Chapter 1 Flashcards
The basic purpose of a financial statement audit is to
Provide assurance regarding whether the client’s financial statements are fairly stated
What is audit risk?
The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated
Decision makers demand reliable information that is provided by accountants. (T/F)
True
Testing all transactions that occurred during the period is cost effective (T/F)
False
The auditor can lack independence when?
Never, the auditor cannot lack independence
The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with who?
Management of the company
What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.?
PCAOB
Services that improve the quality of information for decision makers
Assurance services
A service where one party issues a report or assertion about subject matter that is someone else’s responsibility
Attestation services
A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events, and communicating the results to interested parties
Auditing
The magnitude of an omission or misstatement of information that makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement
Materiality
What are the two elements of Evidence
Relevance & Reliability
Refers to whether the evidence relates to the specific assertion being tested
Relevance
Refers to the diagnosticity of the evidence, signals true state of assertion
Reliability
A discipline that provides assurance regarding the results of accounting and other functional operations and data.
Independent Auditing
The imbalance of information between stockholders and the management of the company
Information Asymmetry
What is the primary reason an independent auditor reports on the financial statements?
To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements
Assurance services differ from auditing services in that…
Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information
What is the relationship between attestation services and audit services?
Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements
How what a decrease in the desired level of assurance affect the sample size of the audit
Would create a smaller sample size
An auditor’s evaluation of the reasonableness of a company’s loan loss reserve would normally be made during which phase of the audit?
Auditing business processes and related accounts
The study and practice of auditing in unlike other areas in accounting because it…
requires common sense and some creativity
