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What is the economic demand for auditing?
Auditing helps reduce information risk, which can have an effect on borrowers ability to obtain capital at reasonable rates.
What are the key elements of auditing?
- -Information-many forms
- -evidence-info. used to determine if the info. being audited meets the criteria
- -competence-must be able to use evidence to come to a conclusion
- -independence-cant be biased about evidence
What are the differences between an audit, assurances, and attestation?
- Audit-evaluating evidence to determine if information about f/s is consistent with standards.
- Assurance-improves the quality of information for users.
- Attestation-a type of assurance that reports about he reliability of an assertion made by another party
What are the 3 types of audits?
- Operational-evaluates the effectiveness and effciency of operations
- Compliance-conducted to determine is someone is following specific rules or procedures.
- Financial Statement-to determine whether f/s are stated in accordance to specified criteria.
What are the 4 most common types of auditors?
- Governmental accountability office-audits for congress
- CPA firms-audit historical f/s of companies
- IRS-enforce federal tax laws
- Internal auditors-employed by all types of organizations to audit management
What is the typical structure of CPA firms?
Limited Liability Partnerships
What is the SEC?
The securities and exchange commission-assist in providing investors reliable information with which to make investment decisions
What is the PCAOB?
the public companies accounting oversight commitee-overseen by the sec, the provide oversight for auditors of public companies
what is the AICPA?
American institute of Certified public accountants- set audit standards, code of conduct and other standards
who do International standards of Auditing apply?
to international companies
what are the type of companies that comply to PCAOB standards?
All pubic companies
What types of companies need to comply with GAAS?
What are the 3 GAAS standards- general?
- 1.)adequate technical training
- 2.)maintain independence
- 3.)exercise due professional care
What are the 3 GAAS standards- field work?
- 1.)adequately plan and supervise
- 2.)obtain sufficient information about the entity
- 3.)obtain sufficient evidence
What are the 4 GAAS standards- reporting?
- 1.) state whether f/s comply with GAAP
- 2.) identify the circumstances where GAAP is not consistantly applied
- 3.)adequacy of disclosure
- 4.)expression an opinion
what are the 6 elements of quality control?
- 1.)leadership for quality
- 2.)ethical requirements
- 3.)acceptance and continuation of clients
- 4.)human resources
- 5.)engagement performance
What are SAS?
Statements on auditing standards- issued interpretations of the principles of GAAS made by the AICPA
What are the 4 underlying principles of GAAS?
What are the 4 categories of audits reports?
- -unqualified with explanation
- -adverse or disclaimer
What are the parts of a standard unqualified audit report?
What are the 4 conditions that need to be satisfied for an unqualified report?
- -inclusion of all f/s
- -evidence was evaluated with compliance to audit standards
- -f/s presented in accordance to U.S.gaap
- -no circumstances requiring a explanation
What are the 5 conditions that could lead to an unqualified report with an explanation?
- -lack of consistency with GAAP
- -doubt of going concern
- -Auditor agrees with the departure from a principle
- -emphasis of a matter
- -reports involving other auditors
What are the conditions that warrant a depature from an Unqualified report?
- -scope limitation
- -GAAP departure
- -auditor no Independence
What is the definition of materiality?
a misstatement that if known about will affect the decision of a reasonable user
What are the levels of materiality?
- -immaterial-user decisions unlikely affected
- -material-decisions likely affected only if the information is important to the specific decisions being made
- -highly material-decisions based on the f/s are likely to be significantly affected
What are the relationships between the types of materiality and reports?
- highly material-adverse or disclaimer
What are ethics?
a set of morals or values
What are the prescribed ethical principles?
What are ethical dilemmas?
situations where a person faces a decision to be made about a behavior
What is independence of mind?
the unbiased attitude of an auditor
What is independence of appearance?
the interpretations of others about an auditors independence
What are the provisions that the sarbanes oxley act and the SEC states about independence?
- -restrictions on nonaudit services
- -Audit commitees
- -employment relationships (required 1-year from audit to become a key manager of former client)
- partner rotation-partners rotate after 5 years on engagement
- -ownership interests-prohitation of ownership by audit team and others
Code of conduct rule 101?
What are managements responsibilities?
-they have the responsibility to adopt accounting policies, internal control, and fair representations in f/s.
What are the auditors responsibilities?
-they have the responsibility for detecting material misstatements in f/s
What are the types of f/s cycles and how are they audited?
- -sales and collection
- -aquistion and payment
- -payroll and personell
- -Inventory and warehousing
- -capital acquisition and repaymeny
audits are performed by dividing f/s into cycles
What are managements assertions regarding transactions?
- occurrence- trans. have been recorded
- completeness-all trans. are recorded
- accuracy- trans. recorded correctly
- classification-trans recorded in proper accounts
- cutoff-trans recorded in correct period
What are managements assertions about account balances?
- existence-assets, liabilities and equity interests exist
- completeness- all a,l and e have been recorded
- valuation and allocation- a,l, and e are recorded at correct amounts
- rights and obligations- entity hold the rights to assets and liabilities are their obligations
What are managements assertions about disclosures?
- occurrence and rights and obligations- disclosed events/trans are of the entities
- completeness- all disclosures are included
- accuracy and valuation- information disclose is appropriate
- classification and understandably- disclosures described are clearly stated
What are the types of audit evidence?
- -physical exam-(counting inventory)
- -confirmation-(reciept of direct written response)
- -analytical procedures-
- -Inquiries of the client-(response to questions by auditor)
what are audit programs?
a list of audit procedures for an audit area or entire audit
What are the 2 determinants of persuasiveness of audit evidence?
What are the appropriateness of types of audit evidence?
What are permanent files?
- -contain data of a historical or continuing nature pertinent to the current audit
- -provide a convenient source of information
what is a current file?
- -includes all information applicable to the year under audit
- -includes: audit program, general info, trial balance, adjusting entries and supporting schedules
What are the 8 key parts of planning?
- 1.)accept client
- 2.)understand clients business/industry
- 3.)assess client business risk
- 4.)perform prelim analytical procedures
- 5.)set materiality
- 6.)assess control risk
- 7.)assess fraud risks
- 8.)develop overall plan and audit program
How to assess the clients business risk?
- -management is the priamary source for assessing business risk
- -auditor uses his knowledge of the business and the indusrty to assess the business risk
What 3 phases are analytical procedures applied to?
What are the 5 types of analytical procedures?
- 1.)industry data
- 2.)similar prior period data
- 3.)client determined expected results
- 4.)auditor determined expected results
- 5.)expected results using nonfinancial data
What is an engagment letter?
an agreement between the client and the CPA firm with regard to the terms of the engagement for the conduct of the audit.
What is the preliminary judgement about materiality?
it is the requirement of an auditor to set the combined amounts of misstatements that would be considered material early in the audit
what is meant by allocating preliminary judgement about materiality?
- -nessesary to allocate materiality into segements because auditors accumulate evidence by segments as well.
- -the amounts allocated to each segment is called tolerable misstatement
The difference between known misstatement and likely misstatement?
the auditor can determine the amount of the misstatement in the account
- likely-1.)difference b/t management and auditor about estimates
- 2.)projections by the auditor from samples
How to Evaluate audit findings?
use materiality to evaluate findings
What is Engagement risk?
the risk that the auditor or the audit firm will suffer harm after the audit is finished
What is acceptable audit risk?
a measure of how willing the auditor is to accept that the f/s are misstated and still issue a unqualified report
What are the factors affecting audit risk?
- -nature of clients business
- -results of previous audits
- -related parties
- -initial vs repeat engagement
- -nonroutine transactions
What is the audit risk model for planning?
helps auditors decide how much and what types of evidence to accumulate in each cycle
What is inherent risk?
auditors assessment of the likelihood that there are material misstatements due to error of fraud in a segment before considering controls
What is control risk?
auditors assessment of whether misstatements will be prevented or detected in a timely manner
what is planned detection risk?
the risk that the audit evidence will fail to detect misstatements exceeding the tolerable amount
when the Acceptable Audit Risk is set to low, how much work needs to be done?
more work needs to be done
When planned detection risk is set to low, how much work needs to be done?
more testing and more work