The Audit Process - Setting Terms for the Engagement
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CPA Auditing and Attestation (AUD) › The Audit Process - Setting Terms for the Engagement
At a minimum, an understanding with a client should include:
The specific audit procedures the auditor plans to perform
The objectives and limitations of the engagement, as well as the responsibilities of management and of the auditor
The assessed level of the risk of material misstatement
The auditor's opinion regarding whether the financial statements are free of material misstatement
Explanation
At a minimum, an understanding with a client should include the objectives and limitations of the engagement, as well as the responsibilities of management and of the auditor.
The engagement letter specifically mentions
The auditor’s responsibility
The responsibility of the AICPA
The responsibility of SEC
The responsibility of PCAOB
Explanation
Auditors' communication with predecessor auditor may be either oral or in written form. The preferred standard however is written.
Of the following examples, which would dictate the need for an Other-Matter paragraph?
Reference to required supplementary information
Going concern issue
Material justified change in an accounting principle
Special purpose framework
Explanation
If there is a piece of information critically important to the understanding of financial statements, the auditor will point it out through an Other-Matter paragraph.
An auditor's engagement letter would most likely include a statement regarding:
Management's responsibility to provide certain written representations to the auditor
Materialty matters that could modify the auditor's preliminary assessment of fraud risk
Internal control activities that would reduce the auditor's assessment of risk
Conditions under which the auditor may modify the preliminary judgement about materiality
Explanation
The auditor is required to establish an understanding with the client, and this understanding should be documented in the form of an engagement letter. The understanding should encompass management's responsibilities which include providing the auditor with a representation letter at the conclusion of the engagement.
Communication with predecessor auditor should include:
Information regarding appropriate fees
Disagreements with management related to accounting or auditing issues
Predecessors agreement with the change in auditors
An assessment of management performance
Explanation
In developing an audit plan, the engagement partner should identify the scope of the audit. Management is not involved in determining what opinion may be given by the auditors.
Auditors communication with predecessor auditor must be
Verbal
Written
either a or b
neither a or b
Explanation
Among the items communicated with predecessor auditors are any disagreements with management. The purpose of this communication is to disclose any attempt to circumvent the applications of GAAP.