Chapter 4 Flashcards
Information is considered material if it
affects a user’s decision-making process. This may be due to factors other than the magnitude of misstatements.
information that exceeds an auditor’s preliminary materiality assessment
Quantitatively material
an amount less than materiality, which is set to reduce the likelihood that a misstatement in a particular class of transactions, account balances, or disclosures, in aggregate, do not exceed materiality for the financial statements as a whole
Performance materiality
information that is relevant when some areas of the financial statements are expected to influence the economic decisions made by users of the financial statements
Specific materiality
strategy that sets the scope, timing, and direction of the audit and provides the basis for developing a detailed audit plan
Audit strategy
strategy used when the auditor does not plan to rely on the client’s controls and increases the reliance on detailed substantive procedures that involve intensive testing of year-end account balances and transactions from throughout the year
Substantive audit strategy
strategy used when the auditor obtains a detailed understanding of their client’s system of internal controls and plans to rely on that system to identify, prevent, and detect material misstatements
Combined audit strategy
measurements, agreed to beforehand, that can be quantified and reflect the success factors of an organization
Key performance indicators (KPIs)
the ability of a company to earn a profit
Profitability
market price per share to earnings per share
Price-earnings (PE) ratio
profit to weighted average ordinary shares issued
Earnings per share (EPS)
the ability of a company to pay its debts when they fall due
Liquidity
an evaluation of financial information by studying plausible relationships among both financial and non-financial data
Analytical procedures
detailed testing of controls and substantive testing of transactions and accounts
Execution stage
Analytical procedures are conducted at the planning stage of the audit to:
- highlight unusual fluctuations in accounts
- aid in the identification of risk
- enhance the understanding of a client
- identify the accounts at risk of material misstatement
- reduce audit risk by concentrating audit effort where the risk of material misstatement is greatest.