Chapter 4 Flashcards
Accounting estimates
The approximations of financial statement amounts often included in financial statements
Analytical procedures
Procedures that allow auditors to evaluate financial information by studying relationships among both financial and nonfinancial data. When used near the end of the audit, analytical procedures allow auditors to assess the conclusions reached during the audit and evaluate the overall financial statement presentation
Audit committee
A subcommittee of the board of directors that is generally composed of three to six “outside” members of the organization’s board of directors
Audit risk
The risk that the auditor will express an inappropriate audit opinion when the financial statements are materially misstated (e.g., giving an unmodified opinion on financial statements that are misleading because of material misstatements the auditors failed to discover)
Audit strategy memorandum
The scope, timing, and direction for auditing each relevant assertion based on the results of the audit risk model
Business risks
Those factors, events, and conditions that could prevent the organization from achieving its business objectives
Defalcation
Another name for employee fraud and embezzlement.
Direct-effect noncompliance
The violations of laws or government regulations by the entity or its management or employees that produce direct and material effects on dollar amounts in financial statements.
Embezzlement
A type of fraud involving employees or nonemployees wrongfully taking money or property entrusted to their care, custody, and control, often accompanied by false accounting entries and other forms of lying and cover-up
Employee fraud
The use of fraudulent means to take money or other property from an employer. It consists of three phases: (1) the fraudulent act, (2) the conversion of the money or property to the fraudster’s use, and (3) the cover-up
Errors
The unintentional misstatements or omissions of amounts or disclosures in financial statements
Extended procedures
The audit procedures used in response to heightened fraud awareness as the result of the identification of significant risks
Fraud
The misrepresentation of facts that the individual knows to be false with the intention to deceive
Fraudulent financial reporting
Intentional misstatements, including omissions of amounts or disclosures in financial statements intended to deceive financial statement users
Horizontal analysis
The comparative analysis of year-to-year changes in balance-sheet and income-statement accounts
Indirect-effect noncompliance
The violation of laws and regulations that does not directly affect specific financial statement accounts or disclosures (e.g., violations relating to insider securities trading, occupational health and safety, food and drug administration regulations, environmental protection, and equal employment opportunity).
Larceny
The simple theft of an employer’s property that is not entrusted to an employee’s care, custody, or control
Management fraud
The deliberate fraud committed by management that injures investors and creditors through materially misleading information
Misappropriation of assets
Asset theft from an entity. It is often perpetrated by employees in small amounts and is sometimes referred to as employee fraud
Related parties
Those individuals or organizations that are closely tied to the audit client, possibly through family ties or investment relationships
Significant risk
A risk of material misstatement that requires special audit consideration. Fraud risk is always considered significant risk
Vertical analysis
The common-size analysis of financial statement amounts created by expressing amounts as proportions of a common base such as sales for the income-statement accounts or total assets for the balance-sheet accounts
White-collar crimes
Fraud perpetrated by people who work in offices and steal with a pencil or a computer terminal. The contrast is with violent street crime.
