Audit Midterm Audit Planning

Audit Opinion Formulation Process

Making client acceptance and continuance decisions

Performing risk assessment

Obtaining evidence about internal control design and operating effectiveness

Obtaining substantive evidence about accounts, disclosures, and assertions

Completing the audit and making reporting decisions

Objective of Audit

Obtain reasonable assurance financial statements are free from material misstatements

Report on financial statements based on auditor’s findings

Reasonable assurance

Can’t give 100% assurance

there is a remote possibility that there is a material error

To accomplish audit objectives, auditor must

Comply with relevant ethical and professional conduct requirements

Conduct audit in accordance with professional standards

Exercises professional judgement, professional skepticism, and critical thinking skills

Obtain sufficient appropriate evidence

Parties involved in preparing and auditing financial statements

Management

Internal audit function

Audit committee

External auditor

Management Responsiblities

Adopting sound accounting policies

Maintaining internal controls

Preparing and making fair representations on financial statements

Certifying quarterly and annual financial statements (established by SOX Act)

Auditor responsibilities

Report on financial statements and communicate as required by standards

Responsible for finding any material intentional and unintentional errors (more difficult to find fraud than errors b/c usually an attempt to hide)

Client Acceptance and Continuance

AS 2101

Must re-evaluate each engagement to determine if you want to keep working with the client

Before accepting a new client, must communicate with previous auditor (client must give previous audit firm permission to see communicate with new auditor)

Reasons to leave an old client

Financial statement situation deteriorates and concerned with ability to continue

Poor controls

Obstructive in the audit process

Changes in management we are uncomfortable with

Risk Considerations for Client acceptance/continuance

Client entity characteristics

Integrity of management

Independence risk factors

third-party/due diligence risk factors

Quantitative risk factors

Qualitative risk factors

Entity organization or governance risk

Financial reporting risk

Communication with Predecessor Auditor

AS 2610

Should not except engagement until evaluate:

management integrity

disagreements with management

communications regarding fraud, illegal acts, or internal control matters

Reasons for change in auditor

Nature of company’s related party or other significant transactions

Predecessor auditor cannot speak/disclose anything about the client without the client’s permission. If the client doesn’t give permission, cannot speak to them

Independence considerations

Financial interests or loans

Employment with potential client

Business relationships

Non audit services

SEC Covered person

Members of audit engagement

Individuals in a position to influence the audit

Partners in the same office as lead engagement partner

Immediate families (spouse, spousal equivalent, financial dependents) of above

*anybody who supervises or oversees anyone on the audit team

Every partner in the office must be independent

Direct vs indirect financial interest

Covered persons cannot have a direct financial interest

Can have indirect interest if not material (mutual funds are indirect)

Engagement Staffing

Responsibility of the engagement partner

Audit should be conducted by person with adequate training and proficiency

Higher risk client will have more experienced engagement team members

Engagement Letters

Establish terms of engagement and record understanding in the letter

Letter should have objective of audit, responsibilities of auditor, responsibility of management

Must be done annually, is the basis for relationship with client

If a client doesn’t sign, cannot complete the engagement

Engagement Letter Content

Mutual understanding of audit scope and process

timing of services

fee

other services provided

Management responsibilities

Appendix C provides required material

Management Responsibilities

Prepare financial statements, including disclosures

Establish and maintain internal controls

Identify and ensure compliance with laws/regulations

Making all financial records and relevant info available

Adjust financial statements to correct material misstatements and confirm uncorrected misstatements are immaterial