Engagement Planning, Obtaining an Understanding of the Client and Assessing Risks Flashcards
Analytical Procedures
Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data. Analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.
Assertions
Representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur.
Audit evidence
Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Includes both information contained in the accounting records underlying the financial statements and other information:
a. sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity of audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence.
b. appropriateness of audit evidence is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.
Audit Plan
a description of the nature, timing and extent of the audit procedures to be performed. It is often documented with an audit program.
Audit program
a detailed listing of the specific audit procedures to be performed in the course of an audit engagement. Audit programs are tailored to the risks and internal control of each engagement.
Audit risk
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk
Audit strategy
The approach which involves determining overall characteristics of an audit that define its scope, reporting objectives, timing of procedures and various important factors relating to the audit. When the overall audit strategy has been established, the auditors start the development of a more detailed audit plan to address the various matters identified in the audit strategy
Control risk
the risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure 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 entity’s internal control
Detection risk
The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.
Engagement letter
a formal letter sent by the auditors to the client at the beginning of an engagement summarizing such matters as the nature of the engagement, any limitations on the scope of the audit work, work to be performed by the client’s staff, and the basis for the audit fee. The purpose of engagement letters is to avoid misunderstandings
Fraud
an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in financial statements that are subject of an audit. For financial statement audits, fraud includes two types of intentional misstatements -
- misstatements arising from fraudulent financial reporting
- misstatement arising from misappropriation of assets
Fraud risk factors
events or conditions that indicate an incentive or pressure to perpetrate fraud, provide an opportunity to commit fraud, or indicate attitudes or rationalizations to justify a fraudulent action.
Fraudulent financial reporting
management fraud, cooking the books
Material misstatement of financial statements by management with the intent to mislead financial statement users.
Further audit procedures
The additional procedures that are performed based on the results of the auditors’ risk assessment procedures. Such procedures include:
- tests of controls (if needed)
- detailed tests of transactions, balances and disclosures
- substantive analytical procedures
Inherent risk
The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.
Materiality
magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been hanged or influenced by the omission or misstatements.
misappropriation of assets
defalcations
Theft of client assets by an employee or officer of the organization
Misstatement
difference between the amount, classification, presentation or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. May arise from error or fraud. Include those adjustments of amounts, classifications, presentations, or disclosures that, in the auditors judgement, are necessary for the financial statements to be presented fairly, n all material respects.
a. factual misstatements: misstatements about which there is no doubt
b. judgmental misstatements: differences arising from the judgements of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate.
c. projected misstatements: auditor’s best estimate of misstatements in populations, involving the projection of misstatements identified in audit sample to the entire population from which the samples were drawn.
Noncompliance
Acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations. Such acts involve transactions entered into by or in the name of the entity, or on its behalf, by those charged with governance, management, or employees. Noncompliance does not include personal misconduct (unrelated to the business activities of the entity) by those charged with governance, management, or employees of the entity.
Performance materiality
amount (or amounts) set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. It may also refer to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances, or disclosures.
Relevant assertion
a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated. The determination of whether an assertion is a relevant assertion is made without regard to the effect of controls.
Risk assessment procedures
audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels
includes:
- inquiries of management and others within the entity
- observation and inspection
- analytical procedures
- other procedures
risk of material misstatement
risk that the financial statements are materially misstated prior to the audit
inherent risk
control risk
significant risk
identified and assessed risk of material misstatement that, in the auditor’s judgment, requires special audit consideration
substantive procedure
audit procedure designed to detect material misstatements at the assertion level. Comprise of tests of details (classes of transactions, account balances, and disclosures) and substantive analytical procedures
tolerable misstatement
application of performance materiality to a particular sampling procedure. Tolerable misstatement may be the same amount or an amount lower than performance materiality
Financial statement assertions
Occurrence: Transactions and events that have been recorded have occurred and pertain to the entity
Existence: Assets, liabilities and equity interests exist
Rights and obligations: the entity holds or controls the rights to assets, and liabilities are the obligations of the entity
Completeness: all transactions, events assets, liabilities and equity interest have been recorded
Accuracy: amounts and other data relating to recorded transactions have been recorded appropriately
Valuation and allocation: assets, liabilities, and equity interest are included at appropriate amounts
Cutoff: Transactions and events have been recorded in the correct accounting period
Classification: Transactions and events have been recorded in the proper accounts
Professional Skepticism
attitude that includes a questioning mind and critical assessment of audit evidence.
Fraud Risk Factor
Factors whose presence often have been observed in circumstances where frauds have occurred
Predecessor Auditor Inquiries
Permission from client to make inquiries of predecessor auditor is required before successor auditor can accept engagement.
Inquiries:
1. disagreements with management as to auditing procedures and accounting principles
- facts that might bear on the integrity of management
- predecessor’s understanding as to the reasons for the change of auditors
