficient for an experienced auditor to understand the nature, timing, and extent of the audit procedures and comply with GAAS and applicable legal and regulatory requirements.

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Documenting the scope of inquiries of specific personnel

The auditor should record the inquiries made, the dates of the inquiries, and the names and job designations of the entity personnel.

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Documenting the scope of observation procedures

The auditor should record the process or matter being observed, the relevant individuals, their respective responsibilities, and the location and time of the observation.

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Understandability of audit documentation

Audit documentation should enable an experienced auditor to understand the audit procedures performed and the evidence obtained.

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Auditor's Responsibility for Disclosures in Special Purpose Financial Statements

The auditor must obtain management's agreement that they understand their responsibility to include all necessary disclosures in special purpose financial statements.

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Internal Control for Financial Reporting

Internal control is a system that management implements to ensure the reliability and accuracy of financial reporting.

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Limitations of Internal Control

Internal control provides reasonable assurance about the accuracy of financial reporting, but it cannot eliminate all risks completely.

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Audit vs. Internal Control

An independent audit does not replace the need for strong internal controls within a company.

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Management's Responsibility for Internal Control

Management is responsible for designing, implementing, and maintaining effective internal controls.

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Auditor's Responsibility for Internal Control Agreement

The auditor must obtain management's agreement that they understand their responsibility for internal control.

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Components of Internal Control

Internal control includes various components that work together, like the control environment, risk assessment, and monitoring activities.

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Management's Determination of Internal Control Scope

Management decides what level of internal control is necessary to ensure the accuracy of financial reporting.

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Predecessor Auditor Communication

When an auditor is considering taking over an audit from a predecessor auditor, they're required to communicate with the predecessor auditor to gather information on any noncompliance with laws and regulations.

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Predecessor Auditor's Responsibility

The predecessor auditor must respond to the inquiries of the new auditor in a timely manner and on the basis of known facts. However, they can limit their response if unusual circumstances exist or if there are legal restrictions.

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Limited Responses from Predecessor Auditor

If a predecessor auditor decides to limit their response to the new auditor's inquiries due to legal concerns, they should clearly state that the response is limited and explain the reason.

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Evaluating Predecessor Auditor's Response

The auditor should carefully consider the predecessor auditor's response or the absence of a response to determine if accepting the engagement is appropriate.

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Documenting Predecessor Auditor Communication

The auditor should document the inquiries made to the predecessor auditor and the results of those inquiries.

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Recurring Audits – Reviewing Engagement Terms

On recurring audits, the auditor should review the terms of the engagement to ensure they're still appropriate. If they are, the auditor should remind management of the terms and document the reminder.

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Reminding Management of Engagement Terms

The auditor should remind management of the terms of the audit engagement and document the reminder.

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Revising Engagement Terms for Recurring Audits

The auditor should evaluate the engagement terms to determine if they need to be revised for the current engagement.

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Study Notes

AU-C Section 210 - Terms of Engagement

  • Objective: The auditor's objective is to accept an audit engagement for a new or existing client only when the basis upon which it is to be performed has been agreed upon. This includes establishing that certain preconditions for an audit are present and confirming a common understanding of the terms of the audit engagement between the auditor and management, and when appropriate, those charged with governance.
  • Effective Date: Effective for audits of financial statements for periods ending on or after December 15, 2012, unless otherwise indicated. Amendments effective for engagements conducted in accordance with generally accepted auditing standards for periods beginning on or after December 15, 2025.
  • Preconditions for an Audit: The preconditions involve management using an acceptable financial reporting framework in preparing and presenting the financial statements; and the agreement of management, and, when appropriate, those charged with governance, with the premise on which the audit is conducted. Recurring audits should also follow the preconditions for new engagements.
  • Requirements for Audit Engagement Acceptance: The auditor should determine if the financial reporting framework used is acceptable and obtain agreement from management they acknowledge and understand their responsibilities for the preparation and fair presentation of the financial statements, in accordance with the applicable financial reporting framework.
  • Documentation of Engagement Terms: The agreed-upon terms of the audit engagement should be documented in an audit engagement letter, and should include the objective, scope, responsibilities of the auditor and management and a statement that some material misstatements may not be detected, even with a properly planned and executed audit.
  • Initial and Recurring Audits: Before accepting an initial audit engagement, the auditor should request management to authorize the predecessor auditor to respond fully to inquiries regarding matters that will assist the auditor in determining whether to accept the engagement. Recurring audits require the auditor to assess whether circumstances require a revision in the terms of the audit engagement.
  • Change in Engagement Terms: The auditor should not agree to a change in the terms of the engagement if there isn't a reasonable justification. The auditor must document any such changes.
  • Other Considerations: If law or regulation prescribes unique requirements for the auditor's report, the auditor must evaluate whether the requirements would cause users to misunderstand the report. The auditor also must consider whether users would understand alternative approaches that don't violate GAAS, in such cases.
  • Objective and Scope: The auditor's objective includes accepting an audit engagement, and clearly defining the scope of work.
  • Responsibilities of Auditor and Management: The auditor's responsibilities and management's responsibilities are specified, and how this affects the engagement acceptance process is outlined in the documentation.

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Required Reading for Class 1-21 (AU-C Section 210)

Description

This quiz covers essential auditing procedures, including document selection, sampling methods, and internal control responsibilities. You will explore the requirements for auditors and management in the context of special purpose financial statements and the role of predecessor auditors. Test your knowledge on these critical aspects of the auditing process.

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