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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
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
25
In contrast to auditing and Attestation, what does assurance services include?
Nonfinancial information
26
Assurance services
Accounting information including both financial and nonfinancial Information Independent professional services that improve the quality of info In context for decision makers
27
Who are the consumers of assurance services
Decision makers
28
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
29
Consulting services
CPA's use their professional skills and experiences to provide Recommendations to client for outcomes such as information System design and operation
30
Assurance services focus entirely on the...
Information that decision makers use
31
XBRL
Facilitates the collection, summarization and reporting of financial Info in medium users can easily transform for decision making Purposes
32
3 major elements of assurance services
1 independence 2 professional services 3 improving quality of information or its context for decision makers
33
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)
34
Auditing standards emphasize that financial statements are responsibility of...
Company's managements
35
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
36
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
37
What does existence assert?
Asserts that each of the balance sheet and income statement balances actually exists
38
What does occurrence assert?
Occurrence assets that each income statement events and transactions actually did occur
39
Occurrence transaction relates to...
Events, transactions, presentations and footnotes
40
Existence assertion relates to what?
Account balances
41
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
42
PCAOB and ASB Assertions key question: existence
Do assets listed really exist?
43
PCAOB and ASB Assertions key question: occurrence
Did recorded sales transactions really occur?
44
PCAOB and ASB Assertions key question: rights
Does company really own assets?
45
PCAOB and ASB Assertions key question: obligations
Are related legal responsibilities identified?
46
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?
47
PCAOB and ASB Assertions key question: valuation
Are accounts valued correctly?
48
PCAOB and ASB Assertions key question: allocation
Are expenses allocated to the periods benefited
49
PCAOB and ASB Assertions key question: presentation
Were all transactions recorded in correct accounts?
50
PCAOB and ASB Assertions key question: disclosures
Are disclosures understandable to users?
51
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
52
Cutoff
Refers to accounting for revenue, expense and other transactions In proper period
53
Completeness
Whether all info is included in financial statements Managements assertions are backed by evidence
54
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
55
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
56
Disclosures must be...
Relevant, reliable and understandable or transparent to financial Statement users
57
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
58
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
59
Financial accounting concepts no. 2 definition of understandability
Quality of information that enables users to perceive its significance
60
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
61
Professional skepticism
Having attitude that includes a questioning mind and critical Assessment of evidence Auditors tendency to not believe management's assertions without Corroboration
62
Textbook definition: Attestation engagement
Provision of an opinion on subject matter Or an assertion about subject matter that is responsibility of Another party
63
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
64
A potential conflict of interest always exists between auditors and...
The management of the company being audited
65
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
66
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
67
Internal auditing
Independent, objective assurance and consulting activity | Designed to add value and improve organization's operations
68
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
69
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
70
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
71
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
72
US Government Accountability Office (GAO), GAO Aditors
Highest level of internal auditors for federal government
73
GAGAS
Generally accepted government auditing standards
74
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
75
2 types of performance audits
1 economy and efficiency audits 2 program audits
76
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
77
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 ```

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