QUIZ 1 Flashcards
What is relevance
information that is useful in the audit of a company
what is reliability
Information that will not confuse investors
What is assertion
claim business owners make that states financial information is accurate
What is an example of an agent
Managers
What is an example of principals
Stockholders
Information Asymmetry
imbalance between two negotiating parties in their knowledge of relevant details (Agents vs principals.)
Factors affecting demand for information
Complexity, information in a timely manner, information for remote people, reliability
Occurence
transactions and events have been recorded or disclosed have occured
Completeness (transactions)
transactions and events that should have been recorded have been recorded
Authorization
All transactions have been properly authorized
Accuracy
amounts an other data relating to recorded transactions and events have been recorded appropriately
Cutoff
transactions and events have been recorded in correct accounting period
classification
transactions and events have been recorded in proper accounts
presentation
transactions and events are appropriately aggregated or disaggregated and clearly described
Existence
Assets, liabilities, and equity acutally exists
Rights and Obligations
the entity holds or controls the rights to assets, and liabilities are obligations of entity
completeness (Accounts)
all assets, liabilities, and equity interests that should have been recorded are recorded
Valuation and allocation
assets, liabilities, and equity interests are included in the financial statements at the appropriate amounts
Accuracy, valuation, allocation
assets, liabilities, and equity have been included in financial statements in proper amounts
Classification
Assets, liabilities, and equity have been recorded in proper accounts
Presentation
Assets, liabilities, and equity interests are appropriately aggregated and disaggregated and clearly described
Auditing
systematic process of objectively obtaining and evaluating evidence regarding assertion, about economic actions and events to ascertain the degrees of correspondence between assertions and established criteria and communicating results to users
Materiality
magnitude of an omission or misstatement of information that makes a potential investor change there mind
Audit Risk
Risk the auditor expresses, an inappropriate audit opinion when the financial statements are materially misstated
Reasonable Assurance
implies some risk that a material misstatement could be present in the financial statements and the competent auditor will fail to detect it
Audit evidence
consists of underlying accounting information or external information to the auditor
Sufficient
Quantity of evidence
Appropriateness
is evidence relevant and reliable
Unqualified Opinion
Statements are free from material misstatements, so auditor does not need to qualify his opinion on company
Qualified
Statements presented are fair EXCEPT for the misstatement found
Adverse
statements are not presented fairly and should not be relied upon
Disclaimer
not possible to express an opinion on the fairness of financial statements
Four sections of CPA
auditing and attestation, business environment and concepts, financial accounting and reporting, regulation
1887
AICPA is established
Revenue Acts (1913/1918)
increased importance of accounting
1932
Kreuger and Toll ponzi scheme exposed
1933/1934
SEC established, audits are required
1990’s-2000’s
Huge frauds (WorldCom, Enron), Arthur Anderson collapses, confidence in auditing is ruined
SOX
Regulation of audit profession, PCAOB created
SOX Implications
CEO/CFO certification of, statements, audit of internal controls, PCAOB, prohibition of certain not audit services
Who is responsible for internal controls and fairness of financial statements
Management
Corporate Governance
Board of directors mostly, then subgroup of audit committee
Five Business Components
Revenue process, financing process, purchasing process, human resources, inventory
ASB
Accounting standards board- nonpublic company audits
PCAOB
public company accounting oversight board- public company audits
ASB’s auditing standards
Purpose, responsibilities, performance, reporting
Ethics
system or code of conducts based on moral duties and obligations that indicate how we should behave
professionalism
conduct, aims, or qualities that characterize a profession or professional person
Utilitarian approach
decision making involves trade offs between the benefits and burdens of alternative actions and focuses on consequences and on individuals affected
Rights Based Approach
requires recognition that individuals have certain rights and other individuals have a duty to respect those rights when making decisions
Justice based approach
is concern with issues such as equity, fairness, and impartiality
Responsibilities
exercise sensitive professional and moral judgements in all activities
Public Interest
accept the obligation to act in a way that will serve the public interest, honor the public interest
integrity
maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity
objectivity and independence
maintain objectivity and be free of conflicts in discharging professional responsibilities
Due care
member should observe the profession’s technical and ethical standard and continue to improve
scope and nature of services
should observe the principles of the code of conduct in determine scope and nature of services provided
Covered members
individual on the attest engagement team, position to influence the attest engagement, partner or equivalent or manager who provides more than 10 hours non-attest service’s to client, partner or equivalent in the office in which lead attest engagement practices, firm including firms employee benefit plan, entity whos’ operating, financial, or accounting policies can be controlled by any individuals entities if they act together
Prohibited Financial Relationships
Direct and material indirect
direct
financial interest that is owned directly by an individual or entity or is under the control of an individual or entity
material indirect
may result when a covered member has a associate financial interest in an entity associated with an attest entity.
Prohibited business relationships
CPA performs a managerial or other significant role for an entity’s organization. CPA leaves firm and is employed by firm in key position
Family Rules
Spouse is covered, children is covered (immediate family is CPA). Other family members impair if have financial interest and CPA knows or has close relationship
Litigation
Instantly indicates impaired indipendence
Four basic principles of objectivity
auditor should not audit own work, auditor should not function as management, auditor should not advocate, should not have mutual or conflicting interest
General standards rule
professional competence, due professional care, planning, sufficient relevant data
