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
