AUDITING THEORY: REVIEW

AUDIT PLANNING
Audit planning involves
developing an overall
strategy for performing the
audit. During planning
auditors establish an
understanding with their client
as to the nature of services to
be provided and the
responsibilities of each
party—this is ordinarily
accomplished through use of
an engagement letter.
Obtain an
Understanding of the
Client and Its
Environment, Including
Internal Control
Auditors should attain a
sufficient background to
assess the risk of material
misstatement of the financial
statements and to design the
nature, timing, and extent of
further audit procedures
Risk assessment
procedures
Auditors use the information
collected while obtaining their
understanding of the client and
its environment to identify classes
of transactions (transaction
classes), account balances, and
disclosures that might be
materially misstated
Perform Tests of Controls
Tests of controls are
performed to determine
whether key controls are
properly designed and
operating effectively
Perform Substantive
Procedures—General
Substantive procedures (also
referred to as substantive
tests) are used to
“substantiate” account
balances
detection risk

the risk that audit procedures

will incorrectly lead to a
conclusion that a material
misstatement does not exist in
an account balance when in
fact such a misstatement does
exist
Substantive
procedures—
analytical
procedures
• related to account balances
or classes of transactions
• relationships
Substantive procedures—
tests of details of account
balances, transactions and
disclosures
• detect misstatements in the
financial statements—more
specifically, misstatements
of relevant assertions
relating to transactions,
account balances, and
disclosures
Complete the Audit
• evidence is aggregated
and evaluated for
sufficiency
• Analytical procedures are
performed (again) to assist
the auditor in assessing
conclusions reached and
for evaluating overall
financial statement
presentation
TYPES OF THREATS

• Adverse interest threat - Threat that an auditor will not

act with objectivity because member’s interests are
opposed to client’s interests
• Advocacy threat—Threat a member will promote a
client’s interests to point of impairing objectivity or
independence.
TYPES OF THREATS

• Familiarity threat - Threat that due to a long or close

relationship with a client the member will become too
sympathetic to client’s interests
• Management participation threat—Threat that member
will take on role of management or otherwise assume
management responsibilities
TYPES OF THREATS

• Self-interest threat
• Self-review threat
• Undue influence threat
Generally accepted auditing standards are
a. Required procedures to be used to gather evidence to
support financial statements.
b. Policies and procedures designed to provide reasonable
assurance that the CPA firm and its personnel comply with
professional standards.
c. Pronouncements issued by the Auditing Standards Board.
d. Rules acknowledged by the accounting profession because of
their universal application.
Generally accepted auditing standards are
a. Required procedures to be used to gather evidence to
support financial statements.
b. Policies and procedures designed to provide reasonable
assurance that the CPA firm and its personnel comply with
professional standards.
c. Pronouncements issued by the Auditing Standards Board.
d. Rules acknowledged by the accounting profession because of
their universal application.
Which of the following is not an attestation standard?
a. Sufficient evidence shall be obtained to provide a
reasonable basis for the conclusion that is expressed in the
report.
b. The report shall identify the subject matter on the assertion
being reported on and state the character of the
engagement.
c. The work shall be adequately planned and assistants, if any,
shall be properly supervised.
d. A sufficient understanding of internal control shall be
obtained to plan the engagement.
Which of the following is not an attestation standard?
a. Sufficient evidence shall be obtained to provide a
reasonable basis for the conclusion that is expressed in the
report.
b. The report shall identify the subject matter on the assertion
being reported on and state the character of the
engagement.
c. The work shall be adequately planned and assistants, if any,
shall be properly supervised.
d. A sufficient understanding of internal control shall be
obtained to plan the engagement.
Which of the following is most likely to be unique to the audit
work of CPAs as compared to work performed by practitioners
of other professions?
a. Due professional care.
b. Competence.
c. Independence.
d. Complex body of knowledge
Which of the following is most likely to be unique to the audit
work of CPAs as compared to work performed by practitioners
of other professions?
a. Due professional care.
b. Competence.
c. Independence.
d. Complex body of knowledge
According to the standards of the profession, which of the
following circumstances will prevent a CPA performing audit
engagements from being independent?
a. Obtaining a collateralized automobile loan from a financial
institution client.
b. Litigation with a client relating to billing for consulting
services for which the amount is immaterial.
c. Employment of the CPA’s spouse as a client’s director of
internal audit.
d. Acting as an honorary trustee for a not for profit
organization client
According to the standards of the profession, which of the
following circumstances will prevent a CPA performing audit
engagements from being independent?
a. Obtaining a collateralized automobile loan from a financial
institution client.
b. Litigation with a client relating to billing for consulting
services for which the amount is immaterial.
c. Employment of the CPA’s spouse as a client’s director of
internal audit.
d. Acting as an honorary trustee for a not for profit
organization client
Which of the following is a “self review” threat to member
independence?
a. An engagement team member has a spouse that serves as
CFO of the attest client.
b. A second partner review is required on all attest
engagements.
c. An engagement team member prepares invoices for the
attest client.
d. An engagement team member has a direct financial interest
in the attest client.
Which of the following is a “self review” threat to member
independence?
a. An engagement team member has a spouse that serves as
CFO of the attest client.
b. A second partner review is required on all attest
engagements.
c. An engagement team member prepares invoices for the
attest client.
d. An engagement team member has a direct financial interest
in the attest client.