456 midterm Flashcards
(201 cards)
what is an audit
engagement where practitioner issues written report and concludes on a subject matter for which accountable party is responsible
what are the five types of audit and explain them
- financial statement audit
- compliance audit - making sure info is in compliance with particular act
- operational audit - looking at how things are being opperated
- comprehensive audit - doing more than one thing at the same time
- internal audit - internal departments provide assurance about aspects of activities
what is management’s responsibility
to prepare the financial statements (charged with governance)
what are five attributes that financial statements should include
relevant - impact user's decisions reliable - unbiased comparable - through time understandable fair presentation - according to standards or framework
what is auditors responsilibty
provide level of assurance that numbers are fair
what are three attributes auditors should have
professional skepticism
professional judgement
due care
what is professional skepticism
open and questioning mind - not accepting everything as true and not accepting everything as false
what is due care
do work thoroughly, properly, correctly
who are the users of financial statements
shareholders, owners of business investors suppliers customers lenders employees government general public
reasons why users demand audited financial statements
remoteness - can’t see what managers are doing, dont have access to entity
complexity - don’t have accounting/legal knowledge
competing incentives - can be biased
reliability - need to make sure info is reliable, have real consequences
what are the three frameworks
agency theory
information hypothesis
insurance hypothesis
what is the agency theory
managers behave opportunistically
focused on own self interests
so shareholders willing to pay to have them monitored
good quality managers willing to have audits
what is information hypothesis
users value higher quality information when they know it’s accurate
audited info more valued- lower risk premium
what is insurance hypothesis
investors use audited info to insure against potential losses
what are the limitations of an audit
no guarentee that statements are free from error/fraud
required to be performed within reasonable period and cost
judgement is required in process - not always right
what are the different levels of assurance
reasonable assurance
moderate assurance
no assurance
what reports are the different levels of assurance related with?
reasonable assurance - audit
moderate assurance - review engagement
limited assurance - notice to reader / compilation engagement
what is reasonable assurance
gathering sufficient evidence to form positive expression of opinion regarding whether info being assured is presented fairly
highest, but not absolute, assurance
what is moderate assurance
gathering sufficient evidence to form negative expression of opinion regarding reliability of information being assured
nothing has come to attention of reader
what is no assurance
reports on factual findings (ie mathematical accuracy) and does not express an opinion
what are misstatements?
only happens in audit or review engagement
differences between reported financial statement and correct reporting required by standards
can’t force them to change misstatement but can tell them the consequences
what are the factors to consider when evaluating
risk of additional misstatements remaining undetected
effects of misstatements on debt covenants/contracts
whether error or judgemental misstatement
reversing effect on current year’s financial report on misstatements identified in previous year
recurring differences will be more material in future
fraud, illegal acts
significance of financial statement element affected by misstatement
effect of misstatements on segment info/key ratio
changes net income into net loss
what is a schedule of uncorrected differences
auditor keeps list of all the errors they find in order to assess overall effect on financial statements and/or individual items/balances
consider effect on future year’s reports
what is another name for schedule of uncorrected differences
summary of unadjusted differences
summary of uncorrected differences