Chapter 1 Terms Flashcards
Assertions
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.
Public Company
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.
Principals
Diverse groups of owners who are not directly involved in running the business. Also called stockholders.
Agents
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.
Information Asymmetry
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.
Reporting
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).
Information Risk
The risk that information circulated by a company’s management could be false or misleading.
Desirable Characteristics of ‘Inspectors’
1) Competent
2) Objective
3) Honest
4) Skeptical
5) Responsible/Liable
Desirable Characteristics of the Service
1) Timely
2) Reasonably Priced
3) Complete
4) Thorough
5) Systematic & Reliable
6) Informative
Why are assertions central to auditing?
These are central to auditing because they are the focus of the auditor’s evidence collection efforts.
Assertions about classes of transactions and events:
1) Occurrence
2) Completeness
3) Authorization
4) Accuracy
5) Cutoff
6) Classification
7) Presentation
Occurence
Transaction and events that have been recorded or disclosed have occurred, and such transactions and events pertain to the entity.
Completeness
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.
Authorization
All transactions and events have been properly authorized.
Accuracy
Amounts and data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described.
Cutoff
Transactions and events have been recorded in the correct accounting period.
Classification
Transactions and events have been recorded in the proper accounts.
Presentation
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.
Assertions about account balances, and related disclosures:
1) Existence
2) Rights & Obligations
3) Completeness
4) Accuracy, Valuation, & Allocation
5) Classification
6) Presentation
Existence
Assets, liabilities, and equity interests exist.
Rights and Obligations
The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
Completeness
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.
Accuracy, Valuation, and Allocation
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.
Classification
Assets, liabilities, and equity interests have been recorded in the proper accounts.
Presentation
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.
Assurance Services
Independent professional services that improve the quality of information, or its context, for decision makers. Encompasses attest services and financial statement audits.
Attest Services
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.
Auditing
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.
Materiality
The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users.
Misstatement
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.
Audit Risk
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
Reasonable Assurance
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.
Audit Evidence
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.
What are the two key descriptors of audit evidence?
1) Sufficient
2) Appropriate
Sufficiency
Refers to the quantity of evidence the auditor obtains.
Appropriateness
Refers to the quality of the evidence.
When is evidence considered appropriate?
This is considered appropriate when it provides information that is both relevant and reliable.
Relevance
Refers to whether the evidence relates to the specific management assertion being tested.
Reliability
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?
How are sufficiency and appropriateness of an audit interrelated?
These two characteristics are interrelated in that they jointly affect the persuasiveness of audit evidence.
Internal Controls
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.
What are the different audit phases?
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.
What are the three preliminary engagement activities?
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.
Risk of Material Misstatement (RMM)
The risk that the financial statements are materially misstated prior to the audit.
Unqualified/Unmodified Audit Report
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.
Audit Data Analytics (ADA)
Using analysis, modeling, and visualization to discover and analyze patterns, anomalies, and other information in data in the context of the audit.
What is the five-step process that the AICPA recommends to plan, perform, and evaluate results?
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.
What does blockchain do?
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.
