Read the summary and the most important questions on Lecture 8 Auditing (Responsibilities and objectives Client engagement)

• 1 Lecture 8 Auditing (Responsibilities and objectives Client engagement)

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• What are the two responsibilities of the management?

  1. Maintain adequate internal control
  2. Make fair representations in the financial statements

• Is the auditor responsible for the financial statements?

  No, the management is responsible. CEO and CFO need to sign the financial report.

• What are the five responsibilities of the auditor?

  1. Reasonable assurance > audit makes a plan with a reasonable assurance that he find out the problems, but no total certainty
  2. Free of material misstatements
  3. Fraud or error > find out that there no illegal facts in the numbers
  4. Opinion > going concern = auditor need to try to estimate that the firm within 12 months will go bankrupt or not.
  5. Integrated audit > Financial statements audit and Control audit of internal control are combined = both are linked together

• Name the three forms of causality.

  1. Causation (a change in one factor influences the other, or is it the other way around?)
  2. Common response (an external factor influences both factors)
  3. Confounding (an external factor influences one of the factors)

• When is a misstatement material?

  A misstatement in the financial statements can be considered material if knowledge of the misstatement would affect a decision of a reasonable user of the statements.

• What is the difference between qualitative material misstatements and quantity material misstatements?

  quantitative material misstatements: just the numbers that are changed. 
  qualitative material misstatements: take the effects of changing the numbers into account.

• What are the two errors an auditor can make by giving an opinion about going concern?

  
  Type I error is a GC opinion for a firm that does not file for bankruptcy within one year of the audit opinion.
  Type II error is a clean opinion for a firm that files for bankruptcy within one year of the audit opinion.

• What are the three categories of assertions?

  
  1. Assertionsabout classes of transactions and events for the periodunder audit
  2. Assertionsabout account balances at period end
  3. Assertionsaboutpresentationanddisclosure

• What are the different stages in an audit engagement?

  1.Plan the audit
  2.Obtainanunderstanding of theclientandits environment, includinginternal control
  3.Assesstherisks of misstatement and design further audit procedures
  4.Performfurther audit procedures
  5.Complete the audit
  6.Form an opinion and issue an audit report

• What are two ways of acquiring new clients?

  - New company from existing client
  - New (or already existing) company via contacts of the partner