Chapter 1 Intro to Auditing Flashcards
What is auditing?
Auditing is the verification of information by someone other than the one providing that information.
What is information risk?
There is information risk that financial statement information will not be a full, true, and fair representation of the transactions and events that occurred and hence will not be reliable for economic decision making. Unreliable financial statements mean that the financial statements are so full of errors and omissions that the information risk is sufficiently high to mislead users of the financial statements. In other words, financial statements with high information risk result in unethical reporting.
What does reasonable assurance mean? What relationship does it have two informational risk? To an audit?
The concept of reasonable assurance describes a mental attitude that the auditor gains from the conclusions drawn from audit examination findings. Based on the examination, if the auditor believes the financial statements to be fairly stated, the auditor will communicate this belief to financial statement users as an opinion in the Auditor’s Report. This opinion, in essence, provides a high level of assurance to the user that the auditor believes that the information risk is low and has evidence to support that believe.
What is three-party accountability and who are the three parties involved?
What is an accountability relationship?
What roles do auditors perform in this accountability relationship? Who are auditors accountable to?
Three-party accountability is a relationship in which at least one of the parties needs to be able to justify its actions or claims to another party in the relationship. It reduces the risk on information created by the second party, the preparer of the information, to foreseeable third parties who use the information. Reducing information risk is synonymous with improving the credibility of, or providing assurance on, information produced by the second party.
An accountability relationship in which there are three parties (individuals): an asserter (2nd party), an assurer (1st party), and a user of the asserted information (3rd party).
For example:
The auditor can be called the first party and the seller the second party. Notice, however, that there is a third-party – you, the investor. The auditor is an independent party hired to verify information provided by the second party. The auditor is hired because you, the third-party,do not trust the information provided by the second party. You feel the information risk is too high; therefore, the first party will provide you with the independent verification.
An accountability relationship is a relationship in which at least one of the parties needs to be able to justify its actions or claims to another party in the relationship.
In an accountability relationship management is accountable to the users. However, the users cannot rely on financial statements, as they do not trust management sufficiently; they demand that financial statements be verified by a competent, independent auditor. Thus, the auditor is also accountable to the user. Three – party accountability is an important distinguishing feature of auditing.
The auditor is expected to act in the interests of the user of financial statements. You are entitled to assume that an audited set of financial statements will not mislead you. If you could not assume the auditor is trustworthy, the relevance of the audit would largely disappear, leaving little, if any, role for the audit in society.
What are audit societies?
The term coined by Michael Power for societies in which there is extensive examination by auditors of economic and other politically important activities.
What is the difference between accounting, financial reporting and auditing?
….
What value do auditors provide and to whom?
The auditor increases the reliability, or reduces the risk, of using inaccurate information in your decision-making (i.e., The auditor reduce his information risk).
What are the 3 underlying conditions that affect users’ demand for accounting information?
Complexity
Remoteness
Consequences
What are external auditors?
What does “adding credibility” mean?
Auditors who are outsiders and independent of the entity being audited. They are professional accountants who serve as objective intermediaries and add credibility to financial information.
Adding credibility is AKA providing assurance, and external auditing of financial statements is described as an assurance engagement.
What is assurance engagement?
An engagement in which the auditor adds either reasonable (high) or moderate (negative) levels of assurance.
The “adding of credibility” and external auditing of financial statements.
Auditors determine whether the information in the financial statements is reliable, and they communicate this conclusion to users by reporting that the company’s presentation of financial position, results of operation, and cash flow statements are in accordance with GAAP or some other disclosed basis of accounting. This is the assurance provided by the assurance function, as it relates to the traditional financial statements. Insurance requires three party accountability. To achieve three-accountability, auditors must not be involved in producing the information audited.
Do auditors include financial report production?
No, that function is performed by a company’s accountants under the direction of management. Auditors determine whether the information in the financial statements is reliable, and they communicate this conclusion to the users by reporting that the company’s presentation of financial position, results of operations, and cash flow statement are in accordance with GAAP, or some other disclosed basis of accounting.
What is providing assurance?
The adding of credibility to financial information by objective intermediaries.
What is a client and an auditee?
A client is a person or company who retains the auditor and pays the fee.
An auditee is the entity (company, proprietorship, organization, department, etc.) being audited; Usually it refers to the entity whose financial statements are being audited.
What is professional judgment?
The application of relevant training, knowledge, and experience, within the context provided by auditing, accounting, and ethical standards, and making informed decisions about the courses of action that areappropriate in the circumstances of the audit engagement. Is a process used to reach a well reasoned conclusion. It is based on the relevant facts and circumstances at the time the audit decision is made. Professional judgement is critical to effectively perform an audit.it is used to focus on the nature, timing, and extent of audit procedures and evaluating the appropriateness of the application of GAAP by management. Professional judgement also involves identifying reasonable alternatives. Careful and objective consideration of information that may seem contradictory to conclusion is critical to the appropriate application of professional judgment, which is essential to the appropriate application of accounting and auditing standards.
What is documentation of professional judgement at the time the judgements are made is also very important?
Documentation demonstrates that is sound process was followed and helps the development of a well reasoned conclusion. When professional judgement is challenged, contemporaneous documentation shows the analysis of the sharks, circumstances, and alternatives considered as well as the basis for conclusions reached. The extent of documentation and effort used in the process will vary with the significance and complexity of an issue. When the professional judgement process is appropriately applied and contemporaneously documented, it is much easier to support and defend conclusion reached. If decisions appear to be arbitrary, which is not supported by facts, evidence, or professional literature, or not well reasoned or well-documented are difficult to support
What is professional skepticism?
Professional skepticism is a term that appears frequently in auditing literature and speech, is an auditor’s tendency not to believe management assertions but, instead, to find sufficient support for the assertions through appropriate audit evidence. professional skepticism is an important aspect of professional judgment. Specifically, professional scepticism means recognizing that circumstances causing the financial statements to be materially misstated may exist. Note that to implement this concept of scepticism, The auditor first needs to define “misstatement” and “materiality” and then implement them in practice.
Skepticism as adopted by auditors is an important attitude for fulfilling their duties. A Skeptical mindset is the key to detecting fraud or other unethical behavior. The auditor should always consider whether his or her approach is sufficiently skeptical.
Professional scepticism is an inclination to question all material assertions made by management, whether oral, written, or contained in the accounting records. However, this attitude must be balanced by a willingness to respect integrity of management. Auditors should neither blindly expect that every management is dishonest nor thoughtlessly assume management to be totally honest. The key lies in auditors’ objectivity and in the audit requirement of gathering sufficient appropriate evidence and evaluating financial statement disclosures to reach reasonable and supportable audit decisions.
