Chapter 6 Auditing

Front 1

Analytical Procedures

Back 1

Tests that involve comparisons of financial data for the current year to that of prior years, budgets, nonfinancial data, or industry averages. From a planning standpoint, analytical procedures help the auditors obtain an understanding of the client's business, identify financial statement amounts that appear t be affected by errors or fraud, or identify other potential problems.

Front 2

Assertions

Back 2

Representations of management that are communicated, explicit or implicitly by the financial statement

Front 3

Audit Committee

Back 3

A committee composed of outside directors charged with responsibility for appointing, compensating, and overseeing the auditors

Front 4

Audit Plan

Back 4

A description of the nature, timing and extent of the audit procedures to be performed. It is often documented with an audit program.

Front 5

Audit Program

Back 5

A detailed listing of the specific audit procedures to be performed in the course od an audit engagement. Audit programs produce a basis for assign and scheduling audit work and for determining what work remains to be done. Audit programs are specially tailored to the risks and internal controls of each engagement.

Front 6

Audit Risk

Back 6

At the overall engagement level, this is the risk that the auditors may unknowingly fail to appropriately modify there opinion on financial statements that are materially misstated. At the financial statement assertion level, it is the risk that a particular assertion about an account balance is materially misstated.

Front 7

Business Risk

Back 7

Risk that threaten management's ability to achieve the organization's objectives

Front 8

Control Risk

Back 8

The risk that a material misstatement that could occur into an account will not be prevented or detected on a timely basis by internal controls

Front 9

Dual-Purpose Procedure

Back 9

An audit procedure that serves as a test of controls an a substantive test of the details of the transactions that occurred during the year.

Front 10

Engagement Letter

Back 10

A formal letter sent by the audtors to the client at the beginning of an engagement summarizing such matters as the nature of the engagement, any limitations on the scope of audit work, work to be done by the client's staff, and the basis for the audit fee. The purpose of engagement letters is to avoid misunderstandings, they are essential on nonaudit Engagements as well as audits.

Front 11

Engagement Risk

Back 11

The risk of loss or injury to the auditors' reputation by an association with a client that goes bankrupt or one whose management lacks integrity.

Front 12

Fraudulent financial reporting

Back 12

Material misstatements of financial statements by management with the intent to mislead financial statement users.

Front 13

Further Audit Procedures

Back 13

Substantive procedures for all relevant assertions and tests of controls when the auditors' risk assessment includes an expectation that controls are operating effectively, or when substantive procedures alone do not provide sufficient appropriate audit evidence.

Front 14

Inherent Risk

Back 14

The risk of material misstatement of an assertion about an account without considering internal control

Front 15

Interim Period

Back 15

The risk of material misstatement of an assertion about an account without considering internal control

Front 16

Internet

Back 16

An international network of independently owned computers that operates as a giant computing network.

Front 17

Misappropriation of assets (defalcations)

Back 17

Theft of client assets by an employee or officer of the organization

Front 18

Opening Balances

Back 18

Those account balances that exist at the beginning of the period. Opening balances are based un the closing balances of the prior period and reflect the effects of transactions and events of poor periods and accounting policies applied in the poor period. Also include matters requiring disclosure that existed a that beginning of the period such as contingencies and commitments.

Front 19

Overall Audit Strategy

Back 19

This strategy involves determining overall characteristics of the engagement that define its scope, determining the engagement's reporting objectives to plan the timing of procedures, and considering important factors that will determine the focus of the audit team's efforts.

Front 20

Performance Materiality

Back 20

The among set by the auditors at less than materiality for accounts to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

Front 21

Predecessor Auditors

Back 21

A CPA firm that formerly served as auditor but has resigned from the engagement or has been notified that its services have been terminated.

Front 22

Relevant Assertion

Back 22

A financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated. The destination of whether an assertion is a relevant assertion is based on inherent risk, without regard to the effect of controls.

Front 23

Risk Assessment Procedures

Back 23

The audit procedures performed to obtain an understanding other entity and its environment including the entity's internal control. They are designed to identify and assess the risks o's material misstatement, whether due to fraud or error, at the financial statement and assertion levels. Procedures include: inquiries of management and others, analytical procedures, observations and other procedures including inquiries of others outside the entity.

Front 24

Shopping for accounting principles

Back 24

Conduct by some enterprises that discharge one independent auditing firm after seeking out another firm that will sanction a disputed accounting principle or financial statement presentation.

Front 25

Significant Risks

Back 25

Identified and assessed risks of material misstatement that, in the auditors judgment, require special audit consideration.

Front 26

Substantive Procedures

Back 26

Tests of accounting balances and transactions designed to detect any material misstatements in the financial statements.

Front 27

Tests of Controls

Back 27

Tests directed toward the design or operation of a control to assess its effectiveness in preventing or detecting material misstatements of financial statement assertions.

Front 28

Time Budget

Back 28

An estimate of the time required to perform each step in the audit

Front 29

Transaction Cycle

Back 29

The sequence of procedures applied by the client in the processing a particular type of recurring transaction. The term cycle reflects the idea that the same sequence of procedures is applied to each similar transaction. The auditors' consideration of internal control often is organized around the client's major transaction cycles.