Audit Section 1

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Audit Section 1
2011-02-10 23:08:40

Audit Ch. 1,2,3,4,5
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  1. Independent professional services that improve the quality of information, or its context, for decision makers. Encompasses attest services and financial statement audits.
    Assurance Services
  2. A service when a practioner is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. Encompasses financial statement audits.
  3. All the information used by the auditor in arriving at the conclusions on which the audit opinion is based; includes the info contained in the acct records underlying the financial statements and other information
    Audit Evidence
  4. The risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated.
    Audit Risk
  5. A systematic process of (1) objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and (2) communicating the results to interested users
  6. Expressed or implied representation by management that are reflected in the financial statement components
    Financial Statement Assertions
  7. The concept that the manager generally has more information about the true financial position and results of operations of the entity than the absentee owner does
    Information Asymmetry
  8. The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced.
  9. An instance where a financial statement assertion is not in accordance with the criteria against which it is audited (e.g., GAAP). Misstatements may be classified as fraud (intentional), other illegal acts such as noncompliance with laws and regulations (intentional or unintentional), and errors (unintentional).
  10. The concept that an audit done in accordance with auditing standards may fail to detect a material misstatement in a client's financial statements. In an auding context this term has been defined to mean a high but not absolute level of assurance.
    Reasonable Assurance
  11. The end product of the auditor's work, indicating the auditing standards followed, and expressing an opinion as to whether an entity's financial statements are fairly presented in accordance with agreed-upon criteria (GAAP)
  12. The risk that the entity's financial statements will contain a material misstatement whether caused by error or fraud.
    Risk of material misstatement
  13. A "clean" audit report, indicating the auditor's opinion that a client's financial statements are fairly presented in accordance with agreed-upon criteria (GAAP)
    Unqualified Audit Report
  14. A committee consisting of members of the board of directors, charged with overseeing the entity's system of internal control over financial reporting, internal and external auditors, and the financial reporting process. Members typically must be independent of management.
    Audit Committee
  15. Persons elected by the stockholders of a corporation to oversee management and to direct the affairs of the corporation
    Board of Directors
  16. Processes implemented by management to achieve entity objectives. Business processes are typically organized into the following categories: revenue, purchasing, human resource management, inventory management, and financing processes.
    Business Processes
  17. The oversight mechanisms in place to help ensure the proper stewardship over an entity's assets. Management and the board of directors play primary roles, and the independent auditor plays a key facilitating role.
    Corporate Governance
  18. A system or code of conduct based on moral duties and obligations that indicates how an individual should behave.
  19. Expressed or implied representations by management about information that is reflected in the financial statements. The three sets of assertions relate to ending account balances, transactions, and presentation and disclosure.
    Financial Statement Assertions
  20. Accounting principles that are generally accepted for the preparation of financial statements in the US. GAAP standards are currently issued primarily by the FASB, with oversight and influence by the SEC.
    Generally Accepted Accounting Principles GAAP
  21. Ten broad statements guiding the conduct of financial statement auditing.
    Generally accepted auditing standards GAAS
  22. Violations of law or govt. regulation
    Illegal Acts
  23. A state of objectivity in fact and in apprearance, including the absence of any significant conflicts of interest.
  24. An audit of both financial statements and internal control over financial reporting, provided by the external auditor. Required for public companies.
    Integrated Audit
  25. Consulting services that may provide advice and assistance concerning an entity's organization, personnel, finances, operations, systems, or other activities.
    Management Advisory Services
  26. An organization created to provide professional accounting-related services, including auditing. Usually formed as a proprietorship or as a form of partnership.
    Public Accounting Firm
  27. Standards regarding the conduct of financial statement auditing for public companies. Currently consist primarily of standards and statements established by the AICPA's Auditing Standards Board, as these statements and standards were adopted by the PCAOB in 2003 on an interim basis, though the PCAOB has added a few significant standards.
    Standards of the PCAOB
  28. Statements issued by the AICPA's Auditing Standards Board, considered as interpretations of the 10 GAAS statements.
    Statements on Auditing Standards (SAS)
  29. 1. The auditor must have adequate technical training and proficiency to perform the audit. 2. The Auditor must maintain independence in mental attitude in all matters relating to the audit. 3. The auditor must exercise due professional care in the performance of the audit and the preparation of the report.
    GAAS General Standards
  30. 1. The auditor must adequately plan the work and must properly supervise any assistants. 2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. 3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.
    GAAS Standards of Field Work
  31. 1. The auditor must state in the auditor's report whether the financial statements are presented in accordance with GAAP. 2. The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. 3. When the auditor determines that informative disclosures are not reasonably adequte, the auditor must so state in the auditor's report. 4. The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor's report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor's report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report.
    GAAS Standards of Reporting
  32. Determines the extent to which rules, policies, laws, covenants, or governemtn regulations are being followed by the entity.
    Compliance Audit
  33. A systematic review of part or all of an organization's activities to evaluate whether resources are being used effectively and efficiently. The purpose is to assess performce, identify areas for improvement and develop recommendations.
    Operational Audits
  34. The purpose it to detect or deter fraudulent activities.
    Forensic Audit
  35. Testing controls to obtain indirect evidence about the fairness of the financial statements.
    Internal Control Audits
  36. Evaluations of financial information made by a study of plausible relationships amond both financial and nonfinancial data.
    Analytical Procedures
  37. Specific acts performed by the auditor in gathering evidence to determine if specific assertations are being met.
    Audit Procedures
  38. The risk that the auditor may unknowingly fail to appropriately modify the opinion on materially misstated financial statements
    Audit Risk
  39. Risks resulting from significant conditions, events, circumstances, and actions or inactions that could adversely affect managements's ability to execute its strategies and to achieve its objectives, or through the setting of inappropriate objectives or strategies.
    Business Risks
  40. A range of acceptable amounts or a precisely determined point estimate for an estimate (e.g. uncollectible receivables), if that is a better estimate than any other amount.
    Closest Reasonable Estimate
  41. The risk that material misstatements that could occur will not be prevented, or detected and corrected, by internal controls.
    Control Risk
  42. The risk that the auditor will not detect a material misstatement that exists in the financial statements.
    Detection Risk
  43. The risk that the auditor is exposed to financial loss or damage to his or her professional reputation from lititgation, adverse publicity, or other events arising in connection with financial statements audited and reported on.
    Engagement Risk
  44. Unintentional misstatements or omissions of amounts or disclosures.
  45. Intentional misstatements that can be classified as fraudulent financial reporting and/or misappropriation of assets.
  46. The susceptibility of an assertion to material misstatement, assuming no related controls.
    Inherent Risk
  47. An attitude that includes a questioning mind and a critical assessment of audit evidence. The auditor should not assume that management is either honest or dishonest.
    Professional Skepticism
  48. The identification, analysis, and management of risks relevant to the preparation of financial statements that are fairly presented in conformity with GAAP.
    Risk Assessment
  49. The auditor's combined assessment of inherent risk and control risk.
    Risk of material misstatement
  50. Refers to the nature, timing, and extent of audit procedures, where nature refers to the type of evidence; timing refers to when the evidence will be gathered; and extent refers to how much of the type of evidence will be evaluated.
    Scope of the audit
  51. A risk of material misstatement that is important enough to require special audit consideration.
    Significant Risk
  52. The amount of the planning materiality that is allocated to a financial statement account.
    Tolerable Misstatement
  53. The risk that the auditor might select an inappropriate audit procedure, misapply the appropriate audit procedure, or misinterpret the audit results.
    Nonsampling Risk
  54. Audit Risk = Inherent Risk x Control Risk x Detection Risk
    Detection risk has an inverse relationship to inherent and control risk. If an auditor judges a client's inherent risk and control risk to be high, the auditor would accept a lower level of detection risk in order to achieve the planned level of audit risk.
  55. The records of initital entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries, and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations, and disclosures.
    Accounting Records
  56. Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data
    Analytical Procedures
  57. Expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in financial statements and related disclosures
  58. The auditor's principal record of the work performed and the basis for the conclusions in the auditor's report. It also facilitates the planning, performance, and supervision of the engagement and provides the basis for the review of the quality of the work providing the reviewer with written documentation of the evidence supporting the auditor's significant conclusions
    Audit Documentation (Working Papers)
  59. All information used by the auditor in arriving at the conclusions on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information such as minutes of meetings; confirmations from third parties; industry analysts' reports; control manuals; information obtained by the auditor through audit procedures such as inquiry, observation, and inspection
    Audit Evidence
  60. Specific acts performed by the auditor in gathering evidence to determine if specific assertations are being met.
    Audit Procedures
  61. The process of obtaining and evaluating a direct communication from a third party in response to a request for info about a particular item affecting financial statement assertions.
  62. Seeking info of knowledgeable persons, both financial and nonfinancial, throughout the entity or outside the entity
  63. Examination of internal or external records or documents that are in paper form, electronic form, or other media
    Inspection of records and documents
  64. Physical examination of tangible assets
    Inspection of tangible assets
  65. Process of watching a process or procedure being performed by others
  66. Audit evidence that includes minutes of meetings; confirmations from third parties; industry analysts' reports; comparable data about competitors (benchmarking); controls manuals; info obtained by the auditor from such audit procedures as inquiry, observation, and inspection; and other info developed by, or available to, the auditor that permits the auditor to reach conclusions through valid reasoning
    Other Information
  67. Determination of the mathematical accuracy of documents or records
  68. refers to evidences relationship to the assertion or to the objective of the control being tested
    Relevance of evidence
  69. The diagnosticity of evidence; that is, whether the type of evidence can be relied on to signal the true state of the assertion
    Reliability of Evidence
  70. The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control, either manually or through the use of computer-assisted audit techniques
  71. Reviewing accounting data to identify significant or unusual items; including the identification of anomalous individual items within account balances or other client data through the scanning or analysis of entries in transaction listings, subsidiary ledgers, general ledger control accounts, adjusting entries, suspense accounts, reconciliation, and other detailed reports
  72. The accounts and transactions that should be included are included; thus, the financial statements are complete.
  73. Assets, liabilities, equity revenues, and expenses are appropriately valued and are allocated to the proper accounting period
    Valuation and Allocation
  74. The assets are the rights of the entity, and the liabilities are its obligations
    Rights and Obligations
  75. The assets and liabilities exist, and the recorded transactions have occured
    Existence or occurance
  76. transactions and events that have been recorded have occurred and pertain to the entity (sometimes referred to as validity)
    Occurrence (assertions about classes of transactions and events for the period under audit)
  77. all transactions and events that should have been recorded have been recorded
    completeness (assertion about classes of transactions and events for the period under audit)
  78. all transactions and events have been properly authorized
    authorization (assertions about classes of transactions and events for the period under audit)
  79. amounts and other data relating to recorded transactions and events have been recorded appropriately and properly accumulated from journals and ledgers
    accuracy (assertions about classes of transactions and events for the period under audit)
  80. transactions and events have been recorded in the correct acct period
    cutoff (assertions about classes of transactions and events for the period under audit)
  81. assets, liabilities, and equity interests exist
    existence (assertions about acct balances at the period end)
  82. the entity holds or controls the right to assets, and liabilities are the obligations of the entity
    rights and obligations (assertions about acct balances at the period end)
  83. all assets, liabilities, and equity interests that should have been recorded have been recorded
    completeness (assertions about acct balances at the period end)
  84. assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded
    valuation and allocation (assertions about acct balances at the period end)
  85. disclosed events, transactions, and other matters have occured and pertain to the entity
    occurrence and rights and obligations (assertions about presentation and disclosure)
  86. all disclosures that should have been included in the financial statements have been included
    completeness (assertions about presentation and disclosure)
  87. financial information is appropriately presented and described, and disclosures are clearly expressed
    classification and understandability (assertions about presentation and disclosure)
  88. financial and other info are disclosed fairly and at appropriate amounts
    accuracy and valuation (assertions about presentation and disclosure)
  89. evaluations of financial info made by a study of plausible relationships among both financial and nonfinancial data
    analytical procedures
  90. a subcommittee of the board of directs that is responsible for the financial reporting and disclosure process
    audit committee
  91. specific acts performed as the auditor gathers evidence to determine if specific audit objectives are being met
    audit procedures
  92. the auditor's plan for the expected conduct, organization, and staffing of the audit
    audit strategy
  93. tests of transactions that both evaluate the effectiveness of controls and detect monetary errors
    dual-purpose tests
  94. a letter that formalizes the contract between the auditor and the client and outlines the responsibilities of both parties
    engagement letter
  95. a violation of laws or government procedures
    illegal act
  96. audit procedures performed to test material misstatements in an account balance, transaction class, or disclosure component of the financial statements
    substantive procedures
  97. tests to detect errors or fraud in individual transactions
    substantive tests of transactions
  98. audit procedures performed to test the operating effectiveness of controls in preventing or detecting and correcting, material misstatements at the relevant assertion level
    tests of controls
  99. substantive tests that concentrate on the details of items contained in the account balance and disclosure
    tests of details of account balances and disclosures
  100. risk that info circulated by a company will be false or misleading
    information risk
  101. they possess the required training, expertise, and experience to evaluate the financial information
    competent (desirable characteristic of an auditor)
  102. they have no reason to side with the client; they are independent of the client's influence
    objective (desirable characteristic of auditor)
  103. they will conduct themselves with integrity and will share share all of their findings with the public
    honest (desirable characteristic of an auditor)
  104. they will not simply take the client's assertions at face value; they will conduct their own analysis and testing
    skeptical (desirable characteristic of an auditor)
  105. they should stand behind their assessment with a guarantee and/or be subject to litigation if they fail to act with due care
    responsible and/or liable (desirable characteristic of an auditor)
  106. the results of the audit are reported in time to benefit the decision makers
    timely (desirable characteristic of an audit service)
  107. the costs of the services must not exceed the benefits. for this to occur the service provider will likely need to focus attention on the most important and risky assertions and likely can't provide absolute assurance
    reasonably priced (desirable characteristic of an audit service)
  108. the audit addresses all of the most important and risky assertions made by the client
    complete (desirable characteristics of an audit services)
  109. the service provides some degree of certainty that it will uncover significant risks or problems
    effective (desirable characteristics of an audit service)
  110. the audit is based on a systematic process, and the conclusions are based on reliable evidence. In other words, another comparable auditor would likely find similar things and come to similar conclusions.
    systematic and reliable (desirable characteristics of an audit service)
  111. the service provides a sense for how the company is performing and how likely failure in the near future will occur
    informative (desirable characteristics of an audit service)
  112. assists auditors in evaluating management's financial statement assertions by evaluating underlying accounting data
  113. the information is related to the specific assertion being tested
  114. the information can be relied on to signal the true state of the specific assertion being tested
  115. 1. Client acceptance/continuance and establishing an understanding with the client 2. preliminary engagement activities 3. plan the audit 4. consider and audit internal control 5. audit business processes and related account (e.g. accounts receivables) 6. complete the audit 7. evaluate results and issue an audit report
    Major Phases of the Audit
  116. standard clean audit report
    unqualified audit report
  117. fairly stated audit report except for the misstatement identified by the auditor
    qualified audit report
  118. the financial statements are not fairly stated and should not be relied upon
    adverse opinion on audit report
  119. quantitative base for materiality is. .
    3-5% of total revenues, gross profit, income before taxes*, income from continuing operations, total assets, or three year average income
  120. qualitative amounts of materiality are. .
    close to violating loan convenants, break-even earnings, earnings forecast
  121. inventory concern for objects that may be out of date (computers)
  122. inventory concern for objects they may not be valued properly (jewelry)
  123. system or code based on moral duties and obligations that indicate how we should behave
  124. conduct, aims, or qualities that characterize or mark a profession or professional person
  125. state of objectivity in fact and in appearance, including the absence of significant conflicts of interest
  126. unintentional misstatements due to omission(exlusions) or commission (inclusions)
  127. intentional misstatements-misappropriation or cooking the books
  128. incentive/pressure, opportunity, rationalization
    fraud triangle
  129. how we acted and how we should have acted
    cognitive dissonance
  130. when establishing the terms of the engagement, what topics should be discussed?
    1. the engagement letter 2. the internal auditors 3. the audit committee
  131. this is documented in the engagement letter and should included the objectives of the engagement, management's responsibilities, the auditor's responsibilities, and the limitations of the engagement
    terms of the engagement
  132. the audit committee should:
    1. independent 2. cannot own a law firm on retainer 3. hiring, firing, and directing internal and external auditors
  133. quality and accuracy
  134. used to explain why accts appear the way they do, evidence must be shown for accts that appear misstated
    corroborating evidence
  135. 1. risk assessment procedures 2. tests of controls 3. substantive analytical procedures 4. remaining assurance needed from tests of details
    the assurance bucket
  136. types of audit procedures
    • risk assessment procedures
    • tests of controls
    • substantive procedures
  137. refers to selecting an item for testing from the accounting journals or ledgers and then examining the underlying source documents. Tests occurrenc
  138. Refers to first selecting a source document and then following it into the journal or ledger. Tests completeness