Engagement Terms And Engagement Letters
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CPA Auditing and Attestation (AUD) › Engagement Terms And Engagement Letters
A CPA is asked to perform an issuer integrated audit (financial statements and internal control over financial reporting) under PCAOB standards. Management wants the engagement letter to state that management is responsible only for providing access to records, while the auditor will be responsible for internal control. What is required to be included in the engagement letter for an issuer audit under PCAOB standards?
A statement that the audit will be conducted in accordance with International Standards on Auditing (ISA) without reference to PCAOB standards.
A statement that the auditor will provide assurance that the company will remain a going concern for at least 12 months.
A statement that management is responsible for the financial statements and for establishing and maintaining effective internal control over financial reporting.
A statement that the auditor will design, implement, and operate the company’s internal controls during the audit.
Explanation
PCAOB AS 2101 requires the engagement letter for an issuer integrated audit to state management's responsibilities for the financial statements and for establishing and maintaining effective internal control over financial reporting. Management's desire to shift internal control responsibility to the auditor contradicts standards, as the auditor does not assume this role. Choice A aligns with AS 2101 by correctly stating management's responsibilities. Choice B is incorrect as the auditor does not design or operate controls per AS 2101; choice C is incorrect because auditors do not provide going concern assurance in the engagement letter under AS 2415. Choice D is incorrect as PCAOB audits must reference PCAOB standards, not solely ISA, per AS 2101. Auditors should confirm responsibilities in writing to establish clear terms. This framework prevents misunderstandings and ensures compliance with regulatory requirements.
In a nonissuer financial statement audit, the audit documentation includes extensive copies of client invoices and contracts, but it does not clearly document the auditor’s conclusions on key assertions for revenue and the linkage to the procedures performed. The engagement partner is evaluating documentation sufficiency. Which documentation is necessary to support audit conclusions under AICPA standards?
A separate memo for each transaction tested, because standards require one memo per item selected.
Copies of all client source documents, because quantity of documents alone demonstrates sufficient documentation.
Only a final sign-off checklist, because checklists replace the need to document conclusions.
Documentation that clearly shows the objectives of the procedures, the work performed, the results, and the auditor’s conclusions, including significant judgments.
Explanation
AICPA AU-C Section 230 requires documentation that shows procedure objectives, work performed, results, and conclusions, including significant judgments, to support audit opinions. The extensive copies without conclusion linkages fail to meet sufficiency for revenue assertions. Choice A aligns with AU-C 230 by requiring clear documentation of objectives, work, results, and judgments. Choice B is incorrect as quantity does not ensure sufficiency; choice C is incorrect because checklists do not replace conclusions. Choice D is incorrect as standards do not mandate per-transaction memos. Auditors should link documentation to assertions and judgments. This rule ensures comprehensive and defensible audit files.
The primary purpose of audit documentation is to provide:
the principal support for the auditor's report and the representation that the audit was conducted in accordance with GAAS.
a basis for the subsequent year's audit plan and fee structure.
evidence to the client that the audit was performed in an efficient manner.
a record for management to use in evaluating the effectiveness of its internal controls.
Explanation
According to auditing standards (AU-C 230 and AS 1215), the primary purpose of audit documentation is to provide the principal support for the auditor's opinion expressed in the report and to provide evidence that the audit was planned and performed in accordance with generally accepted auditing standards (GAAS) and applicable legal and regulatory requirements.
An auditor used nonstatistical sampling to test the existence of accounts receivable. To ensure the audit documentation is sufficient, the workpapers should include a description of:
a complete list of all customer accounts that comprise the subsidiary ledger.
the client's credit-granting policies and procedures.
the specific customer accounts that were selected for confirmation.
the auditor's overall assessment of control risk for the entire entity.
Explanation
Audit documentation must record the identifying characteristics of the specific items or matters tested. For a test of accounts receivable, this would include the specific customer accounts and invoice numbers selected, allowing another auditor to understand what was tested and to potentially reperform the test.
Audit documentation should be prepared in sufficient detail to enable an experienced auditor, with no previous connection to the engagement, to understand the:
underlying business rationale for every accounting policy choice made by the entity's management.
nature, timing, and extent of the audit procedures performed to comply with GAAS.
firm's internal administrative practices related to billing and engagement economics.
professional qualifications and industry expertise of the engagement team members.
Explanation
The 'experienced auditor' test is a core concept of documentation sufficiency. The documentation must be clear enough for an experienced auditor to understand the nature, timing, and extent of procedures performed; the results and evidence obtained; and the significant findings, conclusions, and judgments made during the audit.
An audit firm has completed the audit of a nonissuer entity. According to AICPA professional standards, for how long must the firm retain the audit engagement documentation from the report release date?
Three years.
Ten years.
Five years.
Seven years.
Explanation
For audits of nonissuers, AICPA Statement on Auditing Standards (AU-C 230) requires audit documentation to be retained for a period of not less than five years from the report release date.
Regarding the situation described, which of the following is the most appropriate way to document this matter?
The initial finding and management's explanation should be documented, but not the subsequent contradictory information.
The workpapers should be revised to remove the initial finding, as it was subsequently clarified.
Only the final conclusion should be documented to avoid creating a record of a resolved issue.
The documentation should include both the contradictory evidence and the final resolution of the matter.
Explanation
Auditing standards require the auditor to document significant findings or issues, actions taken to address them, and the basis for the conclusions reached. This includes documenting information the auditor has identified that is inconsistent with or contradicts the auditor's final conclusion. Discarding or ignoring such evidence is improper.
An engagement quality reviewer is examining the audit documentation for a significant and complex accounting estimate related to a contingent liability. Which of the following would represent the most significant deficiency in the documentation?
The documentation fails to describe how the auditor evaluated the reasonableness of management's key assumptions.
The workpapers do not contain a detailed biography of the external legal counsel used by management.
The preparer's name is included, but the specific date of preparation is missing from the workpaper header.
The workpapers do not include a copy of the prior year's workpaper for the same estimate.
Explanation
For significant accounting estimates, the most critical aspect of the audit is evaluating the reasonableness of the data and assumptions used by management. A failure to document this evaluation means there is no evidence of the primary audit procedure performed, which is a significant deficiency in the documentation.
An auditor auditing a nonissuer decides not to use external confirmations for a material accounts receivable balance, which is a departure from a presumptively mandatory requirement in GAAS. To be considered sufficient, the audit documentation for this decision must include the:
alternative procedures performed to obtain sufficient appropriate evidence and the justification for the departure.
results of confirmations from the prior year's audit, which showed no exceptions.
statement that management requested the omission of confirmations to reduce audit fees.
waiver signed by the entity's chief executive officer and chief financial officer.
Explanation
When an auditor departs from a presumptively mandatory requirement (indicated by 'should' in the standards), the auditor must document the justification for the departure and how the alternative audit procedures performed were sufficient to achieve the intent of that requirement. Management's request or a waiver cannot override GAAS.
An audit manager reviews a staff accountant's workpaper and leaves a review note identifying a procedural error. Which of the following best demonstrates sufficient documentation related to the clearance of this review note?
The manager corrects the workpaper directly and deletes the review note without any further notation.
The staff accountant documents the corrective action taken, and the manager documents that the review note has been satisfactorily resolved.
The staff accountant verbally informs the manager that the error has been corrected.
The original workpaper with the error is discarded and replaced with a corrected version.
Explanation
Sufficient documentation requires evidence of supervision and review. This includes documenting the review process itself. The review note, the action taken to resolve it, and the reviewer's sign-off on the resolution should all be part of the final audit documentation to demonstrate proper supervision and quality control.