Chapter 2: The Financial Statement Audit Environment

Question 1

Audit committee

Answer 1

A committee consisting of members of the board of directors, charged with overseeing the entity’s system of internal control over financial reporting, internal and external auditors, and the financial reporting process. Members typically must be independent of management.

Question 2

Auditing standards of the PCAOB

Answer 2

Statements issued by the PCAOB

Question 3

Board of directors

Answer 3

persons elected by the stockholders of a corporation to oversee management and to direct the affairs of the corporation.

Question 4

Business processes

Answer 4

processes implemented by management to achieve entity objectives. Business processes are typically organized into the following categories: financing processes, purchasing, HR, inventory management, and revenue.

Question 5

Code of Professional Conduct.

Answer 5

A set of principles, rules, and interpretations that establish guidance for acceptable behavior for accountants and auditors.

Question 6

Corporate governance

Answer 6

The oversight mechanisms in place to help ensure the proper stewardship over an entity’s assets. Management and the board of directors play primary roles, and the independent auditor plays a key facilitating role.

Question 7

Ethics

Answer 7

A system or code of conduct based on moral duties and obligations that indicates how an individual should behave.

Question 8

Generally accepted accounting principles GAAP

Answer 8

Accounting principles that are generally accepted for the preparation of financial statements in the US. GAAP standards are currently issued primarily by the FASB, with oversight and influence by the SEC. International Financial Reporting Standards IFRS are set by the International Accounting Standards Board.

Question 9

Independence

Answer 9

a state of objectivity in fact and in appearance, including the absence of any significant conflicts of interest.

Question 10

Integrated audit

Answer 10

an audit of both financial statements and ICFR, provided by the external auditor. Required for public companies.

Question 11

International Standards on Auditing ISA

Answer 11

Statements issued by IFAC’s International Auditing and Assurance Standards Board

Question 12

Management advisory services MAS

Answer 12

Consulting services that may provide advice and assistance concerning an entity’s organization, personnel, finances, operations, systems, or other activities.

Question 13

Principles Underlying an Audit Performed in Accordance with GAAS.

Answer 13

The ASB replaced the 10 Generally Accepted Auditing Standards with these Principles, organized into four parts: Purpose of an Audit and Premise upon which an Audit is conducted, Auditor Responsibilities, Audit Performance, and Audit Reporting.

Question 14

Professionalism

Answer 14

Conduct, aims, or qualities that characterize a profession or professional person

Question 15

Public accounting firm

Answer 15

an organization created to provide professional accounting-related services, including auditing. Usually formed as a proprietorship or as a form of a partnership.

Question 16

Statements on Auditing Standards SAS

Answer 16

Statements issued by the AICPA’s ASB.