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Audit > Ch 1 > Flashcards

Ch 1 Flashcards

0
Q

Business risk

A

Risk that an entity will fail to meet its objectives

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1
Q

What is an example of an information assurance provider?

A

Financial statement auditor

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2
Q

5 examples of common business risk situations

A 
1 chance company takes that customers buy from its competitors 
2 product lines become obsolete
3 taxes increase
4 government contracts lost
5 employees go on strike
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3
Q

Information professionals

A

Accountants, auditors and other information assurance providers

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4
Q

What 2 types of demand do information professionals help satisfy?

A

1 CEOs have timely, relevant and reliable info

2 investors and creditors have high quality info to make educated
Financial decisions

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5
Q

What 4 environmental conditions increase user demand for relevant, reliable info?

A

1 complexity
2 remoteness
3 time sensitivity
4 consequences

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6
Q

Complexity

A

Derivatives and hedging are examples of complex business
Environment activities that need explaining by information
Professionals

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7
Q

Remoteness

A

Decision makers may be away from the location of their investment

And need information professionals to check up on their
Investments for them

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8
Q

Time-sensitivity

A

Business decisions are being made faster than ever

Accurate timely info is essential

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9
Q

Consequences

A

Accurate info is essential to avoid catastrophic losses and make
Gains

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10
Q

Information risk, ex.

A

Probability that info circulated by a company will be false or
Misleading

Target companies have incentive to exaggerate financials to
Attract creditors and investors and takeovers

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11
Q

Assurance

A

Third party lending credibility to information provided by

Company that reports its financial results

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12
Q

Attestation

A

Assurance provided for specific assertions made by management

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13
Q

Auditing

A

Attestation of assertions embodied in a company’s financial

Statement

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14
Q

American Accounting Association’s (AAA) definition of Auditing

A

Systematic process of objectively obtains and evaluating evidence
Regarding assertions about actions and events

To ascertain the degree of correspondence btw/the assertions
And established criteria and communicating results to interested
Users

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15
Q

Systematic process (auditing)

A

Purposeful, logical process based on disciplined structured

Approach to reaching final decisions

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16
Q

Independent Auditors: Evaluating evidence in auditing

A

Knowledge of client’s business, observation of physical assets,
Inquiry for material provided by managers, confirmations from
3rd parties, inspection of documents

Make sure financial statements disclosures are fairly presented

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17
Q

3 examples of financial reporting framework auditors rely on

A

1 GAAP for US companies
2 IFRS for international companies
3 IRC for IRS auditors

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18
Q

External auditors

A

Generally begin their work with focus on assertions of management
About financial statement amounts and info disclosed in
Footnotes

Then set out to obtain and evaluate evidence to prove or disprove
These assertions or representations

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19
Q

Attestation engagement

A

Engagement in which a practitioner is engaged to issue report
On subject matter

Or assertion about subject matter that is responsibility of
Another party

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20
Q

Sustainability report (Attestation engagement) may measure 3 things

A

Companies performance in areas such as:
1 environment
2 labor
3 human rights

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21
Q

Attestation engagement: agreed upon procedure engagements ex.

A

Verifying inventory quantities and locations

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22
Q

Attestation engagement ex: Financial forecasts and projections

A

Analysis of pro rata/ what if financial statements

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23
Q

What does auditing refer specifically to?

A

Opinion on financial statements

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24
Q

What does Attestation refer specifically too?

A

More generally expressing an opinion on any type of information
Or subject matter that is responsibility of another party

Ex. Sustainability measures

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25
Q

In contrast to auditing and Attestation, what does assurance services include?

A

Nonfinancial information

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26
Q

Assurance services

A

Accounting information including both financial and nonfinancial
Information

Independent professional services that improve the quality of info
In context for decision makers

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27
Q

Who are the consumers of assurance services

A

Decision makers

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28
Q

Examples of assurance services

A

Risks the company faces, rental property operations review,
Customer satisfaction surveys, evaluation of investment
management policies

Fraud and illegal acts prevention

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29
Q

Consulting services

A

CPA’s use their professional skills and experiences

to provide Recommendations to client for outcomes such as information System design and operation

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30
Q

Assurance services focus entirely on the…

A

Information that decision makers use

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31
Q

XBRL

A

Facilitates the collection, summarization and reporting of financial
Info in medium users can easily transform for decision making
Purposes

32
Q

3 major elements of assurance services

A

1 independence
2 professional services
3 improving quality of information or its context for decision makers

33
Q

Function of financial reporting 3 things

A

Provide statements of financial position (balance sheets),
Changes in cashflows (statement of cashflows)

Accompanying disclosures (footnotes) to those that don't have
Access to managements internal sources of info

Results of operations (income statements, statements of
Shareholders equity, statements of comprehensive income)

34
Q

Auditing standards emphasize that financial statements are responsibility of…

A

Company’s managements

35
Q

Under SOX the CEO and CFO must sign a statement indicating what 4 things

A

1 they have read the financial statements
2 they aren’t aware of false or misleading statements or
Omitted disclosures
3 they believe company’s statements present accurate picture
Of company’s financial condition
4 certify control system for internal financial reporting

36
Q

What must 1st year audit professionals understand?

A

The relationship between the company’s internal control
Activities

and the relevant financial statement assertions about
Financial statement account balances

37
Q

What does existence assert?

A

Asserts that each of the balance sheet and income statement balances actually exists

38
Q

What does occurrence assert?

A

Occurrence assets that each income statement events and transactions actually did occur

39
Q

Occurrence transaction relates to…

A

Events, transactions, presentations and footnotes

40
Q

Existence assertion relates to what?

A

Account balances

41
Q

3 ways auditors test the existence assertion

A

1 confirm cash and count physical inventory
2 confirm receivables and insurance policies with customers
3 perform other procedures to make sure management’s
assertion is in fact supported

42
Q

PCAOB and ASB Assertions key question: existence

A

Do assets listed really exist?

43
Q

PCAOB and ASB Assertions key question: occurrence

A

Did recorded sales transactions really occur?

44
Q

PCAOB and ASB Assertions key question: rights

A

Does company really own assets?

45
Q

PCAOB and ASB Assertions key question: obligations

A

Are related legal responsibilities identified?

46
Q

PCAOB and ASB Assertions key question: completeness 3

A

1 Are financial statements including footnotes complete?
2 were all transactions recorded?
3 are transactions at the beginning or end of period included
In proper period?

47
Q

PCAOB and ASB Assertions key question: valuation

A

Are accounts valued correctly?

48
Q

PCAOB and ASB Assertions key question: allocation

A

Are expenses allocated to the periods benefited

49
Q

PCAOB and ASB Assertions key question: presentation

A

Were all transactions recorded in correct accounts?

50
Q

PCAOB and ASB Assertions key question: disclosures

A

Are disclosures understandable to users?

51
Q

Rights and obligations

A

Objective for auditor is to obtain evidence that assets are owned
By the company audited

And Liabilities are really owed by company being audited
Also leased property is tracked

52
Q

Cutoff

A

Refers to accounting for revenue, expense and other transactions
In proper period

53
Q

Completeness

A

Whether all info is included in financial statements

Managements assertions are backed by evidence

54
Q

Valuation and allocation

A

Proper values have been recorded in accordance with GAAP
or IFRS

allocation: appropriate percentage of asset or liability balance
Is recorded in financial statement in accordance with GAAP
or IFRS

55
Q

How do auditors obtain evidence about specific valuations and mathematical accuracy?

A

By comparing vendors’ invoices to inventory prices, obtaining
Lower-of-cost-or-market data, evaluating collectibility of
receivables

Recalculating depreciation schedules

56
Q

Disclosures must be…

A

Relevant, reliable and understandable or transparent to financial
Statement users

57
Q

Transactions must be classified in correct accounts, how do auditors test this assertion?

A

Auditors perform audit procedures analyzing whether expenses

Should be expensed or capitalized

58
Q

To make sure presentations and disclosures are relevant, reliable and understandable auditors will often…

A

Use a disclosure checklist which highlights all disclosures that
Should be made for a particular entity

59
Q

Financial accounting concepts no. 2 definition of understandability

A

Quality of information that enables users to perceive its significance

60
Q

Transparent

A

Investors should be able to make sense of financial statements
And footnotes without having to rely on lawyers or financial experts

Disclosures should be written in plain English

61
Q

Professional skepticism

A

Having attitude that includes a questioning mind and critical
Assessment of evidence

Auditors tendency to not believe management’s assertions without
Corroboration

62
Q

Textbook definition: Attestation engagement

A

Provision of an opinion on subject matter

Or an assertion about subject matter that is responsibility of
Another party

63
Q

Textbook definition: Assurance service

A

Independent professional services that improve quality of info
Or it’s context for decision makers

Lending credibility to info whether financial or nonfinancial

64
Q

A potential conflict of interest always exists between auditors and…

A

The management of the company being audited

65
Q

Conflict of interest: How does management want to present their financial statements, how do auditors want to present it?

A

Management wants to present it in most favorable light

Auditors want to present it fairly

66
Q

When is a firm restricted from providing auditing services by the public Company Accounting Oversight Board PCAOB?

A

When it provides other accounting services (tax consulting, valuation,
consulting, etc.)

Same firms can only provide general corporate tax return
preparation

67
Q

Internal auditing

A

Independent, objective assurance and consulting activity

Designed to add value and improve organization’s operations

68
Q

Objective of internal auditing

A

Bringing systematic, disciplined approach to evaluate and
Improve the effectiveness of risk management, control and
Governance processes

Helps organization accomplish its objectives

69
Q

Operational auditing

A

Refers to study of business operations for purpose of making
Recommendations

Recommendations about efficient and effective use of resources,
Effective Achievement if business objectives and compliance
With company policies

70
Q

4 services provided by internal auditors

A

1 reviews of internal control systems in compliance with company
Policies
2 compliance with laws and regulations
3 appraisals of economy and efficiency of operations
4 reviews of effectiveness of achieving results of objectives

71
Q

How does the AICPA define operational auditing performed by independent CPA firms?

A

Distinct type of management consulting service

whose goal is to Help Client improve the use of its capabilities and resources to achieve its objectives

72
Q

US Government Accountability Office (GAO), GAO Aditors

A

Highest level of internal auditors for federal government

73
Q

GAGAS

A

Generally accepted government auditing standards

74
Q

Expanded scope services (provided by GAO Internal auditors) 3 things

A

1 financial info presented in accordance to GAAP
2 entity adhered to laws and regulations (financial compliance
Requirements)
3 suitably designed and implemented internal control of company

75
Q

2 types of performance audits

A

1 economy and efficiency audits

2 program audits

76
Q

Government: Performance audits

A

Whether financial resources are spent to help government truly
Achieve program goals

Means of seeking to improve accountability for efficient and
Economical use of resources and achievement of program goals

77
Q

Substantial equivalency 3 things

A 
Concept of practices across state lines as long as liscensing
State requires:
1 150 hours of education
2 successful completion of CPA exam
3 one year of experience

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