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Unformatted text preview: Chapter 05 - Audit Planning and Types of Audit Tests CHAPTER 5 AUDIT PLANNING AND TYPES OF AUDIT TESTS Answers to Review Questions 5-1 The auditor should inquire of the prospective client's bankers and attorneys, credit agencies, and other members of the business community who may have knowledge about the integrity of the prospective client and its management. 5-2 The successor auditor is responsible for initiating the communication with the predecessor auditor. However, the successor auditor should request permission of the prospective client before contacting the predecessor auditor. The successor auditor's communication with the predecessor auditor should include questions related to the integrity of management, disagreements with management over accounting and auditing issues, and the predecessor auditor's understanding of the change in auditors. 5-3 An engagement letter is used to formalize the arrangement reached between the auditor and client. It serves as a contract that outlines the responsibilities of both parties and is intended to prevent misunderstandings between the two parties. The letter states the responsibilities of the auditor and management, that the audit will be conducted in accordance with auditing standards, that certain types of audit procedures will be conducted and written representations will be obtained from management, and that the audit may not detect all material errors and fraud. Exhibit 5-1 in the text contains a sample engagement letter. In addition, the engagement letter might include: Arrangements involving the use of spets or internal auditors. Any limitation of the liability of the auditor or client, such as indemnification to the auditor for liability arising from knowing misrepresentations to the auditor by management. (Note that regulatory bodies, such as the SEC, may restrict or prohibit such liability limiting arrangements.) Additional services to be provided relating to regulatory requirements Arrangements regarding other services (e.g., assurance, tax, or consulting services). 5-4 The following factors can be used to judge the competence of the internal auditors: Educational level and professional experience. Professional certification and continuing education. Audit policies, procedures, and checklists. Practices regarding their assignments. The supervision and review of their audit activities. The quality of their working paper documentation, reports, and recommendations. Evaluation of their performance. The objectivity of internal auditors can be determined by assessing the following factors: The organizational status of the internal auditor responsible for the internal audit function....
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