Audit

Front 1

What is Auditing?

Back 1

systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to the interested users

Front 2

What is Attest?

Back 2

attest services occur when a practitioner is engaged to issue...a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.

Front 3

What is Assurance?

Back 3

Assurance services are independent professional services that improve the quality of information, or its context, for decision makers

Front 4

What do Audit services help to do?

Back 4

Help ensure financial information is RELIABLE, CREDIBLE/BELIEVABLE, RELEVANT, TIMELY

Front 5

An audit is done under what presumption?

Back 5

Under the presumption of "reasonable assurance." Not a guarantee even if you tested 100% of transactions recorded, could still not give an "absolute" assurance due to audit or human errors, unrecorded transactions, etc.

Front 6

What is the objective of an audit?

Back 6

Not just to detect fraud but, rather, to provide reasonably assurance that f/s are fairly presented (ie fraud detection very important but not primary objective of audit.)

Front 7

Who are the principals and Agents?

Back 7

Prinicapals are the owners, they want info. Agents are the managers of businesses, they have info. This can cause information asymmetry, which can lead to conflict of interest between the two.

Front 8

What role does the auditor play for the principals and the agents?

Back 8

Auditor adds credibility/objectivity to the f/s which reduced P info risk

Front 9

What are the three fundamental concepts of audit

Back 9

-Audit risk
-Materiality
-Evidence

Front 10

What is audit risk?

Back 10

unknowingly issue an unqualified opinion when f/s are materially misstated )ie wrong opinion issued)

Front 11

What is materiality?

Back 11

if reader knew, would have been influenced to do something different; judgmental (quantitative and qualitative)

Front 12

What is evidence?

Back 12

relevant and reliable (direct: confirm/physically count; indirect: analytic proc/discuss with client). Discussion with client, on its own generally not enough.

Front 13

What do risk, materiality and evidence help to do?

Back 13

help determine nature/timing./extent of audit work to do

Front 14

Describe sampling?

Back 14

-cannot test everything so must sample. Will need to extrapolate results
-lower the materiality level, the larger the sample needed; if acceptable risk is low, sample must be larger; more assurance desired means bigger the sample size

Front 15

What are the phases of Audit?

Back 15

-Acceptance/Continuance
-Preliminary engagement activities (obtain/update understanding of client; risk assessment; engagement team; independence)
-Plan audit (including prelim determination of materiality)
-Consider internal control and test IF APPROPRIATE (non SEC). If SEC, must consider AND test
-Audit business processes and accounts (test controls; sub tests)
-Complete audit (legal letter, rep letters, f/s tie-in, etc)
-Issue audit opinion

Front 16

What do SOX/PCAOB do?

Back 16

-restores confidence in the public financial reporting
-overseeing the audits of public companies. Even though they have no legal rule over non-public companies they are still influencing

Front 17

What are some provisions of SOX?

Back 17

provisions of SOX in 2002:
-CEO/CFO must signoff each Q and YE regarding f/s presentation, f/s comply with regs, no untrue statements, and that controls appropriate and working effectively
-Auditors must also opine that controls are working at Y/E. We no longer opine on mgmt's opinion on controls
-5 yr rotation of engagement partner
-More involvement by BOD/AC (all on AC must be independent of mgmt; must have one that qualifies as expert)
-New auditor independence rules; certain non-audit services prohibited
-PCAOB now the accounting and auditing std setter and regulator for profession as it relates to public company audits

Front 18

What is the business model and its 5 types of transactions?

Back 18

-The financing Process
-The Purchasing process
-The Human resource mgmt process
-The inventory mgmt process
-The revenue process

Front 19

What are the three main management assertions?

Back 19

-Assertions about classes of transactions and events for the period under audit (I/S)
-Assertions about account balances at the period end (B/S)
-Assertions about presentation and disclosure (F/S)

Front 20

What is corporate governance?

Back 20

people/processes/activities in place to help ensure proper stewardship over an entity's assets. Primarily associated with BOD oversight of mgmt and , secondarily AC oversight of external (and internal) auditors

Front 21

What are the three types Generally Accepted Auditing Standards?

Back 21

-General standards
-Standards of field work
-Standards of reporting

Front 22

Who sets standards for nonpublic companies?

Back 22

ASB (AICPA)

Front 23

Who sets standards for public companies?

Back 23

PCAOB (SEC)

Front 24

What is MGMT responsible for?

Back 24

Responsible for the f/s (ie the bucket of assertions). Our audit is to provide reasonable assurance that those f/s are fairly presented and that fraud, if material and financial in nature, has a responable chance of being discovered

Front 25

What is professional skepticism?

Back 25

-need to question and use, not just "per discussion with client"

Front 26

What are some types of firms?

Back 26

proprietorship, general/limited partnerships, LLP

Front 27

What are some different types of auditors?

Back 27

external, internal, govt, forensic, SEC, PCAOB, FBI
-different but some overlap with each other

Front 28

What are some of the organizations that affect accounting profession?

Back 28

AICPA, SEC, PCAOB, FASB

Front 29

What is the relationship between audit risk and acceptance risk?

Back 29

The greater the audit risk, the smaller ourt acceptance risk should be
-the smaller I want the audit risk to be, the more/better evidence I must gather

Front 30

What is audit risk?

Back 30

Risk that the auditor might not catch something material to the f/s that, if it had been detected, would have changed the opinion.
-Bad/wrong opinion
-cannot be known with certainty

Front 31

What is engagement risk?

Back 31

exposure of firm to losses from litigation, adverse publicity pertaining to a client, etc- "guilt by association"

Front 32

What are the risks are various level?

Back 32

-Overall f/s due to catastrophic misstatement (ie poor mgmt view/attitude re controls, incompetent mgmt)
-account balance
-class of transactions
-disclosure level (particular area may be misstated but does not extend to entire f/s)

Front 33

What is the Audit risk module?

Back 33

Audit Risk= Inherent Risk X Control Risk X Detection Risk

AR=IR x CR x DR

Front 34

What is inherent risk?

Back 34

susceptibility of assertion being incorrect due to nature of the account (judgement area vs. nonjudgemental), ignoring controls

Front 35

What is control risk?

Back 35

error could occur and client's internal control system would not timely prevent/detect. As CR increases, level of testing must increase
-controls never cause misstatement they only fail to detect misstatement
-remember when testing controls , if not initially effective don't keep testing controls. Prob need to increase sub tests

Front 36

What is detection risk?

Back 36

risk that auditor will not catch a material misstatement
-sampling and non sampling risk
-One of the biggest risks when sampling, is the need to ensure sample is representative of the entire population

Front 37

What are some of the relations between IR, CR, and DR?

Back 37

-As IR/CR increases, DR (risk of missing an error) has be to lower
-As IR/CR decreases, DR can go up
-Ultimate determination of risk is always a matter of professional judgement
-IR and CR are independent of audit. Auditor can only directly manage DR

Front 38

In the Risk assessment process what are the five factors to consider in gathering info to help understand client?

Back 38

-Nature of entity
-Industry/Regulations
-Company's objectives/strategies/business risks
-Entity's performance measurement
-Internal control

Front 39

What are three risk assessment procedures that auditors perform?

Back 39

-Inquiries of mgmt and others
-Analytical procedures
-observation or inspection

Front 40

What is the difference between errors and fraud?

Back 40

-Errors (unintentional) vs. Fraud (intentional)
-incentive/pressure, opportunity, ability to rationalize
-Must reduce level of acceptable risk if fraud is discovered
-errors are generally associated with f/s whereas fraud can be associated with f/s and/or misappropriation (ei stealing)

Front 41

What is corporate governance?

Back 41

consist of all people, processes and activities in place to help ensure proper stewardship over an entity's assets and is typically view as the primary responsibility of the BOD

Front 42

What is the FASB?

Back 42

a privately funded body whose responsibility is to establish financial accounting and reporting standards