How does a CPA rate the exam risk
If you are taking the Auditing and Attestation (AUD) test of the CPA exam, you will need to go through the exam planning process. When planning an audit, an auditor must check whether certain requirements are met. These requirements enable the CPA company to conduct an audit efficiently and to help the auditor obtain sufficient audit evidence for an audit opinion:
The customer is using an acceptable financial reporting framework. Basically, the customer uses a chart of accounts and reconciles the bank accounts on a monthly basis. A Chart of accounts is a listing of all account titles and account numbers. The company also posts adjustment postings and uses the accrual method.
The company takes responsibility for the design and implementation of internal controls.
Management is ready to provide all relevant financial information and provide employees to the audit staff.
A letter of commitment
After both parties have agreed to the conditions of the audit, the conditions are documented in a letter of commitment. A Order letter, which is a written agreement between the client and the auditor sets out the responsibilities of each party. The annual financial statements are the responsibility of the management. The auditor, on the other hand, collects sufficient audit evidence to support an opinion on the financial statements.
Below are some of the items that you will find in an order letter:
The aim of the exam: This includes the individual financial statements to be examined. If the examination includes comparable qualifications, the comparison years are listed in the letter of commitment.
The responsibilities of the auditor and management: This includes management's responsibility to inform the auditor of subsequent events. A Follow-up event is a business transaction that occurs after the balance sheet date but before the financial statements are published.
Agreements that affect the work of the internal auditors
A statement of the inevitable risk that some material misrepresentation will not be detected, even if the audit is properly planned and conducted in accordance with GAAP:> This risk exists because of the inherent limitations on both an audit and internal controls. Audit risk is the risk that an auditor will issue an unqualified opinion if the financial statements are materially misrepresented. This part of the engagement describes the audit risk. Identify the applicable accounting framework for the preparation of the financial statements and the expected form and content of the reports
If an examiner replaces another examiner, the CPA asks management for permission to contact the previous examiner. Management should give the previous auditor permission to respond to any inquiries from the current auditor. If the CPA determines that management restricted the request - or that the previous auditor did not respond to all requests - the auditor should consider not taking over the engagement.
If the auditor worked on the client's review in the previous year, the engagement is a
recurring audit . A CPA and senior management should evaluate whether the terms of the employment letter should be changed. If so, a new cover letter will be created and signed by the customer. Here are some circumstances that may require a new letter of employment: A significant change has occurred in the management or ownership of the company.
The company has seen a significant change in the type or size of the business. A manufacturer who sells all of its assets and becomes an investment company would need a new letter of employment. If Company A bought Company B and doubled in, the new company would require a new employment letter.
There have been significant changes in legal or regulatory requirements. Companies making their stock public for the first time must begin complying with the SEC's requirements.
In some cases, a law or regulation may require a specific layout, shape, or wording of an audit report. The wording of the report can differ significantly from what GAAS (Generally Accepted Auditing Standards) requires.
The reviewer must assess whether the report format will create confusion for the users of the review report. The auditors also consider whether the statutory wording can be changed to comply with GAAS or whether a separate report can be included. If not, the auditor should remove any reference to the GAAS audit. If the law or regulation allows, the CPA should not accept the audit at all.
Internal auditors and external specialists
are employees of the audited company. You will conduct business operations reviews to improve risk management and internal controls. Internal auditors report to management, which means that the work of internal auditors can help improve corporate governance. Internal audit departments can carry out procedures similar to those of an external auditor. For example, an internal auditor can observe a process to determine whether internal controls are working effectively.
For example, suppose a clothing store has a process for handling returned goods. Customers returning goods must fill out a form explaining why the goods are being returned. The customer must submit the return form and original sales receipt prior to the refund, this is a check to ensure that all refunds are legitimate.
An in-house auditor can take a sample of refund payments to verify that there is a return form and proof of purchase for each refund payment. If the sample work shows that documentation is missing for some of the samples, the internal auditor may need to test more items and inform management that the control may not be effective.
If the work of the internal auditor will have an impact on the audit of the auditing company, the auditor must take into account the competence, objectivity and work skills of the internal auditor.
Another external specialist is a
actuary . Actuaries use math and statistics to assess probability. In the audit area, actuaries are used to assess the likelihood of insurance and retirement plans. For a company pension plan, an actuary will use several factors (employee age, salary level, return on investment) to calculate the company's future liability for pension payments to retired employees. The company must put enough money into the pension fund to meet the company's future pension obligations.
The actuary assesses whether the company's pension contributions are sufficient or not. The CPA firm will rely on the actuary's assessment.
Actuaries also support life insurance company audits. The actuary will assess the age, gender and medical history of the insured. The actuary will use this analysis to assess, on average, when insured persons will die. The CPA firm will use this analysis to determine whether the insurance company has sufficient assets to pay the beneficiaries of each insured death benefit.
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