Nature of Auditing Flashcards
What are the reasons for audits? (4)
- Conflicts of interest
- Remoteness
- Complexity
- Importance
What are the benefits of auditing? (4)
- Reduced information risk
- Reduced cost of capital for auditee
- More efficient and effective allocations of capital in the economy
- Increased reliability and credibility
Phases of an audit (3)
- Planning
- Gather evidence (Perform and evaluate substantive tests)
- Issue the audit report
Management Assertions (6)
- Existence (A, L and E all exist)
- Completeness (All A, L, E and disclosures have been recorded)
- Accuracy, valuation and allocation (Recorded at appropriate amounts and adjusted accordingly, disclosures recorded properly)
- Rights and Obligations (Entity holds the rights to assets and liability obligations belong to them)
- Classification (A, L and E have been recorded in the proper accounts)
- Presentation (Items properly aggregated and presented)
Types of Tests (2)
- Test of Controls (Compliance tests)
- Substantive Procedures / Tests
What is a compliance test (test of controls)?
An audit procedure to evaluate the effectiveness of a company’s internal controls in preventing or detecting misstatements.
What is a substantive test (procedure)?
An audit procedure to gather direct evidence on the accuracy, completeness, and validity of financial statement transactions or balances. (Detects material misstatements)
What is an assurance engagement?
Auditor provides an INDEPENDENT OPINION on the reliability of financial statements, based on established criteria. The goal is to enhance the confidence of users.
What is a related engagement (non assurance engagement)?
Factual findings are reported for the company to make conclusions. NO OPINION. Agreed-upon procedures (examines financial data with no opinion). Compilation engagements (assists preparing statements without verification)
How can assurance engagements be classified? (2)
- Assertion-based audits - The subject matter of the audit is an assertion (e.g., financial statements) made by the responsible party (e.g., board of directors) to the intended user(s) (e.g., shareholders).
- Direct reporting audits - Those in which the auditor issues an audit report about a matter which is not subject to assertions being made by the responsible party to a third party. E.g., a efficiency and effectiveness audit.
Types of audit activities (5)
- Financial statement audit
- Compliance audit
- Operational audit
- Value-for-money audits
- Environmental audits
What is agency theory?
Agency theory is the theory that a company’s managers or employees (agents) may have different priorities to their shareholders (principals) and as such may not always act in line with the shareholders desires.
What is a reasonable assurance engagement?
Aims at reducing risk to an acceptable low level of risk as a basis for a positive conclusion (high but not absolute level of assurance) EXAMPLE: Financial Statement Audit
What is a limited assurance engagement?
The practitioner collects less evidence than for a reasonable assurance engagement but sufficient for a negative form of expression of the practitioners conclusion EXAMPLE: Sustainability Assurance
