OBJECTIVES AND INSTRUCTIONS - NASACT



OBJECTIVES AND INSTRUCTIONSThe objective of this overall financial statement level risk assessment and response form is to document the planning aspects of the overall engagement, including the assessment of risks of material misstatement at the overall engagement (opinion unit financial statement level) that can be significant throughout the engagement and to develop responses to these engagement level risks. Such overall engagement level risk responses include considerations regarding (1) assignment of staff, (2) need for any involvement of specialists, (3) required level of supervision, and (4) the appropriate preliminary overall audit strategy.The purpose of this 3-part form is to consolidate and summarize the information gathered and evaluated in regards to the overall engagement or financial statement level risk considerations and related auditor responses to such risks in a single document, with reference to any other supporting documents as needed.Part 1 - Audit Evidence Considered in Overall Engagement Planning and Financial Statement Level Risk AssessmentsDuring this pre-engagement phase of the audit process, the firm will gather information and make overall engagement or financial statement level risk considerations in the following areas:Determining the financial reporting entityObtaining an understanding of the entity and its environmentObtaining an understanding of the design and implementation of entity-level controlsObtaining an understanding of information technology (IT) general controlsObtaining an understanding of the use of service organizations and related controlsConsidering the risks of management override of internal controlsIdentifying applicable opinion unitsDetermining materiality thresholdsIdentifying the significant audit areas (classes of transactions, account, and disclosures)Identifying any applicable complex or new accounting pronouncementsPerforming preliminary analytical reviewsMeeting with the audit team to brainstorm on risks of material misstatementsInquiring of management and others as to risks of fraudReviewing minutes of governing body and other key committee meetingsReviewing prior audit reports and status of prior findingsPart 2 - Identification of Any Significant Financial Statement Level Risks Upon considering the above noted matters, the firm will identify and assess any significant risks of material misstatement at the overall engagement or financial statement (each opinion unit) level, including any fraud risks, and document such risks in the section entitled “Significant Financial Statement-Level Risks Identified”.Part 3 – Auditor Responses to Overall Financial Statement Level RisksUpon identification of the risks of material misstatement at the overall engagement or financial statement level, the firm will develop and document engagement level responses (in the section of the document entitled “Auditor Responses to Overall Financial Statement Level Risks”) to the identified and assessed risks of material misstatement at the overall engagement or financial statement level, that involve decisions as to (1) assignment of staff, (2) need for any involvement of specialists, (3) required level of supervision, and (4) the appropriate preliminary overall audit strategy.PART 1 – AUDIT EVIDENCE CONSIDERED IN OVERALL ENGAGEMENT PLANNING AND FINANCIAL STATEMENT LEVEL RISK ASSESSMENTSSECTION A: DETERMINING THE FINANCIAL REPORTING ENTITYObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through identifying the separate legal entities or organizations that comprise the financial reporting entity, including the primary government, component units, joint ventures, jointly government organizations and other arrangements; and documenting their method of inclusion or exclusion within the financial statements and the basis for the method chosen by management. Considerations with Respect to this EngagementTypes of Entities or Arrangements – could include the primary government, component units, joint ventures, jointly governed organizations, pools, undivided interests, and cost-sharing arrangements.Methods of Inclusion/Exclusion – could involve (1) part of primary government, (2) blended component unit, (3) discretely presented component unit, (4) note disclosure only, (5) excluded from presentation and disclosure. Entities and Arrangements Considered:Entity or Arrangement NameType of Entity or ArrangementMethod of Inclusion/ExclusionDescription of the Basis for Method of Inclusion or ExclusionReference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION B: OBTAINING AN UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENTObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks by obtaining an understanding of the entity and the environment under which it operates.Considerations with Respect to this EngagementMakeup of the governing body and assessment of its oversight capabilities and style.Makeup of key management and assessment of its management capabilities and style.Accounting and financial reporting staff and assessment of their capabilities and performance.Overall assessment of the entity’s accounting system and information it produces.Overall assessment of the entity’s internal financial reporting and budgetary oversight.Significant regulatory requirements or industry conditions under which the entity operates.Major economic or financial issues affecting the entity.Reliance on certain revenue sources or other concentration issues.Significant expenditure contracts, commitments or burdens that could affect financial condition.Any significant going concern issues identified.Significant pending or threatened litigation or claims.Significant related party transactions or financial plex or unusual investments or other financial instruments, such as derivatives.Debt structure, limitations, and covenants.Any other identified complex or unusual accounting or financial reporting issues.Past history of misstatements and required audit adjustments.Past history of any fraud or illegal acts.Any significant issues identified from the pre-engagement activities and considerations as documented in Form M1. Reference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION C: OBTAINING AN UNDERSTANDING OF THE DESIGN AND IMPLEMENTATION OF ENTITY-LEVEL CONTROLSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through consideration of the design and implementation of internal controls at the entity-wide level, including an understanding of the entity’s (1) control environment, (2) risk assessment processes, (3) information and communication systems, and (4) monitoring activities. The understanding of the design of controls is generally obtained through inquiry and review of policies and procedures, while the understanding of implementation of controls is generally obtained through observation and walkthroughs. [Note: The understanding of activity-level controls (control activities) is documented within the master audit documents for each significant audit area in the M3 series audit documents.]Considerations with Respect to this EngagementControl Framework CategoryUnderstanding of Control Design and ImplementationAre the Entity-Level Controls Effectively Designed and Implemented?YesNo?Control Environment - the attitudes, awareness, and actions of those charged with governance concerning the entity’s internal control and its importance to achieving reliable financial reporting.Risk Assessment Processes - how management considers risks relevant to financial reporting objectives and decides about actions to address those risksInformation and Communication -(a) how the information system captures significant financial events and conditions, other than classes of transactions; (b) the procedures used to prepare financial statements and related disclosures; and (c) how the entity assigns and communicates financial reporting roles and responsibilitiesMonitoring Activities -the major types of activities that the entity uses to monitor effectiveness of internal controls over financial reporting, including ongoing monitoring (such as ongoing or recurring processes) and separate evaluations (such as internal audit activities) 1 - If potential significant deficiencies or material weaknesses in entity-level internal controls are noted above, they should be included in Part 3, Section B of master audit document M4 – Evaluating, Concluding, and Reporting Form.Reference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION D: OBTAINING AN UNDERSTANDING OF THE DESIGN AND IMPLEMENTATION OF INFORMATION TECHNOLOGY (IT) GENERAL CONTROLSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through consideration of the design and implementation of information technology (IT) general controls. The understanding of the design of controls is generally obtained through inquiry and review of system design and related policies and procedures, while the understanding of implementation of controls is generally obtained through observation and walkthroughs. [Note: The understanding of activity-level IT controls (control activities) is documented within the master audit documents for each significant audit area in the M3 series audit documents.]Considerations with Respect to this EngagementName of Application, Database, or SystemUnderstanding of Control Design and Implementation(Controls over testing of system changes, user access, system backup, and system operations, including reporting and correcting problems)Are the IT General Controls Effectively Designed and Implemented?YesNo?2 - If potential significant deficiencies or material weaknesses in IT general controls are noted above, they should be included in Part 3, Section B of master audit document M4 – Evaluating, Concluding, and Reporting Form.Reference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION E: OBTAINING AN UNDERSTANDING OF THE USE OF SERVICE ORGANIZATIONS AND RELATED CONTROLSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through consideration of the entity’s use of outside service organizations and the related internal controls over the activities of the service organization applicable to the entity’s significant accounting events and transactions. Often service organizations obtain and make available a service auditor’s report (SAR) defined as either a Type 1 Report (report on controls placed in operation at the service organization) or a Type 2 Report (report on controls placed in operation at the service organization and results of testing of controls for effectiveness). [Note: If no SAR is available, the understanding of service organization controls (control activities) is documented within the master audit documents for each significant audit area affected by the service organization in the M3 series audit documents.]Considerations with Respect to this EngagementYesNoAre any of the entity’s significant transactions processed by service organizations? (If Yes, complete the remainder of this section. If No, proceed to section F.)Does the preliminary audit strategy call for a planned reliance on the controls maintained by the service organization? (If Yes, an unqualified Type 2 service auditor’s report will be required or the auditor will need to obtain an understanding of such controls and perform their own testing of controls for effectiveness.)Service Organization Information (the following information will be needed for each separate service organization):Name of Service OrganizationSignificant Audit Areas (Cycles or Transaction Classes) Affected by Service OrganizationForm of Controls Understanding (Type 1 or Type 2 SAR, or Documented in Applicable Audit Area Controls within Forms M3)When SAR Reports Are Available:Name of service auditorReputation of service auditorType 2 report opinion issuedLevel of planned reliance on reportWhen SAR Reports Are Not Available:Method used to obtain controls understandingReference to documentation of controls understandingReference to controls testing, if applicableLevel of planned reliance on controlsReference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION F: CONSIDERING THE RISKS OF MANAGEMENT OVERRIDE OF INTERNAL CONTROLSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through consideration of the potential for and risk of management override of otherwise effectively designed internal controls.Considerations with Respect to this EngagementAssessment of management’s dedication to maintaining an effective control environment.Assessment of management’s separation from involvement in the processing of accounting events and transactions.Assessment of the effectiveness of the governing body or board’s oversight of management.Assessment of the presence of any risk factors in the form of pressures on management to achieve certain financial performance targets.Any evidence of management attempting to place undue influence on staff with regards to accounting, financial reporting, or budget issues.Any other evidence of management exhibiting domineering behavior towards others, including the auditors.Reference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION G: IDENTIFYING APPLICABLE OPINION UNITSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through identifying the opinion units on which the auditor is required to report, including the determination of major funds. Special purpose government engaged solely in business-type activities will only have a single opinion unit, while other governments may have multiple opinion units.Considerations with Respect to this EngagementNormal Opinion UnitsGovernment-wide Financial StatementsFund Financial StatementsGovernmental activitiesBusiness-type activitiesDiscretely presented component unitsEach Major Governmental FundEach Major Enterprise FundAggregate remaining government, proprietary, and all fiduciary fundsBasis for Major FundsA. The General Fund is always a major fund.B. Funds must be reported as major if they meet both criteria 1 and 2 to be a major fund:1. The individual fund's total assets, liabilities, revenues, or expenditures/expenses (excluding extraordinary items) are at least 10% of the corresponding total (assets, liabilities, revenues, or expenditures/expenses) for all funds of that category or type (i.e., total governmental or total enterprise funds); and 2. Total assets, liabilities, revenues, or expenditures/expenses of the individual governmental fund or enterprise fund are at least 5% of the corresponding total for all governmental or enterprise funds combined.C. The government entity may choose to report a fund as a major fund that would otherwise not be required to be reported as a major fund. Identification of Applicable Opinion UnitsOpinion UnitBasis for DeterminationReference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION H: DETERMINING MATERIALITY THRESHOLDSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through the determination of materiality thresholds for each opinion unit, including the determination of quantitative thresholds for planning materiality, tolerable misstatement, individually significant items, and trivial amounts, and considerations of qualitative materiality. Considerations with Respect to this EngagementMateriality Benchmark GuidelinesMateriality ThresholdRule-of-Thumb Benchmark Percentage GuidelinesPlanning MaterialityTotal revenue or expenditures/expenses (0.5% - 6%)Total assets or liabilities 0.5% - 6%)Net assets/fund balance (1%-5%)Changes in net assets/fund balance (5% - 10%)Tolerable Misstatement50% - 75% of planning materialityIndividually Significant Items15% - 35% of tolerable misstatementTrivial Amounts1% - 5% of planning materialityDescription of Any Considerations of Lesser Materiality Levels for Particular Audit Areas, Items, or Disclosures (including qualitative materiality considerations)CommentsPlanning Materiality BenchmarkQuantitative Materiality Threshold AmountsOpinion UnitBenchmark UsedBenchmark AmountPlanning MaterialityTolerable MisstatementIndividually SignificantTrivialReference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION I: IDENTIFYING THE SIGNIFICANT AUDIT AREASObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through identification of the significant audit areas (accounts, transaction classes, and disclosures) that are considered material to the financial statements and will require a separate risk assessment and audit program (as documented through the use of master audit documents in the M3 series).Considerations with Respect to this EngagementSignificant Audit AreaOpinion Units Affected by This Audit AreaM3 Series ReferenceReference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION J: IDENTIFYING ANY APPLICABLE COMPLEX OR NEW ACCOUNTING PRONOUNCEMENTSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through consideration of any new or complex accounting pronouncements and their impact on the current period financial statements and audit engagement.Considerations with Respect to this EngagementNew or Complex Accounting PronouncementImpact on Current Year EngagementReference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION K: PERFORMING PRELIMINARY ANALYTICAL REVIEWSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through consideration of the results of the preliminary analytical review, including identification of unusual or unexpected variances noted and the potential risks of material misstatement within the current period financial statements.Considerations with Respect to this EngagementOpinion Unit(s) AffectedDescription of Unusual or Unexpected Variance NotedReference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION L: MEETING WITH THE AUDIT TEAM TO BRAINSTORM ON RISKS OF MATERIAL MISSTATEMENTObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks by brainstorming among audit team members as to the presence of risk factors related to material misstatements of the financial statements, including fraud risk factors related to fraudulent financial reporting and misappropriation of assets.Considerations with Respect to this EngagementBrainstorming Meeting(s) Held:Date(s)AttendeesBrainstorming Results:Fraud risk factors identified related to fraudulent financial reporting:Incentives or pressuresOpportunitiesAttitudes or RationalizationsFraud risk factors identified related to misappropriation of assets:Incentives or pressuresOpportunitiesAttitudes or RationalizationsOther risk considerations:Risk factors for misstatements due to errors.Reference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION M: INQUIRING OF MANAGEMENT AND OTHERS AS TO FRAUD RISKSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through consideration of fraud risks identified through interviews and inquiries of the entity’s management and other individuals as deemed necessary.Considerations with Respect to this EngagementIndividual or Group InterviewedSummary of Interview Results and Any Fraud Risks IdentifiedReference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION N: REVIEWING MINUTES OF GOVERNING BODY AND OTHER COMMITTEE MEETINGSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through consideration of events or transactions that may have a material impact on the financial statements as described in the minutes of meetings of the governing body and any other key committees.Considerations with Respect to this EngagementBoard or CommitteeMeeting DateItems of Financial Statement Interest NotedReference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperSECTION O: REVIEWING PRIOR AUDIT REPORTS AND STATUS OF PRIOR FINDINGSObjective of the Considerations: To assist the firm in planning the overall audit engagement and its assessment of overall financial statement (engagement) level risks through consideration of the status of prior audit findings and other reported conditions and their impact on the current period engagement.Considerations with Respect to this EngagementPrior Finding or ConditionCurrent Status and Impact on Current Period Engagement Reference to Any Other Supporting Documentation:Work Paper ReferenceTitle or Description of Work PaperPART 2 – IDENTIFICATION OF ANY SIGNIFICANT FINANCIAL STATEMENT LEVEL RISKSObjective: To document the results of the above assessments and to identify any significant risks of material misstatement at the overall engagement or financial statement level, in other words, risks that could affect the engagement as a whole, or more than one opinion unit or audit area.Significant Financial Statement Level Risks IdentifiedImpacts Engagement as a Whole? (Yes/No)If No, Opinion Unit(s) ImpactedIf No, Audit Area(s) Impacted ?3 - The risks identified above should also be considered in the risk assessments and auditor responses at the significant audit area level to the extent they are applicable to each audit area. Such considerations should be documented in the M3 series audit documents.PART 3 - AUDITOR’S RESPONSES TO OVERALL FINANCIAL STATEMENT LEVEL RISKSObjective: To document the auditor’s responses to any identified significant risks of material misstatement at the overall engagement or financial statement level, in other words, general responses to risks that could affect more than one audit area or aspect of the engagement.YESNOAre special considerations required in the assignment of staff to this audit engagement? If Yes, describe mentsYESNODo certain aspects of this audit engagement need the involvement of a specialist? If Yes, describe mentsYESNODoes this audit engagement call for a higher than normal level of supervision for the engagement as a whole or for specific audit areas? If Yes, describe mentsYESNOAre there any significant financial statement level risks that would prevent the use of an overall preliminary audit strategy that involves a plan for both testing of controls effectiveness and substantive tests in the specific audit areas? If Yes, describe mentsYESNOAre there any significant audit areas that pose unusually high risks of material misstatement for the engagement as a whole that require special attention by the audit team or increased levels of professional skepticism? If Yes, describe below. CommentsYESNOAre there any other auditor responses needed to address overall engagement or financial statement level risks? If Yes, describe mentsPrepared by:Date:Approved by:Date: ................
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