Ch4 Flashcards
Why is it important to gain an understanding of the entity being audited?
Because there are often inherent risks related are related to how the business operates
What is the difference between entity-level risks and transaction-level risks?
Entity-level risks affect multiple financial statement accounts whereas transaction-level risks affect only one class of transactions or accounts.
List a few factors that influence inherent risk.
- Number of customers
- Quality of suppliers
- Trades with stable or unstable countries
- Falls behind with technology
- Warranties
- Discounts
Questions such as:
(1) What is the level of demand for my client’s services/products?
(2) Does government affect the industry?
(3) Is the client’s industry subject to fast technological change?
allow auditors to assess __________________ risk.
inherent
Auditors gain an understanding of their clients through inquiry, _____________ _____________, observation, and ______________.
Analytical procedures
inspection
What is the auditor’s responsibility regarding illegal acts committed by their client?
Use professional skepticism and gain an understanding of the nature of the act. If there are possible effects on the financial statements, the audit team discusses the acts w/ those in charge of governance. If management does not respond appropriately, legal counsel is consulted to determine if they should withdraw from the audit.
______________ are measurements, agreed before hand, that can be quantified to reflect the success of an organization.
key performance indicators (KPIs)
List a few common KPIs.
EPS (earnings per share) reflects earnings return on each share issued.
PE ratio (price-earnings ratio) how much those are willing to pay per dollar of earnings.
Define solvency.
Ability of a company to pay off its long-term obligations
Define liquidity.
Ability of a company to pay its current debts.
List a few profitability ratios.
Gross profit margin
Profit margin
