 Hello and welcome to the session. This is Professor Fahad in which you would look at CPA exam questions that deals with audit planning and important stage of the audit process. This topic is covered on the CPA exam auditing section as well as an auditing course, whether it's a graduate or undergraduate. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, as well as Excel tutorials. If you like my lectures, please like them, share them, put them in playlists. If they help you, they might help other people as well, connect with me on Instagram. On my website, farhatlectures.com, I do have additional resources for whatever accounting or auditing course you are taking. For example, if you are studying for audit, audit planning, I do have an audit course. And audit planning is an important component of your CPA exam. Simply put, a CPA review course would review audit planning with you. I explain and teach you this process in my auditing course. That's the difference between what I do and any other review course that does an excellent job reviewing the material with you once you have learned it properly and you can learn it properly on farhatlectures.com if you haven't done so at your university. So let's take a look at the first question. Which of the following procedures will be an auditor likely to perform in the planning stage of a financial statement audit? Okay, let's take a look at the answers and see what do we do in the planning stage? Obtain a signed agreement letter from the client's management. Do we do this during the planning stage? Is it something that we do during the planning stage? And the answer is yes. You want to kind of gain an understanding with the client and this is when you will get a signed engagement letter. Now the question is, well, I'll keep that for later. But yes, getting a signed engagement letter is something that you do in the planning stage. Therefore, we keep A, we take out B, we keep C, take out D. All that we have to find out now is if two is a correct or incorrect statement. If two is correct, C is the answer. If two is incorrect, one is the answer. Examining documents to detect violation of laws and regulation having a material effect on the financial statement. Look, this statement sounds correct, sounds reasonable, sounds like a good answer. Okay, it is. We do examine document to detect violation of laws and regulation that have a material effect on the financial statements. We do that. That's not the question is, do we do it during the planning stage? And the answer is no. We do this when we are basically collecting evidence or maybe we might do it as a final step if we missed something toward the end. But definitely we don't do this in the planning stage. So remember, the statement is correct and this is why auditing is tricky. You have to understand auditing that what do you do during certain stage? You have a planning stage, you have the audit stage which is during the audit and you have the wrap up which is the end of the audit. So you have to know what do we do in each stage? So in this stage, we only kind of obtain for our purposes, among other things, we obtain an understanding, obtain a sign letter from the client's management understanding our response, spelling out our responsibility and understanding the management responsibility. Therefore the answer is A. So this is why auditing is tricky because you see the right answer but that's not what you do for now. Inquiries of the predecessor auditor prior to accepting the engagement should include specific questions regarding what. So here's what happened. Once you have a new auditor, the new auditor would like to ask the predecessor auditor certain questions. And basically it's something that's required. You have, so for example, make sure it's required. So what happened is the old auditor, the predecessor auditor, the first thing they have to do is they have to ask the client because there's a confidentiality problem. They have to ask the client. If the client says yes, then they would answer question. If the client says no, then they don't have to give you anything. But let's assume they say yes and if they say no, well you have to be very careful if the client is, if it's not allowing the predecessor auditor to speak about the relationship with the new auditor. Daddy, look. How did you do, daddy? I didn't know how to get that. That's fine. I didn't see any X. It's okay, no problem. But it's something else. Okay. Let's take a look at these questions. Inquiries of the predecessor auditor, that means the old auditor. Prior to the acceptance of the engagement should include specific questions regarding what? What is this? First of all, this is a required procedures. So we have the new and the old auditor. The new auditor is required to ask the old auditor certain questions. Now the predecessor auditor or the old auditor, they're gonna go to the client and ask the client for permission because they cannot give you any info if the client says no. Now if the client says no, you should question accepting the engagement, but you have to know this up to this point. They will ask them about this agreement with management as to accounting, principle and auditing procedures. Will they ask them about this? Well, what do you think? Should they ask them about this? I would say yes. If you're taken on a new client and you can talk to the old auditor, wouldn't you ask them, was there any disagreement with management as to accounting and auditing procedures? So one is definitely an answer. So we keep A, we take out B, we keep C, take out D. We're down to 50-50. Can we ask them about the integrity of management? Let me ask you this. Would you ask them if you're the new auditor, would you like to know about the integrity? How ethical they are? In the answer, I would say yes. I would like to ask them about the management integrity. Therefore, two is also a correct answer. Both answers are correct. One and two, one and two are correct. Now, you might also, as a new auditor, you might ask other questions like any disagreement, any disagreement or any, we talked about it, disagreements are here, but any communication with the corporate governance about any fraud, any, anything that they're not complying with any rules of regulation. Also, why are they changing the auditor? For what purpose are you hiring us? Why? So why are you hiring us? That's another question. Why are they hiring us? Okay. If there is any communication between the management and the corporate governance and any regulatory body, we need to know about this. But remember, if the client says no, the old auditor cannot communicate, that's why you should be very careful. Now, also we have to understand that the new auditor, they can also conduct their own investigation if they like to, to find information about management integrity on the side. But the point is, the whole point of this question is you have to understand that when you take on a new client during the planning stage, during the planning stage, you have to learn as much as possible. And this is a good opportunity to learn from the old auditor what's going on. So make sure you know this. Let's take a look at this question. Which of the following should be considered by a CPA prior to acceptance of an audit engagement by a non issuer? So what should you take into account? What should you consider prior to your acceptance? Should you take into account the quality of the accounting record? Should you take this into account? I would say, of course you should take it into account. How good is their accounting record? Why? Because if they don't have good accounting record, if you cannot collect enough sufficient appropriate evidence to support your opinion, you might have a scope because that's a limitation. Now, knowing that their accounting record is bad, it doesn't mean you don't engage, but no one ahead of time will help you prepare. Therefore, I would say A is a correct answer. We'll take out B, we'll take out D. So now too, do we have to know about the future of the company? Do you have to know about the future of the company? About their future specifically, not future, future plans of the company? And the answer is yes. Why are they hiring you? That's the thing. What is the purpose of the audit? Is it for an IPL? I need to know this. Are you going public? Is it for a loan? Is it to renew your line of credit? I need to know why are you engaging me in an audit? What's your future plan? I have to know this as well. You wanna know, again, as much as possible about your client before. Because remember, once you take on a client, that's the thing. You associate your name with that client. So if there's any problem with that client, if the client having any problems, it's gonna reflect on the firm. That's why you would need to learn as much as possible, as much as possible, okay? So make sure we know this. So that's the big idea. You need to know as much as possible about the client. All the following are correct regarding an auditor's understanding with the potential client prior to begin an audit except. So they are all correct except one. Okay, let's take a look at what are they? The understanding should cover responsibilities of the independent auditor. Let me ask you this. Do you want the client to know what's your responsibilities? I would say that's the first thing you wanna make sure you make them aware of is how much are you responsible for, okay? Basically, you're responsible for issuing an opinion based on reasonable assurance and so on and so forth. So I would say you'll have to kind of make sure that understanding with the potential client exists there. A, B, the understanding should cover limitation of the engagement. Sure, there's gonna be limitation. The auditor is not perfect. There's a risk you may miss fraud. There's a risk you may miss material misstatement and you have to kind of let them know that's the case. So you have to let them know, B is out. C, the understanding should be in a form of an engagement letter in order to be in conformity with auditing standard. So the question here is, do you have to have an engagement letter? Do you have to have an engagement letter? And the answer is guess what? No, you don't have to have an engagement letter. That's a practice. You want to have an engagement letter but you don't have to have it in accordance with in conformity with the auditing standards for an audit, okay? Now, listen to me carefully. If you are doing a compilation, if you are conducting a review, then that's a must, okay? So the understanding should be a form of the engagement letter, not necessary, not necessary. So I would say C is a good candidate that let's look at D. The understanding should list the audit fees and the frequency of billing, I would say yes. Because when you do an audit, you are not doing an audit based on something of a contingency. And that's gonna kind of, in a sense, impair your independence and you become basically part of the client. So you wanna let them know, this is my fee upfront and this is how often am I gonna be billing you, okay? So that's very important. That's very important. That's also a must, okay? Otherwise, you don't go blindly and suddenly you are in bed with the client without you even noticing. So C is the correct answer. Management responsibilities and the engagement letter should include which of the following. Now management, what is the management responsibilities? We talked about the engagement letter, that's not, that's not, it's a practice, but it's not in conformity with the accounting, other things standard. And you'll be stupid not to have an engagement letter, although it's a practice. So what should the engagement letter spells out as far as management responsibilities? One, adjusting the financial statements, the correct material in the statement. Who should adjust the financial statements? Should the auditor adjust it or should management? I would say management, because once we do adjustments, it means we are kinda doing managerial work, operational work, that's not our job. Basically kind of financial accounting work. That's not, we can do that. So they adjust the financial statement. Therefore A will stay, C will stay, D will stay, B is out. Identify and ensure that entity complies with the rules and regulation. Whose responsibility to make sure that the company complies with rules and regulation? Whose responsibility? That's management responsibility. I would say two will stay, so one and two will stay, C is out. Now we have to find out is number three, selecting and applying accounting principle. Who selects and apply accounting principle? Would the auditor do so or do management do so? Of course, management select the appropriate. And we judge it, but we don't select and apply it. We judge that process, whether they are doing it or not. We don't select it. Therefore C is also a correct candidate. Therefore the answer is D. Also, what's important in the management responsibilities to be spelled out is they're responsible for the internal control. They're responsible for making the accounting record available to us. We make sure they spell this out. We wanna make sure that at the end of the period, they give us what's called a wrap or representational letter. All these topics as well as other topics are covered in my auditing course. Make sure if you need any additional resources, supplemental resources that pass your auditing section of the CPA exam, check out my website. That's all what I'm gonna say. You can add, in my opinion, 10 to 15 points. It will make your journey to the CPA easier. I don't replace your CPA course. I compliment your CPA course. I supplement your CPA course. So make sure you know this. I am not, if I can be a CPA course on my own, I will charge you much more than what I charge you now. Anyhow, remember that investing in your career is an investment, it's an asset, not an expense. Investing in your CPA is a lifetime investment. It's gonna pay dividend for years. Don't sure change yourself, study hard, stay safe, especially if we are staying, if we are living, still living this coronavirus days. Good luck.