Study topics Flashcards
Substantive Procedures
An audit procedure designed to detect
material misstatements at the assertion level; comprised of tests of details and substantive analytical procedures.
Test of details definition
evidence that the balances, disclosures, and underlying transactions associated with a client’s F/S are correct
substantive analytical procedures
obtain evidential matter about particular assertions related to account balances or classes of transactions
Analytical Procedures definition
Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.
Examples of Analytical Procedures
comparable information for prior
periods; anticipated results (such as forecasts or budgets); and similar industry information (such as ratio information)
3 Purposes of Analytical Procedures
1 For risk assessment (required)
2 Substantive purposes (not required)
3 As a final review (required)
Tests of controls definition
An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.
Control Risk definition (CR)
The risk that a misstatement that could occur in an assertion in a class of transaction, account balance, or disclosure and that could be material, that will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.
Inherent Risk definition (IR)
The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, before consideration of any related controls
RMM definition (risk of material misstatement)
The risk that the financial statements are materially misstated prior to the audit. (IR x CR)
RMM at the overall financial statement level
refers to risks that are pervasive to the F/S and potentially affect many assertions.
RMM at the assertion level
the purpose of determining the nature, timing and extent of further audit procedures to obtain sufficient appropriate audit evidence
Audit Risk formula
IR x CR x DR
Detection risk definition (DR)
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.
Audit procedures includes
inspection, observation, confirmation,
recalculation, reperformance, analytical procedures, and inquiry
Meaning of inspection
consists of examining records or documents or a physical examination of an asset
Meaning of observation
consists of looking at a process or
procedure being performed by others
Meaning of confirmation
consists of a direct written response to
the auditor from a third party in paper form or by other (electronic) medium
Meaning of recalculation
consists of checking the mathematical
accuracy of documents or records
Meaning of reperformance
consists of the independent execution of procedures or controls that were originally performed as part of the entity’s internal control
Meaning of inquire
may range from formal written inquiries to
informal oral inquiries
What is Fair Value
estimated price at which an asset can be sold or a liability settled in an orderly transaction to a third party under current market conditions
What are observable inputs
Pricing an asset or liability based on market data, independent of the reporting entity
What are unobservable inputs
An entity’s own judgement about what assumptions market participants would use.
Auditors Report has 3 paragraphs
Introductory, Scope and Opinion
Types of engagements
Audit, Review and Compilation
Whats an audit
it conveys a high level of assurance about the reliability of the F/S and is expressed as positive assurance in the form of an opinion
Whats a review
conveys a lower (moderate, negative assurance) level of assurance about F/S
what’s a compilation
conveys no assurance about the reliability of the F/S
What re the 3 Modified Opinions
Qualified, Adverse and Disclaimer of Opinion.
Disclaimer of opinion
when the auditor is unable to obtain sufficient appropriate audit evidence and concludes the affect on F/S could be material but pervasive.
Adverse Opinion
when the auditor concludes that misstatements are material, and pervasive to the F/S
Qualified opinion
when the auditor is unable to obtain sufficient appropriate audit evidence and concludes the affect or misstatements on F/S could be material, but not pervasive
Emphasis-of-matter paragraph
refers to a matter appropriately presented or disclosed in the F/S that in the auditor’s judgement is of importance to the user’s understanding of the F/S
Situations when emphasis-of-matter paragraph is required
1 Auditor has substantial doubt about the entity’s ability to continue as a going concern
2 Inconsistency in accounting principles
3 When F/S are prepared in accordance with special purpose frameworks
Circumstances when an auditor considers emphasis-of-matter paragraph
1 uncertainty as to the outcome of unusually important litigation
2 a major casualty having a significant effect
3 significant transactions with related parties
4 unusually important subsequent events
Other-matter paragraph
refers to a matter other than those presented or disclosed in the F/S that in the auditor’s judgement is of importance to the user’s understanding of the audit, the auditor’s responsibility or the auditors report
Circumstances when an auditor considers an other-matter paragraph
1 rare situations, to explain why it was not possible to withdraw from the engagement
2 when an opinion expressed on the prior years F/S is different than the opinion previously expressed
