Final Review Flashcards
Compilation Engagement
the practitioner formats factual finding mathematically and does not provide an opinion. This means that there is no assurance and no conclusion.
Review Engagement
practitioner gathers sufficient evidence and assesses the financial statements for reliability. This is limited assurance and a conclusion but there is no opinion.
An Audit
an engagement that expresses an opinion on whether the financial statements are presented fairly and in accordance with the reporting framework. This is reasonable assurance and the highest level of assurance.
Reasonable Assurance
Practitioner gathers sufficient evidence and expresses an opinion on whether the financial statements are presented fairly and in material manners and pervasive.
Limited Assurance
the practitioner gathers sufficient evidence and assesses the financial statements for reliability.
Material
Errors in the financial statements that are large enough or significant enough to impact the users’ decision-making.
Pervasive
refers to the extent of the misstatement or issue and how broadly it affects the financial statements. A misstatement is considered pervasive if it is not confined to one particular account or area but affects multiple areas of the financial statements, leading to overall unreliability.
Qualified Opinion
is bad and means that something has to be changed on the financial statements.
Unqualified Opinion
is good and means that nothing has to be changed on the financial statements.
Adverse Opinion
When the financial statements are misstated and the misstatements are material and pervasive.
Three responsibilities of an Auditor
1) Professional Scepticism: maintaining independence by always having a questioning mind and not allowing biases.
2) Professional Judgement: by always using knowledge and training to perform their duties.
3) Due Care: being diligent.
Three Biases under Professional Scepticism
1) Availability Bias: occurs when the auditor only focuses on the information that easy to remember as being more relevant and more important. This can happen when the auditor does not consider alternatives.
2) Overconfidence Bias: this occurs when the auditor overestimates their ability.
3) Anchoring Bias: this occurs when the auditor starts from one intial numeric value and insufficiently adjusts the value.
What are the five audit threats?
1) Self-Interest Threat: occurs when the auditor or audit staff have a financial interest in the client company.
2) Self-Review Threat: occurs when the auditor or staff have to form an opinion on something they worked on.
3) Advocacy Threat: occurs when the auditor or staff acts on behalf and in best interest of the client.
4) Familiarity Threat: occurs when there is a relationship between the assurance team and the client.
5) Intimidation Threat: occurs when the auditor feels pressure and threatened by the client.
Two Types of Fraud
Financial Reporting Fraud: when assets are incorrectly values, liabilities are united, delaying revenues and expenses.
Misappropriation of Assets: theft of cash, theft of inventory, unauthorized discounts.
Going Concern Risk
justifies valuing an asset on basis that they will continue to be used after they are due.
Seven Red Flags of Fraud
1) High auditor turnover.
2) Complex business structure.
3) Unusual transactions.
4) No internal audits.
5) Key Finance personnel refuse to take leave.
6) Weak internal controls.
7) Poor compensation practices.
Three parts of the fraud triangle
1) Incentives and Pressures
2) Opportunities
3) Attitudes and Rationalization
Audit Risk
Auditor gives an opinion that the financial statements are presented fairly when they contain fraud or error.
Three Types of Audit Risk
Inherent Risk: the financial statements contain signifiant misstatement.
Control Risk: risk that the internal controls will not prevent misstatements.
Detection Risk: risk that the auditors procedures will not be effective in detecting misstatement.
Performance Materiality
an amount that is less than the planning materiality to reduce the likelihood that a misstatement in a particular account does not exceed overall materiality.
