Chapter 2 Flashcards
A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic activities and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users (AAA).”
Auditing
2 Processes in Auditing
Investigative process
Reporting process
involves the systematic gathering and evaluation of evidence as a basis for determining whether assertions or representations made by a responsible person in a company’s financial statements, correspond with the established criteria, such as generally accepted accounting principles (GAAP).
Investigative process
involves communicating an evaluation or opinion in an audit report to interested users.
Reporting process
Auditing is not a branch of accounting
T or F
T
Concerned with the determination of whether the recorded accounting information for the entity properly reflects the economic events that occurred during the accounting period.
Auditing
Process of recording, classifying and summarizing economic events in logical manner for the purpose of providing financial information for decision making
Accounting
Refers to the gathering of evidence on the assertions embodied in the financial statements of an entity and using the evidence to determine whether the assertions adhere to generally accepted accounting principles (GAAP) or another comprehensive authoritative financial reporting framework.
Financial Statement Audits
Involve “a systematic review of an organization’s activities in relation to specified objectives for the purposes of assessing performance, identifying opportunities for improvement, and developing recommendations for improvement or further action.
Operational Audits
Used to determine whether a person or entity has adhered to laws and regulations. Results of compliance audits are generally reported to a specific user within the organization.
Compliance Audits
Audits performed by CPAs who are independent of the organizations whose assertions are being audited. These CPAs are also known as independent auditors or external auditors.
External Audits
“an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization”.
Often reports to the audit committee of the board of directors and also to the president or another high executive.
Internal Audits
Involves the determination of whether government funds are being handled properly and in compliance with existing laws and whether the government programs of a particular agency are being conducted efficiently and economically.
Government Audits
Risk that information is misstated or misleading.
Factors:
Remoteness of information users from information provider.
Potential bias and motives of information provider.
Voluminous data
Complex exchange transactions
Information Risk
Allow users to verify information.
User shares information risk with management.
Have the financial statements audited
Reducing Information Risk
3 divisions:
of government audits
Compliance audit – accordance with laws & regulations
Financial audit – audit of accounting & financial system and controls
Performance audit – financial and operational performance of an organization, program, activity or function
Economy & efficiency audit – management audit
Effectiveness audit – program results audit (read)
read
Means through which the auditor provides reasonable assurance that the financial statements are fairly stated
Uniform in format and suitably titled to avoid confusion regarding the level of assurance being provided and to differentiate it from other reports which client management might include with the financial statements.
The Audit Report
The fundamental nature and characteristics of financial reporting and business processes
The nature of audit evidence and procedures; and
The need for the audit to be conducted within a reasonable period of time and at a reasonable cost.
Limitations of an Audit
The future viability of the entity.
The efficiency or effectiveness with which management has conducted the affairs of the entity.
The extent of compliance with all laws and regulations that may be applicable to the entity. (read)
An auditor does not express an opinion on the following:
For what reason an independent auditor gather evidence
To form an opinion on the financial statements
In goverrnment auditing the 3 elements of expanded scope auditing are
Financial and compliance
economy and efficiency
program results
Audit which serves the needs of management
Internal auditing
a measure of management performance in meeting organizational goals
operational audit
