Chapter 7 Auditing

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As of Date

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A ceoncept applied to internal control reporting by the Sarbanes-Oxley Act of 2002 and PCAOB Standard NO 5. The Internal control reports of both management and auditors are as of the final day of the reporting period.

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Assessed level of control risk

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The level of control risk used by the auditors in determine the acceptable detection risk for a financial statement assertion and accordingly indo exciting on the nature timing and extent of substantive procedures.

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Audit Decision Aid

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A standard checklist, form, or computer program that assists auditors in marking audit decision s by ensuring that they consider all relevant information or that aids them in weighting and combining the information to make a decision.

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Compensating Control

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A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a control objective. Compensating controls are ordinarily controls performed to detect rather than prevent, the original misstatement form occuring

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Complementary Controls

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Controls that function together to achieve the same control objective

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Control Risk

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The possibility that a material misstatement due to error or fraud in a financial statement assertion will not be prevented or detected by the client's internal control.

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Corrective Control

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A control established to remedy control problems that are discovered through detective controls

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Deficiency in internal Control

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A situation in which the design or operation of a control does not allow management r employees in the normal course of profiling their functions ot prevent or detect misstatements on a timely basis. A deficiency in design exists when either a control necessary to meet a control objective is missing or the existing control is not designed to operating effectively. A deviancy in operation exists when a properly designed control does not operating as designed or when the person performing the control does not possess the necessary authority or qualifications to perform the control effectively.

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Detective Controls

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Controls designed to discover control problems soon after they occur.

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Fidelity Bonds

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A form of insurance n which a bonding company agrees to reimburse an employer for losses attributable to theft or embezzlement by bonded employees.

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Foreign Corrupt Practices Act

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Federal legislation prohibiting payments to foreign officials for the propose of securing business. The act also requires all companies under SEC jurisdiction to maintain a system of internal providing reasonable assurance that transactions are executed only with the knowledge and authorization of management.

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Further Audit Procedures

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Substantive procedures for all relevant assertions and tests of controls when the auditors' risk assessment includes an expectation that controls are operating effectively. The auditors perform risk assessment procedures to obtain an understanding of the client and its environment, including internal control. They then conduct a risk assessment and determine appropriate further procedures.

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Incompatible Duties

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Assigned duties that place an individual in a position bother perpetrated and conceal errors or fraud in the normal course of job performance.

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Inherent Risk

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The risk of material misstatement of a financial statement assertion.

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Integrated Audit

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An audit where auditors, in additon to an opinion on the financial statements, express and opinion on the effectiveness of a company's internal control over financial reporting, in accordance with PCAOB auditing standard #5. Public companies with a market capitalization of $75,000,000 or more are required to undergo interegrated audits.

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Internal Auditors

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Corporation employees who design and execute audit programs to test the effectiveness and efficiency of all aspects of all aspects of internal control. The primary objective of internal auditors is to evaluate and improve the effectiveness and efficiency of the various operating units of an organizations rather than to express an opinion as to the fairness of financial statements.

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Internal Control

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A process effected by the entity's board of directors, management, and other personnel diesgned to provided reasonable assurance services regarding the achievement of objectives in the categories of effectiveness and efficiency of operations, reliability of financial reporting, compliance with applicable laws and regulations. Previously referred to as internal control structure.

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Internal Control Questionnaire

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One of several methods of describing internal control in audit working papers. Questionnaires are usually designed so the "no" answers prominently identify weaknesses in internal control.

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Management Letter

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A report to management containing the auditors recommendations for correcting any deficiencies disclosed by the auditors' consideration of internal control. In addition to providing management with useful information, a management letter may also help limit the auditors' liability in the event a control weakness subsequently results in a loss by the client.

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Material Weakness

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A deficiency in internal control over financial reporting or a combination of deficiencies such that there is a reasonable possibility that a material misstatement of the company's financial statements will not be prevented or detected on a timely basis.

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Organizational Structure

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The division of authority, responsibility, and duties among members of an organization.

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Planned assessed level of control risk

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The level of control risk the auditors assume in designing further audit procedures, which include and appropriate combination of tests of controls and substantive procedures.

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Preventative controls

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Controls that deter control problems before they occur

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Redundant Controls

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Duplicate controls that achieve a control objective

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Relevant Assertions

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Assertions that have a meaningful bearing on whether an account balance, class of transaction, or disclosure is fairly stated.

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Risk Assessment Procedures

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Audit procedures performed to obtain an understanding of the client an its environment, including its internal control. Some of the information obtained by performing these procedures may be used by the auditors as audit evidence to support assessments of the risks of material misstatement. Risk assessment procedures include a) inquiries of management an others within the entity, b) analytical procedures, c) observation and other procedures including inquiries of others outside the entity.

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Significant Deficiency

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A deficiency in internal control over financial reporting that is less server than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.

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Substantive procedures

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Procedures performed by the auditor to detect material misstatements in account balances, classes of transactions and disclosures.

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Suitable Criteria

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Criteria are the standards of benchmarks used to measure and present the subject matter and against which the CPA evaluates the subject matter. Suitable criteria are established or developed by groups composted of experts that follow due process procedures including exposure of the proposed criteria fro public comment Suitable criteria must have each of the following attributes: objectivity, measurability, completeness and relevance.

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Systems flowchart

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A symbolic representation of a system or series of procedures with each procedures shown in sequence. Systems flowcharts are a widely used method of describing internal control in audit working papers.

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Tests of controls

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Procedures performed by the auditor to test the operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertion level. These tests are performed when the auditor's risk assessment includes an expectation of the operating effectiveness of controls including circumstances in which planned substantive procedures alone do not provide sufficient appropriate audit evidence.

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Transaction Cycle

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The sequence of procedures applied by the client in processing a particular type of recurring transaction. The auditors' working paper description of internal control often is organized around the client's major transaction cycles.

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Walk-Through

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A procedure in which an auditor follows a transaction from origination through the company's processes, including information systems, until it is reflected in the company's financial records, using the same documents and information technology that company personnel use. Walk-through procedures usually include a combination of inquiry, observation, inspection of relevant documentation, and re-performance of controls.

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Written narrative of internal control

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A written summary of internal control for inclusion in audit working papers. Written narratives are more flexible than questionnaires, but by themselves are practical only for describing relatively small, simple systems.