Chapter 1 - Auditing and Assurance Engagements Flashcards
1
Q
What is assurance?
A
Denotes the comfort that can be derived from credible information, or the level of confidence that somebody can place in business information, such as financial statements.
2
Q
What is an assurance engagement?
A
Involves asking an expert to given an independent opinion or conclusion on a subject matter in exchange for a fee.
3
Q
What are the two types of assurance engagements?
A
Reasonable (High) and Limited (Low)
4
Q
What is reasonable assurance?
A
assurance that provides high but not absolute assurance on the reliability of a subject matter. It is non conclusive.
5
Q
What is limited assurance?
A
The level of assurance obtained where engagement risk is reduced to a level that is acceptable in the circumstances of the engagement, but where the risk is greater than for a reasonable assurance engagement as the basis for expressing a conclusion in accordance with CSRE 2400.
6
Q
What information does a practitioner use for limited assurance?
A
Analytics and inquiries, which is much more limited.
7
Q
What is materiality?
A
The size of misstatements, individually or in the aggregate, that would likely influence the decisions of users who rely upon the information of a specific reporting entity, such as financial statements.
8
Q
What are the different factors to consider when determining materiality?
A
Qualitative and quantitative factors such as:
1. Size
2. Nature and the extent of the effects of the factors on the evaluation or the measurement of the subject matter.
3. The need of the intended users of the assurance reports.
9
Q
What are the five elements of an assurance engagement?
A
- A three party accountability relationship.
- Subject matter
- Criteria
- Evidence
- A written conclusion
10
Q
Who are the three groups in an accountability relationship?
A
- The User
- Management
- Assurance Provider (Auditor)
11
Q
Who are the users in the accountability relationship?
A
Investors, employees, customers, or other stakeholders,.
12
Q
What is the role of management in the accountability relationship?
A
Supplies the information which is the responsible party, as the users want to know the extent to which they can rely upon the information.
13
Q
What is the role of the auditor in the accountability relationship?
A
Adds credibility to the information, evaluates on behalf of the user.
14
Q
What are the four ethical requirements of the assurance provider?
A
- Professional judgement
- Integrity
- Professional skepticism
- Recognize responsibility to user.
15
Q
What is professional judgement
A
Analytical, systematic, and objective judgement carried out with integrity and recognition if responsibility to those affected by the consequences
16
Q
What is integrity?
A
The quality of being honest and courageous.
17
Q
What is professional skepticism?
A
An attitude that includes a questioning mind, a critical assessment of audit evidence, and willingness to challenge the audits assertions.
18
Q
Why are assurance services valued?
A
The auditor is independent of the responsible party and is perceived to be unbiased with respect to the information being examined.
19
Q
What is independence in mind?
A
The auditors ability to be objective.
20
Q
What is a subject matter?
A
The matter of interest to the user for whose benefit an assurance engagement is conducted.
21
Q
What are criteria?
A
Criteria are the benchmarks that are used to evaluate or measure the subject matter, including, where relevant, for presentation and disclosure.
22
Q
What is subject matter information?
A
The outcome of the responsible party’s evaluation and / or measurement of the subject matter against the criteria.
23
Q
What is evidence?
A
Any information used by the assurance provider to assess whether the subject matter information is stated in accordance with the established criteria.
24
Q
What is the written conclusion?
A
The degree of confidence the assurance provider has that the assertions made and the subject matter information provided by management corresponds to the established criteria.
25
What are the two different types of forms and when are they used?
Standardized format - Financial statements auditors reports.
Customized reports - Audit of the effectiveness of computer systems or an audit of the efficiency of manufacturing operations.
26
What are the 5 parts of a written conclusion?
1. The assurance providers conclusion.
2. The subject that was evaluated.
3. The criteria to which is was evaluated.
4. The work that was performed
5. How the assurance provider formed the conclusion.
27
What is auditing?
The accumulation and evaluation of evidence regarding assertions about the subject matter information to determine and report on the degree of correspondence between the subject matter and the established criteria. It is what auditors do.
28
What is information risk?
The risk that information upon which a business decision is made is inaccurate.
29
What is the main reason that users demand audits and other types of assurance
Users are relying on the subject matter information, such as reliable financial statements, and need assurance that the information is reliable.
30
What is a smaller reason as to why users demand audits and other types of assurance?
Legal our regulatory requirements.
31
What is the common concern for shareholders?
Monitoring the company's operations for investing purposes.
32
What is the common concern for banks and creditors
Ensure the company can repay them.
33
What is the common concern for the company's directors?
Monitors the company's operations and make internal decisions.
34
What is the common concern for the suppliers and credit agencies?
Determine the risk of doing business with the company.
35
What is the common concern for prospective and current employees?
Additional comfort with regard to targets, bonuses, and share incentive plans.
36
What is misinformation?
Information that is incorrect or false, but unintentionally so. (Results from error)
37
What is disinformation?
Information that is intentionally misleading.
38
What are the four reasons for misinformation/ disinformation?
1. Remoteness of information.
2. Bias and Motives of the Provider.
3 .Voluminious Data
4. Complex Exchange Transactions.
39
Describe Remoteness of Information
In the global economy, it is impossible for a decision maker to have much first hand knowledge about the organization with which it does business. Information must be relied upon by others, and thus the chance of misstatement or disinformation increases.
40
Describe Bias and Motives of Provider
If the information provided is provided by someones whose goals are inconsistent with that of the decision maker, the information will; be biased to the provider. It could be based on honest optimism about future events or intentional omission or emphasis designed to influence the users.
41
Describe Voluminous of Data
As organizations become larger, so does the volume of their exchange transactions. This increases the likelihood that improperly recorded information is included in the records.
42
Describe Complex Exchange Transactions
The transactions are much more complex and difficult to record properly. In addition, the accounting standards have also grown more complex.
43
What are the three ways to reduce information risk?
1. User verifies the information.
2. User shares information risk with management.
3. Audited financial statements are provided.
44
Describe user verifies the information.
The user may go to the business and examine the records and obtain information about the reliability of the financial statements.
45
Describe the user shares information risk with management. What is the problem.
Since management is legally required to provide reliable financial information to the users, any user incurring a loss because they relied upon inaccurate financial statements can sue. They may not be able to collect on losses.
46
Describe audited financial statements are provided
Have an independent auditor to ensure the information show is correct and accurate,
47
What are the examples of the value assurance engagements can provide?
1. Funding
2. Negotiations
3. Service costs
4. Supplier terms
5. Employees
1. Improved likelihood of getting funding
2. Stronger hand in negotiations
3. Reduced debt service costs
4. Better supplier terms , improving cash flow
5. Additional comfort to employees, improving the ability to attract and retain top talent.
48
What is a financial statement audit?
Is conducted to determine whether the financial statements (the information verified) are stated in accordance with specified criteria (the applicable accounting framework like ASPE or IFRS)
49
What is required in a compliance audit?What is an assurance engagement to report on compliance?
Requires expert knowledge of the relevant legislation, regulations, or policies (the criteria), as well as the knowledge of control related processes. This audit is performed to determine whether the auditee is following specified procedures, rules, or regulations set by some higher authority.
50
What is a performance audit?
Evaluates the economy, efficiency, and effectiveness of the organizations procedures and processes to assure management that its strategic objectives are being carried out, and whether they can be improved.
51
What is another name for performance audits?
Operational or value for money, audit.
52
What other six pieces of evidence is examined in performance audits?
| Soci
1. Organizational culture
2. Diversity, Equity, and Inclusion (DEI)
3. Processes
4. Computer Operations
5. Production Methods
6. Marketing
53
What are the main type of audits performed by government and internal auditors?
Compliance and performance.
54
What are sustainability assurance engagements?
Assess whether sustainability, often referred to as ESG, reports or parts of the report, are prepared in accordance with the applicable sustainability framework.
55
What is sustainability?
The impact of an organization on society and the environment, in the context of its business decisions and activities.
56
What seven topics are
included in sustainability?
1. Corporate governance,
2. human rights,
3. labour practices,
4. environmental issues,
5. operating practices
6. Customer issues
7. Community involvement and development.
57
Who are internal auditors?
Work for individual companies, banks, hospitals, universities, and government.
58
What is internal auditing?
How does internal auditing help companies achieve its objectives?
An independent, objective assurance and consulting activity designed to add value and improve an organizations operations.
Brining a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
59
What are the five types of audits thatinternal auditors provide?
Financial and internal control, operational, compliance, system security, and forensic and fraud.
60
Who do internal auditors provide assurance too?
Management or the board of directors, ensuring that the internal controls are designed adequately and operating efficiently.
61
How do we ensure that assurance engagements are performed properly?
Internal auditor must be independent of the line function in an organization but will not be completely independent as long as an employer employe relationship maintains. To remain independent, they will report directly to an audit committee of the board off directors and senior management.
62
What is an audit committee?
A committee of the board of directors that is responsible for auditor oversight. It is an objective and independent liaison between auditors, management, and the board of directors.
63
What is the major difference between internal and external auditors?
Internal auditors struggle / lack independence, whereas external auditors are completely independent.
64
Who is the auditor general?
Responsible for auditing the ministries, departments, and agencies that report to the government.
65
What is the primary responsibility of the government audit staff?
Perform the audit functions for the government. The extent and scope are determined by the legislation in the various jurisdictions.
66
Who are the government auditors similar to and why?
Who does the auditor general report to?
What audit do the government auditors perform perform and why is it important?
They are organizationally independent and thus act like an external auditor.
the auditor general reports directly to the legislature.
They conduct performance audits as it helps the government to understand if value is received for the money that is spent.
67
What are the two items that the Canada Revenue Agency (CRA) auditors responsible for?
What type of audits are these?
1. Enforcement of the federal tax laws as they have been defined by the parliament and interpreted by the courts.
2. Audit the returns of tax payers to determine whether they have complied with tax laws.
They are compliance audits, and those who perform these audits are known as CRA auditors.
68
What are the different type of tax audits?
1. Simple tax audits of an individual who only works for one employer
2. Multinational corporations.
69
What is the job of forensic accountants? (5 points)
Investigate financial statement fraud, asset misappropriations, money laundering, bribery, theft of information via computer hacking.
70
Why are forensic accounts needed more in todays life?
The increase in white collar occupation fruad.
71
What is a key characteristic that differentiates fraud / forensic auditors to other auditors?
Their persistence and doggedness in following up on suspicion, what is referred to as an investigative mindset.
72
What are sustainability auditors?
Provide assurance on KPI's, sustainability report, and key data and disclosures.
73
What are public accountants? What are two services they are commonly associated with?
Provide accounting services to the public, like assurance services, accounting and tax advice, and the financial statement audit.
74
What type of audit is referred to when the term audit is used?
What can only public accounting firms do? Who is the only person permitted to sign assurance reports of a financial statement?
An audit is typically referred top as a financial statement audit.
Conduct financial statement audits (reasonable assurance) or reviews (limited assurance). Those people who have a designated CPA license.
75
What is a statutory audit?
Required by law, as the case for public and not for profit organizations that meet certain revenue threshold.
76
What are the different assurance engagement provide by public accountants for historical information?
1. Audit of historical financial statements
2. Review of historical financial statements
3. Audit of Financial information other than Financial statements.
77
Describe the assurance engagement provided by PA for non financial information
All types of audits can be performed here such as:
1. Effectiveness of internal controls and financial reporting
2. Attestation services on service organizations.
3. Reports on compliance with agreements and regulations
4. Greenhouse Gas Emissions Reports.
5. Sustainability reports.
6. Other types of non financial information.
78
What are other types of services provided by PA that fall outside the scope of assurance?
1. Compilations
2. Tax Services
3. Management Advisory services
4. Accounting and Book Keeping Services.
79
What are compilations?
The accountant preparing financial information from a clients records or other information provided. Less extensive and costs less than a review, but there is no assurance.
80
What tax services are provided by PA's?
Corporate and individual tax return for audit and non audit clients. In addition to other types of tax services like remittence and planning.
81
What are management advisory services provided by PA's?
Retirement planning and personal financial planning, or providing insights on how to improve a business process.
82
What are the accounting and bookkeeping services provided by the company?
Provide accounting software so that small companies can work with their own data effectively and efficiently.
83
Why is the audit of the effectiveness of internal controls over financial reporting important?
If a reader can be confident that the internal controls are good, there is less likelihood that there will be a future misstatement on the financial statement.
84
Why is the audit of the systems and controls of service organizations important.
Many companies may provide their information systems to other IT companies using an SAAS, and thus it is important that the audit is done on these service companies to ensure that there is confidence and security in these SAAS firms, and that there is risk management in the data. PA's review the confidentiality, integrity, and privacy.
85
Why is the assurance engagement on the compliance with an agreement regulation important?
It ensures that the agreement between two parties is in compliance and that all parties are obeying, like the current ratio of a bank loan agreement.
86
Why is the assurance engagement on greenhouse gas statement important?
What is the relevant standard in this case?
This just provides assurance to the readers of the financial statement that the information disclosed about their greenhouse emissions is correct and there is confidence that they are abiding by the relevant standard.
The relevant standard is the greenhouse Gas protocol corporate accounting and reporting standard.
87
Why are assurance engagement for sustainability reports important?
There can be a competitive advantage due to their reputation for competence and independence, following all rigorous assurance and ethical standards, and having this assurance from PA's ensures that there is confidence and security.
88
Why are assurance engagements for other types of non financial important?
Ensures that the information provided are accurate without mistake, like PwC providing the wrong winner to the Grammy awards.
89
What are the two types of subject matter?
1. Quantifiable subject matter such as the financial statements and tax returns.
2. Subjective subject matter, such as the effectiveness of computer systems and efficiency of manufacturing operations.
90
What are examples of subject matter information?
A company presents, measures and evaluates, and disclose its financial statements by applying the IFRS standards to the ASPE standards.
An assertion about the effectiveness of internal controls, that result from particular frameworks like Committee off Sponsoring Organizations.
