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115 Cards in this Set

  • Front
  • Back
Management's Responsibility
Prep & presentation of F/S in accordance w/applicable framework; Design, implementation, and maintenance of internal controls relevant to F/S presentation & provide auditor access to all necessary information needed
Auditor's Responsibility
Express opinion on F/S based on results of audit
Obtain reasonable assurance F/S free from material misstatement due to error or fraud
SAS
Statements on Auditing Standards
issued by AICPA for audits of NON-issuers
AS
Auditing Standards
issued by PCAOB for issuers
Unmodified Opinion
Introductory Paragraph
MR. DIM
AR.EPPORTS CRAME
Opinion Paragraph
Report on Other Legal & Regulatory Requirements
Introductory Paragraph
Audit was performed & indicate individual financial statements that were audited
Auditor's Responsibility Paragraph
Express opinion on F/S based on audit; conducted in accordance with GAAS in US; require auditor to plan & perform audit to obtain reasonable assurance F/S free from MM; details of whats involved in performing audit & rationale for procedures selected & risk assessment; evidence obtained is sufficient & appropriate to provide basis for opinion
Opinion Paragraph
opinion regarding fair presentation of F/S in accordance w/applicable financial reporting framework
Qualified Report
"Except for"
GAAP---Material departure- accounting policy, F/S presentation, inadequate disclosure, unreasonable estimate
GAAS--Material---insufficient evidence; scope limitation
Disclaimer
No opinion expressed
Unable to obtain sufficient appropriate audit evidence on which to base opinion & auditor concludes possible effects of undetected misstatements could be both material & pervasive
Adverse
F/S NOT presented fairly b/c mgmt. failed to follow GAAP
Misstatements individually/aggregate are both material & pervasive to F/S
Emphasis of Matter
Referring to matter adequately disclosed;
important to users;
AFTER opinion
Going concern;
Justified acctg change
Special Purpose Framework
Other Matter Paragraph
Matters other than presented/disclosed in F/S relevant to understanding audit
AFTER Opinion & Emphasis of Matter
Restrict use of report
prior F/S
Elements of Quality Control System
HELP ME
Human Resources
Engagement Acceptance
Leadership Responsibilities
Performance
Monitoring (review)
Ethical Requirements
NET varies based on:
size, structure, complexity, and cost-benefit considerations
Quality Control Standards vs GAAS
Apply to all professional activities of firm's practice

Apply to individual audit engagements

Failed QC <> Failed GAAS
Special Purpose Frameworks
Cash Basis, Tax basis, regulatory basis, or contractual basis

OCBOA- Other Comprehensive Basis of Accounting
Compliance w/contractual agreements/regulatory requirements
Negative assurance on compliance- restrict use of report
must have audited F/S
"nothing came to auditor's attention"
Summary Financial Statements
Unmodified or Adverse NOT qualified
Withdraw when report on F/S contains adverse/disclaimer
SSARS
Statements on Standards for Accounting and Review Services

Govern Compilations & Reviews
Elements of Compilations & reviews
3party relationship involving mgmt, acct, & users
Applicable financial reporting framework
F/S or financial information
Sufficient appropriate evidence (review)
Written Communication/report
Engagement Letter
Document of understanding with client regarding service being provided
Objectives & scope of engagement, limitations, Mgmt's & auditor's responsibilities
Compilation
NO assurance
Independence not required--must be disclosed
General Understanding of Client's business
STAFF
Staff qualifications, transactions types & frequency, accounting basis used, form of accounting records, F/S form and content
Compilation report
Title, Addressee
Intro (CAR)- compiled NOT audited/reviewed
MR. DIM
AR. SOM (SSARS issued by AICPA objective to assist mgmt
Review
Limited Assurance
Client Representation Letter from mgmt
No tests of controls; NO assessment control risk
Analytical procedures
Review Report
Title, Addressee
Intro- AMISAD--Analytical procedures to mgmt.'s financial data & inquires of company mgmt, substantially less in scope than audit, doesn't express opinion
MR. FI (fair presentation F/S; maintain I/C)
AR.SALA (SSARS by AICPA; Limited Assurance)
Review of Interim Financial Info--Procedures
U LIAR CPA
Understanding w/client (engagement letter)
Learn entity's business & I/C
Inquires of appropriate individuals (mgmt)
Analytical Procedures
Review minutes/financial info
Client Rep letter from mgmt
Professional judgment to evaluate results
Auditor communicates
Comfort letter
restricted use letter from accountant to named underwriter sent right before registration of client's securities
Positive assurance- CPAs independence & compliance
Negative assurance- f/s not audited/review was performed on condensed unaudited interim f/s or capsule financial info
Attest Engagement Standards
TIPPY----use SSAE
Training & proficiency,
Independence,
Performance/due professional care
Professional knowledge of subject matter,
Your belief as to whether assertion is capable of evaluation
Attest Fieldwork standards
PA
Planning & Supervision
Appropriate Sufficient Evidence
Attest Reporting Standards
SSER
Subject matter of assertion
disclose Significant reservations
Express conclusion
Restrict use of report (sometimes)
Agreed-upon Procedures
NO ASSURANCE---IAMSURE
Independence; Agreement of parties on procedures, subject matter capable of consistent measurement, sufficiency of designated procedures, use of report restricted, client responsible for subject matter, engagements include summary of significant assumptions used for prospective f/s
Planning Stage
Obtain knowledge of business & industry
Develop overall audit strategy
Develop audit plan
Audit Strategy
outlines scope of engagement, reporting objectives, timing of audit, required communications, factors that determine focus of audit
preliminary assessment of materiality & tolerable misstatement
Audit Plan
based on audit strategy & outlines NET of procedures to performed during audit
--risk assessment procedures to be performed
--planned further audit procedures
Substantive Procedures
Detect misstatements- response to planned level of detection risk
-tests of details
-substantive analytical procedures
REQUIRED for all relevant assertions
Financial Statement Assertions
COVER-U
Completeness
CutOff
Valuation, Allocation, & Accuracy
Existence
Rights & Obligations
Understandability & Classification
Completeness
Balances, Transactions, Disclosures
Cutoff
Transactions
Valuation, Allocation, Accuracy
Balances, Transactions, Disclosures
Existence & occurrence
Balances, Transactions
Rights & Obligations
Balances, Disclosures
Understandability & Classification
Disclosures
PCAOB Financial Statement Assertions
CEO APROVeD
Completeness, Existence, Occurrence, Allocation, Presentation, Rights, Obligations, Valuation, Disclosure
Audit Risk
risk F/S materially misstated but opinion is not appropriately modified

= (IR X CR) X DR = RMM X DR
Risk of Material Misstatement
IR X CR
risk that F/S are materially misstated
Inherent Risk
Susceptibility of relevant assertion to material misstatement, assuming no related controls
Control Risk
Risk that controls fail to prevent/detect material misstatement in F/S assertion
Detection Risk
risk that the auditor doesn't detect material misstatement in a F/S assertion

Controlled by auditor by varying NET
Risk Assessment Tools
Inquiries, Analytical procedures, observation & inspection, risk assessment discussion among audit team members
Internal Control
help company meet its objectives (reliable financial statements, effective/efficient operations, compliance w/laws/regulations)
Components of Internal Control
CRIME
Control Environment
Risk Assessment- (mgmt.'s assessment)
Information Systems
Monitoring
Existing Control Activities
Control Activities
PAID TIPS
Prenumbering, Authorization of transactions, independent checks, documentation, timely & appropriate performance reviews, Information processing, Physical control, Segregation of duties
Segregation of Duties
ARC- Authorization, Recordkeeping, Custody

COPAL- Control Group, Operators, Programmers, Analysts, Librarians
Tests of Controls
evaluate operating effectiveness of controls

Inquiry, inspection, observation, reperformance
Audit Evidence Hierarchy
AEIO
Auditor's knowledge, External evidence, internal evidence, oral evidence
Substantive Procedures
tests of details
analytical procedures
Tests of Detail
audit procedures applied to ending balances, details of transactions, or combination
Analytical Procedures
studying plausible relationships amond data & usually involves comparison of recorded amounts to auditor expectations
Comparisons & ratios
Required during planning & final review
more appropriate with predictable relationships
Tracing
Test for completeness.
Start with source documents & trace to accounting records
Identify understatement errors
Vouching
Test for Existence
Start with accounting records and vouch backwards to original source documents
Identify overstatement errors
Positive Confirmation
party responds whether they agree/disagree w/information provided in request
Negative Confirmation
Parties respond only if disagree with information provided in request
Standard Audit Procedures used
FIVE CARROT CARS
Footing; Inquiry; Vouching; Examination
Confirmation; Analytical Procedures; Reperformance; Reconciliation; Observation; Tracing
Cutoff; Auditing Related Accounts; Rep Letter; Subsequent Events Review
Account Balances Main Assertions
Completeness
Valuation, Allocation, Accuracy
Existence
Rights & Obligations
Transactions & Events Main Assertions
Completeness
Cutoff
Valuation, Allocation, Accuracy
Existence
Understandability
Disclosures Main Assertions
Completeness
Valuation, Allocation, Accuracy
Rights & Obligations
Understandability
Completeness- Procedures
Tracing, Analytical Review, Observation
Valuation, Allocation, Accuracy Procedures
Inspection, footing, independent recalculation , reconciliation
Existence Procedures
Confirmations, Observation, Inspection, Examination, Vouching
Rights & Obligations Procedures
Inspection
Understandability Procedures
Inspection, review, inquiry
Lapping
Using today's cash receipts to cover yesterday's theft
- inspect dates deposited vs receivable credited
Kiting
Cash recorded in two places at once
-bank transfer schedule
-dates deposited and recorded
Liquidity Ratios
Working Capital
Current Ratio
Acid Test
Cash Ratio
Working Capital
Current Assets - Current Liabilities
Current Ratio
Current Assets/Current Liabilities
Acid Test
Cash Equil + Marketable Sec. + AR
---------------------------------------------------
Current Liabilities
Activity Ratios
AR Turnover
Inventory Turnover
Operating Cycle
Working Capital Turnover
Total Asset Turnover
Accounts Payable Turnover
Accounts Receivable Turnover
Net Credit Sales/Avg Accounts Receivable

Days= 365/ AR Turnover
Inventory Turnover
Cost of Goods Sold/Avg Inventory

Days = 365/Inventory Turnover
Operating Cycle
AR Turnover Days + Inventory Turnover Days
Working Capital Turnover
Sales/Average Working Capital
Total Asset Turnover
Net Sales/Average Total Assets
Accounts Payable Turnover
Cost of Goods Sold/Average Accounts Payable
Profitability Ratios
Net Profit Margin
Return on Total Assets
Return on Assets
Return on Investment
Return on Common Equity
Net Operating Margin %
Gross Profit Margin %
Net Profit Margin
Net Income/Net Sales
Return on Total Assets
Net Income/Average Total Assets
Return on Assets
Net Profit Margin * Total Asset Turnover
Return on Investment
Net Income + Interest Exp (1-Tax Rate)
--------------------------------------------------------
Average(Long-term Liabilities + Equity)
Return on Common Equity
Net Income - Preferred Dividends
--------------------------------------------------
Average Common Equity
Net Operating Margin %
Net Operating Income/Net Sales
Gross Profit Margin %
Gross Profit Margin/Net Sales
Sampling Risk
sample is not representative of population & therefore auditor's conclusion will be incorrect
Audit Risk
Uncertainty inherent in applying audit procedures
Attribute Sampling
estimate a rate of occurrence (exception) of a specific characteristic
Internal Control testing
Risk of Assesing Control risk too high/too low
Deviations/errors
Risk of assessing control risk too high
Overreliance (beta risk)
Sample indicates control is working but it is not
Effectiveness problem
Risk of assessing control risk too low
Underreliance (alpha risk)
Sample indicates control is not working when it is
Efficiency problem
Variables Sampling
Used to estimate a numerical quantity
Substantive Testing
Risk of Incorrect Acceptance/Rejection
Misstatements
Risk of Incorrect Acceptance
Beta Risk- Effectiveness
Sample indicates balance is fairly stated when it isn't
5-10% risk; 90-95% confidence
Risk of Incorrect Rejection
Alpha Risk- Efficiency
Sample indicates balance isn't fairly stated when it is
Factors Affecting Sample Size (attribute)
Risk of assessing control risk low (inverse)
Tolerable Deviation Rate (inverse)
Expected Deviation Rate- direct
Factors Affectign Sample Size (variable)
Expected misstatement
Population Variability
Assessed level of risk
Tolerable Misstatement (inverse)
Acceptable level of risk (inverse)
Mean Per Unit Sampling
Sensitive to variability
Average value of items in sample to estimate the true value of population
Ratio Estimation
Ratio of corrected values of items to book value
Difference Estimation
Average difference between corrected values and book values
PPS Sampling
hybrid method that uses attribute sampling theory to express conclusion in dollar amounts
PPS Sampling Interval
Tolerable Misstatement/Reliability factor
PPS Sample Size
Recorded Amount Population/Sampling Interval
PPS Tainting
Book value - Audited Value
--------------------------------------------
Book Value
PPS Projected Error
Sample Interval * Tainting
Nonissuers- Controls during audit
Mgmt's responsibility to evaluate & address control deficiencies
Auditor's responsibility- evaluated control deficiencies become aware of during audit & repot significant/material weaknesses
Disclaimer regarding internal control; 60 days after report release date
Purposes of Management Rep Letter
Confirm representations given to auditor
Documetn continuing appropriateness of such representations
Reduce Possibility of missunderstanding
Contents of Management Rep Letter
Date- same as audit report; signed by CEO & CFO;
responsible for fair presentation F/S & DIM
completeness of information; misstatements due to fraud/knowledge of actual/suspected fraud
identified/suspected noncompliance w/laws
uncorrected misstatments mgmt believes immaterial
actual/possible litigation/claims
related parties, subsequent events, acct est. reasonable