Chapter 1 Flashcards
(27 cards)
Studying accounting
The rules, techniques, and computations required to prepare and analyze financial information.
Studying auditing
Learning the analytical and logical skills necessary to evaluate the relevance and reliability of financial information as well as of the systems and processes responsible for recording and summarizing that information.
Reliable information is important for managers, investors, creditors, and regulatory agencies to make…
Informed decisions.
Auditing helps ensure that…
Information is reliable, credible, and relevant. In fact, the assurance provided by auditing is vital to the proper functioning of our economic system.
Information symmetry (conflicts of interest)
The concept that the manager generally has more information about the true financial position and results of operations of the entity than the absentee owner.
Management makes assertions (claims) about:
A. transactions
B. Account balances
C. Disclosures
Auditing is demanded, because it plays a valuable role in monitoring…
The contractual relationships between the entity and its stockholders, managers, employees, and debt holders. CPAs have been charged with providing audit services because of their traditional reputation of competence, independence, objectivity, and concern for the public interest. As a result, they are able to add credibility to information produced and reported by management to outside parties.
Assurance services
Independent professional services that improve the quality of information for decision makers.
Attest services
Reporting on subject matter that is the responsibility of another party.
Auditing is a systematic process of:
1) Objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria.
2) Communicating the results to interested users.
A financial statement audit is “built on” 3 fundamental concepts:
1) Materiality
2) Audit risk
3) Evidence
Materiality
The amount by which a set of fundamental statements could be misstated without affecting the judgement of reasonable people.
FASB definition for 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.
If materiality is set at a LOW level…
MORE evidence will need to be collected. (Inverse relationship)
A common rule of thumb for determining materiality is that…
Total (aggregated) misstatements of more than about 3-5% of income before tax would cause the financial statements to be materially misstated.
Audit risk
The risk that the auditor mistakenly expresses a clean audit opinion when the financial statements are materially misstated.
The auditor’s standard report states that the audit provides “reasonable assurance” that the financial statements do not contain material misstatements. The phrase “reasonable assurance” implies that…
Even when the auditor does a good job, there is some risk that a material misstatement could be present in the financial statements and the auditor will fail to detect it.
Audit evidence
Consists of the underlying accounting data and any additional information available to the auditor, whether originating from the client or externally.
What are the 2 key descriptors of audit evidence?
Sufficient and appropriate.
Auditors cannot examine all evidence due to ____ and ____ constraints.
Cost & time
The size of the subset of items the auditor examines is primarily a function of…
Materiality and the desired level of assurance for the account or assertion being examined.
There is a(n) ______ relationship between sample size and materiality, and a(n) _____ relationship between sample size and desired level of assurance.
Inverse; direct
Major phases of an Audit
A. Client acceptance
B. Preliminary engagement activities
C. Plan the audit
D. Consider and audit internal control
E. AUDIT business processes (collect evidence) F. Complete the audit
G. Evaluate the evidence and issue a report
The end product of an auditor’s work is an opinion indicating whether or not the client’s financial statements are free of material misstatement. What might an auditor do to obtain the information needed to develop and support that opinion?
The auditor must first obtain a thorough understanding of the client, its business and industry, and its information system. The auditor must understand the risks the client faces, how it deals with those risks, and what remaining risks are most likely to result in a material misstatement in the financial statements.
