Chapter 2: Professional Standards

Question 1

American Institute of Certified Public Accountants (AICPA)

Answer 1

As related to professional auditing standards, the body charged with established auditing standards for the audits of nonpublic entities 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 comprehensive 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; auditors are expected to possess the skills and knowledge of others in their profession and are not expected to be infallible.

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 or board of directors) in the preparation of the financial statements.

Question 12

generally accepted auditing standards (GAAS)

Answer 12

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 audits 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 public entities.

Question 17

internal control

Answer 17

A process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the reliability of financial reporting, the effectiveness and efficiency of operations, and compliance with applicable laws and regulations.

Question 18

materiality

Answer 18

An amount or event that is likely to influence financial statement users’ decisions.

Question 19

professional judgment

Answer 19

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

Question 20

professional skepticism

Answer 20

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

Question 21

Public Company Accounting Oversight Board (PCAOB)

Answer 21

As related to professional auditing standards, 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 public entities.

Question 22

public entity

Answer 22

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

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 control. 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.