Audit Messier Glover

Front 1

What is accounting?

Back 1

Process of Identifying, recording, updating, summarizing, and reporting info regarding economic states and events.

Front 2

2 kinds of accounting

Back 2

Managerial and Financial

Front 3

What are the 4 financial statements?

Back 3

1. Balance Sheet
2. Income Statement
3. Cash Flow Statement
4. Retained Earnings Statement

Front 4

What do we learn from the financial statements?

Back 4

-profitability
- liquidity
- leverage/risk
- Cost Structure
- Value
- overall, help outsiders

Front 5

Why do we need rules in accounting?

Back 5

GAAP allows us to ensure we mean what we say.

Front 6

What is auditing?

Back 6

Process of investigating something to ascertain whether is is as it should be.

Front 7

5 types of audits

Back 7

-IRS
-Compliance Audit
- Operational Audit
- Fraud Audit
- Financial Statement Audit

Front 8

Which type of audit do we focus on in this class?

Back 8

Financial Statement Audit

Front 9

What is the purpose of a financial statement audit?

Back 9

to investigate an organizations financial statements, being sure they are fairly stated and consistent with GAPP.

Front 10

What is financial statement auditing?

Back 10

- understanding financial statement and accounting systems
- understanding accounting principles and accounting standards
- understanding ecnomics and organizations.
- understanding misatements risk and red flags.
- understanding materiality
- understanding evidence
- working with people
- thinking creatively
- practicing skepticism (have a questioning mind)
- using professional judgement
- maintain objectivity and integrity
- being professional

Front 11

What is the finality of an audit?

Back 11

Letter to Board of Directors and stockholders

Front 12

4 incentives for a company to get an audit

Back 12

1. raise capital (public trading)
2. satisfying debt covenant
3. regulation
4. cost effective monitoring

Front 13

Moral Hazard

Back 13

incentive to act in ones self interest which is in contrast with organizations goals while being able to hide those actions through privately held info.

Front 14

Accounting

Back 14

The process of identifying, recording, processing, summarizing, and reporting info regarding economic states and events.

Front 15

Information Risk

Back 15

The likelyhood that info is not fairly stated (error or fraud)

Front 16

Assurance

Back 16

reduction of info risk (more credibility and believable)

Front 17

External Audit / Financial statement audit

Back 17

investigation of an organizations account info to provide reasonable assurance that account info is fair and consistent with GAAP.

Front 18

Internal Controls

Back 18

a process, affected by entities board of directors, management, and other personnel designed to provide reasonable assurance regarding the achievement of objectives.These objectives include
- reliable financial reporting (accounting)
- effective efficient operations
- compliance with applicable laws.

Front 19

Financial Statment Audit

Back 19

a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those events and established criteria and communicating results to users.

Front 20

Chain of events

Back 20

1. prinicple agent problem
2. moral hazard problem
3. Demand for accounting
4. info risk
5. demand for assurance
6. demand for auditing.

Front 21

Who are the Big 4?

Back 21

PricewaterhouseCoopers, Deloitte, Ernst & Young, KPMG

Front 22

Independence

Back 22

A state of objectivity in fact and in appearance, including the absence of any significant conflicts of interests.

Front 23

Assurance

Back 23

is a function of knowledge and independence. Counteracts information asymmetries and conflicting interests.

Front 24

Who provides assurance?

Back 24

The big 4, some smaller public accounting firms.

Front 25

How is auditing reputation regulated?

Back 25

ASB for private firms, PCAOB for public firms.

Front 26

What is information risk all about?

Back 26

the possibility of misstatement.

Front 27

Public Company Accounting Oversight Board

Back 27

Has authority to set and enforce auditing standards for public companies

Front 28

How do we maintain reputation

Back 28

- AICPA
- Knowledge
- degree in acct
- CPA exam
- experience
- CPE
- Independence
- code of professional conduct
- independence standards

Front 29

Who created the PCAOB

Back 29

The SEC

Front 30

Government Accountability Office

Back 30

Set up by congress. Issues GAS (yellow book)

Front 31

GAAS

Back 31

10 generally accepted auditing standards. Satisfies knowledge and independence requirements and ensures audit quality is high.

Front 32

Who issued GAAS

Back 32

The Auditing Standards Board

Front 33

What did the PCAOB release that is similar to GAAS?

Back 33

(AS) Auditing Standards

Front 34

Who controls the auditing standards board (ASB)?

Back 34

The The American Institute of Certified Public Accountants. (AICPA)

Front 35

What organization sets auditing standards for publicly traded companies?

Back 35

the Public Company Accounting Oversight Board (PCAOB)

Front 36

What organization sets auditing standards for private companies?

Back 36

the American INstitute of Certified Public Accountants.

Front 37

Assurance Services

Back 37

independent services that improve the quality of information for decision makers.

Front 38

What 2 services do auditors offer besides auditing?

Back 38

Assurance and Attest services

Front 39

What are the three types of attest services offered by auditors?

Back 39

1. Examination(high assurance) (opinion)
2. Review (moderate assurance) (negative assurance)
3. Agreed-Upon Procedures (low assurance) (summary of findings)

Front 40

What are the 3 types of assurance?

Back 40

1. Compilation (no assurance)
2. Review (limited assurance)
3. audit ( reasonable assurance)

Front 41

What are the three types of compilation disclosures?

Back 41

1. full disclosure
2. omits most disclosures
3. accountant not indépendant.

Front 42

What percent is reasonable assurance?

Back 42

95%

Front 43

Alternative Definition of financial statement auditing

Back 43

an investigation of financial statements wherein evidence is gathered to provide reasonable assurance regarding the veracity of managements assertions.

Front 44

Internal Controls

Back 44

Internal Processes designed to provide reasonable assurance regarding the veracity account of assertions.

Front 45

Alternative Definition of INternal Controls

Back 45

A process by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives..

Front 46

What are the three objectives for which internal controls provide assurance?

Back 46

1. reliable financial reporting
2. effective and efficient operations
3. compliance with applicable laws and regs.

Front 47

what are the 3 violations of internal controls called?

Back 47

1. control deficiency
2. significant deficiency
3. material weakness

Front 48

What is a control deficiency?

Back 48

exist when the design or operation of a control does not allow for prevention or detection of a misstatement on a timely basis. Can be deficiency in design or operation.

Front 49

What is a significant Deficiency?

Back 49

A control deficiency that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant’s fin’l reporting.

Front 50

What is a material weakness?

Back 50

A significant deficiency that may lead to a material misstatement in the fin’l statements.
Suggests that a misstatement could occur because it will not be prevented or detected by internal controls.

Front 51

What are the 5 steps/components of COSO's framework that management must perform?

Back 51

1. control activities (ex: segregation of duties, getting things initialed\signed)
2. control environment (overall environment that you perform your job in)
3. risk assessment (assess risk that may prevent you from achieving company goals)
4. information and communication (accounting system)
5. monitoring (watching all components to make sure they are operating as they should)

Front 52

What is COSO?

Back 52

policies and procedures that help ensure management directives are carried out.
Manuel/computer activities designed to prevent misstatements or to detect them on a timely basis

Front 53

What are the four control activities?

Back 53

1. Preventive (prevents misstatements)
2. Detective (looks for abnormalities (ex: bank reconciliation))
3. Manual (people involved)
4. Computer (generally stronger than manual controls) designed to prevent misstatements or to detect them on a timely basis
Note: these typically focus on specific control objectives.

Front 54

What is the control environment?

Back 54

any part of an organizations internal environment that contributes generally to the likelihood of misstatements being prevented, or detected on timely basis

Front 55

What are the four components of the Control Environment?

Back 55

1. Integrity and Ethical Values
- Tone at the top (top management)
- Guidance (ex: code of conduct)
- Incentives (ex: incentive based compensation like Stock Options)
2. A commitment to competence (
hire smart people and reward them so that they stay with you)
- training
- good job descriptions (so people know what they will do, better competency through better matches)
3. Management Philosophy and Operating Style (does mgt think that accounting and internal controls are important?)
4. Corporate Governance
- Board of Directors (knowledge and independence, involved)
- Auditing Committee

Front 56

What does the Board of Directors do concerning internal control?

Back 56

oversee the actions of management
Hire CEO
Highest Authority
Approve Budgets
Elected by stockholders

Front 57

What does the Auditing committe do concerning internal control?

Back 57

Subcommittee of Board of Directors
Oversee financial reporting
Review financial statements
Understand risks
Have one expert
Understand scope of audit

Front 58

What does management do concerning internal control?

Back 58

Ensure that things are properly recorded
Establish and maintain internal controls
Ensure that laws and regulations are complied with

Front 59

Materiality

Back 59

magnitude of an omission or misstatement.

Front 60

audit risk

Back 60

risk that auditor may make a mistake

Front 61

What are the seven major phases of an audit?

Back 61

1. Client Acceptance/continuance and establishment of an understanding with client.
2. Preliminary engagement activity
3. Plan audit
4. consider and audit internal controls
5. audit business processes and related accounts
6. complete audit
7. evaluate results and issue report

Front 62

What are the seven factors of the control environment?

Back 62

1. Integrity of Ethical Values
2. Commitment to Competence
- Board of Directors and Audit Committee
3. Corporate Governance
4. Management Philosophy and Operating Style
- Attitude regarding what is important
5. Organization structure
- Facilitate effective communication
- Degree automation
- Delegate authority/ responsibility with formal reporting lines (hierarchical style)
6. Assignment of authority and Responsibility
- Ownership / Empowerment (feel personally responsible for project)
- Accountability
7. Human Resources Policies and Practices
- Hiring / Firing/ Training
- Compensation / Promotion / Rotation
- Dealing with outside problems (protect org from outside environment)

Front 63

Risk Assessment

Back 63

Processes / mechanisms designed to identify, analyze, and manage risks of not meeting financial reporting objectives

Front 64

What is the external financial reporting objective?

Back 64

financial statements that are “fairly stated”

Front 65

what are the 4 risk assessment steps?

Back 65

1. ID objectives
2. ID risks to achieving objectives
3. Judge the risks and determine critical risk
4. Take actions to mitigate risks

Front 66

Information and Communications

Back 66

processes / mechanisms that contribute to the capturing, processing, and communication of information used for financial reporting

Front 67

What are we monitoring

Back 67

- Processes / mechanisms designed to “monitor” the design and operating effectiveness of internal controls
- Mechanisms used to assess whether internal controls are performing as designed

Front 68

ADMONISH (ad MAH nish)

Back 68

v to reprove; to express warning or disapproval

• How many times has your roommate admonished you to put the toilet seat down?

An admonition is a warning or a scolding and admonitory means expressing warning or disapproval.

• He tried to admonish us not to open the secret passageway, but his admonition fell on deaf ears. Man, were we sorry we hadn't listened to him when all the monsters came rushing out!

• Dad's admonitory tone made us feel guilty about ruining our appetites with pre-dinner cookies.

Front 69

Inherent Risk

Back 69

misstatements can occur

Front 70

Control Risk

Back 70

risk that misstatement can occur. These always exist.

Front 71

Audit Risk Model

Back 71

audit risk = (inherent risk x control risk) x detection risk

Front 72

what 2 things can misstatements result from?

Back 72

1. Error
2. Fraud

Front 73

Why do errors (a type of misstatement) arise?

Back 73

complexity and competence

Front 74

Detection Risk

Back 74

risk that auditor does not detect misstatement

Front 75

Audit Risk

Back 75

risk that auditor comes to wrong conclusion. can happen for many reasons.

Front 76

Evidence

Back 76

Anything that causes an auditor to revise his\her beliefs regarding the financial statements assertions.

Front 77

3 Evidence activities

Back 77

1. examine
2. compute
3. confirm

Front 78

What are the 5 limitations of internal controls?

Back 78

1. Breakdown
2. Management override
3. Collusion
4. cost\benefit not universal
5. unclear whether internal control can provide enough assurance

Front 79

What are the three steps of the audit process?

Back 79

1. Plan
2. Perform
3. Report

Front 80

Why do we plan?

Back 80

1. For effectiveness (discover misstatements)
2. for efficiency (spend less time in areas that do not need it)

Front 81

What are the planning steps?

Back 81

1. gain understanding of client (to determine audit risk and establish materiality)
2. identify inherent risk
3. identify control risk (evaluate internal controls)
4. Develop audit plan
- Focus on risky areas
- Develop Audit Strategies
- Staffing, Experts
- Timing, Budget

Front 82

What to things are developed from planning?

Back 82

1. planning memo (tells client strategy)
2. audit program

Front 83

What are the five steps to performing the audit?

Back 83

1. perform audit procedures
2. Gather Evidence
3. Evaluate evidence
4. Document in work papers
5. review

Front 84

Assersions

Back 84

- Facts that are relayed in financial statements
- Facts stated explicitly or implicitly in or through accounting disclosures
(numbers) in the financial statements

Front 85

What are the 6 income statement assertions?

Back 85

1. Transactions Occurred (sales are valid)
2. Authorization (sales were approved)
3. Cutoff (sales are recorded in correct period)
4. Accuracy (mechanical process of making sure number stays the same from invoice to ledger to sub-ledger to fin’l statements)
5. Classification (assigned to appropriate account)
6. Completeness (everything is reported)

Front 86

What are the six balance sheet assertions?

Back 86

1. Existence (validity, whatever is stated on balance sheet is actually there)
2. Accuracy
3. Classification (not in book as a b/s assertion)
4. Completeness (all liabilities are reported)
5. Valuation
6. Rights and Obligations

Front 87

What are the 4 footnote assertions?

Back 87

1. Occurrence / Existence/Valid
2. Completeness
3. Accuracy
4. Understandability

Front 88

What are we doing when we perform audit procedures?

Back 88

Gathering evidence about assertions.

Front 89

What three things do we do when performing procedures?

Back 89

1. Risk assessment Procedures (performed during planning only)
2. Test of controls
3. Substantive Test (Direct Test)

Front 90

What 4 things can we do when performing the substantive test part of the audit procedures?

Back 90

1. Test of Transactions
2. Test of account balances/details
3. Test of Disclosures
4. Analytical Procedures

Front 91

What is audit evidence?

Back 91

Anything that causes an auditor to revise his/her belief about the consistency between a management assertions and reality. Basically it is proof.

Front 92

What are the evidence types?

Back 92

1. Inspection
- Inspection of tangible assets
- Inspection of docs and records
2. Observation
3. Inquiry
4. Confirmation
5. Scanning
6. analytical procedures
7. Re-performance
8. Recalculation

Front 93

6 documentation facts

Back 93

- Record of procedures Performed, evidence gathered, conclusions reached
- Call work-papers
- Support Audit Report
- Aids in planning, performing, and supervising
- Owned by Audit Firm
- Must keep work papers for 7 years

Front 94

relevance of evidence

Back 94

strengthens link between evidence and assertion.

Front 95

reliability of evidence

Back 95

can evidence be relied upon to signal truth of management assertion.

Front 96

of the 9 types of evidence which are highly reliable, moderately, and lower?

Back 96

High: inspection of tangible assets, re-performance, recalculation
Moderate: inspection of res and docs, confirmation, analytical procedures, scanning
Low: observation, inquiry

Front 97

Considering the proximity to an event when evaulating the reliability of evidence, which 4 types are more reliable and which 4 are less?

Back 97

More: written, original document, 1sthand evidence, year end
Less: verbal, copy, 2nd hand evidence, interim

Front 98

Why do we need sampling?

Back 98

- Companies are large
- Human judgments are involved in control processes
- Testing procedures require auditor to inspect transactions or balances
- Auditors obtain evidence from 3rd parties

Front 99

What three questions do we ask when sampling?

Back 99

1. How Many?
- population size
- confidence level (1-sampling risk) (the more samples you have the more confident you are)
- margin of error (tolerable problems - expected problems)
2. Which Ones? (sampling method)
3. How do I interpret the results?

Front 100

What are the 4 steps to interpreting the results when sampling?

Back 100

1. quantify results in terms of ratio/rate
a. deviation rate for control test
b. misstatement rate for substantive test
2. project to population
3. consider plausible rate
4. compare plausible to tolerable

Front 101

Financial Statement Audit

Back 101

a formal search for all material misstatements.