AUD Area II.A Study Notes: How Auditors Plan the Audit to Address Risk

Overall Engagement Strategy

The auditor’s high-level approach for conducting the audit, detailing scope, timing, and direction.

Risk of Material Misstatement (RMM)

The risk that financial statements are misstated due to error or fraud.

Scope

What is being audited and factors that could impact audit effort.

Timing

When audit work will be performed and its significance.

Direction

The high-level approach decisions for the audit.

Resources

Staffing and expertise required for the audit.

Governance, Communication, and Supervision

Expectations for oversight and communication with the engagement team.

Planning

A risk management tool that assists in focusing audit efforts effectively.

Service Organizations

Third parties that provide services that affect the client's financial reporting.

SOC Reports

System and Organization Controls reports used to evaluate service offerings.

Fraud Considerations

Assessing where misstatements could occur and how fraud might be concealed.

Interim Work

Audit work performed before the year-end.

Engagement Plan

Detailed actions specifying how to carry out the overall engagement strategy.

Risk Assessment Procedures

Procedures used to identify and assess risks of material misstatement.

Tests of Controls

Procedures to evaluate the effectiveness of controls in preventing or detecting material misstatements.

Substantive Procedures

Actions performed to obtain audit evidence about assertions in the financial statements.

Performance Materiality

An amount set lower than overall materiality to reduce the risk that the aggregate of uncorrected misstatements exceeds materiality.

Professional Skepticism

An attitude that includes a questioning mind and a critical assessment of audit evidence.

Audit Opinion

The formal statement by the auditor on the financial statements.

Evidence

The information used by the auditor to form an opinion on the financial statements.

Updates to the Plan

Revisions of the engagement plan when new information arises during the audit.

Nature, Timing, and Extent

Key elements that influence the design of audit procedures.

Engagement Team Composition

The mix of partner, manager, senior, and staff auditors involved in the engagement.

Audit Procedures

Specific actions taken by the auditor to gather evidence.

Approach Decisions

Choices made regarding reliance on controls versus substantive testing.

Entity Structure

The organization of the entity being audited, which can impact the audit's complexity.

Communication with Governance

Discussions with those charged with governance about audit scope and significant risks.