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42 Cards in this Set

  • Front
  • Back
What is Auditing?
systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to the interested users
What is Attest?
attest services occur when a practitioner is engaged to issue...a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
What is Assurance?
Assurance services are independent professional services that improve the quality of information, or its context, for decision makers
What do Audit services help to do?
Help ensure financial information is RELIABLE, CREDIBLE/BELIEVABLE, RELEVANT, TIMELY
An audit is done under what presumption?
Under the presumption of "reasonable assurance." Not a guarantee even if you tested 100% of transactions recorded, could still not give an "absolute" assurance due to audit or human errors, unrecorded transactions, etc.
What is the objective of an audit?
Not just to detect fraud but, rather, to provide reasonably assurance that f/s are fairly presented (ie fraud detection very important but not primary objective of audit.)
Who are the principals and Agents?
Prinicapals are the owners, they want info. Agents are the managers of businesses, they have info. This can cause information asymmetry, which can lead to conflict of interest between the two.
What role does the auditor play for the principals and the agents?
Auditor adds credibility/objectivity to the f/s which reduced P info risk
What are the three fundamental concepts of audit
-Audit risk
-Materiality
-Evidence
What is audit risk?
unknowingly issue an unqualified opinion when f/s are materially misstated )ie wrong opinion issued)
What is materiality?
if reader knew, would have been influenced to do something different; judgmental (quantitative and qualitative)
What is evidence?
relevant and reliable (direct: confirm/physically count; indirect: analytic proc/discuss with client). Discussion with client, on its own generally not enough.
What do risk, materiality and evidence help to do?
help determine nature/timing./extent of audit work to do
Describe sampling?
-cannot test everything so must sample. Will need to extrapolate results
-lower the materiality level, the larger the sample needed; if acceptable risk is low, sample must be larger; more assurance desired means bigger the sample size
What are the phases of Audit?
-Acceptance/Continuance
-Preliminary engagement activities (obtain/update understanding of client; risk assessment; engagement team; independence)
-Plan audit (including prelim determination of materiality)
-Consider internal control and test IF APPROPRIATE (non SEC). If SEC, must consider AND test
-Audit business processes and accounts (test controls; sub tests)
-Complete audit (legal letter, rep letters, f/s tie-in, etc)
-Issue audit opinion
What do SOX/PCAOB do?
-restores confidence in the public financial reporting
-overseeing the audits of public companies. Even though they have no legal rule over non-public companies they are still influencing
What are some provisions of SOX?
provisions of SOX in 2002:
-CEO/CFO must signoff each Q and YE regarding f/s presentation, f/s comply with regs, no untrue statements, and that controls appropriate and working effectively
-Auditors must also opine that controls are working at Y/E. We no longer opine on mgmt's opinion on controls
-5 yr rotation of engagement partner
-More involvement by BOD/AC (all on AC must be independent of mgmt; must have one that qualifies as expert)
-New auditor independence rules; certain non-audit services prohibited
-PCAOB now the accounting and auditing std setter and regulator for profession as it relates to public company audits
What is the business model and its 5 types of transactions?
-The financing Process
-The Purchasing process
-The Human resource mgmt process
-The inventory mgmt process
-The revenue process
What are the three main management assertions?
-Assertions about classes of transactions and events for the period under audit (I/S)
-Assertions about account balances at the period end (B/S)
-Assertions about presentation and disclosure (F/S)
What is corporate governance?
people/processes/activities in place to help ensure proper stewardship over an entity's assets. Primarily associated with BOD oversight of mgmt and , secondarily AC oversight of external (and internal) auditors
What are the three types Generally Accepted Auditing Standards?
-General standards
-Standards of field work
-Standards of reporting
Who sets standards for nonpublic companies?
ASB (AICPA)
Who sets standards for public companies?
PCAOB (SEC)
What is MGMT responsible for?
Responsible for the f/s (ie the bucket of assertions). Our audit is to provide reasonable assurance that those f/s are fairly presented and that fraud, if material and financial in nature, has a responable chance of being discovered
What is professional skepticism?
-need to question and use, not just "per discussion with client"
What are some types of firms?
proprietorship, general/limited partnerships, LLP
What are some different types of auditors?
external, internal, govt, forensic, SEC, PCAOB, FBI
-different but some overlap with each other
What are some of the organizations that affect accounting profession?
AICPA, SEC, PCAOB, FASB
What is the relationship between audit risk and acceptance risk?
The greater the audit risk, the smaller ourt acceptance risk should be
-the smaller I want the audit risk to be, the more/better evidence I must gather
What is audit risk?
Risk that the auditor might not catch something material to the f/s that, if it had been detected, would have changed the opinion.
-Bad/wrong opinion
-cannot be known with certainty
What is engagement risk?
exposure of firm to losses from litigation, adverse publicity pertaining to a client, etc- "guilt by association"
What are the risks are various level?
-Overall f/s due to catastrophic misstatement (ie poor mgmt view/attitude re controls, incompetent mgmt)
-account balance
-class of transactions
-disclosure level (particular area may be misstated but does not extend to entire f/s)
What is the Audit risk module?
Audit Risk= Inherent Risk X Control Risk X Detection Risk

AR=IR x CR x DR
What is inherent risk?
susceptibility of assertion being incorrect due to nature of the account (judgement area vs. nonjudgemental), ignoring controls
What is control risk?
error could occur and client's internal control system would not timely prevent/detect. As CR increases, level of testing must increase
-controls never cause misstatement they only fail to detect misstatement
-remember when testing controls , if not initially effective don't keep testing controls. Prob need to increase sub tests
What is detection risk?
risk that auditor will not catch a material misstatement
-sampling and non sampling risk
-One of the biggest risks when sampling, is the need to ensure sample is representative of the entire population
What are some of the relations between IR, CR, and DR?
-As IR/CR increases, DR (risk of missing an error) has be to lower
-As IR/CR decreases, DR can go up
-Ultimate determination of risk is always a matter of professional judgement
-IR and CR are independent of audit. Auditor can only directly manage DR
In the Risk assessment process what are the five factors to consider in gathering info to help understand client?
-Nature of entity
-Industry/Regulations
-Company's objectives/strategies/business risks
-Entity's performance measurement
-Internal control
What are three risk assessment procedures that auditors perform?
-Inquiries of mgmt and others
-Analytical procedures
-observation or inspection
What is the difference between errors and fraud?
-Errors (unintentional) vs. Fraud (intentional)
-incentive/pressure, opportunity, ability to rationalize
-Must reduce level of acceptable risk if fraud is discovered
-errors are generally associated with f/s whereas fraud can be associated with f/s and/or misappropriation (ei stealing)
What is corporate governance?
consist of all people, processes and activities in place to help ensure proper stewardship over an entity's assets and is typically view as the primary responsibility of the BOD
What is the FASB?
a privately funded body whose responsibility is to establish financial accounting and reporting standards