Audit Test 1

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evidence

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any info used by the auditor to determine whether the info being audited is stated in accordance w/ the established criteria

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independent auditors

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auditors reporting on financial statements

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assurance service

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independent professional service that improves the quality of information for decision makers

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attestation service

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type of assurance service in which the CPA firm issues a report about the reliability of an assertion that is made by another party

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5 categories of attestation services

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1. audit of historical financial statements
2. attestation on internal control over financial reporting
3. review of historical financial statements
4. attestation services on information technology
5. other attestation services that may be applied to a broad range of subject matter

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audit of historical financial statements

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management asserts that the statements are fairly stated in accordance with GAAP

auditors issues a written report saying that financial statements are reported in accordance w/ GAAP

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internal control over financial reporting

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management asserts that internal controls have been developed and implemented following well established criteria

auditors must attest to the effectiveness of internal control

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review of historical financial statements

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management asserts that statements are fairly stated in accordance with GAAP

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attestation services on IT

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management makes assertions about the reliability and security of electronic information.

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other attestation services

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ex: bank has cpa provide assurance about the company's compliance w/ loan

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other assurance services

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company's use of personal data used by customers

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operational audit

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evaluates the efficiency and effectiveness of any part of an org's op procedures and methods

management expects recommendations for improving operations

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compliance audit

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conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority

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financial statement audit

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conducted to determine whether the financial statements are stated in accordance w/ specified criteria. typically the criteria are GAAP

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government accountability office auditor

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auditor working for the US Gov Accountability Office

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Public Company Accounting Oversight Board

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appointed and overseen by the SEC

provides oversight for auditors of public companies, establishes auditing and quality control standards for public company audits, performs inspections of the quality controls

conducts inspections of accounting firms

(took of responsibilities of AICPA)

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AICPA and ASB handles _____ companies

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private

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SEC

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assists in providing investors w/ reliable info upon which to make investment decisions

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s-1

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no spec prescribed form

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8-k

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sig events that are of interest to public investors

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10-k

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annual filing

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10-q

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quarterly filing

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AICPA

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voluntary membership
for cpas
sets prof requirements for cpas and promotes the accounting profession

1. ASB pronouncements are SASs
2. Compile and review standards
3. standards for other attestation standards
4. consulting stnadards
5. code of professional conduct

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GAAS Categories

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General standards
Standards of field work
reporting standards

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General standards

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1. adequate technical training and proficiency
2. Independence in mental attitude
3. Due professional care (audtitors are professionals responsible for fulfilling their duties diligently and carefully)

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Standards of Field Work

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1. Adequate Planning and Supervision
2. Understand the entity and its environment, including internal controls
3. Sufficient Appropriate Evidence

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Statements on Auditing Standards

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provide meaningful guidance to GAS

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Quality control

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methods used to ensure that the firm meets its professional responsibilities to clients and others

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Quality Control Elements

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1. Independence, integrity, and objectivity
2. Personnel management
3. Acceptance and continuation of clients and engagements
4. Engagement performance
5. Monitoring

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peer review

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review by CPAs of a CPA firms practices

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interpretations of the rules of conduct and ethical rulings

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not enforceable, but must justify departure

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audit commitee

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selected # of members of a company's BOD whose responsibilities include helping auditors remain independent of managemet

5-7 directors who are not part of company manaement

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contingent fees

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a member in public practice shall not perform for a contingent fee any prof service if the member all performs for the client an audit, review, or certain compilations of financial statements

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advertising

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do not advertise in forms that are misleading

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commissions or referal fees

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not happening

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enforcement

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failure to follow the rules of conduct can result in expulsion from the AICPA

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business failture

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business is unable to repay its lenders or meet the expectations of investors because of economic or business conditions

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audit failure

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auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards

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audit risk

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possibility that the auditor conclues after conduction an adequate audit that the financial statements were fairly statement when they were in fact materially misstated

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prudent person concept

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standard of due care

reasonable care and dilligence

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ordinary negligence

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absence of reasonable care that can be expected of a person in a set of circumstances

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gross negligence

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lack of even slight care, tantamount to reckless behavior

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constructive fraud

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extreme or unusal negligence even though there was no intent to deceive or do harm. Recklessness

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Fraud

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misstatement is made and there is knowledge and intent

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breach of contract

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failure of one or both parties to fulfill the obligation

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SAS 1

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the obj of audit is the expression of an opinion on the fairness with which they present fairly, in all material respects financial position, results of operatoins, and cash flows in conformity with gaap

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steps to develop audit obj

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1. understand obj and responsibilities for audit
2. divide financial statemetns into cycles
3. know management assertions about financial statements
4. know general audit objectives for classes of transactions, accounts, and disclosures
5. know specific audit obj...

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management responsibility

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adopt sound accounting policies, maintain adequate ic, make fair rep of fin stmnts

sox increases mngmnt responsibility by requiring the ceo and cfo to certify quarterly and anual financial statements

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reasonable assurance

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respon of auditor

- measure of the level of certainty that the auditor has obtained at the completion of the audit

reasonable, not absolute:
1) sampling
2) complex calcs: persuasive, not convincing
3) fraudulently prepared fin stmnts are nearly impossible to detect- esp with collusion from mgment

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error

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unintential mistake

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fraud

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intentional misktake

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misappropriation of assets

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defalcation or employee fraud

ex: cleark taking cash at time of sale

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fraudulent financial reporting

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management fraud

ex: intentional overstatement of sales

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professional skepticism

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attitude that includes an questioning mind and a critical assessment of audit evidence

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illegal acts

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violations of laws or gov reg other than fraud

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reason to believe there is a direct/ indirect effect

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1. auditor should inquire at mgmnt above those involved in illegal act
2. consult w/ client's legal counsel
3. accum addtl evidence

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actions when know of illegal act

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consider effects on financial statements

question the relationship of cpa firm w/ managment (are they being honest)

communicate to audit committee or others of equiv authority

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transaction-related audit objectives

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must be met before an auditor can conclude that the trans are properly booked

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balance-related audit obj

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met for acct balance

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presentation and disclosure obj

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ex: specific for a/r

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management assertions

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implied or expressed representations by management about classes of trans and the related accounts and disclosures in the financial statements

ex: cash on bs, unless otherwise stated assume unrestricted and available

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Occurence

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trans and events that have beenr ecorded occured

assertion about trans and events

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completeness

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all trans and events that should ahve been recorded were

assertion about trans and events

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accuracy

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amnts and other data rellating to recorded trans are appropriate

assertion about trans and events

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classification

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recorded in proper acts

assertion about trans and events

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cutoff

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correct acting pd

assertion about trans and events

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existence

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assets, liabilities, and equity interests exist

assertions about account balances

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completeness

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all assets, liabilities, and equity interests that should have been recorded have

assertions about account balances

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valuation and allocation

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assets, liab and equity interests are included at approp amnts

assertions about account balances

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rights and oblig

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the entity holds or controls the rights to assets, and the liab are the obl of the entity

assertions about account balances

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occruents and rights and obligations

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disclosed events and trans have occrued

assertion about pres and disclosure

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completeness

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all disclosures are included

assertion about pres and disclosure

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accuracy and valuation

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financial and other info are disclosed approp.

assertion about pres and disclosure

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class and understandability

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accruately pres and described

assertion about pres and disclosure

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4 phases of audit process

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1. plan and design an audit approach
2. perform tests of controls and substantive tests of trans
3. perform analytical procedures and tests of details of balances
4. complete the audit and issue an audit report

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plan phase

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obtain understanding of entity and env

understand ic and assess control risk

assess risk of material mistatement

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test of controls

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test the effectiveness of internal controls: are they effective

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substantive tests of trans

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eval the client's recording of trans

ex: compare price list with sales price

*accuracy*

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analytical procedures

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comparisons and relatinships to assess reasonablness

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tests of details of balances

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test monetary misstatements in the balances of fin statements.

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questions about what evidence to gather and how much?

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1. audit procedure?
2. sample size?
3. which items from pop?
4. who?

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audit procedure

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detailed instruction that explains the audit evidence

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persuasiveness of evidence

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are appropriateness and suffiency

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appropriateness of evidence

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measure of the quality of evidence (relevance and reliability)

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relevance

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must pertain to or be relevant to the audit obj that the auditor is testing

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reliabilitity

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believable and worthy of trust

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sufficiency of evidence

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measured by sample size the auditor selects

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types of audit evidence

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1. physical examiniation
2. confirmation
3. documentation
4. analytical procedures
5. inquiries of the client

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physical examiniation

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inspection or count by auditor of tangible asset (can include documentation)

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confirmation

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receipt of a writen or oral response from an independent third party verifying the accuracy of info

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documentation

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auditor's inspection of the client's docuents and recordds to substantiate the info that is, or should be, included in the financials.

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internal document

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prepared and used w/in the client's org and is retainedd w/out going to outside party

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external document

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handled by someone outside org

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vouching

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when auditors use documentation to support recorded trans or amnts

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analytical procedures

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use comparisons and relationships to assess whether the act balances or other data appear reasonable compared the auditor's expecations

requrires that the auditor understand the client's industry and business, assess the entity's ability to continue as going concer, and indicate unusual fluctuations

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inquiry

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obtain written or oral info from client in response to questions from the auditor

not usually regarded as conclusive

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recalcuation

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rechecking a sample of clacs made by the client

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reperformance

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independent tests of client acting procedures or controls that were origonally done as part of the system

ex: reperform the aging of a/r

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observation

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use of the senses to assess client activities

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two most expensive types of evidence

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physical examination and confirmation

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least expensive

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observation, inquiries, recalculation

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audit documentation

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principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagementT

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audit documetnation is the property of the

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auditor

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permanent files

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data of a historical or continuing nature pertinent to the current audit
ex:
- extracts or copeis of company documents of continuing importance as the atricle of incorporation
- analyses from prev yrs
- info related to understanding Ic and control risk
- results of analystical proc from prev yrs audits

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current files

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all audit documentation applicable to the yr aunder audit
- audit program
- general info
- working trial balance (gl acts and yr end balances)
- lead schedule- detailed accounts from the G/L making up the line item total
- adj ad reclass entries
- supporting schedules- prepared by the client or auditor in support of specific amnts in the fin statements