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Analytical procedures are required for which of the following?
A.Internal control evaluation.
C.Client retention decision.
D.Tests of balances.
An audit plan based on the audit strategy must be developed and documented for all audit engagements. It includes the nature, timing, and extent of procedures expected to reduce audit risk to an acceptably low level. Thus, the audit plan includes a description of risk assessment procedures. Risk assessment procedures are performed to obtain an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement (RMMs) at the levels of (1) the financial statements as a whole and (2) relevant assertions. Risk assessment procedures include (1) inquiries of management and others within the entity, (2) analytical procedures, and (3) observation and inspection. The auditor also may perform other appropriate procedures, such as inquiring of external parties (e.g., legal counsel) or reviewing externally generated information (e.g., financial publications). Analytical procedures may be applied not only as risk assessment procedures (analytical procedures used to plan the audit) but also as substantive procedures. These are procedures (tests of details and analytical procedures) designed to detect material misstatements at the assertion level.
The scope and nature of an auditor’s contractual obligation to a client is ordinarily set forth in the
The terms of the engagement should be documented in an engagement letter that states the (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) applicable financial reporting framework, and (5) expected form and content of audit reports. An engagement letter should be sent by the CPA to the prospective client on each engagement, audit or otherwise.
Auditing standards require that sufficient appropriate evidence be obtained by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. The substantive evidence required may be obtained, in part, through
Analytical procedures are evaluations of financial information made by a study and comparison of the relationships among data. The premise is that certain relationships prevail in the absence of known conditions to the contrary. Analytical procedures may be, but are not required to be, used as substantive procedures (along with tests of details) to provide sufficient appropriate evidence about specific financial statement assertions related to account balances or classes of transactions.
What elements underlies the development of an overall audit strategy?
Materiality and audit risk.
Materiality and audit risk affect the development of an overall audit strategy. The auditor must make judgments about materiality and audit risk in determining the nature, timing, and extent of procedures to apply.
To obtain an understanding of a continuing client in planning an audit, an auditor most likely would
Read internal audit reports.
The auditor performs risk assessment procedures to obtain the understanding of the entity and its environment, including its internal control. These include, for example, reading (1) internal audit reports, (2) interim statements, (3) quarterly reports, and (4) minutes of board meetings.
An auditor may be able to reduce audit risk to an acceptably low level for some relevant assertions by
Performing analytical procedures.
For some relevant assertions, analytical procedures alone may suffice to reduce audit risk to an acceptably low level. For example, the auditor’s risk assessment may be supported by audit evidence from tests of controls. Substantive analytical procedures generally are more applicable to large transaction volumes that are predictable over time (AU-C 330). The decision is based on the auditor’s professional judgment about the expected effectiveness and efficiency of the available procedures.