Chapter 1 Terms

Question 1

Assertions

Answer 1

Representations, explicit or otherwise, with respect to the recognition, measurement, presentation, and disclosure of information in the financial statements, which are inherent in management, representing that the financial statements are prepared in accordance with the applicable financial reporting framework. Assertions are used by the auditor to consider the different types of potential misstatements that may occur when identifying, assessing, and responding to the risks of material misstatement.

Question 2

Public Company

Answer 2

A company that sells its stocks or bonds to the public, giving the public a valid interest in the proper use of the company’s resources.

Question 3

Principals

Answer 3

Diverse groups of owners who are not directly involved in running the business. Also called stockholders.

Question 4

Agents

Answer 4

The professional managers hired by the owners to run the corporation on a day-to-day basis and who fulfill a stewardship function by managing the corporation’s assets for the owners.

Question 5

Information Asymmetry

Answer 5

The concept that the manager generally has more information about the true financial position and results of operations of the entity than the absentee owner does.

Question 6

Reporting

Answer 6

The end product of the auditor’s work, indicating the auditing standards followed and expressing an opinion as to whether an entity’s financial statements are fairly presented in accordance with agreed-upon criteria (e.g., GAAP).

Question 7

Information Risk

Answer 7

The risk that information circulated by a company’s management could be false or misleading.

Question 8

Desirable Characteristics of ‘Inspectors’

Answer 8

1) Competent
2) Objective
3) Honest
4) Skeptical
5) Responsible/Liable

Question 9

Desirable Characteristics of the Service

Answer 9

1) Timely
2) Reasonably Priced
3) Complete
4) Thorough
5) Systematic & Reliable
6) Informative

Question 10

Why are assertions central to auditing?

Answer 10

These are central to auditing because they are the focus of the auditor’s evidence collection efforts.

Question 11

Assertions about classes of transactions and events:

Answer 11

1) Occurrence
2) Completeness
3) Authorization
4) Accuracy
5) Cutoff
6) Classification
7) Presentation

Question 12

Occurence

Answer 12

Transaction and events that have been recorded or disclosed have occurred, and such transactions and events pertain to the entity.

Question 13

Completeness

Answer 13

All transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.

Question 14

Authorization

Answer 14

All transactions and events have been properly authorized.

Question 15

Accuracy

Answer 15

Amounts and data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described.

Question 16

Cutoff

Answer 16

Transactions and events have been recorded in the correct accounting period.

Question 17

Classification

Answer 17

Transactions and events have been recorded in the proper accounts.

Question 18

Presentation

Answer 18

Transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Question 19

Assertions about account balances, and related disclosures:

Answer 19

1) Existence
2) Rights & Obligations
3) Completeness
4) Accuracy, Valuation, & Allocation
5) Classification
6) Presentation

Question 20

Existence

Answer 20

Assets, liabilities, and equity interests exist.

Question 21

Rights and Obligations

Answer 21

The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

Question 22

Completeness

Answer 22

All assets, liabilities, and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.

Question 23

Accuracy, Valuation, and Allocation

Answer 23

Assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described.

Question 24

Classification

Answer 24

Assets, liabilities, and equity interests have been recorded in the proper accounts.

Question 25

Presentation

Answer 25

Assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Question 26

Assurance Services

Answer 26

Independent professional services that improve the quality of information, or its context, for decision makers. Encompasses attest services and financial statement audits.

Question 27

Attest Services

Answer 27

Services provided by a practitioner engaged to issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. Encompasses financial statement audits.

Question 28

Auditing

Answer 28

A systematic process of (1) objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and (2) communicating the results to interested users.

Question 29

Materiality

Answer 29

The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users.

Question 30

Misstatement

Answer 30

A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be presented fairly in accordance with the applicable financial reporting framework.

Question 31

Audit Risk

Answer 31

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Question 32

Reasonable Assurance

Answer 32

The concept that an audit done in accordance with auditing standards may fail to detect a material misstatement in a client’s financial statements. In an auditing context this term has been defined to mean a high but not absolute level of assurance.

Question 33

Audit Evidence

Answer 33

All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence is information to which audit procedures have been applied and consists of information that corroborates or contradicts assertions in the financial statements.

Question 34

What are the two key descriptors of audit evidence?

Answer 34

1) Sufficient
2) Appropriate

Question 35

Sufficiency

Answer 35

Refers to the quantity of evidence the auditor obtains.

Question 36

Appropriateness

Answer 36

Refers to the quality of the evidence.

Question 37

When is evidence considered appropriate?

Answer 37

This is considered appropriate when it provides information that is both relevant and reliable.

Question 38

Relevance

Answer 38

Refers to whether the evidence relates to the specific management assertion being tested.

Question 39

Reliability

Answer 39

Refers to the diagnosticity of the evidence. Can a particular type of evidence be relied upon to signal the true state of the account balance or assertion examined?

Question 40

How are sufficiency and appropriateness of an audit interrelated?

Answer 40

These two characteristics are interrelated in that they jointly affect the persuasiveness of audit evidence.

Question 41

Internal Controls

Answer 41

These are implemented to ensure that the client’s information system appropriately captures and records individual transactions, which are then collected into ending account balances.

Question 42

What are the different audit phases?

Answer 42

1) Client Acceptance/Continuance
2) Preliminary Engagement Activities
3) Plan the Audit
4) Consider and audit internal control.
5) Audit business processes and related accounts.
6) Complete the audit.
7) Evaluate results and issue audit report.

Question 43

What are the three preliminary engagement activities?

Answer 43

1) Determine the audit engagement team requirements,
2) Ensure the independence of the audit firm and audit team, and
3) Establish and understanding with the client regarding the services to be performed and the other terms of engagement.

Question 44

Risk of Material Misstatement (RMM)

Answer 44

The risk that the financial statements are materially misstated prior to the audit.

Question 45

Unqualified/Unmodified Audit Report

Answer 45

A “clean” audit report, indicating the auditor’s opinion that a client’s financial statements are fairly presented in accordance with agreed-upon criteria (e.g., GAAP). By far the most common type of report.

Question 46

Audit Data Analytics (ADA)

Answer 46

Using analysis, modeling, and visualization to discover and analyze patterns, anomalies, and other information in data in the context of the audit.

Question 47

What is the five-step process that the AICPA recommends to plan, perform, and evaluate results?

Answer 47

1) Plan the ADA
2) Access and prepare the data to be used in the ADA
3) Consider the relevance and reliability of the data used.
4) Preform the aDA
5) Evaluate and interpret the results of the ADA.

Question 48

What does blockchain do?

Answer 48

This allows for the use of decentralized, distributed digital ledgers that record economic transactions…. Allows for enhanced transparency of transactions, increased operating efficiency, and greater reliability of data and data trails.