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75 Cards in this Set
- Front
- Back
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Regulators |
SEC, PCAOB |
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PCAOB |
governed by SEC, created by SOX, regulate public company auditors, write standards, inspect internal auditors. "Auditors of auditors" |
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External Auditors |
independent auditors, follow GAAS, hired/fired by company's audit committee |
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internal auditors |
look at more than financial statements, not independent, have more detailed knowledge of the company, reporting relations to audit committee |
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Audit Committee |
part of the board of directors that have the shareholders' interests in mind, elected, members are independent |
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Audit demand increases with |
environmental risk (complexity, remoteness, time-sensitivity, consequences) and information risk (probability that information will be false/misleading) |
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Assurance |
independent professional services that improve the quality of information or its context for decision makers |
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Attestation |
practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedure report on subject matter, or an assertion about subject matter, that is the responsibility of another party. |
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Auditing |
Systematic process (GAAS) of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria (GAAP/IFRS) and communicating the results to interested users |
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Section 302 of SOX |
key company officials must certify the financial statements (CEO and CFO sign a statement indicating they have read, are not aware of any false statements, believe statements present an accurate picture) |
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Section 404 A and B of SOX |
auditors must report on internal controls over financial reporting. (A - management and B - auditors) |
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Existence or occurence |
assets and liabs included in the accounts exist and recorded transactions are valid and have actually occured (usually bias for revenues) |
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rights and obligations |
entity has a legal claim on all assets and revenues reported and has a legal responsibility for all liabilities and expenses |
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completeness |
all balances and transactions have been recorded in the financial statements (usually bias for expenses) |
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valuation and allocation |
assets, liab, and recorded transactions have been valued in accordance with GAAP |
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presentation and disclosure |
all accounts are presented in the appropriate place and all information required has been disclosed in the statements and footnotes (ex: classification of debt) |
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Corroborative Inquiry |
questioning multiple people |
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Audit Report |
express an opinion on financial statements, provide reasonable assurance, conduct in accordance with auditing standards |
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SOC 1 |
Say Microsoft and Apple outsource their payroll to ADP. Instead of Micro and Apple's auditors auditing ADP too, ADP will get everything audited and send a SOC1 to all of their client's auditors |
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SOX '02 |
creates PCAOB, auditor reports to the audit committee, bans non-audit services, rotation of audit partners every 5 years, integrated audits |
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NYSE and NASDAQ (2003) |
majority of directors must be independent, independent audit committees |
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Dodd-Frank Act (2010) |
PCAOB can inspect foreign audit firms that practice in the US or have US clients, and permanently exempted non-accelerated filers from internal control audits |
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IAASB |
international auditing standard accepted in over 100 countries |
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Components of GAAS |
fundamental principles, PCAOB auditing standards and ASB statements on auditing standards, interpretive publications |
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fundamental principles of GAAS |
responsibilities principle, performance principle, reporting principle |
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GAAS responsibilities principle |
competence and capabilities, independence, due care, professional skepticism and professional judgement |
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GAAS Responsibilities Principle: competence and capabilities |
education, experience, and expertise |
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GAAS Responsibilities Principle: independence |
we want objective auditors, in fact vs appearance, financial and managerial relationships |
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GAAS Responsibilities Principle: due care |
level of performance by reasonable auditor in similar circumstances (prudent auditor) |
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GAAS Responsibilities Principle: professional skepticism |
appropriate questioning and critical assessment |
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GAAS Responsibilities Principle: professional judgement |
application of training, knowledge, and experiences |
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GAAS performance principle |
planning and supervision, materiality, risk assessment, obtain sufficient and appropriate audit evidence |
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sufficient audit evidence |
quantity |
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appropriate audit evidence |
quality (relevant and reliable) |
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GAAS reporting principle |
auditors express an opinion on entity's financial statements by assessing them against financial reporting framework |
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Unmodified/unqualified/clean opinion |
FS are in conformity with GAAP |
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qualified opinion |
in conformity with GAAP except for limited items |
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adverse opinion |
FS are not in conformity with GAAP |
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disclaimer opinion |
audit does not express an opinion, usually happens if auditor resigns etc |
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System of quality control |
tone at the top, relevant ethical requirements, acceptance and continuation of client relationships and specific engagements, HR, engagement performance, monitoring |
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Engagement letter |
formal contract that protects the client and auditor and outlines the responsibilities of both parties |
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termination letter |
sent when resigning from a client or when a specific engagement is finished, provides opportunity to deal with subject of future services, may also include understanding of circumstances of termination |
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Audit Plan goal |
list the specific audit procedures (develop and document a plan) that the audit team needs to perform to gather sufficient appropriate evidence on which to base their opinion on the FS |
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steps to get to an audit plan |
risk assessment, staffing, materiality |
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audit engagement staff |
audit engagement partner, audit manager, audit staff, IT audit specialist, tax partner, quality assurance partner (plus experienced staff for new clients, companies with complex transactions, and public companies) |
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materiality |
amount that would influence the decisions of USERS, requires professional judgement |
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Overall Materiality (Planning Materiality) |
established for the financial statements as a whole |
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Tolerable Misstatement (Performance Materiality) |
used as a basis for designing audit tests, allocate to individual accounts, used to make sure aggregate of uncorrected and undetected immaterial misstatements does not exceed materality for the financial statements as a whole |
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how to determine overall materiality |
quantitative base adjusted for qualitative factors |
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how audit findings are evaluated |
aggregate misstatements from each acount, compare account misstatements to tolerable misstatement, compare aggregate misstatement to overall materiality. if aggregate is less than overall and if accounts are not misstated by more than tolerable, auditor can issue unqualified opinion. if not, adjustments should be made |
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Rollover method |
account is misstated based on the amount of the error originating in the current year income statment, leaves balance sheet misstated |
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Iron curtain method |
account is misstated based on the amount of the error as it related to the end-of-current-year balance sheet, regardless of the year the misstatement occurs, leaves the income statement misstated |
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most common benchmark for overall materiality |
5% of income before taxes |
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most common benchmark for tolerable misstatement |
50-75% of overall materiality |
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most common benchmark for clearly trivial misstatements |
3-5% of overall materiality |
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Substantive audit procedures |
direct material misstatements in a transaction class, account balance, and disclosure component of the financial statements |
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substantive audit plan |
contains a list of audit procedures for gathering evidence related to the relevent assertions identified for the significant financial statement accounts and disclosures of an audit client |
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substantive procedures |
do either Test of Details or Analytical Procedures |
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Test of Details |
tests for errors or fraud in individual transactions, account balances, and disclosures (look at underlying support) |
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Analytical Procedures |
evaluations of financial information through analysis of plaudible relationships among financial and non-financial data (ex: gross margin this year vs last year) |
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Control for Existence assertion |
inspection of tangible assets |
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control for occurence assertion |
inspection of records or documents (vouching) |
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control for completeness |
inspection of records or documents (tracing) |
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control for cutoff |
inspection of records or documents (tracing or vouching) |
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control for rights and obligations |
confirmation |
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control for valuation or allocation |
reperformance |
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control for accuracy |
inspection of records or documents (tracing or vouching) |
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controls for classification |
analytical procedures |
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controls for understandability |
inquiry |
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Vouching |
auditor selects an item of financial information and follows its path back through the processing steps to its origin (evidence for existence or occurence) |
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Tracing |
auditor selects a basic source document and follows its ptocessing path forward to find its final recording in a summary journal or ledger (evidence for completeness) |
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audit documentation |
the written record of the basis for the auditor's conclusion that provides the support for the auditors representations, whether those representations are contained in the auditor's report or otherwise (documentation for PCAOB judgement) |
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Permanent files |
information of continuing audit significance, rolls forward from year to year (ex: contracts, bylaws, org chart) |
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current files |
include entire engagement administration file for the year under audit, includes documentation this is sufficient to support all conclusions on the audit |
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audit documentation retention |
documents including discussion and subsequent resolution of differences in professional judgements among team members, retained for seven years from report release date |
