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To misuse or embezzle funds.
An internal control shortcoming or opportunity to strengthen internal controls.
The risk audit procedures will lead to a conclusion that material error does not exist when in fact such error does exist.
A control designed to discover an unintended event or result.
- Departure from prescribed internal control.
- Often expressed as a rate at which the departure occurs.
A statement that the auditor is unable to express an opinion as to the presentation of financial statements in conformity with U.S. GAAP.
- Revealing information.
- Financial statement footnotes are one way of providing necessary disclosures.
Acceptance sampling (sampling to determine whether internal control compliance is greater than or less than the tolerable deviation rate) when the expected attribute occurrence rate is zero.
- Written or printed paper that bears information that can be used to furnish decisive evidence.
- Could also be a recording, computer readable information, or a photograph.
Dollar unit sampling
(aka: probability proportional to size sampling)
A sampling plan that bases the likelihood of selecting a particular account on the relative size of that account, so larger accounts have a greater probability of being selected for the sample than smaller accounts.
- If a major event comes to the auditor's attention between the report date and issuance of the report, the financial statements may include the event as an adjustment or disclosure.
- The auditor dual dates the audit report (as of the end of workpaper review, except footnote XX, which is dated later).
- Audit procedures are classified as substantive tests or tests of controls.
- If a procedure provides both types of evidence it is a dual-purpose test.
- Electronic Data Interchange
- The use of communication between an entity and customers or suppliers to transact business electronically.
- Purchases, shipping, billing, cash receipts, and cash disbursements can be completed entirely by exchanging electronic messages.
Reasonableness, validity, limit, and completeness tests that are programmed routines designed to check input data and processing results for completeness, accuracy and reasonableness.
- Electronic Data Processing.
- Processing of information by computer as opposed to handwritten records.
Effective income tax rate
- The income tax provision (expense) shown on an income statement divided by pretax income.
- This differs from the statutory rate because of deductions, credits, and exclusions.
Effective internal control
Reasonable assurance that operational objectives are achieved, that published financial statements are reliably prepared, and that the entity complies with applicable laws and regulations.
- Producing a desired outcome.
- An audit procedure is effective if the evidence supports a correct conclusion.
The ratio of the audit evidence produced to audit resources used.
Embedded audit modules
Are included in the client’s data processing systems to facilitate the acquisition of data needed by auditors.
Embedded control performance
Deals with unexpected changes to data.
To take assets in violation of trust.
Scrambling data so it is meaningless to anyone but the intended recipient, who has the key to unscramble the data.
- A letter that represents the understanding about the engagement between the client and the CPA.
- The letter identifies the financial statements and describes the nature of procedures to be performed.
- It includes the objectives of the procedures, an explanation that the financial information is the responsibility of the company's management, and a description of the form of report.
Enterprise Risk Management (ERM)
- Identifies risks and opportunities, assesses them for likelihood and magnitude, determines responses strategy, and monitors progress.
- ERM integrates strategic planning, operations management, and internal control.
- Monitoring ERM is part of internal control activities.
- The control environment is the attitude, awareness, and actions of the board, management, owners, and others about importance of control.
- It includes integrity and ethical rules, commitment to competence, board or audit committee participation, organization structure, assignment of authority and responsibility, and human resource policies and practices.
- Unintentional misstatements or omissions in financial statements.
- Errors may involve mistakes in gathering or processing accounting data, incorrect estimates from oversight or misinterpretation of facts, and mistakes in application of principles relating to amount, classification, presentation or disclosure.
Sampling to estimate the actual value of a population characteristic within a range of tolerable misstatement.
Evidence (evidential matter)
Includes written and electronic information (such as checks, records of electronic fund transfers, invoices, contracts, and other information) that permits the auditor to reach conclusions through reasoning.
- Evaluating the preparation of prospective statements, support underlying assumptions, and presentation.
- The accountant reports whether, in his or her opinion, the statements conform to AICPA guidelines and assumptions provide a reasonable basis for the responsible party's forecast.
- The accountant should be independent, proficient, plan the engagement, supervise assistants, and obtain sufficient evidence to provide a reasonable basis for the report.
As an audit procedure to examine something is to look at it critically.
- A qualified opinion.
- An auditor can qualify the audit opinion for both departures from U.S. GAAP in the financial statements and restrictions on the scope of the audit.
- The opinion paragraph of the qualified report is worded "In our opinion, except for..."
To carry out an internal control procedure, such as to sign and mail a check after inspecting supporting documents.
- Assertions about existence deal with whether assets or liabilities exist at a given date.
- For example, management asserts that finished goods inventories in the balance sheet are available for sale.
Cash paid or liability incurred.
A paragraph added to an audit report to explain something, such as the reason for a qualified or adverse opinion.
Fully and clearly expressed, leaving nothing implied.
- To multiply one number by another (to test extensions is to test the accuracy of multiplication done by the client).
- To extend audit procedures is to apply additional audit procedures to obtain more evidence.
Extent of an audit test
- The sample size.
- A small number of transactions provides less assurance than a large sample.
- There is more risk your conclusion will be incorrect if you use a smaller sample size.
- Federal Accounting Standards Advisory Board.
- An organization that sets GAAP in the U.S. for federal government entities.
- Financial Accounting Standards Board.
- A nongovernment private organization that sets GAAP in the U.S. for profit making entities and not-for-profit nongovernmental organizations.
- The performance of audit procedures outside the CPA's office.
- Much field work, but not all, is done in the client's offices after the balance sheet date.
“First In First Out” inventory cost flow.
- Prospective financial statements that present expected future financial position, results of operations, and cash flows based on expected conditions.
- A financial forecast is of the most likely future scenario.
Financial institution confirmation request
A confirmation sent to the client's bank or other financial institution asking the bank to confirm directly to the auditor information about balances at a particular date.
- Prospective financial statements that present, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and changes in financial position.
- A financial projection includes several alternative scenarios while a forecast is the single most likely scenario.
Financial reporting framework
A set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements.
Structured representation of historical financial information, including related notes, intended to communicate an entity's economic resources and obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework.
A schematic representation of a sequence of operations in an accounting system or computer program. Also called a flow diagram or flow sheet.
To add a column of numbers. To test footing is to add the column again to check accuracy.
- A deliberate deception to secure unfair or unlawful gain.
- False representation intended to deceive relied on by another to that person's injury.
- Fraud includes fraudulent financial reporting undertaken to render financial statements misleading, sometimes called management fraud, and misappropriation of assets, sometimes called defalcations.
- Generally Accepted Accounting Principles.
- According to Rule 203 of the AICPA Code of Professional Conduct, GAAP for nongovernment entities include (in a conflict the source earlier in the list prevails):
- 1. FASB Standards and Interpretations, APB Opinions, ARBs.
- 2. FASB Technical Bulletins, AICPA Guides and AICPA Statements of Position.
- 3. Positions of the FASB Emerging Issues Task Force and AICPA Practice Bulletins.
- 4. AICPA accounting interpretations, FASB staff "Qs and As", and widely recognized industry practices.
- 5. FASB Concepts Statements, textbooks, articles.
- Generally Accepted Auditing Standards.
- The ten auditing standards adopted by the membership of the AICPA.
- Auditing standards differ from audit procedures in that "procedures" relate to acts to be performed, whereas "standards" deal with quality of the performance of those acts and objectives of the procedures.
- Government Accounting Standards Board.
- A non-government private organization that sets GAAP in the United States for non-federal governmental entities.
Policies and procedures to assure proper operation of computer systems, including controls over network operations, software acquisition and maintenance, and access security.
- A book of original entry in a double-entry system.
- The journal lists transactions and indicates accounts to which they are posted.
- The general journal includes all transactions not included in specialized journals used for cash receipts, cash disbursements, and other common transactions.
- A record to which monetary transactions are posted (in the form of debits and credits) from a journal.
- It is the final record from which financial statements are prepared.
- General ledger accounts are often control accounts that report totals of details included in subsidiary ledgers.
- In the ten U.S. generally accepted auditing standards there are three general standards:
- 1. The examination is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
- 2. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor.
- 3. Due professional care is to be exercised in performing the examination and preparation of the report.
Generalized audit software
Packaged computer programs used on a variety of computers during audit field work to read computer files, select information, perform calculations, create data files, and print reports in a format specified by the auditor.
Going concern assumption
- Assumes the company will continue in operation long enough to realize its investment in assets through operations (as opposed to sale).
- Presenting assets at historical cost is justified by assuming productive assets will be used rather than sold.
- This makes market values irrelevant and supports accounting methods that match the actual cost of an asset to periods benefited.
Government Auditing Standards
- A book issued by the comptroller general of the United States, sometimes called the "yellow book."
- Government Auditing Standards contains standards for audits of government organizations, programs, activities, and functions and of government assistance received by organizations.
- The audit is designed to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a direct and material effect on determination of financial statement amounts, are followed when required by law, regulation, agreement, contract, or policy.
Gross margin percentage
he gross margin from an income statement divided by net sales revenue.
A computer and associated physical equipment involved in data processing or communications functions as opposed to software (the computer programs that provide instructions the computer follows).
Computer controls built into physical equipment by the manufacturer.
A control total that has no meaning in itself except for control, e.g., total social security numbers of employees paid.
- Protect an entity against the risk of adverse price or interest-rate movements on its assets, liabilities, or anticipated transactions.
- A hedge reduces risk by counterbalancing losses with gains on separate positions.