Ch 1 Flashcards
Business risk
Risk that an entity will fail to meet its objectives
What is an example of an information assurance provider?
Financial statement auditor
5 examples of common business risk situations
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
Information professionals
Accountants, auditors and other information assurance providers
What 2 types of demand do information professionals help satisfy?
1 CEOs have timely, relevant and reliable info
2 investors and creditors have high quality info to make educated
Financial decisions
What 4 environmental conditions increase user demand for relevant, reliable info?
1 complexity
2 remoteness
3 time sensitivity
4 consequences
Complexity
Derivatives and hedging are examples of complex business
Environment activities that need explaining by information
Professionals
Remoteness
Decision makers may be away from the location of their investment
And need information professionals to check up on their
Investments for them
Time-sensitivity
Business decisions are being made faster than ever
Accurate timely info is essential
Consequences
Accurate info is essential to avoid catastrophic losses and make
Gains
Information risk, ex.
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
Assurance
Third party lending credibility to information provided by
Company that reports its financial results
Attestation
Assurance provided for specific assertions made by management
Auditing
Attestation of assertions embodied in a company’s financial
Statement
American Accounting Association’s (AAA) definition of Auditing
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
Systematic process (auditing)
Purposeful, logical process based on disciplined structured
Approach to reaching final decisions
Independent Auditors: Evaluating evidence in auditing
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
3 examples of financial reporting framework auditors rely on
1 GAAP for US companies
2 IFRS for international companies
3 IRC for IRS auditors
External auditors
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
Attestation engagement
Engagement in which a practitioner is engaged to issue report
On subject matter
Or assertion about subject matter that is responsibility of
Another party
Sustainability report (Attestation engagement) may measure 3 things
Companies performance in areas such as:
1 environment
2 labor
3 human rights
Attestation engagement: agreed upon procedure engagements ex.
Verifying inventory quantities and locations
Attestation engagement ex: Financial forecasts and projections
Analysis of pro rata/ what if financial statements
What does auditing refer specifically to?
Opinion on financial statements
What does Attestation refer specifically too?
More generally expressing an opinion on any type of information
Or subject matter that is responsibility of another party
Ex. Sustainability measures
In contrast to auditing and Attestation, what does assurance services include?
Nonfinancial information
Assurance services
Accounting information including both financial and nonfinancial
Information
Independent professional services that improve the quality of info
In context for decision makers
Who are the consumers of assurance services
Decision makers
Examples of assurance services
Risks the company faces, rental property operations review,
Customer satisfaction surveys, evaluation of investment
management policies
Fraud and illegal acts prevention
Consulting services
CPA’s use their professional skills and experiences
to provide Recommendations to client for outcomes such as information System design and operation
Assurance services focus entirely on the…
Information that decision makers use
XBRL
Facilitates the collection, summarization and reporting of financial
Info in medium users can easily transform for decision making
Purposes
3 major elements of assurance services
1 independence
2 professional services
3 improving quality of information or its context for decision makers
Function of financial reporting 3 things
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)
Auditing standards emphasize that financial statements are responsibility of…
Company’s managements
Under SOX the CEO and CFO must sign a statement indicating what 4 things
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
What must 1st year audit professionals understand?
The relationship between the company’s internal control
Activities
and the relevant financial statement assertions about
Financial statement account balances
What does existence assert?
Asserts that each of the balance sheet and income statement balances actually exists
What does occurrence assert?
Occurrence assets that each income statement events and transactions actually did occur
Occurrence transaction relates to…
Events, transactions, presentations and footnotes
Existence assertion relates to what?
Account balances
3 ways auditors test the existence assertion
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
PCAOB and ASB Assertions key question: existence
Do assets listed really exist?
PCAOB and ASB Assertions key question: occurrence
Did recorded sales transactions really occur?
PCAOB and ASB Assertions key question: rights
Does company really own assets?
PCAOB and ASB Assertions key question: obligations
Are related legal responsibilities identified?
PCAOB and ASB Assertions key question: completeness 3
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?
PCAOB and ASB Assertions key question: valuation
Are accounts valued correctly?
PCAOB and ASB Assertions key question: allocation
Are expenses allocated to the periods benefited
PCAOB and ASB Assertions key question: presentation
Were all transactions recorded in correct accounts?
PCAOB and ASB Assertions key question: disclosures
Are disclosures understandable to users?
Rights and obligations
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
Cutoff
Refers to accounting for revenue, expense and other transactions
In proper period
Completeness
Whether all info is included in financial statements
Managements assertions are backed by evidence
Valuation and allocation
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
How do auditors obtain evidence about specific valuations and mathematical accuracy?
By comparing vendors’ invoices to inventory prices, obtaining
Lower-of-cost-or-market data, evaluating collectibility of
receivables
Recalculating depreciation schedules
Disclosures must be…
Relevant, reliable and understandable or transparent to financial
Statement users
Transactions must be classified in correct accounts, how do auditors test this assertion?
Auditors perform audit procedures analyzing whether expenses
Should be expensed or capitalized
To make sure presentations and disclosures are relevant, reliable and understandable auditors will often…
Use a disclosure checklist which highlights all disclosures that
Should be made for a particular entity
Financial accounting concepts no. 2 definition of understandability
Quality of information that enables users to perceive its significance
Transparent
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
Professional skepticism
Having attitude that includes a questioning mind and critical
Assessment of evidence
Auditors tendency to not believe management’s assertions without
Corroboration
Textbook definition: Attestation engagement
Provision of an opinion on subject matter
Or an assertion about subject matter that is responsibility of
Another party
Textbook definition: Assurance service
Independent professional services that improve quality of info
Or it’s context for decision makers
Lending credibility to info whether financial or nonfinancial
A potential conflict of interest always exists between auditors and…
The management of the company being audited
Conflict of interest: How does management want to present their financial statements, how do auditors want to present it?
Management wants to present it in most favorable light
Auditors want to present it fairly
When is a firm restricted from providing auditing services by the public Company Accounting Oversight Board PCAOB?
When it provides other accounting services (tax consulting, valuation,
consulting, etc.)
Same firms can only provide general corporate tax return
preparation
Internal auditing
Independent, objective assurance and consulting activity
Designed to add value and improve organization’s operations
Objective of internal auditing
Bringing systematic, disciplined approach to evaluate and
Improve the effectiveness of risk management, control and
Governance processes
Helps organization accomplish its objectives
Operational auditing
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
4 services provided by internal auditors
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
How does the AICPA define operational auditing performed by independent CPA firms?
Distinct type of management consulting service
whose goal is to Help Client improve the use of its capabilities and resources to achieve its objectives
US Government Accountability Office (GAO), GAO Aditors
Highest level of internal auditors for federal government
GAGAS
Generally accepted government auditing standards
Expanded scope services (provided by GAO Internal auditors) 3 things
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
2 types of performance audits
1 economy and efficiency audits
2 program audits
Government: Performance audits
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
Substantial equivalency 3 things
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
