Definitions Flashcards
The risk that an entity will fail to meet its objectives. If the company fails to meet its objectives enough times, the company will ultimately fail
Business Risk
The probability that the information circulated by a company will be false or misleading
Information risk
Independent professional services that improve the quality of information or its context for decision makers
Assurance services
The provision of an opinion on subject matter or an assertion about the subject matter that is the responsibility of another party
Attestation engagement
The systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to interested users
Auditing
Defined in the professional auditing standards as having an attitude that “includes a questioning mind and a critical assessment of evidence.” Essentially, it is an auditor’s tendency to NOT believe management’s assertions without corroboration
Professional skepticism
Asserts that each of the balance sheet and income statement balances actually exist (general rule- relates to account balances)
Exsistence
Asserts that each of the income statement events and transactions actually did occur. (general rule- relates to events, transactions, presentations and footnote disclosures)
Occurrence
In financial statements, management asserts that they have property rights for all amounts reported as assets on balance sheet and amounts reported as liabilities represent the company’s own obligations
Rights and Obligations
Management asserts that all transactions, events, assets, liabilities and equities that should have been recorded have been recorded.
Completeness
Special classification of completeness referring to accounting for revenue, expenses and other transactions in the proper period
Cutoff
Management asserts that the transactions and events have been recorded accurately and that the assets, liabilities and equities on the balance sheet have been valued in accordance with GAAP
Accuracy and valuation
Refers to the appropriate recording of the transactions involving assets, liabilities and equities
Accuracy
Management asserts that all transactions and events have been presented correctly in accordance with GAAP and that all relevant information has been disclosed to financial statement users, usually in the footnotes to the financial statements
Classification and Understandibility
Disclosures must be relevant, reliable and understandable or transparent to financial statement users
Understandability
Transactions must be classified in the correct accounts
Classification
Appropriate competence and capabilities to perform the audit, complying with relevant ethical requirements, maintaining professional skepticism and exercising professional judgment, throughout the panning and performance of the audit
Responsibilities
The extent to which others (particularly financial statement users) perceive auditors’ to be independent
Independent in appearance
An auditors’ mental attitude and impartiality with respect to the client
Independent in fact
Expertise, education, experience
Competence and capabilities
A level of performance that would be exercised by reasonable auditors in similar circumstances; auditors are expected to possess skills and knowledge of others in their profession and are not expected to be infallible
Due care
A state of mind that is characterized by appropriate questioning and a critical assessment of audit evidence
Professional skepticism
The application of relevant training, knowledge and experience in making informed decisions about appropriate courses of action during the audit engagement
Professional judgement
Responsibility principle (competence and capabilities/ relevant ethical requirements-independence)
Obtain (retain) engagement
Sets forth general quality criteria for conducting an audit. Five elements: (1) reasonable insurance (2) planning and supervision (3) materiality (4) risk assessment (5) audit evidence
Performance
Concept that a GAAS audit may not detect all material misstatements and auditors are not “insurers” or “guarantors” regarding the fairness of the entity’s financial statement
Reasonable assurance
(1) preparing an audit plan and supervising the work (2) obtaining knowledge of the client’s business and (3) dealing with differences of opinion among the accounting firm’s own personnel
Planning and supervising (engagement planning)
As it relates to financial reporting, the dollar amount that would influence the lending of investing decisions of financial statement users
Materiality
Stage of audit that requires an understanding of the client, its operating environment and its industry
Risk assessment
Policies and procedures implemented by an entity to prevent or detect material accounting frauds or errors and provide for their connection on a timely basis
Internal control
the probability that a material misstatement, either error or fraud will occur
Inherent risk
the probability that a material misstatement, either error or fraud will not be prevented or detected on a timely basis by the entity’s internal controls
control risk
The final element of the performance principle requires that the audit team collects and evaluates sufficient appropriate evidence to provide a reasonable basis for their opinions
Audit Evidence
The information that auditors use in arriving at the conclusions on which to base the audit opinion and includes the underlying accounting data and all available corroborating information
Evidence
Evidence must be trust worthy (reliable) and must provide the audit team with information of interest (relevant). (evidence quality)
Appropriate
Relates to the number of transactions or components evaluated. (evidence quantity)
Sufficiency
Risk that the audit team’s substantive procedures will fail to detect a material misstatement
Detection risk
Based on the evaluation of the evidence obtained, the auditor expresses in the form of a written report, an opinion in accordance with the auditor’s findings or states that an opinion cannot be expressed. Ultimate objective
Reporting Principle
Set of criteria used to determine the measurement, recognition, presentation and disclosure of material items in the financial statements (ex: GAAP, IFRS)
financial reporting framework
Opinion that concludes that the entity’s financial statements present its financial condition, results of operations and cash flows in conformity with GAAP
Unqualified opinion
Opinion that concludes that the entity’s financial statements are not presented in conformity with GAAP (or other frameworks)
Adverse opinion
Opinion that concludes that except for a relatively isolated (limited) departure, the entity’s financial statements are presented in conformity with GAAP
Qualified opinion
In some cases (ex: if auditor lacks independence), auditors may choose not to express an opinion
Disclaimer
(1) perform procedures regarding the acceptance or continuance of audit client relationships (2) determine compliance with independence and ethics requirements (3) reach a contractual understanding with client for the terms and conditions of the audit engagement
Pre-engagement activities
Decision whether or not to accept a new client or to continuing providing services to existing clients
Client acceptance or continuance
The public accounting firm that has been terminated or has voluntarily withdrawn from an audit engagement
Predecessor auditor
To reduce the risk of accepting a problem client, auditing standards require a prospective auditor to initiate contact with and attempt to obtain basic information directly from the predecessor regarding issues that reflect directly on the integrity of management
Communications with predecessor auditor
The responsibilities principle requires auditors to comply with appropriate ethical requirements for each audit engagement: two important requirements (1) independence (2) due care
compliance with independence and ethical requirements
This letter sets forth the understanding with the client, including in particular (1) the objectives of engagement (2) management’s responsibilities (3) auditors’ responsibilities (4) any limitations of the engagement
Engagement letter
Comprehensive list of the specific audit procedures that the audit team needs to perform to gather sufficient appropriate evidence on which to case their opinions on the financial statements
Audit plan
Should include all team members (engagement partner/quality assurance partner) and focus on the financial statement accounts that represent the highest risk of material misstatement. Also brainstorming sessions: (1) ensure that all audit team members are informed about potential risks in the engagement (2) increase team members’ awareness for potential fraud
Staffing the engagement- planning team meetings
External auditors should consider objectivity and competence
Internal auditors
Standards that identify necessary qualifications and characteristics or auditors and guide the conduct of the audit examination
Generally accepted auditing standards
The specialized actions auditors take to obtain evidence in an egagement
Auditing procedures
The audit quality guides that apply to all audits
Auditing standards
Audit procedures to gain understanding of clients and risks associated with the client
Risk assessment
Audit procedures to test the operating effectiveness of internal controls
Tests of control
Audit procedures to gather evidence about management assertions related to amounts and disclosures in the financial statements
Substantive procedures
vouching, tracing, scanning
inspection
An audit procedure in which an auditor selects an item of financial information, usually from a journal or ledger and follows its path back through the processing steps to its origin
Vouching
An audit procedure in which the auditor selects a basic source document and follows its processing path forward to find its final recording in a summary journal or ledger. In practice, however, the term tracing may be used to describe following the path in either direction
tracing
Audit procedure- way auditors exercise their general alertness to unusual items and events in clients’ documentation
scanning
Examining property, plant and equipment: inventory, and securities certificates. Physical inspection provides compelling evidence of existence and may provide tentative evidence of valuation
Inspection of tangible assets
View clients’ physical facilities and personnel on an inspection tour. Can produce general awareness of events in clients’ office
observation
Procedure that generally involves the collection of oral (sometimes written) evidence from independent parties and management
Inquiry
Procedure that can produce evidence of existence and rights and obligations and sometimes of valuation and cutoff. Auditors typically limit use to specific transactions
Confirmation
Used to provide evidence of valuation for all other financial data. Mathematical evidence can serve the objectives of existence and valuation
Recalculation
Can involve any client control procedure. Auditor can verify that an accounts receivable aging schedule was prepared properly. Like recalculation but broader
Reproformance
Auditors can evaluate financial statement accounts by developing expectations about what an account balance should be based on an analysis of relevant non/financial data. Required to use when planning and when performing review of financial statements near the end of the audit before audit report is issued
Analytical procedures
The written basis for the auditors’ conclusions that provides the necessary support for the auditor’s assertions and representations made in the auditors’ report
Audit documentation
The audit documentation containing information of continuing audit significance for current and past audits of the same client
Permanent files
Include all client acceptance or continuance documentation along with planning documentation for the year under audit (planning memorandum)
Current files
The probability that the information circulated by an entity will be false or misleading
Information risk
The risk that the auditor will express an inappropriate opinion when the financial statements are materially misstated (i.e. giving an unmodified opinion on fin state that are misleading b/c of material misstatements that auditors failed to discover)
Audit risk
The deliberate fraud committed by management that injures investors and creditors through materially misstated information. Auditor is responsible to design procedures to provide reasonable assurance that frauds are detected
Management fraud risk
