A3 M1 Understanding the Entity and its Environment Flashcards
What are analytic procedures?
study of relationships among financial and nonfinancial data used in planning or final review stage
What is the objective of analytic procedures?
1) identify unusual transactions and events, unexpected relationships etc.
2) transactions and events occurred for last audit
What is the objective of obtaining an understanding of entity and its environment?
to assess the risk of material misstatement and to design and perform further audit procedures
What does a fixed price that meets price stability and product affordability indicate between consumers and producers?
If a price is supposed to be stable and helps make a product affordable, it benefits consumers because they can buy more of the product for a reasonable price, but it does not benefit producers because they are not making as much off of their product, so they will want to make less of it.
what are leading indicators?
they predict economic activity and change before economy begins to show that trend
ex. avg consumer expectations for business conditions, average weekly hours, bond yield curve, building permits for private residences, interest rate spreads etc.
what are lagging indicators?
tends to follow economic activity and change after trend has started and either confirm or dispute forecasts
ex. avg prime rate charged by banks, avg duration of unemployment, CPI, inventories to sales ratio, commercial and industrial loans outstanding etc.
what are coincident indicators?
change at the same time as economy and show current state of economy
ex. industrial production, manufacturing and trade sales, GDP, personal income less transfer payments
what do analytic procedures consist of during planning?
-a review of data aggregated at a high level, such as comparing F/S to budgeted or anticipated results
-can compare financial and non-financial data
ex. square footage of selling space, number of employees, or volume of goods produced
When are mgmt representations generally obtained?
at the end of the audit
Are auditors required to communicate with those charged with governance about prior year adjustments?
No, just current year adjustments
