Audit 1 Flashcards
a principal is…
an owner
an agent is…
a hired manager to run the business
the difference in business knowledge between the principal and agent is referred to as…
information asymmetry:
means the manager generally has more information about the true financial position of the company than does the absentee owner.
audits lend credibility to information by reducing….
information risk
Material misstatements may occur due to:
Accidental (clerical) errors
Lack of knowledge of specific accounting standards
Unintentional bias
Deliberate falsification
The three A’s
1.2 Audit, 1.1 attest, 1 assurance
from least encompassing to most
Assurance Services
Emphasis is decision making
Improving the quality (relevance and reliability) of information or its context (usefulness)
A level of independence is necessary (e.g. objectivity)
examination, review, and agreed upon procedures
3 basic concepts of financial statement auditing
1) Audit risk
2) Materiality
3) Evidence on A&M
Risk has an ______ relationship with materiality
inverse
Major audit phases
Client Acceptance/Continuance
Preliminary Engagement Activities
Planning the Audit
Consider and Audit Internal Control
Audit Business Processes and Related Accounts
Complete the Audit
Evaluate Results and Issue an Audit Report
Audit report contains…
Title Addressee(s) Introductory Paragraph Scope Paragraph Opinion Paragraph (see next slide) Explanatory / ICOFR Paragraph
Types of audit reports/opinions
Unqualified (“Clean”)
Qualified
Adverse
Disclaimer of Opinion (NO opinion)
Different types of auditors
1) External———
- —Sole providers or members of a CPA firm who are hired by third parties
2) Internal———
- —–Employees of individual companies or partnerships who perform work solely for that entity
3) Government——–
- —-Employed by federal, state or local agencies, typically considered a subset of internal auditors
4) Forensic———-
- —-Sole providers or specially trained members of a CPA firm (typically) who are specially trained to investigate white collar crime
Different Types of Audit services
Financial Statement Audit (Assurance) Internal Control Audit (Assurance) Compliance Audits (Non-Assurance)* Operational Audits (Non-Assurance)* Forensic Audits (Non-Assurance)*
auditing is not one size fits all…describe the pyramid of differences within businesses
#
business
#########
##I.n.d.u.s.t.r.y##
###############
Economic Environment
##################Five Component Model
Financing Purchasing HR Inventory MGMT Revenue Process
Generally Accepted auditing standards
1) General Standards (3)
2) Standards of Fieldwork (3)
3) Standards of Reporting (4)
General standards
1) auditor must have technical training and proficiency
2) auditor must have independence
3) must exercise due professional care
Standards of Fieldwork
1) auditor must adequately plan and supervise assistance
2) The auditor must obtain a sufficient understanding of the entity and its environment
3) The auditor must obtain sufficient appropriate audit evidence
Standards of reporting
1) Must state if FR’s are in accordance with GAAP
2) Must report inconsistencies and how they might effect future reports
3) Must report problems and how they might effect future reports
4) The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report.
Shall
Unconditional Responsibility (“must/is required/shall”): Auditors must fulfill responsibilities.
Should
Presumptively Mandatory Responsibility (“should”): Auditors must comply with requirements unless auditors demonstrate and document that alternative actions were sufficient to achieve the standards’ objectives.
Might/Could
Responsibility to Consider (“might/could”): Auditors should consider; whether the auditors comply with the requirements depends on the exercise of professional judgment in the circumstances.
CPA standards
Professional competence
Due professional care
Planning and supervision
Sufficient relevant data
Quality Control Elements
Review responsibilities
Engagement Performance
Supervision
Independence is important….
in fact and appearance
Covered Members
1) An individual on the attest engagement team
2) An individual in a position to influence the attest engagement
3) A partner or manager who provides nonattest services to the attest client beginning once he or she provides 10 hours of nonattest services
4) A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement
5) The firm, including the firm’s employee benefit plan
6) An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described above or by two or more such individuals or entities if they act together
Immediate Family Members
Spouses, spousal equivalents and dependents are viewed as extensions of the individual CPA and must meet more stringent independence criteria applicable to the CPA him/herself.
Close Relatives
Parents, siblings and nondependent children (in addition to other relatives and friends on a case-by-case basis) of covered members also impair firm independence if they are employed in a key position by the client or hold a material investment in the client, and the CPA is aware of that investment.
Independence threats
self review advocacy adverse interest familiarity undue influence financial self interest
Audit risk=
inherant riskcontrol riskdetection risk
risk of material misstatement=
inherent risk*control risk
Evidence on Management assertions
CEAVOP
CEAVOP
completeness existence accuracy valuation obligations presentation
PCAOB made
AS, SAS, GAAS
for public companies
Integrated audit is…
financial statements and internal control by external auditor
ASB
Non public, AICPA made the ASB
They altered GAAS.
Attest engagements include
financial statement audits, reviews, and examinations of prospective financial information
what does GAAS accomplish?
standards that measure the quality of the auditor’s performance
holding out
letting people know of your CPA status
close relative
parent, sibling , nondependent child
immediate family
spouse, spouse equivalent, dependent (even unrelated)
“key position”
primary responsilibit for acct functions, fs prep, or has control over fs contents
safeguard
a way to combat independence threats
six quality control elements
i. Leadership / Tone at the Top
ii. Relevant Ethical Requirements
iii. Client Acceptance and Continuance
iv. Human Resources
v. Engagement Performance
vi. Monitoring
