Term
|
Definition
| Managers typically have more info about the true financial position and results of operations of the entity than the absentee owner |
|
|
Term
|
Definition
| The risk that info circulated by a company will be false or misleading |
|
|
Term
|
Definition
-issues audit standards for public companies
-keeps an eye on audit firms (watches the watchers)
-created by SOX in response to Enron |
|
|
Term
| Auditing Standards Board (ASB) |
|
Definition
| Issues standards for private auditing firms |
|
|
Term
|
Definition
-report from PCAOB on quality of an audit, given to auditing firms
1. Departures from GAAP (failure to recognize)
2. Auditing Deficiencies (estimates, analytical procedures, IC, use of specialists, materiality, scope)
3. Deficiencies in Quality Control (partner eval, internal inspections, independence)
4. Root cause of weakness (training, supervision, lack of prof skepticism) |
|
|
Term
|
Definition
| A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. |
|
|
Term
|
Definition
| Services that occur when a practitioner is engaged to issue a report on subject matter or an assertion about subject matter, that is a responsibility of another party. |
|
|
Term
|
Definition
| Independent professional services that improve the quality of information, or its context, for decision makers. |
|
|
Term
|
Definition
-not limited to historical financial info, economic events or actions.
-subject matter can be prospective info, analyses, processes, actions of specific parties.
-fin statement auditing is a specialized form |
|
|
Term
|
Definition
-focus on looking at quality of information
-can capture info, improve its quality, and enhance its usefulness for decision makers
-attestation is a form of this |
|
|
Term
|
Definition
| the nature, timing, and extent of the audit work to be performed |
|
|
Term
|
Definition
| magnitude of an omission/misstatement of accounting info that makes is probable that the judgement of a reasonable person, relying on the info, would have been changed or influenced by the omission/misstatement. (the fineness of the auditor's filter: lower amount=larger samples) |
|
|
Term
|
Definition
| the risk that the auditor expresses an inappropriate clean audit opinion when the financial statements are materially misstated. |
|
|
Term
| The promise of "reasonable assurance" in the audit report implies that: |
|
Definition
| some risk that that material misstatement could be present in the financial statements and the auditor will fail to detect it |
|
|
Term
| 3 major concepts in conducting a financial statement audit |
|
Definition
| Materiality, Audit Risk, Evidence Regarding Management Assertions |
|
|
Term
| 3 stages auditors look at in the accounting process |
|
Definition
| 1. Internal Controls 2. individual transactions 3. Ending account balances |
|
|
Term
| Major phases of the audit |
|
Definition
-client acceptance/continuance
-Preliminary engagement activities
-Plan the audit
-Consider and audit internal control
-Audit biz processes and related accounts
-Complete the audit
-Evaluate results and issue audit report |
|
|
Term
| Preliminary Engagement Activities |
|
Definition
| 1. Team requirements (# and type of people) 2. Ensure independence 3. Est. understanding w/ client on services and terms |
|
|
Term
|
Definition
Unqualified (clean): if there are material misstatements client is correcting them or they do not cause the financial statements to be materially misstated.
Qualified: statements are fairly stated except for something found by the auditor, and client refused to correct it.
Adverse: misstatement(s) so material that the financial statements should not be relied on. |
|
|
Term
| 3 categories of 10 generally accepted auditing standards |
|
Definition
C 2 General Standards:Qualifications and Quality of work
Standards of Field Work:the actual conduct of the audit
Standards of Reporting:consider these before issue report |
|
|
Term
|
Definition
-adequate training and proficiency
-an attitude of independence on an engagement (in fact and appearance)
-Due professional care (plans and performs w/ care expected)
1. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
2. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.
3. Due professional care is to be exercised in the performance of the audit and the preparation of the report. |
|
|
Term
| GAAS Standards of Field Work |
|
Definition
-planning and supervision
-understand IC for proper planning of audit
-get enough of the right kind of evidence to give opinion
1. The work is to be adequately planned and assistants, if any, are to be properly supervised.
2. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.
3. Sufficient appropriate evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. |
|
|
Term
| GAAS Standards of Reporting |
|
Definition
-in accordance w/ GAAP
-consistently applied GAAP
-if disclosures have been made
-how much responsibility auditor is taking and type of work done.
1. The report shall state whether the financial statements are presented in accordance with GAAP.
2. The report shall ID those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.
3. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.
4. The report shall contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor's name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor's work, if any, and the degree of responsibility the auditor is taking. |
|
|
Term
| 10 GAAS vs. Principals Underlying GAAS |
|
Definition
| 1 is old form still used by PCAOB, 2 new form created for convergence with IFRS, and is used by ASB |
|
|
Term
| 3 types of Management Assertions |
|
Definition
C5 1. Assertions about classes of transactions and
events for the period under audit
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure |
|
|
Term
Management Assertions About Classes
of Transactions and Events (6) |
|
Definition
Occurrence
Completeness
Authorization
Accuracy
Classification
Cutoff |
|
|
Term
Management Assertions About
Account Balances (4) |
|
Definition
Existence
Completeness
Valuation/Allocation
Rights and Obligations |
|
|
Term
Management Assertions About
Presentation and Disclosure (4) |
|
Definition
Occurrence and rights and obligations
Completeness
Accuracy and valuation
Classification and understandability |
|
|
Term
| Management Assertions about Transactions: Occurrence |
|
Definition
Recorded transactions actually
exist |
|
|
Term
| Management Assertions about Transactions: Completeness |
|
Definition
| Actual transactions were recorded |
|
|
Term
| Management Assertions about Transactions: Accuracy |
|
Definition
Recorded transactions
are stated at the
correct amounts |
|
|
Term
| Management Assertions about Transactions: Authorization |
|
Definition
| All transactions and events have been properly authorized |
|
|
Term
| Management Assertions about Transactions: Cutoff |
|
Definition
| Transactions are recorded in the correct accounting period |
|
|
Term
| Management Assertions about Transactions: Classification |
|
Definition
Transactions are properly
classified in the correct accounts. |
|
|
Term
| Management Assertions about Account Balances: Existence |
|
Definition
| Amounts included in account balances exist. |
|
|
Term
| Management Assertions about Account Balances: Rights/obligations |
|
Definition
| The entity actually holds/controls the rights to assets and the obligation to liabilities in account balances. |
|
|
Term
| Management Assertions about Account Balances: Completeness |
|
Definition
| Existing amounts are recorded in account balances. |
|
|
Term
| Management Assertions about Account Balances: Valuation and Allocation |
|
Definition
| Account balances are stated at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded. |
|
|
Term
Management Assertions About
Presentation and Disclosure: Occurrence and rights and obligations |
|
Definition
| Disclosed events, transactions, and other matters have actually occurred and do pertain to the entity. |
|
|
Term
Management Assertions About
Presentation and Disclosure: Completeness |
|
Definition
| All disclosures that should have been included in the financial statements have been included. |
|
|
Term
Management Assertions About
Presentation and Disclosure: Classification and understandability |
|
Definition
| Financial information is appropriately presented and described, and disclosures are clearly expressed. |
|
|
Term
Management Assertions About
Presentation and Disclosure: Accuracy and Valuation |
|
Definition
| Financial and other info is disclosed fairly and in appropriate amounts. |
|
|
Term
| 3 categories of audit procedures |
|
Definition
1. Risk assessment
2. Test of controls
3. Substantive procedures |
|
|
Term
|
Definition
| A set of audit procedures prepared to test assertions for a component of the financial statements (e.g. for Accounts Receivable) |
|
|
Term
|
Definition
| Selecting an item for testing from the journals/ledgers and comparing it to the underlying source documents. |
|
|
Term
|
Definition
| Selecting a source document for testing and comparing it to associated journals/ledgers. |
|
|
Term
| Types of Audit Evidence (9), and what is most/least reliable |
|
Definition
1. Physical examination of tangible assets H
2. Confirmation
3. Inspection of records or documents
4. Analytical procedures
5. Scanning
6. Inquiries of the client L
7. Recalculation H
8. Reperformance H
9. Observation L |
|
|
Term
| Audit Evidence: Analytical procedures |
|
Definition
| Evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. |
|
|
Term
| Audit Evidence: Recalculation |
|
Definition
| Determining the mathematical accuracy of documents or records. |
|
|
Term
| Audit Evidence: Reperformance |
|
Definition
| The auditor’s independent execution of procedures or controls that were originally performed as part of the internal control system. |
|
|
Term
| Audit Evidence: Confirmation vs. inquiry |
|
Definition
| 1 is verifying a specific assertion in audit evidence by contacting an outside party, 2 is seeking written/oral info from internal/external source to better understand client |
|
|
Term
The Sarbanes-Oxley Act requires auditors of
public companies to prepare and maintain
audit working papers for a period of no
less than ___ years. |
|
Definition
|
|
Term
| When auditing a private company, what auditing standards apply? |
|
Definition
Ch 19
ASB (AICPA) GAAS is used when auditing ___. |
|
|
Term
| When auditing a public company, what auditing standards apply? |
|
Definition
| PCAOB (similar to ASB w/ exceptions) is used when auditing ___. |
|
|
Term
| When auditing a private company, what standards of professional conduct apply? |
|
Definition
AICPA Code of professional conduct,
ISB applied unless AICPA expressly disagrees |
|
|
Term
| When auditing a public company, what standards of professional conduct apply? |
|
Definition
PCAOB Code of Professional Conduct (adopted from AICPA)
SEC stringent rules for independence
ISB standards |
|
|
Term
|
Definition
a. person on attest engagement team
b. person in position to influence attest engagement
c. Partner/manager beginning when they provide 10+ hours of nonattest services to the attest client and ending when firm signs statements for the year the services were provided or partner/manager no longer expects to provide such services for 10+ hours on a recurring basis
d. A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement
e. The firm itself, including the firm’s employee benefit plan
f. An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described above or by two or more such individuals or entities if they act together |
|
|
Term
| Direct Financial Interest |
|
Definition
| When a covered member has a financial interest in an attest client, such as ownership of stock or a loan to or from the client |
|
|
Term
| Indirect Financial Interest (exception, when allowed) |
|
Definition
Results when a covered member has a financial interest in an entity that is associated with an attest client, including when the interest is owned through another intermediary when the auditor has dose not control the intermediary's investment decisions.
-Exception for certain types of personal loans from financial institutions who are clients
-okay only amount is immaterial (>5%) of covered members wealth) |
|
|
Term
| Professional Ethics Executive Committee (PEEC) |
|
Definition
| Part of AICPA that writes 'Interpretations of Rules of Conduct' and ethics rulings. Unlike the rules, these are not enforceable but departures by an auditor need to be justified. |
|
|
Term
| AICPA Rules of Conduct Rule 101: Independence |
|
Definition
| A member in public practice shall be independent in the performance of professional services when conducting financial statement audits/reviews or other attest services as defined by SSAEs. Applied to 'covered members'. |
|
|
Term
| Covered member's immediate family (who they are and effect) |
|
Definition
| spouse (or equivalent), or dependent or covered member. Rule 101 independence is applied to them as well. |
|
|
Term
| Close relative of covered member (who and effect) |
|
Definition
Non-dependent children, siblings, parents, grandchildren, parents-in-law, respective spouses
-independence impaired if they have a material financial interest and CPA on engagement knows about it or they could exercise significant influence over the financial policies of the client |
|
|
Term
| SEC 3 basic principles of auditor objectivity/independence |
|
Definition
1. An auditor should not audit his or her own work.
2. An auditor should not function in the role of management.
3. An auditor should not serve in an advocacy role for his or her client. |
|
|
Term
| SEC/PCAOB Nine Categories of Prohibited Nonaudit Services required for independence |
|
Definition
| bookkeeping, Financial info system design/implementation, appraisal/valuation, actuarial services, internal auditing outsourcing services, mgmt functions or HR, broker or lender, legal services, expert services |
|
|
Term
| SEC time limits for auditing public companies |
|
Definition
-partners are limited to 5 consecutive years
-if a former member of the audit team is employed in an financial oversight role by client need a 1 year cooling off period
-audit partner must not receive compensation based on selling engagements to that client for services other than audit, review, and attest services. |
|
|
Term
| Rule 302: 'Continent Fees' not allowed in relation to a client when auditor performs |
|
Definition
(a) an audit or review of financial statements, (b) a compilation of financial statements expected to be used by a third party and the compilation report does not disclose a lack of independence, or (c) an examination of prospective financial information.
-preparation of a tax return/claiming a refund |
|
|
Term
Rule 503 Prohibited Commissions
Can't refer any product/service to client for a commission if also perform: |
|
Definition
| (a) an audit or review of financial statements, (b) a compilation of financial statements expected to be used by a third party and the compilation report does not disclose a lack of independence, or (c) an examination of prospective financial information. |
|
|
Term
| Rule 503 Disclosure of Permitted Commissions: |
|
Definition
| If received a commission that is allowable, must disclose that fact to any person or entity to whom the member recommends or refers a product or service to which the commission relates. |
|
|
Term
|
Definition
| Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client. |
|
|
Term
|
Definition
Ch 3
-A contract for the audit - written agreement between auditor and client
-Identifies agreed upon services (review vs. audit)
-Includes:
Services to be rendered
Responsibility for the financial statements
Important dates for the audit
Fees
Is signed by auditor and signed by client to show acceptance |
|
|
Term
| Second Standard of Field Work |
|
Definition
| -must obtain a sufficient understanding of the entity and its environment, including internal control, to 1) assess the risk of material misstatement, and to 2) design the nature, timing and extent of further audit procedures. |
|
|
Term
| Analytical Procedures (how to use, when used and why) |
|
Definition
-develop expectations
-define reasonably significant difference
-compare results to prediction
-investigate significant differences
-DOCUMENT
-using in planning (to find potential misstatements, direct attention, understand client, design audit procedures), testing (substantive tests), and completion phase of audit (as an overall review) |
|
|
Term
|
Definition
Ch 4
-implies some risk that a material misstatement could be present in the financial statements and the auditor will fail to detect it.
-the auditor’s standard report states that the audit provides this |
|
|
Term
| Audit Strategy/Audit plan |
|
Definition
___ helps the auditor to determine what resources are needed to perform the engagement
___ considers how to conduct the engagement in an effective and efficient manner, is more detailed. |
|
|
Term
| Materiality—SAS 107 definition |
|
Definition
| The magnitude of an omission or misstatement of accounting info that makes it probable that he judgment of a reasonable person relying on he info would be changed/influenced by the omission or misstatement. |
|
|
Term
| Tolerable Misstatement (aka tolerable error) |
|
Definition
| the maximum error in a population (for example, the class of transactions or account balance) that the auditor is willing to accept |
|
|
Term
| Steps in Applying Materiality |
|
Definition
1. Plan: Determine level for the overall fin stmts
2. Allocation: Determine tolerable misstatement (at individual account/class of transactions level)
3. Evaluate auditing findings (near end of audit) |
|
|
Term
| List of possible materiality benchmarks |
|
Definition
2-5% of current assets
0.5%-1% of total revenue
3%-5% NI
0.5% - 1% of total asset
Amount to move EPS by 1 cent
50% - 75% of planned materiality as tolerable misstatement |
|
|
Term
|
Definition
| the risk that he auditor expresses an inappropriate audit opinion when the financial statements are materially misstated |
|
|
Term
|
Definition
| An auditor’s exposure to financial loss and damage to professional reputation (e.g. audit failure, client/3rd party lawsuits, negative publicity) |
|
|
Term
|
Definition
-a qualitative model (low to high)
AR=IRxCRxDR
-or-
AR=RMMxDR where RoMM is IRxCR |
|
|
Term
|
Definition
| The susceptibility of an assertion about a class of transactions, account balance, or disclosure to a material misstatement, either individually or aggregated with other misstatements, before consideration of any related controls. |
|
|
Term
|
Definition
| the risk that a misstatement that could occur in an assertion about a class actions, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatement, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control. |
|
|
Term
|
Definition
The risk that the procedures performed by the auditor to reduce audit risk to an acceptable low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.
-only type of risk in audit risk model auditor can affect
-Inverse relationship: adjust to be higher/lower if CR and DR are lower/higher
-composed of sampling risk and non-sampling risk |
|
|
Term
| Risk of Material Misstatement |
|
Definition
|
|
Term
|
Definition
Incentive/Pressure
Opportunity
Rationalization |
|
|
Term
| Fraud involving senior management and fraud that causes a material misstatement of the financial statement should be reported directly to the: |
|
Definition
|
|
Term
| SAS vs. AU numbers (what are they, what is the difference) |
|
Definition
Ch 2
Statements on Auditing Standards (SAS)—Interpretations of GAAS are classified by two numbering categories: SAS and AU numbers. The SAS number applies to the order in which the standards are issued and are thus chronological. The AU codification organizes the SAS according to topical content. |
|
|
