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32 Cards in this Set
- Front
- Back
What is Audit Risk? |
The possibility that auditors may unknowingly fail to modify their opinion on financial statements that are materially misstated |
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Types of assertions that have a possibility of containing material misstatements |
-assertions about account balances -assertions about classes of transactions -assertions about presentation and disclosure |
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5 financial statement accounts |
-existence -rights and obligations -completeness -valuation -allocation |
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Existence or Occurrence definition |
assets, liabilities, and equity exists and recorded transactions have occurred |
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Rights and Obligations definition |
Company holds rights to assets, and liabilities are obligations of the company |
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Completeness definition |
Assets, liabilities, equity interests, and transactions that should have been recorded are recorded |
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Cutoff definition |
Transactions have been recorded in the correct period |
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Valuation, Allocation, and Accuracy definition |
All assets, liabilities, and equity interests are included in financial statements at proper amounts |
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Presentation and Disclosure definition |
Accounts are described and classified in accordance with GAAP and financial statement disclosures are complete |
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2 types of audit risk |
-risk of material misstatement -risk that auditors fail to detect material misstatement |
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Types of risks of material misstatement |
-inherent risk -control risk |
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Type of risk that auditors fail to detect material misstatement |
detection risk |
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Inherent Risk |
Risk of material misstatement occurring in an assertion |
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Control Risk |
Risk that material misstatement in an assertion will not be prevented or detected in a timely basis |
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Detection Risk |
Risk that the auditors procedures will lead them to believe a material misstatement does not exist in an assertion |
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Audit risk formula |
AR= IR * CR * DR |
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Appropriate audit evidence must be: |
-relevant -reliable |
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Risk assessment procedures |
obtain an understanding of the client and its environment including internal controls to assess the risk of material misstatement |
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Further audit procedures |
-tests of controls -substantive procedures |
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Tests of controls |
When appropriate, to test the operating effectiveness of controls in preventing material misstatements |
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Substantive procedures |
To detect material misstatements at a relevant assertion level -analytical procedures -tests of details of account balances, transactions, and disclosures |
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Types of audit procedures |
-inspection of records and documents -inquiry of knowledgable persons -external confirmation -inspection of tangible assets -analytical procedures |
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Substantive Procedures (2 types) |
-analytical procedures -tests of details |
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Tests of details |
-tests of account balances -tests of classes of transactions -tests of disclosures |
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How does one increase the scope of procedures? |
-changing the nature -changing the timing |
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Trend analysis |
analyze the changes in the accounts of the company over time |
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Ratio analysis |
compare relationships between two or more financial statement accounts |
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Types of ratio analysis |
-horizontal analysis -cross sectional analysis -vertical analysis -other methods |
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Horizontal analysis |
review ratios over time |
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Cross sectional analysis |
analyze ratios of different firms at a point in time |
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Vertical analysis |
analyze relationships within a period |
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Other methods |
regression analysis |