Ch. 2 Fundamental Concepts Flashcards
Technical Competencies for this chapter:
- Advises on an entity’s assurance needs
- Assess issues related to the undertaking of the engagement or project
Technical Competencies for this chapter:
- Advises on an entity’s assurance needs
- Assess issues related to the undertaking of the engagement or project
What are the two types of audits?
Statutory Audits: Those required by law, which includes audits of the financial statements of publicly listed companies
Voluntary Audits: Not required by law, which includes private companies, NPOs, and government agencies.
Why are voluntary audits completed?
It can be done for reasons such as obtaining a bank loan, to show transparency to constituents, or because they are required by the company’s laws (common for NPOs).
There are also economic benefits as companies need to share information to shareholders.
How does agency risk play into the role of audit services?
Agency risk is the risk that managers do not act in the best interest of shareholders. Because there is a reliance relationship, it is in the best interest of shareholders to hire an external auditor to undertake an independent examination.
What are agency costs?
The costs of techniques used to reduce agency risk due to the potential conflict of interest. These include the cost of the audit, costs incurred in aligning the manager’s and shareholders interests - such as bonuses based on company shares.
What are some common myths surrounding audits?
The auditor guarantees that the financial statements are 100% correct, the auditor is responsible for the internal controls of the company, the auditor is responsible to detect all instances of fraud, the auditor prepares and produces the financial statements, the auditor is responsible for checking compliance with all laws and regulations, the auditor provides aid and advice to management, auditor assesses effectiveness and adequacy of the client’s operations.
