Definitions Flashcards
Contingent liabilities
Potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. Auditors are especially concerned about:
• Pending litigation for patent infringement
• Income tax disputes
• Product warranties
• Guarantees of obligations of others
• Unused balances of outstanding letters of credit
Comprehensive report
Board is given a comprehensive report with conclusions on the financial reporting, the internal system of control as well as conduct and result of audit
Summary report
General meeting is given a summary report from the audit
True and fair view
The auditor must conclude that the statements follow recognized accounting principles (thereby true and fare view)
o E.g. Swiss GAAP, IFRS or US GAAP
Unqualified with emphasis-of-matter explanatory paragraph or modified wording
A complete audit that is satisfactory, but auditor believes additional information should be provided
• The most important causes are:
• Lack of consistent application of generally accepted accounting principles
• Substantial doubt about going concern
• Auditor agrees with a departure from promulgated accounting principles
• Emphasis of other matters
• Reports involving other auditors
Qualified opinion
- Can result from limitation on the scope of the audit or failure to follow generally accepted accounting principles
- A qualified opinion can be used only when the auditor concludes that the financial statements are fairly stated.
- Qualification of both the scope and the opinion or of the opinion alone
- A scope and opinion qualification can be issued only when the auditor has been unable to accumulate all of the evidence required by auditing standards
Internal auditing
An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
Elements of the IIA-Definition
- Add value
- Improvement of operations
- Helps an organization accomplish its objectives
- Governance process
- Risk management process
- Control process
Implementation guides (IA)
Assist internal auditors in applying the standards. They collectively address internal auditing’s approach, methodologies, and consideration, but do not detail process or procedures
Supplementary guides (IA)
Provide detailed guidance for conducting internal audit activities. These include topical areas, sector-specific issues as well as processes and procedures, tools and techniques etc.
Mandatory guidance IA
- Definition of IA
- Principles
- Ethics
- IIA standards
Discrete variable
Only specific values can be taken
Continuous variable
Any value can be taken
Stratification
Divide data into segments, called Stratification (but then variance is altered, not very common to use this in practice).
Sampling risk
o Probability that the sample is not representative and the auditor reach an incorrect conclusion.
o E.g. for substantive tests the sampling risk is: Risk of incorrectly accepting the financial statements when there are material errors within.
Non-Sampling risk
o The risk that the auditor reaches an incorrect conclusion for any reason not related to sampling risk
Four factors influence the initial sample size
o Population size
o TER
o ARO
o EPER
Tolerable exception rate
Represent the highest exception rate the auditor will permit in the control being tested and still be willing to conclude the control is operating effectively. TER can have significant impact on sample size.
Acceptable risk of overreliance
The risk that the auditor concludes that controls are more effective that they actually are is the risk of overreliance. ARO measures the risk the auditor is willing to take of accepting a control as effective when the true population exception rate is greater than TER. ARO represents the auditor’s measure of sampling risk (i.e. an ARO of 5% leads to 95% confidence level). ARO is based on the assessed control risk, the lower the assessed CR, the lower the ARO. Like for TER there is an inverse relationship to planned sample size.