ACCT 4400 Exam 1 Flashcards
Exam 1 Brief Terms and Laws
Informational Asymmetry
management has more information than creditors, owners and investors
Conflict of Interest
managers may not act in the best interest of owners
Principal/Agent
Principals: Owners/ stockholders; Agent: Managers running the business
Assurance Service Examples
audits, attestation service, and others like IT consulting, installing new accounting systems, tax consulting
Audit Risk
the risk of an auditor giving a clean opinion when in fact it was not
Unqualified Opinion
Clean Audit Report
Qualified Opinion
uncertain report; there may be gray areas
Adverse Opinion
financial stmt not in accordance w/ GAAP
Disclaimer Opinion
choose to not give an opinion
Sarbanes - Oxley Act
created PCAOB; Focus on Internal Control; CEO & CFO must certify financial stmt; Auditor Independence Provision
Professional Skepticism
make sure to have a questioning mind and critical assessment of evidence
Audit Committee
setting term of engagement; hiring external auditor; setting compensation
they are independent director to audit firms
SEC
watchdog of capital market
PCAOB
watchdog of auditors; set standards to public companies
AICPA
code of conduct for accountants; sets standards to private companies
Managers Resposibility
PIE: Prepare financial stmt; internal controls; evidence
Auditors Responsibility
CES: Competence & Capabilities; ethics; skepticism
Audit Report
Opinion address fair presentation of financial stmt according to GAAP standards at material level
Principles of Professional Conduct
basic broad principles that govern the profession
Rule of Conduct
Enforceable rules build from the principles that are more specific
Interpretations of the Rules
deeper dive to the rule of conducts
List 6 Principles of Professional Conduct
Responsibilities; public interest; integrity; objectivity; due care; scope & nature of service
Immediate Family
spouse, spousal equivalent, dependent
Close Family
w/ material investment
Parent; sibling; nondependent children
Prohibited Relationship w/ Client
Direct financial interest, material indirect financial interest, and serving managerial role during audit period
4 Stages in Disposition of Audit
1) event leads to losses 2) investigation 3) legal process 4) final resolution
Engagement Risk
Risks of auditor suffering reputation or monetary loss
Ordinary Negligence
Lack of due care
Gross Negligence (Constructive Fraud)
Reckless disregard for professional standard
Common Law
Case law developed overtime through judge/court decision
Statutory Law
enacted law passed by legislative bodies
Common Law: Client sues Auditor
client has burden of proof: lack of due care and loss of negligence
auditor best defense is GAAP accordance
Common Law: Third Party sues Auditor
third party has burden of proof: breach of contract and suffered loss
auditors best defense is GAAP accordance
Securities Act of 1933
(IPO ONLY) When loss or false/misleading material misstatement auditor must prove they were not negligent AKA they had the burden of proof
Securities Exchange Act 1934
(ALL OTHER PUBLIC) plaintiff must prove loss, material misstatement, reliance to statement, scienter (intent)
Private Securities Litigation Reform Act 1995
Provides proportionate liability based on % if responsibilities aka reduced auditors liability
Securities Litigation Uniform Standard Act 1998
Closes loophole where plantiff could sue in state court instead of federal
Class Action Fairness Act 2005
Attempt to reduce frivolous lawsuit by expanding federal jurisdiction to multi-state class action lawsuits
