Forensic Accounting Test 2

Front 1

auditing

Back 1

the process of gathering and evaluating evidence about information to determine the degree of correspondence between the information and the standards used to prepare the information

Front 2

materiality

Back 2

the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement

Front 3

preliminary judgement of materiality

Back 3

is defined by auditors as the amount of misstatement that could exist in the financial statements and not affect the decisions made by a reasonable user

Front 4

3 considerations when selecting the preliminary judgement:

Back 4

1. the presence of fraud-suspicion of fraud also affects audit procedures selected

2. consequences arising from contractual obligations-if a contractual obligation has serious consequences, the materiality amount may be lower and a more detailed audit is performed

3. misstatements that affect earnings trend

Front 5

tolerable misstatement

Back 5

the maximum amount of misstatement an auditor is willing to tolerate in a segment

Front 6

Audit risk-

Back 6

the likelihood that financial statements will contain material misstatements after the auditor has determined that the financial statements are free of material misstatementsnote- audit risk is a risk the auditor wants to avoid; acceptable audit risk is the level of audit risk the auditor is willing to accept

Front 7

inherent risk-

Back 7

the likelihood that an account or class of transactions is materially misstated before considering the effects of internal controls

Front 8

control risk (residual)

Back 8

the likelihood that the internal controls will not detect or correct a misstatement in an account or class of transactions. In other words, the likelihood that misstatements that exceed a tolerable level will not be prevented or detected in a timely manner by the audited company's internal controls.

Front 9

detection risk

Back 9

the likelihood that the auditor will not detect misstatements that exceed a tolerable level

Front 10

acceptable detection risk

Back 10

level of detection risk the auditor is willing to accept

Front 11

nature of tests

Back 11

the type of test conducted by the auditor

Front 12

timing

Back 12

the timing of the tests conducted by the auditor

Front 13

extent of testing

Back 13

refers to how much testing is performed; the sample size selected

Front 14

standard unqualified report

Back 14

contain the opinion that the financial statements present the financial position and results of operations according to a specified basis of accounting and that no significant departure from that basis exists

clean opinion/clean report

Front 15

unqualified report with modified wording

Back 15

sometimes referred to as unqualified report with explanatory language

contain the opinion that the financial statements present the financial position and results of operations fairly and contains additional information. additional information includes emphasis of matter, lack of consistency, opinion based in part on the report of another auditor, auditor agreement with a departure of GAAP, going concern status

Front 16

qualified report

Back 16

issued when two conditions exists:

1. departure from GAAP-financial statements contain a departure from GAAP but the departure is not egregious enough to issue an adverse opinion

2. scope limitation- the scope of the auditor's examination has been restricted but the restriction is not pervasive enough to issue a disclaimer

Front 17

adverse report

Back 17

Issued when the financial statements contain a departure from the basis specified and the departure has a material and pervasive effect such that the financial statements so not represent the financial position, results of operation, or cash flows.

Front 18

disclaimer report

Back 18

issued in one of the following three situations:

1. Auditor lack of independence (to be independent the auditor must have no direct or indirect financial interest in the client)

2. auditors inability to collect adequate evidence (client restricting the auditor's examination or just cant find enough)

3. the client is a publicly held company whose financial statements have not been audited or reviewed

Front 19

audit assertion

Back 19

a statement about a company's financial condition and results of operations that is implicitly contained in the financial statements

Front 20

Type of assertion: presentation and disclosure

Back 20

states that the components of the financial statements are properly combined, described and disclosed. audit issues that may occur with respect to this assertion is not adequately including information that is required in the footnotes

Front 21

Type of assertion: rights and obligations

Back 21

indicates that the company has a right to use the assets shown on its balance sheet and an obligation to pay the liabilities listed

Front 22

Type of assertion: existence or occurrence

Back 22

pertains to whether the assets and liabilities listed on the balance sheet exist and whether the transactions reported in the financial statements occurred during the period covered by the financial statements

Front 23

Type of assertion: completeness

Back 23

addresses whether all assets, liabilities, and operational items are included in the financial statement

Front 24

Type of assertion: valuation or allocation

Back 24

addresses the correctness of amounts in the financial statements

Front 25

sampling risk

Back 25

the risk that judgement based on the sample differs from the judgement that would be obtained from the entire population

type I error- risk of incorrect rejection

type II error- risk of incorrect acceptance

Front 26

attribute sampling-

Back 26

an item being sampled either will or will not possess certain qualities or attributes

Front 27

tolerable error rate or tolerable exception rate

Back 27

the rate of errors or deviations that the auditor is willing to accept

Front 28

expected error rate or expected exception rate

Back 28

the rate of deviations the auditor expects to exist in the populations

Front 29

low inherent and control risk means...

Back 29

low materiality misstatement

Front 30

high inherent and control risk means...

Back 30

higher possibility or materiality misstatement

Front 31

6 major phases of litigation

Back 31

pleadings,

discovery,

pre-trial conferences,

trial,

outcome,

possible appeal

Front 32

pleadings

Back 32

complaint-plantiff files

service of process- served on defendant

answer- defendant must admit or deny allegations

demurrer- no cause of action exists

possible cross-complaint- defendant files

Front 33

discovery phase

Back 33

the formal process of exchanging information between the parties about the witnesses and evidence to be presented at trial`

Front 34

pre-trial conferences

Back 34

conferences to encourage settlement before trial

in a settlement conference, both parties agree on certain facts called stipulations

when pre-trial conferences fail, the case goes to trial

Front 35

frye standard

Back 35

generally accepted in that scientific community

peer reviewed

Front 36

daubert standard

Back 36

peer reviewed and goes by the scientific method

Front 37

10 guidelines to help avoid legal challenges

Back 37

1. know the relevant professional standards

2. apply the relevant professional standards

3. know the relevant professional literture

4. know the relevant professional orgs

5. use generally accepted analytical methods

6. use multiple analytical methods

7. synthesize the conlcusions of the mupltiple analytcal methods

8. disclose all significant analytical assumptions and variables

9. subject the snalysis to peer review

10. tetst teh analysis and conclusions for reasonableness

Front 38

preparing to testify as an expert witness

Back 38

1. maintain independence from the client

2. evidence upon which experts may rely

3. use of confidential client information

4. expert reports

5. owrking papers

6. evaluation of other experts

7. ehibits and other demonstrative evidence

Front 39

fact oriented report-

Back 39

gathers and evaluates facts and uses them to prepare a report. check and re check the numbers and facts

Front 40

opinion report

Back 40

more subjective and relies more on the professional judgement of the expert

Front 41

experts report organization

Back 41

name and docket number of the case

a statement of qualifications

information considered in formulating opinions

a list of other cases in which the individual has testified as an expert within the preceeding four years

compensation to be received for expert consulting and testimony

opinions to be expressed and the reasons for those opinions

Front 42

commericial damages

Back 42

relate to either a loss of profits or the reduction in value of a business entity

Front 43

proximate (direct) cause-

Back 43

the damages caused were a direct result of the offending party's actions or lack of actions

Front 44

reasonable certainty

Back 44

that it is reasonably certain that the injured party would have earned the claimed amount of damages but-for the actions of the other party

Front 45

forseeability

Back 45

that a product person could look into the future and see that the actions of the offending party would damage the other party to the litigation

Front 46

type of harm- tort

Back 46

the occurrence of the harmful act itself is wrongful (wrongful act - other than a breach of contract- that injures another party)

Front 47

breach of contract

Back 47

a failure wihtout excuse or jjustification to fulfill one's obligations under a contract

Front 48

type of damage- restitution

Back 48

when the harmful act unjustly enriches the defendant at the expense of the plaintiff - money damages awarded to an innocent party to compensate for the benefit that party gave

restore the victims financial status

prevent unjust enrichment of defendant

Front 49

reliance

Back 49

money damages awarded to an innocent party for the lossess sufference due to the reliance on a promise-the intent of damages is to restore the plaintiff to the position they would have been in had the contract or promise never been made

Front 50

damages calculation approach- out of pocket loss

Back 50

refers to the difference between the actual value received and the actual value conveyed. the plaintiff can recover nothing beyond his or her investment

Front 51

benefit of the bargain theory

Back 51

damages include not only the money invested, but also other expenses such as increased costss, lost profits, and decreased value of hte investment

Front 52

before and after method

Back 52

take sales or sales growth before the act and compare to the comparable figures afterward

Front 53

yardstick or benchmark method

Back 53

compare sales growth of the company to other companies or to other industry averages

Front 54

but for method

Back 54

the difference in the estimates profits and the actual profits

Front 55

direct method

Back 55

any agreement may indicate how to calculate

Front 56

combination method

Back 56

may use a combination of these methods

Front 57

in order to win an award for damages...

Back 57

injured party must prove 2 points:

1. the other party was liable for the damage

2. that the injured party suffered damages as a result of the actions or lack of actions of the offending party

Front 58

macroeconomic analysis

Back 58

looking at the overall economic performance

also involves an analysis of regional performance

Front 59

industry analysis

Back 59

looks at the industry's recent performance, current status, and outlook

a specific industry may experience its own peaks and valleys

Front 60

company specific analysis

Back 60

includes scrutinizing of financial statements, income statements, balance sheet, and statement of cash flows

case specific data and financial ratio analysis may be performed

Front 61

financial analysis conclusion

Back 61

make conclusions about the company's financial position

-was the companys performance tranding in a positive direction before hte harmful event?

is there a strong correlation between the companys trends and the macro and industry trends

Front 62

deposition testimony

Back 62

out of court sworn oral testimony by the witness. the expert will be questioned, under oath about several issues including witness qualifications, how the report was developed

Front 63

cost behavior

Back 63

the way that cost change with respect to changes in the volume of activity

Front 64

fixed costs

Back 64

costs that are fundamentally unaffected by changes in the volume of activity. the cost is the same regardless of the number of units sold/produced

Front 65

variable costs-

Back 65

costs that change directly and proportionately with the volume of activity

Front 66

mixed costs

Back 66

costs that contain both a fixed and a variable component

Front 67

semi variable costs

Back 67

costs that change with the volume of activity but not proportionately

Front 68

semi fixed costs

Back 68

costs that increase or decrease in a step function

Front 69

cost behavior assumption-

relevant range assumption

Back 69

the range of activity within which the cost behavior patterns are valid

the further away from the range of activity used in the data analysis, the more likely the cost behavior pattern will differ from the analysis

Front 70

time assumption

Back 70

cost behavior patterns identified are true only over a specified period of time, beyond this period of time therefore, the cost may display a different cost behavior pattern

in other words, as time passes, the business environment changes, and cost behavior may change as well