Chapter 4 Terms Flashcards
Analytical Procedures
Evalutions of financial information made through analysis of plausible relationships among both financial and nonfinancial data
Audit Data analytics
Using analysis, modeling and visualization to discover and analyze patterns, anomalies and other information in data in the contact of the audit
Audit Procedures
Specific acts performed by the auditor in gathering evidence to determine if specific assertions are materially misstated
Audit risk
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
Business Risk
A risk resulting from significant conditions, events, circumstances and action or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies or from the setting of inappropriate objectives and strategies
Control Risk
The risk that a misstatement that could occur in an assertion about an account or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected on a timely basis by the internal control
Detection Risk
The risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material
Engagement risk
The risk that the auditor is exposed to financial loss or damange to his or her professional reputation from litigation, adverse publicity or other events arising in connection with financial statements audited and reported on
Errors
Unintentional misstatements or omissions of amounts or disclosures
Factual Misstatements
These are misstatements which is there no doubt
Fraud
An intentional act by one or more among management, those charged with governance, employees or 3rd parties, involving the use of deception that results in a misstatement in the financial statements
Inherent Risk
The susceptibility of an assertion in an account or disclosure to a misstatement due to error/fraud that could be material before consideration of any related controls
Judgmental Misstatements
These are misstatements that arise from the judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate
Misstatement
A difference between the amount, classification, presentation or disclosure of a reported financial statement item and its requires for the item to be presented fairly in accordance with the applicable financial reporting framework
Nonsampling Risk
The risk that auditors will make judgment errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation
Projected misstatements
These ae the auditor’s best estimate of misstatements in populations, involving the projection of misstatements identified in an audit sample to the entire population from which the sample was drawn
Risk assessment
The identification, analysis, and management of risks relevant to the preparation of financial statements that ae fairly presented in conformity with GAAP
Risk of material misstatement
The risk that the financial statements are materially misstated prior to the audit. it represents the combination of inherent risk and control risk
Significant Risk
An identified risk of material misstatement (1) for which the assessment of inherent risk is close to the upper end of the spectrum of inherent risk due to the degree to which inherent risk factors affect the combination of the likelihood of a misstatement occurring and the magnitude of the potential misstatement should that misstatement occur, or (2) that is to be treated as a significant risk in accordance with the requirements of other auditing standards.
Which of the following is not a misstatement of the financial statements?
A. The entity uses different inventory accounting methods for internal and external reporting.
B. A departure from GAAP.
C. The footnote for pensions is omitted.
D. A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to 13% of sales as determined by the controller.
A. The entity uses different inventory accounting methods for internal and external reporting.
Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity’s financial statements?
A. Accounts receivable confirmation requests yield significantly fewer responses than expected.
B. Audit trails of computer-generated transactions exist only for a short time.
C. The chief financial officer does not sign the management representation letter until the last day of the auditor’s fieldwork.
D. Management consults with other accountants about significant accounting matters.
A. Accounts receivable confirmation requests yield significantly fewer responses than expected
Under Auditing Standards, which of the following would be classified as an error?
A. misappropriation of assets for the benefit of management
B. misinterpretation by management of facts that existed when the financial statements were prepared
C. preparation of records by employees to cover a fraudulent scheme
D. intentional omission of the recording of a transaction to benefit a third party
B. misinterpretation by management of facts that existed when the financial statements were prepared
As the acceptable level of detection risk decreases, the assurance directly provided from:
A. substantive procedures should increase.
B. substantive procedures should decrease.
C. tests of controls should increase.
D. tests of controls should decrease.
A. substantive procedures should increase.
Which of the following is correct concerning required auditor communications about fraud?
A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.
B. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.
C. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor.
D. The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.
A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.
When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the:
A. extent of tests of controls.
B. level of detection risk.
C. extent of substantive tests.
D. level of inherent risk.
C. extent of substantive tests.
What is the #1 cause of Risk?
Change
What is the #1 Fraud Red Flag?
Complexity
2 types of mistakes
- Rejection of the Truth
- Acceptance of a Lie
Audit Risk Model Formula
AR = IR x CR x DR
Fraud Triangle
Opportunity, Pressure/Incentive, Rationalization/Justification
Major opportunity factors
Lack of controls, poor controls, unenforced controls
Transactions should be
valid, properly authorized, complete, properly classified, reported in the proper period, properly valued, summarized correctly
Most Basic control activities
Segregation of duties
Fraud Sqaure Model
Opportunity, Pressure/Incentive, Rationalization/Justification and ability
Fraud Baseball Diamond
Opportunity, Pressure/Incentive, Rationalization/Justification, Ability and Psyche
