AUD3 Flashcards
Why does the auditor perform Risk Assessment procedures?
to obtain an understanding of:
- the entity & its environment
- the applicable financial reporting framework
- the system of internal control
microeconomic concept of Supply
price and quantity supplied are positively correlated. The higher the price received for a good, the more sellers will produce
microeconomic concept of Demand
price and quantity demanded are inversely related. The higher the price charged for a good or service, the less buyers will demand.
Market Equilibrium
the market equilibrium’s price & output is the point at which the S&D curves for a product intersect.
Price Elasticity
measure of how sensitive the demand for, or the supply of, a product is to a change in price
Profit Maximization
occurs when the level of production is such that marginal revenue is equal to marginal cost. This is also the point when total revs > total costs by the largest amount
Expansionary Phase
rising economic activity
rising profits
strong growth
increased demand
rising prices
lower unemployment
Peak
the high point of economic activity, where profits are at their highest levels, firms face capacity constraints, & input shortages lead to higher costs & higher price levels
Contractionary Phase
falling economic activity
slowing growth
falling profits
reduced demand
higher unemployment
Trough
low point of economic activity
lowest level of profits
firms have excess capacity & must reduce costs and their workforces
Recovery Phase
recovering economic activity, rising demand, profit stabilization, increases in employment
Leading Economic Indicators
predict economic activity. They change before the economy starts to follow a certain trend.
Ex. orders for goods, building permits, unfulfilled orders, S&P 500, PPI
Coincident Indicators
change at approximately the same time as the whole economy and provide information about the current state of the economy
Ex. Industrial production, Manufacturing & trade sales
Lagging Indicators
follow economic activity. Used to confirm/dispute previous forecasts
Ex. avg prime rate charged by banks, avg duration of unemployment, CPI for services
What does an auditor do to understand an entity’s controls?
Evaluation of the design & implementation of controls through…
- walk throughs
- inquiry of entity personnel
- observation of the application of controls and of the entity’s premises & plant facilities
- inspection of documents & records
4 inherent limitations of Internal Control
- management override
- human error & collusion
- external events beyond the entity’s control
- issues related to the suitability of the entity’s objectives
4 ways to document the understanding of Internal Controls
-Flowchart
-Internal Control Questionnaire
-Narrative
-Documentation from the client, including copies of the entity’s procedures manuals & organizational charts
2 required procedures in FS audit
Risk Assessment Procedures & Analytical Procedures
Dual-purpose Test
test of controls performed at same time as test of details on same transaction
2 types of Substantive Procedures
Test of Details & Substantive Analytical Procedures
Ex. confirmation, verification, analytical procedures
4 examples of Tests of Controls
Documentation
Inquiry
Observation
Reperformance
Who is responsible for making sure the entity’s operations are conducted in accordance w/applicable laws & regulations?
Management & those charged w/governance
What opinion if noncompliance has a M effect on FS?
What opinion if unable to obtain SAAE regarding noncompliance?
Qualified or Adverse
Qualified or Disclaimer of Opinion
Related Party Transactions
not considered to be an arm’s length transaction
reporting entity’s affiliates, principal owners, management, and immediate family members
