[Anonymous]

The reason I didn’t choose answer A is because the auditor is supposed to bring significant deficiencies to the audit committee, not to management. But it says A is the right answer. Am I just overthinking this?

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An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:

A. the auditor’s responsibility for ensuring that the appropriate level of management is aware of any significant deficiencies that come to the auditor’s attention.

B. management’s responsibility for identifying mitigating factors when the auditor has doubt about the entity’s ability to continue as a going concern.

C. the auditor’s responsibility for determining preliminary judgments about materiality and audit risk factors.

D. management’s responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.

Answer A. The engagement letter should contain information such as:

the objective of the audit (an expression of an opinion on the financial statements);

the fact that management is responsible for:

the financial statements,

establishing and maintaining effective internal control over financial reporting,

identifying and ensuring that the entity complies with laws and regulations,

adjusting the financial statements to correct material misstatements,

making all financial records and related information available to the auditor, and

providing the auditor with a letter that confirms certain representations made during the audit;

the scope of the audit work to be performed (in accordance with GAAS);

the fact that the purpose of the audit is not to detect fraud but to enable the auditor to express an opinion as to the fairness of the financial statements;

mention that an audit includes obtaining an understanding of internal control and that the audit committee will be made aware of any discovered significant deficiencies;

additional work to be performed, such as tax, consulting, or other services (if applicable);

any limitations or restrictions on the scope of the study;

work to be performed by the client’s staff (if applicable);

the basis of the auditor’s fee; and

the audit work schedule and estimated date of completion.

This list is not inclusive, but it is illustrative of items that should be present. Items that would not be addressed in an engagement letter would be the auditor’s responsibility for determining the preliminary judgments about materiality and audit risk factors, management’s responsibility for identifying mitigating factors when the auditor has doubt about the entity’s ability to continue as a going concern, or management’s responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud (this is the auditor’s responsibility).

[Anonymous]

It can definitely get confusing but within the options, A is the only answer that fits:

B: an entity's ability to continue as a going concern can still warrant an unmodified opinion. If the auditors believe that there are no mitigating factors they can put in an other matters paragraph and request footnote disclosure but the auditor's can't make management do anything…ever.

C: This is not part of the scope of any individual audit and is instead GAAS

D: Again, management must attest to their knowledge of fraud but they are not responsibility for determining a materiality level of the effect of potential fraud. It's auditors who set materiality.

With answer A, the audit team does have a responsibility of keeping management in the loop especially about significant deficiencies that were found. You just also have to report them to the audit committee. The difference being management always finds out more than the audit committee so there is an emphasis on the things that absolutely must make it to them beyond just informing management.

[Author]

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