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Flashcards in Introduction to Auditing Deck (11):

What is the purpose of an audit?

The purpose of an audit is to provide financial statement users with an opinionby the auditor on whether the financial statements are presented fairly, in all material aspects, in accordance with the applicable financial accounting framework. An auditor’s opinion enhances the degree of confidence that intended users can place in the financial statements.


What is auditing?

is the accumulation and evaluation of evidenceabout information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be done by a competent, independent person.


What are the goals and reasons of auditing?

(1) Self-protection of the company (2) Protection of shareholders (3) Protection of creditors (4) Protection of other stakeholders and the public


From an agency perspective auditing…

…is regarded as a cost-effective monitoring device. …reduces information asymmetries by adding credibility to financial statements. …has an important role in a setting where ownership and management of the firm is separated and in the relationship between managers and creditors. …reduces risk for investors.


What is the responsibility of the Management?

(1) Preparation of financial statements in accordance with applicable accounting frameworks (2) Integrity and fairness of the representations (assertions) in the financial statements: presentations and disclosures (3) Certification of the financial statements submitted to the SEC (3.1) Financial statements fully comply with the requirements (3.2) Information are fairly presented, in all material respects (4) Internal Control (4.1) Establishing and maintaining internal controls that provide reasonable, but not absolute, assurance that the financial statements are fairly stated (4.2) Publicly report on the operating effectivenessof controls


What is the responsibility of the Auditor?

(1) Expression of an opinion based on the evaluation of the annual report (2) Plan and execute the audit in the manner, that material misstatementscan be detected with reasonable assurance (3) Conduct audit with adequate skepticism (4) Errors or fraud may lead to material misstatements; hereby one differentiates between (4.1) Error: unintentional misstatement of the financial statements, not criminally relevant misstatements or omissions (4.2) Fraud: intentional, criminally relevant acts or omissions, committed by members of the management, employees or third parties (4.2.1) Fraudulent financial reporting, i.e., management fraud (4.2.2) Misappropriation of assets, i.e., management or employee fraud (5) Internal Control (5.1) Obtain understandingof internal control (5.2) Express an opinion on controls


Audit is mandatory for...

(1) Stock companies (Aktiengesellschaften) (2)Limited liability companies (Gesellschaften mit beschränkter Haftung) (3)Cooperatives (Genossenschaften) (4)Associations (Vereine) and foundations (Stiftungen)


Objective of Conducting an Audit of Financial Statements

(1) Understand objectives and responsibilities for the audit (2) Divide financial statements into cycles (3) Know management assertions about accounts (4) Know general audit objectives for classes of transactions, accounts, and disclosures (5) Know specific audit objectives for classes of transactions and accounts


Describe and give examples for the audit cycles.

(1) Sales and Collection - e.g. Cash, account receivable (2)Acquisition and payment - eg. cash, inventories, Imobilizado (3) Payroll and personnel - e.g accrued payroll (4) Inventory and warehousing - e.g inventories (5) Capital acquisition and repayment - e.g dividends, capial stock , retained earnings, notes


Types of Audit Evidence

(1) Physical examination (2) Confirmation (3) Inspection (4) Analytical procedures (5) Inquiries of client (6) Recalculation/ Reperformance (7) Observation