In these videos, we walk through 5 AUD practice questions in each to teach about the scope and timing matters to communicate to management. These questions are from AUD content area 1 on the AICPA CPA exam blueprints: Ethics, Professional Responsibilities, and General Principles.
The best way to use each video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Scope and Timing Matters to Communicate to Management
Effective communication between auditors and those charged with governance is a critical part of the audit process. It fosters transparency, enhances oversight, and helps ensure a successful audit. Below is a detailed overview of the matters related to the planned scope and timing of an engagement that auditors should communicate to management and governance.
Addressing Significant Risks of Material Misstatement
Auditors must communicate how they plan to address significant risks of material misstatement. This involves identifying the key areas of focus where the financial statements may be most vulnerable to error or fraud. By sharing this information, auditors ensure governance is aware of the audit’s priorities and the potential challenges the engagement may face. However, specific audit procedures are not disclosed to maintain unpredictability and safeguard the audit’s effectiveness.
Planned Approach to Internal Controls
Auditors often evaluate a company’s internal control system to determine the extent of reliance during the audit. If internal audit staff are involved, the auditor must explain how they will be utilized. This communication clarifies how audit resources will be allocated and reinforces that the auditor retains ultimate responsibility for the engagement, even when using internal resources.
Factors Affecting Materiality
Materiality is a key factor in any audit, guiding the scope and focus of the work. While auditors may not disclose specific materiality thresholds, they should communicate factors influencing their assessment. For example, changes in the business environment, significant transactions, or risks related to the reporting framework may all impact materiality. This helps governance understand how decisions are made in setting the scope of the audit.
Changes in the Business Environment or Reporting Framework
Auditors must address significant changes that could affect the audit, such as updates to accounting standards or major shifts in the company’s operations. Governance should understand how these changes may influence the financial statements and the auditor’s planned procedures. This ensures alignment between the auditor and governance on any new risks or challenges.
Avoiding Predictability in Audit Procedures
Auditors should aim to balance providing enough information for governance to fulfill their oversight role while avoiding unnecessary detail about specific audit procedures. Overcommunicating procedural details could make the audit predictable, reducing its effectiveness. By focusing on high-level plans and risk areas, auditors maintain confidentiality and the element of surprise necessary for effective auditing.
Preliminary Views on Significant Auditor Attention
Auditors share initial views on areas requiring significant attention, such as transactions, accounts, or disclosures that pose higher risks. These early insights allow governance to provide input on key issues and ensure that potential problem areas are not overlooked. However, these discussions remain broad and avoid pinpointing specific tests or thresholds.
Engaging Governance in Discussions
Auditors engage governance in meaningful discussions about their attitudes, awareness, and actions related to internal controls, fraud, and any significant changes in the organization. Revisiting issues from prior audits ensures that unresolved matters are addressed and progress is made. This exchange of information provides the auditor with valuable insights and supports governance in fulfilling their oversight responsibilities.