Exam #1 Flashcards
Information Risk
The possibility that the information upon which the business risk decision was made was inaccurate
Assurance Service
An independent professional service that improves the quality of information for decision makers
Attestation Service
A type of assurance in which the CPA firm issues a report about the reliability of an assertion that is made by another party
Types of attestation services
- Annual audit of historical financial statements
- Audit of internal control over financial reporting
- Quarterly review of historical financial statements
- Attestation services on information technology
- Other attestation services
Non-assurance services provided by CPAs
- Accounting and bookkeeping
- Tax services
- Management consulting services
Operational audit
Evaluates the efficiency and effectiveness of any part of an organizations operating procedures and methods
Compliance audit
Conducted to determine whether the auditee is following specific procedures, rules or regulations set by some higher authority
Financial statement audit
Conducted to determine whether the financial statements are stated in accordance with specific criteria
Four types of auditors
- Certified public accountants
- Government accountability office auditors
- Internal revenue agents
- Internal auditors
Staff assistant
0-2 years experience. Perform most of the detailed audit work.
Senior or in-charge auditor
2-5 years experience. Responsible for audit field work including supervising staff work.
Manager
5-10 years experience. Helps in-charge plan, manages audit, reviews in-change’s work and works with the client.
Partner
10+ years experience. Reviews audit work and makes significant audit decisions.
Securities and exchange commission (SEC)
Federal government agency that assists in providing investors with reliable information upon which to make investment decisions
American Institute of Certified Public Accountants (AICPA)
Sets professional requirements for CPAs, conducts research and publishes materials
Public Company Audit Oversight Board (PCAOB)
Provides oversight for auditors of public companies, established auditing and quality control standards for public company audits and performs inspections of the quality controls at audit firms performing those audits
GAAS General Standards
- Audit is performed by persons having adequate training and proficiency as an auditor
- Auditor must maintain independence in mental attitude in all matters relating to the audit
- Auditor must exercise due professional care in the performance of the audit and preparation of the report
GAAS Standards of Field Work
- Audit work is to be properly planned and supervised
- Sufficient understanding of the entity must be obtained to plan the audit
- Sufficient appropriate evidence must be obtained by performing audit procedures
GAAS Standards of Reporting
- Report must state whether the financial statements are prepared in accordance with GAAP
- Report shall identify circumstances when GAAP was not followed
- Adequacy of disclosures must be reported
- Report must contain an expression of opinion regarding the financial statements
Standard unqualified audit report
Financial statements are presented in accordance with GAAP and are free from material misstatements
Seven distinct parts of the unqualified audit report
- Report title
- Audit report address
- Introductory paragraph
- Scope paragraph
- Opinion paragraph
- Name of CPA firm
- Audit report date
Unqualified audit report with explanatory paragraph
Meets the criteria of a complete audit with satisfactory results and financial statements that are fairly presented but the auditor believes it’s important to provide additional information
Five circumstances of an unqualified audit report with explanatory paragraph
- Lack of consistent application of GAAP
- Substantial doubt about going concern
- Auditor agrees with a departure from promulgated accounting principles
- Emphasis on other matters
- Reports involving other auditors
Qualified opinion
Report can result from a limitation on the scope of the audit or failure to follow GAAP
Adverse opinion
Used only when the auditor believes that the overall financial statements are so materially misstated that they do not present fairly the financial position
Disclaimer of opinion
Issues when the auditor is unable to be satisfied that the overall financial statements are fairly presented
Audit procedure
Detailed instruction that explains the audit evidence to be obtained during the audit
Audit program
The list of audit procedures for an entire audit
Physical examination
Inspection or count by the auditor of a tangible asset
Confirmation
Receipt of a direct written response from a third party verifying the accuracy of information that was requested by the auditor
Inspection
Auditor’s examination of the client’s documents and records to substantiate the information that is, or should be, included in the financial statements
Vouching
Downstream testing used to detect and overstatement
Tracing
Upstream testing used to detect an understatement
Analytical procedures
Consist of evaluations of financial information through analysis of plausible relationships among financial and non-financial data
- Variances
- Ratio analysis
- Expected values
Inquiries of the client
Obtaining of written or oral information from the client in response to questions from the auditor
Recalculation
Rechecking a sample of calculations made by the client
Foot
Additions of columns
Cross foot
Addition of rows
Reperformance
Auditors independent tests of client accounting procedures or controls that were originally done
Observation
Looking at a process or procedure being performed by others
Audit documentation
Principal record of auditing procedures applied, evidence on roamed and conclusions reached by the auditor
Permanent files
Files intended to continue data of a historical nature pertinent to the current audit
Current files
All audit documentation applicable to the year under audit
Audit risk
The risk that we issue an unqualified audit opinion that states that the financial statements are free from material misstatements, when in fact they are not
Inherent risk
The risk that factors beyond the control of either management or the auditors may lead to a misstatement
Control risk
The risk that the clients internal controls fail to identify or prevent a transcationcr from being improperly recorded (or not recorded at all)
Detection risk
The risk that the auditors procedures fail to detect a misstatement
Actual deviation rate
of instance when internal controls were not applied / sample size
Auditing
Determining whether recorded information properly reflects the economic event that occurred during the accounting period
