Chapter 2

Question 1

AICPA

Answer 1

(American Institute of Certified Public Accountants) the body charged with establishing auditing standards for the audits of non-issuers through Statements on Auditing Standards (SASs) issued by the Auditing Standards Board

Question 2

Appropriate (audit evidence)

Answer 2

Characteristics related to the quality (relevance and reliability) of audit evidence

Question 3

Audit plan

Answer 3

A list of the specific audit procedures that the audit team needs to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements

Question 4

Audit procedures

Answer 4

The specialized actions auditors take to obtain evidence in an engagement

Question 5

Auditing standards

Answer 5

The audit quality guides that apply to all audits

Question 6

Control risk

Answer 6

The likelihood that the client’s internal control policies and procedures fail to prevent or detect a material misstatement

Question 7

Detection risk

Answer 7

The likelihood that the auditors’ substantive procedures will fail to detect a material misstatement that exists within an account balance or class of transactions

Question 8

Due care

Answer 8

A level of performance that would be exercised by reasonable auditors in similar circumstances

Question 9

Engagement quality control review

Answer 9

An internal evaluation of the significant judgments made by the audit team and the conclusions reached in formulating its report on an engagement conducted by that firm

Question 10

Evidence

Answer 10

The information used by auditors in arriving at the conclusion on which the audit opinion is based, which includes the underlying accounting data and all available corroborating information

Question 11

Financial reporting framework

Answer 11

The financial reporting standards (i.e., GAAP, IFRS, etc.) adopted by management and, when appropriate, those charged with governance (audit committee board of directors) in the preparation of the financial statements

Question 12

GAAS

Answer 12

(Generally Accepted Auditing Standards) Standards that identify necessary qualifications and characteristics of auditors and guide the conduct of the audit examination

Question 13

Independence in appearance

Answer 13

The extent to which others (particularly financial statement users) perceive auditors to be independent

Question 14

Independence in fact

Answer 14

Auditors’ mental attitude and impartiality with respect to the client

Question 15

Inherent risk

Answer 15

The probability that in the absence of internal controls, material errors or frauds could enter the accounting system used to develop financial statements

Question 16

Inspection

Answer 16

An evaluation of an accounting firm’s audit engagements and system of quality control conducted by the PCAOB and required for any firms providing auditing services to issuers

Question 17

Internal control

Answer 17

Policies and procedures implemented by an entity to prevent or detect material accounting frauds or errors and provide for their correction on a timely basis

Question 18

Issuer

Answer 18

An entity that offers registered securities, such as stocks and bonds, for sale to the general public

Question 19

Materiality

Answer 19

An amount or event that has a substantial likelihood to influence financial statement users’ decisions. Thus, material information is a synonym for important information. The emphasis is on the financial statement users’ point of view, not on the auditors’ or managers’ points of view.

Question 20

Professional judgement

Answer 20

The application of relevant training, knowledge, and experience in making informed decisions about appropriate courses of action during the audit engagement

Question 21

professional skepticism

Answer 21

A state of mind that is characterized by appropriate questioning and a critical assessment of audit evidence

Question 22

PCAOB

Answer 22

(Public Company Accounting Oversight Board) the body charged with establishing auditing standards for the audits of public entities through the issuance of Auditing Standards. The PCAOB is also responsible for inspecting firms that perform audits of issuers

Question 23

Reasonable assurance

Answer 23

The concept that recognizes that the costs of control activities should not exceed the benefits that are expected from the control activities

Question 24

Risk of material misstatement

Answer 24

The combined probability that a material misstatement (error or fraud) will occur and not be prevented or detected on a timely basis by the entity’s internal controls. The risk of material misstatement is a combination of inherent and control risk

Question 25

Substantive procedures

Answer 25

The detailed audit and analytical procedures designed to detect material misstatements in account balances and footnote disclosures

Question 26

Sufficiency (audit evidence)

Answer 26

The measure of the quantity of audit evidence (the number of transactions or components evaluated)

Question 27

System of quality control

Answer 27

The policies and procedures implemented by a firm to provide with reasonable assurance that the firm and its personnel (1) comply with professional standards and applicable regulatory and legal requirements and (2) issue reports that are appropriate in the circumstances