Unit 2 - Overview of Audit Flashcards
Define attestation services.
Managerial assertions that are not the financial statements
When independent practitioners or CPAs are hired to report on the integrity of financial information. Services are performed when an independent practitioner or CPA is engaged to issue a report on subject matter that is the responsibility of another party.
The term practitioner is used rather than audtor because attestation services encompass more than just the audit of historical financial statements and internal controls.
Audit services fall under the umbrella of attestation services, but so do other services that involve a CPA reporting on other financial information.
What are the two primary types of audit services?
Audit of financial statements
Audit of internal controls over financial reporting (ICFR)
Define assurance services.
Independent professional services that improve the quality of information, or its context, for decision makers.
What is an example of an applicable financial reporting framework?
GAAP
IFRS
Federal income tax basis of accounting
Define an integrated audit.
Public companies are required to have two audits every year, one on the financial statements and one on the effectiveness of the company’s internal controls. For efficiency purposes, these two audits are performed at the same time. This is referred to as an integrated audit.
An audit is not a guarantee that the financial statements are free from error or fraud.
What are the three causes of audit limitations?
- the nature of financial reporting
- the nature of audit procedures
- the need for the audit to be conducted within a reasonable period of time at a reasonable cost
How does FASB define materiality?
Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity.
What is a compliance audit?
A compliance audit involves gathering evidence to determine whether the person or entity under review has followed the rules, policies, procedures, laws, and regulations with which they must conform. One of the best examples of a compliance audit is an income tax audit. The IRS may conduct an audit of an individual or a company to determine if tax laws have been followed and the correct amount of tax paid.
What are Operational (Performance) Audits?
Operational (performance) audits are concerned with the economy, efficiency, and effectiveness of an organization’s activities.
Economy refers to the cost of inputs, including wages and materials.
Efficiency refers to the relationship between inputs and outputs, or the use of the minimum amount of inputs to achieve a given output.
Effectiveness refers to the achievement of certain goals or the production of a certain level of outputs.
What can small private companies do if they do not want or need an extensive audit of their financial statement?
They can receive a historical financial statement review.
In a review engagement, the practitioner expresses limited assurance that no material modifications need to be made to the financial statements. This is less extensive and less expensive than an audit of financial statements, so it is very useful for smaller private companies.
The terms assurance, attestation, and auditing are sometimes used interchangeably, but they actually represent different types of services.
Define the types of services each represent.
They are similar in that they all represent a common process of an independent account firm taking information prepared by someone else and comparing that information to an established set of criteria. Each process adds credibility or integrity to the information reviewed, which makes it more useful for decision-making.
Assurance Services - Website Security, Risk Advisory Services, Data Integrity
Attestation Services - Review of Historical Financial Statements, Examination of Financial Forecast, Agreed-upon Procedures
Audit Services - Historical Financial Statements, Internal Controls
Define Professional Skepticism.
Professional skepticism is an objective and questioning attitude adopted by auditors when conducting an audit.
Define Professional Judgment.
Professional judgment relates to the application of relevant training, knowledge, and experience that auditors use while making informed audit decisions in conducting an audit.
When it comes to auditing, what are management’s three responsibilities?
- Preparing the financial statements fairly and in compliance with the applicable financial reporting framework, which in the US is most often GAAP.
- Designing, implementing, maintaining, and certifying that internal controls provide reasonable assurance the the financial statements are fairly presented in accordance with the applicable framework, are free of material misstatements, and are prepared n a manner consistent to prior years.
- Providing the auditors with access to all records, documentation, and personnel relevant to the preparation and fair presentation of the financial statements, and any additional information the auditors may consider relevant to complete the audit.
What are the auditor’s three responsibilities?
- Conducting the audit in accordance with the appropriate auditing standards. Audit standards provide minimum requirements and guidance for the performance of an audit.
- Planning and performing the audit with professional skepticism.
- Planning and performing the audit with professional judgment.
