Test 1 Flashcards
Relevance
the relationship between evidence and the assertion being tested
Reliability
depends on the nature and source of the evidence and the circumstances under which it is obtained
Assertions
claims made by business owners and managers that the information they share during an audit is accurate
Example of an agent is
managers
an example of principals are
stockholders
Information Asymmetry
When one party knows more than the other
What bridges the gap of information asymmetry
House inspections (audits)
Factors affecting user demand for relevant/reliable information
Complex transactions, information demanded by remote users, information demanded in timely manner, reliability has far reaching consequences
Assertations about transactions and events and related disclosures
occurrence, completeness, authorization, accuracy, cutoff, classification, presentation
Occurrence (transactions)
transactions and events have been recorded and pertain to entity
Completeness (transactions)
transactions and events that should have been recorded have been recorded.
authorization (transactions)
Transactions and events have been properly authorized
Accuracy (transactions)
Amounts and other data relating to the transaction have been recorded accurately.
cutoff (transactions)
Transactions and events have been recorded in the right period
Classification (transactions)
transactions and evens have been put in the proper accounts
Presentation (transactions)
transactions and events are appropriately aggregated or disaggregated and clearly described
Assertations about account balances
existence, rights and obligations, completeness, valuation and allocation, accuracy, classification, presentation
existence (account balances)
assets, liabilities, and equity interest exists
rights and obligations (account balances)
entity holds and controls the rights to assets and liabilities
completeness (account balances)
all assets, liabilities, and equity interests that should have been recorded have been recorded
Valuation and Allocation (accounts)
assets, liabilites, and equity interests are included in the financial statements have been recorded at appropriate amounts
Classification (balances)
assets, liabilities, and equity interests have been recorded into proper accounts
Presentation
Assets, liabilities, and equity are appropriately aggregated and disaggregated and presented in a fair manner.
Define Auditin
Systematic process of objectively obtaining and evaluating evidence regarding assertions and comparing them to established criteria to communicate to interested users
Materiality
Magnitude of an omission or misstatement of accounting information that may cause a reasonable person to make a different decision
Audit Risk
Risk the auditor expresses an inappropriate audit opinion when the financial statements are materially mistated
Reasonable Assurance
implies some risk that the material misstatement is present and a competent auditor will not detect it.
Audit Evidence
Consists of underlying accounting information or external information available to the auditor
Evidence must be:
Sufficient and appropriate
Relevant evidence
is the evidence related to specific assertation being tested
Reliable Information
Can the evidence be relied upon to signal the true state of the specific assertation being tested
Major phases of an audit
Client acceptance, preliminary engagement, plan audit, consider internal control, audit, complete audit, evaluate
Unqualified
free from material mistatement
Qualified
Free from material misstatement except for
Adverse
So material that it pervasively affects financial statements
Disclaimer
Not possible to express on opinion
AICPA
Established in 1887
1900’s
Accounting becomes important uniform accounting by AICPA
1932
Ponzi scheme exposed
199-s-2000’s
WorldCom, Enron fraud, Arthur Andersen collapses
SOX
Passed in 2002, regulated audit profession, PCAOB came from SOX
ASB
Nonpublic company audits
PCAOB
Public company audits
Principles of an Audit
purpose, responsibilities, performance, reporting
Ethics
System or code of conduct based on moral duties and obligations that indicate how an individual should interact in society
Professionalism
Refers to conduct, aims, or qualities that characterize a profession
Utilitarian Approach
Recognized that decision making involves a trade between benefits and burdens
Rights Based Approach
Requires recognition that individuals have rights and that others have a duty to respect those when making decisions
Justice Based Approach
Concerned with issued as equity, fairness, and impartiality
Framework for Auditors based on AICPA
Principles of professional conduct, rules of conduct, interpretations of conduct by PEEC
Principles of Professional Conduct
Ideal attitude and behaviors, not enforceable
Rules of Conduct
Minimally acceptable standards, specifically enforceable
Interpretations to rules and conduct
specifically enforceable, interpretations and answers to questions regarding rule of conduct
Principles of Professional Conduct
responsibilities, public interest, integrity, objectivity, due care, scope of services
Responsibilities
exercise sensitive professional and moral judgements at all times
public interest
honor public trust, demonstrate commitment to professionalism
integrity
maintain and broaden public confidence
objectivity and indipendence
maintain objectivity and be free of conflicts of interest
Due Care
member should observe technical and ethical standards, improve in compitency
scope and nature of services
properly determine the scope and nature of services
Independence Rule
member shall practice independence in services when reviewing or auditing financials and other attest services
Covered Members
on attest team, position to influence attest engagement, partner or equivalent engaging in 10+ hours non attest services to attest clients, partner or equivalent in office, firm including benefits plan, entity that control another if they act together
Direct Relationship
financial interest that is directly owned by individual or entity
Material indirect
covered member has financial interest in an entity associated with an attest entity
immediate family rules
automatically covered member ( as if CPA)
Other family Rules
has financial interest and CPA is aware of it, close relative can influence statements of attested group
Provision of Non Attest Servies
AICPA restricts non audit services to attest clients
SEC rules of objectivity and independence
auditors should not audit own work, auditor should not be management, auditors should not advocate, auditor should not have mutual or conflicting interest
General standards rule
professional competence, due professional care, planning and supervision, sufficient relevant data
Before accepting a new client, the firm must determine that it:
has the capabilities to perform the engagement, complies with legal and relevant ethical requirements, considered the integrity of the client
Three topics to be discussed about the terms of engagement
engagement letter, using the work of the internal audit function, role of the audit committee
Additions to engagement letter
Specialists or internal auditors, limitations, additional services, arrangements regarding other services
Factors for evaluating reliability of the internal audit function
objectivity, competence, systematic and disciplined approach
audit committee requirements
member of board of directors and independent, directly responsible for overseeing work of any registered public accounting firm, preapprove all audit and non audit services, establish procedure for complaints, authority to engage independents council
Audit Strategy
determine resources needed to perform the engagement
audit plan
how the engagement will be done effectively and efficiently
Assess Business Risks
Understand company, identify risks that may result in material misstatements, evaluate how entity responds to those risks
Auditors need to inquire of management about parties:
names of related parties, nature of relationships, types of transactions, reasons for entering transactions with parties
Type of audit tests:
Risk assessment procedure, test of controls, substantive procedures
Steps for testing controls
Inquiry, Inspection, observation, reperformance, walkthrough
Inherent Risk
susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud before consideration of controls
Control Risk
risk misstatement that could occur in an assertion about an account or disclosure that could be material and not prevented by internal control
detection risk
risk that the procedures performed by the auditor to reduce audit risk to an acceptable low level will not detect misstatements
Audit Risk =
Inherent risk * Control risk * detection risk
Engagement Risk
auditor’s exposure to financial loss and damage to professional reputation
Audit Risk Model
Set a planned level of risk audit, assess risk of material misstatement, determine appropriate level of detection risk
Nature of entity
business operations, ownership and governance structures, investments and activities, financing and activities, financial reporting
Auditor must identify and understand
entity’s objectives, strategies used to achieve, business risks associated with strategies and objectives
to understand internal control, and auditor should:
identify types of potential misstatements and factors that make them material, assists in designing appropriate audit procedure
Fraud involves:
fraudulent financial reporting, misappropriation of assets
Fraud triangle
incentive or pressure to commit, opportunity to commit, attitude to justify fraud
incentives for fraud
excessive pressure from upper management, financial stability or profitability is threatened, management’s personal financial situation is threatened
Risk factors related to fraud
nature of industry, complex unstable organizational structure, ineffective monitoring of management, deficient internal control
justifications for fraud
