Module 4: Responding to Risk Assessment: Evidence Accumulation and Evaluation KEYTERMS Flashcards
Accounting Estimate
An approximation of a monetary amount in the absence of a precise means of measurement
How is an accounting estimate measured?
Measured at fair value where there is estimation uncertainty, as well as for other amounts that require estimation.
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.
Appropriateness (of audit evidence)
Measure of quality of audit evidence that is its relevance and its reliability in providing support for conclusions on which the auditor’s opinion is based
Arm’s length transaction
Transaction conducted on such terms and conditions between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursing their own best interests
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 info contained in accounting records underlying the financial statements and other info.
Sufficiency of audit evidence
Measure of the quantity of audit evidence.
Affected by auditor’s assessment of risks of material misstatement and also by the quality of such audit evidence
Appropriateness of audit evidence
Measure of the quality of audit evidence; its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based
Control Risk
The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either ind. or agg 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
Exception (to external confirmation request)
Response that indicates a difference between information requested to be confirmed, or contained in the entity’s records, and information provided by the confirming party.
External confirmation
Audit evidence obtained as a direct written response to the auditor from a third party (confirming party) either in paper or electronic form
Example: through the auditor’s direct access to information held by a 3rd party)
Author’s direct access to information
May meet the definition of an external confirmation if auditor is provided by the confirming party with the electronic access codes or information necessary to access a secure website where data that addresses the subject matter of the confirmation is held
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 financials that are subject of an audit. For financial statement audits, fraud includes two types of intentional misstatements - misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets
Fraud risk factors
Events or conditions that indicate and 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
Aka management fraud/cooking the books
Material misstatement of financial statements by management with the intent to mislead financial statement users
Further audit procedures
Additional procedures that are performed based on the results of the auditors’ risk assessment procedures. Such procedures include (1) tests of controls (if needed), (2) detailed tests of transactions, balances, and disclosures, and (3) substantive analytical procedures
Internal Auditing
Independent, objective assurance and consulting activity designed to add value and improve an orgs operations. It helps an org accomplish its objective by bring a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processess
Negative confirmation request
Request the the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request
Nonresponse
A failure of the confirming party to respond, or fully respond, to a positive confirmation request or a confirmation request returned and undelivered.
Omitted procedure
Auditing procedure that the auditor considered necessary in the circumstances existing at the date of the audit of financials, but was not performed
Positive confirmation request
Request that confirming party respond directly to the auditor providing the requested info or indicating whether confirming party agrees or disagrees with info in the request
Related-party transaction
A transaction in which one party has the ability to influence significantly the management or operating policies of the other party to the extent that one of the transacting parties might be prevented from pursing fully its own separate interest
Risk assessment procedures
The audit procedures performed to obtain an understanding of the entity and its environment, including 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.
Relevant assertion
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 effect of controls
Risk of material misstatement
The risk that the financial statements are materially misstated prior to the audit.
Consists of two components, inherent and control risk
Scanning
Type of analytical procedure involving the auditor’s use of professional judgment to review accounting data to identify significant or unusual items
Specialist
An individual or org possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence
Subsequent events
Events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of or disclosure in financials
Subsequently discovered facts
Facts that become known to the auditor after the date of auditor’s report that had they been known to the auditor at that date, may have caused the auditor to amend the auditor’s report
Substantive procedure
Audit procedure designed to detect material misstatements at the assertion level.
Comprise of test of details (classes of transactions, account balances, and disclosures) and substantive analytical procedures
Sufficiency of audit evidence
Measure of the quantity of audit evidence.
Affected by auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence
Written representation
Written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
Written reorientations do not include financial statements, the assertions or supporting books and records.
