Ch1 Flashcards
Briefly describe the relationship between assurance, attestation, and auditing services.
Audit services is the most specific and narrow of the three - focused on financial statements and compliance with ICFR. Attestation and Audit both fall under the umbrella of assurance services.
Attestation is performed to issue a report on subject matter that is the responsibility of another party.
Assurance services are independent professional services that improve the quality or context of information
What is an integrated audit?
When an audit of internal controls over financial reporting is conducted in conjunction with an audit of the financial statements.
T or F: An audit from a CPA is a guarantee that the financial statements are free from error and fraud.
False - there is always some risk that auditors may have missed something.
What is the concept of materiality?
It is a measure of information’s ability to influence decisions that reasonable users make on the basis of financial information.
Materiality is entity specific. How is this important?
The threshold for materiality changes depending on the client.
Define a compliance audit.
An audit to determine whether an entity has conformed with regulations, rules, or processes.
Operational audits are concerned with _______________, ________________, and ___________________ of an organization’s activities
economy
efficiency
effectiveness
____________ audits are conducted to provide assurance about various aspects of an organization’s activities and can be conducted by employees of the org, or can be outsourced.
Internal
What are some limitations of a financial statement audit?
Auditors must use personal judgment.
Auditors rely on evidence provided by the client and management.
Auditors have a mustcomplete the audit in a reasonable period of time.
List common functions of an internal audit.
Improving risk management, internal control procedures, and elements of governance process.
Who are financial statement users?
Investors, suppliers, customers, lenders, employees, governments, and the general public.
Why is there a demand for audit services?
Most FS users do not have access to the company - remoteness.
FS are complex and require accounting and legal knowledge to assess - complexity.
Managers have an incentive to present the company in the best way and auditors seek the truth - competing incentives
FS users want to be able to rely on the information in the FS because their decisions around them have real consequences - reliability.
What responsibilities must an auditor uphold when conducting their audit?
Following appropriate auditing standards.
Planning and performing the audit with prof. skepticism.
Planning and performing the audit with prof. judgement.
Describe management’s responsibilities in terms of the FS audit.
Ensure info in the FS is presented fairly and is compliant. Design, implement, and maintain IC relevant to the prep and presentation of FS. Also provides access to all documents to auditors in order to conduct their audit.
What does the PCAOB do?
It is a nonprofit corp which oversees audits of public companies to protect the interests of investors.
The ___________ represents accountants before rule-making bodies, acts as an advocate for the profession, provides educational materials to its members, and sets ethical standards for the profession.
AICPA
What is the purpose of an audit?
To provide an opinion by the auditor on whether the FS are presented fairly, in material aspects, and in accordance with applicable financial reporting framework.
Explain what reasonable assurance means.
It means the auditor does not guarantee or certify that the financial statements are 100% correct. Auditors must only obtain reasonable assurance that the FS are free from material misstatement.
What are the three different opinions issued during an audit report?
Unmodified - “clean”.
Modified - “clean” except for x, y, z.
Adverse - FS are not clearly stated.
(one more - disclaimer, which states we cannot express an opinion)
_____________ is the risk that the auditor may knowingly fail to appropriately modify their opinion.
audit risk
What constitutes reasonable assurance?
Planning & supervising the audit
Determine and apply appropriate levels of materiality
Identify and assess risk of material misstatement
Obtain evidence
Section 404 of the SOX (Sarbanes-Oxley Act) legislation requires that ______________ accept responsibility for the design and maintenance of internal controls.
management
What is the audit expectation gap and what causes it?
The gap that occurs when there is a difference between the expectations of auditors (dictated by standards) and FS users.
Auditors providing absolute assurance, guaranteeing future viability, promises that fraud will be detected, or that all transactions have been reviewed.
What can be done to reduce the audit expectation gap?
Auditing standards being reviewed regularly.
Educating users of the auditor’s responsibilities.
Auditors performing duties appropriately and complying with standards.
Assurance providers accurately reporting the level of assurance being provided.
