Chapter 1 Flashcards
What is Auditing?
Verification of information by someone other than the one providing that information
Public Interest
Under three party accountability the auditor is expected to act in the interest of the user of the information
Agency Theory
When a task is delegated by one party to another (agent) it can create a problem when three conditions are present:
- Agent has different objectives
- Agent has the information
- Room for agent to be creative
Auditors job is to monitor the agent
Accounting
Attempts to record and summarize a company’s transactions into financial statements for the benefit of users
What creates the demand for audits?
Audits lend credibility to information by reducing information risk
Information Risk
Risk that information is materially misstated
Financial Statement Misstatements Arise Due To:
Accidental errors
Lack of knowledge of accounting principles
Unintentional bias
Deliberate falsification
Business Risk
Risk that a company will not be able to meet its financial obligations due to economic conditions or poor management decisions
Auditor serves as a ____________________
Independent intermediary who lends credibility to financial information
Three parties of three-party accountability
Client, Auditor, Auditee
Professional Judgement
Application of relevant training, knowledge, and experience within the context provided by auditing, accounting and ethical standards in making informed decisions about the course of action to take
** Must be documented
Professional Skepticism
Auditor’s tendency to not believe management assertions but instead to find sufficient support for the assertions through appropriate audit evidence
Audit Objectives
Enhance the degree of confidence of intended users in the financial statements
To attest to information means to
provide assurance as to its reliability
Direct Reporting Engagement
A type of assurance engagement in which the assertions are implied and not written down in some form
