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Test 1 Flashcards

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1
Q

Relevance

A

the relationship between evidence and the assertion being tested

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2
Q

Reliability

A

depends on the nature and source of the evidence and the circumstances under which it is obtained

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3
Q

Assertions

A

claims made by business owners and managers that the information they share during an audit is accurate

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4
Q

Example of an agent is

A

managers

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5
Q

an example of principals are

A

stockholders

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6
Q

Information Asymmetry

A

When one party knows more than the other

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7
Q

What bridges the gap of information asymmetry

A

House inspections (audits)

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8
Q

Factors affecting user demand for relevant/reliable information

A

Complex transactions, information demanded by remote users, information demanded in timely manner, reliability has far reaching consequences

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9
Q

Assertations about transactions and events and related disclosures

A

occurrence, completeness, authorization, accuracy, cutoff, classification, presentation

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10
Q

Occurrence (transactions)

A

transactions and events have been recorded and pertain to entity

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11
Q

Completeness (transactions)

A

transactions and events that should have been recorded have been recorded.

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12
Q

authorization (transactions)

A

Transactions and events have been properly authorized

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13
Q

Accuracy (transactions)

A

Amounts and other data relating to the transaction have been recorded accurately.

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14
Q

cutoff (transactions)

A

Transactions and events have been recorded in the right period

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15
Q

Classification (transactions)

A

transactions and evens have been put in the proper accounts

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16
Q

Presentation (transactions)

A

transactions and events are appropriately aggregated or disaggregated and clearly described

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17
Q

Assertations about account balances

A

existence, rights and obligations, completeness, valuation and allocation, accuracy, classification, presentation

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18
Q

existence (account balances)

A

assets, liabilities, and equity interest exists

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19
Q

rights and obligations (account balances)

A

entity holds and controls the rights to assets and liabilities

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20
Q

completeness (account balances)

A

all assets, liabilities, and equity interests that should have been recorded have been recorded

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21
Q

Valuation and Allocation (accounts)

A

assets, liabilites, and equity interests are included in the financial statements have been recorded at appropriate amounts

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22
Q

Classification (balances)

A

assets, liabilities, and equity interests have been recorded into proper accounts

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23
Q

Presentation

A

Assets, liabilities, and equity are appropriately aggregated and disaggregated and presented in a fair manner.

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24
Q

Define Auditin

A

Systematic process of objectively obtaining and evaluating evidence regarding assertions and comparing them to established criteria to communicate to interested users

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25
Materiality
Magnitude of an omission or misstatement of accounting information that may cause a reasonable person to make a different decision
26
Audit Risk
Risk the auditor expresses an inappropriate audit opinion when the financial statements are materially mistated
27
Reasonable Assurance
implies some risk that the material misstatement is present and a competent auditor will not detect it.
28
Audit Evidence
Consists of underlying accounting information or external information available to the auditor
29
Evidence must be:
Sufficient and appropriate
30
Relevant evidence
is the evidence related to specific assertation being tested
31
Reliable Information
Can the evidence be relied upon to signal the true state of the specific assertation being tested
32
Major phases of an audit
Client acceptance, preliminary engagement, plan audit, consider internal control, audit, complete audit, evaluate
33
Unqualified
free from material mistatement
34
Qualified
Free from material misstatement except for
35
Adverse
So material that it pervasively affects financial statements
36
Disclaimer
Not possible to express on opinion
37
AICPA
Established in 1887
38
1900's
Accounting becomes important uniform accounting by AICPA
39
1932
Ponzi scheme exposed
40
199-s-2000's
WorldCom, Enron fraud, Arthur Andersen collapses
41
SOX
Passed in 2002, regulated audit profession, PCAOB came from SOX
42
ASB
Nonpublic company audits
43
PCAOB
Public company audits
44
Principles of an Audit
purpose, responsibilities, performance, reporting
45
Ethics
System or code of conduct based on moral duties and obligations that indicate how an individual should interact in society
46
Professionalism
Refers to conduct, aims, or qualities that characterize a profession
47
Utilitarian Approach
Recognized that decision making involves a trade between benefits and burdens
48
Rights Based Approach
Requires recognition that individuals have rights and that others have a duty to respect those when making decisions
49
Justice Based Approach
Concerned with issued as equity, fairness, and impartiality
50
Framework for Auditors based on AICPA
Principles of professional conduct, rules of conduct, interpretations of conduct by PEEC
51
Principles of Professional Conduct
Ideal attitude and behaviors, not enforceable
52
Rules of Conduct
Minimally acceptable standards, specifically enforceable
53
Interpretations to rules and conduct
specifically enforceable, interpretations and answers to questions regarding rule of conduct
54
Principles of Professional Conduct
responsibilities, public interest, integrity, objectivity, due care, scope of services
55
Responsibilities
exercise sensitive professional and moral judgements at all times
56
public interest
honor public trust, demonstrate commitment to professionalism
57
integrity
maintain and broaden public confidence
58
objectivity and indipendence
maintain objectivity and be free of conflicts of interest
59
Due Care
member should observe technical and ethical standards, improve in compitency
60
scope and nature of services
properly determine the scope and nature of services
61
Independence Rule
member shall practice independence in services when reviewing or auditing financials and other attest services
62
Covered Members
on attest team, position to influence attest engagement, partner or equivalent engaging in 10+ hours non attest services to attest clients, partner or equivalent in office, firm including benefits plan, entity that control another if they act together
63
Direct Relationship
financial interest that is directly owned by individual or entity
64
Material indirect
covered member has financial interest in an entity associated with an attest entity
65
immediate family rules
automatically covered member ( as if CPA)
66
Other family Rules
has financial interest and CPA is aware of it, close relative can influence statements of attested group
67
Provision of Non Attest Servies
AICPA restricts non audit services to attest clients
68
SEC rules of objectivity and independence
auditors should not audit own work, auditor should not be management, auditors should not advocate, auditor should not have mutual or conflicting interest
69
General standards rule
professional competence, due professional care, planning and supervision, sufficient relevant data
70
Before accepting a new client, the firm must determine that it:
has the capabilities to perform the engagement, complies with legal and relevant ethical requirements, considered the integrity of the client
71
Three topics to be discussed about the terms of engagement
engagement letter, using the work of the internal audit function, role of the audit committee
72
Additions to engagement letter
Specialists or internal auditors, limitations, additional services, arrangements regarding other services
73
Factors for evaluating reliability of the internal audit function
objectivity, competence, systematic and disciplined approach
74
audit committee requirements
member of board of directors and independent, directly responsible for overseeing work of any registered public accounting firm, preapprove all audit and non audit services, establish procedure for complaints, authority to engage independents council
75
Audit Strategy
determine resources needed to perform the engagement
76
audit plan
how the engagement will be done effectively and efficiently
77
Assess Business Risks
Understand company, identify risks that may result in material misstatements, evaluate how entity responds to those risks
78
Auditors need to inquire of management about parties:
names of related parties, nature of relationships, types of transactions, reasons for entering transactions with parties
79
Type of audit tests:
Risk assessment procedure, test of controls, substantive procedures
80
Steps for testing controls
Inquiry, Inspection, observation, reperformance, walkthrough
81
Inherent Risk
susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud before consideration of controls
82
Control Risk
risk misstatement that could occur in an assertion about an account or disclosure that could be material and not prevented by internal control
83
detection risk
risk that the procedures performed by the auditor to reduce audit risk to an acceptable low level will not detect misstatements
84
Audit Risk =
Inherent risk * Control risk * detection risk
85
Engagement Risk
auditor's exposure to financial loss and damage to professional reputation
86
Audit Risk Model
Set a planned level of risk audit, assess risk of material misstatement, determine appropriate level of detection risk
87
Nature of entity
business operations, ownership and governance structures, investments and activities, financing and activities, financial reporting
88
Auditor must identify and understand
entity's objectives, strategies used to achieve, business risks associated with strategies and objectives
89
to understand internal control, and auditor should:
identify types of potential misstatements and factors that make them material, assists in designing appropriate audit procedure
90
Fraud involves:
fraudulent financial reporting, misappropriation of assets
91
Fraud triangle
incentive or pressure to commit, opportunity to commit, attitude to justify fraud
92
incentives for fraud
excessive pressure from upper management, financial stability or profitability is threatened, management's personal financial situation is threatened
93
Risk factors related to fraud
nature of industry, complex unstable organizational structure, ineffective monitoring of management, deficient internal control
94
justifications for fraud

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