Term
| Planning is important to the efficiency and effectiveness of an audit. |
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Definition
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Term
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Definition
| how willing the auditor is to accept that the financial statements may be materially misstated;relates to overall audit |
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Term
| Low Acceptable audit risk requires more testing |
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Definition
more evidence is required
more experienced staff will be utilized
engagement is reviewed more thoroughly |
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Term
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Definition
| auditors assessment of the likelihood that there are material misstatements in a particular segment before considering internal control; relates to particular accounts, by nature of |
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Term
| If inherent risk is high, more testing |
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Definition
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Term
| Eight phases to Planning and Designing Audit |
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Definition
Accept client and perform initial audit planning
Understand the client's business and industry
Asses client business risk
Perform preliminary analytical procedures
Set materiality and assess acceptable audit risk and inherent risk
Understand internal control and assess control risk
Gather info to asses fraud risks
Develop overall audit plan and audit program |
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Term
| Step 1-Initial planning of the audit |
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Definition
1st Client Acceptance and Continuance
2nd Identify client's reasons for the audit and develop overall audit strategy
3rd obtain engagement letter (explains legal responsibilities)
4th Select staff for the engagement
5th evaluate the need for outside specialists |
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Term
| Step 2-Understand the client's business and industry |
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Definition
1st Obtain knowledge of clients industry and business
2nd tour the plant and offices (never underestimate)
3rd-identify related parties
--GAAP Requires footnotes if material, must be reported in permanent file, can find by asking/looking at stockholders list and review SEC filings
4th Review corporate charter and bylaws and code of ethics
5th review minutes of board meetings and reciew contacts
---authorizes would be noted, inherent risk facts, review of n/p, contacts, pension plans etc
6th stud client objectives and strategies and clients performance measurements |
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Term
| Steps in applying materiality |
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Definition
Step 1-set preliminary judgement about material (Planning material:PM); tells the auditor how much evidence they have to collect
Step 2 Allocate preliminary judgment about materiality to segments-tolerable misstatement TM
STEP 3 estimate total misstatement in segment
Step 4 estimate the combined misstatement
Step 5 compare combined estimate with preliminary or revised judgment about materiality |
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Term
| Factors affecting materiality |
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Definition
Materiality is relative, not absolute concept
Bases are needed for evaluating materiality
Some errors are more important than others, even though same $ amount
1% decline in sales could be material, especially if it may be a trend
Qualitative factors |
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Term
| AICPA and FASB will not give guidelines for materiality |
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Definition
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Term
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Definition
| used during planning to devcide how much evidence to collect |
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Term
| Planned detection risk PDR |
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Definition
| a measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, if such misstatements exists |
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Term
| If PDR low, you need more evidence |
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Definition
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Term
| PDR exists only as a result of its components |
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Definition
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Term
| Control risk is high, need more evidence |
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Definition
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Term
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Definition
| auditors assessment that misstatements exceeding a tolerable amount in which a segment will not be prevented or detected by client's internal controls |
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Term
| Business risk can cause AAR to be even lower |
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Definition
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Term
| Factors to consider when assessing AAR in relation to business risk |
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Definition
The degree to which external users will rely on FS
the likelihood that the lcient have financial difficulties after report is issued
Auditors evaluation of management integrity |
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Term
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Definition
| risk that the auditor/audit firm will suffer after the audit was finished even though the audit was performed correctly |
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Term
| Clients/Management concerns about ICS |
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Definition
Reliability of financial reporting
Efficiency and effectiveness of operations
Compliance w/ applicable laws and regulations |
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Term
| Management of public companies must abide by section 404 of the Sarbanes Oxley act requiring them to issue a report on internal controls |
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Definition
Including
statement that management is responsible for establishing and maintaing an adequate internal control structure and procedures for financial reporting
an assessment of the effectiveness of the internal control structure and procedures for financial reporting as of the end of the company's fiscal year |
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Term
| Auditors concerns about ICS |
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Definition
reliable financial reporting
emphasis on the classes of transactions |
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Term
| Concepts to consider when assessing control risk |
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Definition
management is responsible for maintaining ics
company must provide reasonable assurance that the financial statements are fair
Internal control system/structure can never be completely effective because of inherent risk |
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Term
| internal control structure depends almost 100% of the competibility of the people using |
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Definition
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Term
| most important factor of internal control is the independence of the internal control staff |
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Definition
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Term
| COSO components of Internal Control |
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Definition
Category one Control environment
2. Risk assessment
3. control activities
4. Accounting information and communication systems
5. Monitoring |
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Term
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Definition
actions policies and procedures that reflect managament
integrity and ethical values
commitment to competence
board of directors or audit committee
management's philosophy and operating style
Organizational structure
Human resources policies and practices |
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Term
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Definition
| managements identification and analysis of risks relevant to the preparation of FS in accordance with GAAP; assertions about account balances etc |
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Term
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Definition
| policies and procedures that management has established to meet its objectives for financial reporting; adequate seperation of duties etc |
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Term
| Information and communication |
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Definition
| methods used to initiate, record, process, and report an entity's transactions and to maintain accountability for related assets; transaction related audit objectives |
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Term
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Definition
managements ongoing assessment of the quality of internal control performance
preferably by use of an independent internal audit function
size of the company affects what kind of internal control structure is possible |
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Term
| 4 Steps used to understand internal control and assess control risk |
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Definition
Step 1 Obtain understanding of CS design and operations
Step 2 Assess control risk
Step 3 Design, Perform, and Evaluate Tests of Controls
Step Four Decide planned detection risk and substantive tests |
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Term
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Definition
Find out about the individual components of clients control structure
See that the components have been place into operation
Document info that was obtained |
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Term
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Definition
Identify transaction related objectives
Identify specific controls to accomplish the objectives
Identify and evaluate weaknesses
Consider using a control matrix
Identify and evaluate control and sufficient deficiences and material weakness
Communicate auditable condition to the audit committee or management |
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Term
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Definition
Make inquires of appropriate client personnel
Examine document records report
Observe the control related activities
Reperform client procedures(audit risk model) |
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Term
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Definition
| Audit risk model is used to determine the proper level of detection risk for each balance related audit objective |
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Term
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Definition
Fraudulent Financial reporting
Misappropriation of assets |
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Term
| Fraudulent Financial Reporting |
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Definition
asset or revenue under/overstatement
timing differences
conceal liabilities and expenses
improper disclosures
improper asset valuation |
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Term
| Missappropriation of Assets |
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Definition
cash-direct theft/larceny
cash-taking from the top
fraudulent cash disbursements-payroll scheme
inventory theft or misuse |
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Term
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Definition
defines fraud as an internal act that results in a material misstatement in FS
requires auditor to get info necessary to identify risk that were due to fraud, brainstorming sessions to discuss where you might be susceptible to fraud, use info gathered to identify risks that may result in material misstatement, evaluate controls that identify or address risk, assess risk of misstatment due to fraud, provide guidace regarding communication, describes the doc requirements |
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Term
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Definition
Incentives and pressures
Opportunity-sees weakness
Attitude and rationalization-feeling underpaid
Fraud diamond-individual's capability |
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Term
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Definition
Incentives and pressures
Opportunity-sees weakness
Attitude and rationalization-feeling underpaid
Fraud diamond-individual's capability |
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Term
| Sources of information gathered to assess fraud |
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Definition
communication among audit team
inquires of management
risk factors
analytical procedures
other |
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Term
| Corporate governance oversight to reduce fraud risks |
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Definition
| AICPA institute of Internal auditors, association of certified fraud examines |
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Term
| Management antifraud programs and controls |
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Definition
guidance to help prevent, deter, and detect; 3 factors
a culture of honesty and ethics
managements responsibility to evaluate risks of fraud
audit committee oversigh |
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Term
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Definition
change overall conduct of audit
design audit procedures to address identified risks
design procedures to address management override |
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Term
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Definition
pressure to meet goals or personal gain
pressures to do whatever it takes to meet goals
seeks personal gain
think i won't get caught
do not consider actions fraudulent
believe regulations are easily bypassed
fear losing their job if goals are not met
lack of resources causes corners to be cut
lack of understanding of laws and regulations |
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Term
| Top organizational factors contributing to risk of fraud |
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Definition
collusion between employees and third parties
inadequate internal controls |
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Term
| Top reasons why fraud is found |
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Definition
tip
by accident
internal controls
external audit
notified by police |
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Term
| Top organizational factors contributing to risk of fraud |
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Definition
collusion between employees and third parties
inadequate internal controls |
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Term
| Top reasons why fraud is found |
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Definition
tip
by accident
internal controls
external audit
notified by police |
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Term
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Definition
Informational: ask for details
Assessment: used to combine and contradict what you heard
Interrogative: actually interrogating intentionally omitting key facts |
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Term
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Definition
| revenue/accounts receivable, inventory, and purchases/accounts payable |
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Term
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Definition
Risk Assessment to assess the risk of material misstatement w/ combination of inherent and control risk
Further Audit procedures: test of controls, substantive tests of transactions, analytical procedures, tests of details of balances |
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Term
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Definition
tests performed to determine effectiveness of both design and operations of specific internal controls; an indication that $ misstatement may exist in FS's exceptions
ex: examine sample invoices and compare customer order, use audit software to trace postings |
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Term
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Definition
| a test for monetary misstatements directly affecting correctness of financial statement balances; any problem FS are wrong |
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Term
| 3 Types of Substantive tests |
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Definition
Substantive test of transactions-used to determine whether all six related audit objectives have been satisfied for each class of transactions (completeness and occurrence)
Analytical Procedures: comparison of recorded amount wit expected amounts
Tests f details of balances: test end balances of BS and IS w/ focus on A/R |
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Term
| Substantive test of transactions are usually done at the same time for cost and efficiency |
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Definition
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Term
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Definition
physical examination: inspection or count of a tangible asset
confirmation: receipt of a written or oral response for a 3rd party verifying accuracy of info
documentation:examination of clients documents and records
observation: watch it
inquires of the client: written or oral responses to questions
reperformance: rechecking transfers of info for proper recording and posting
analytical procedures: focus on theories, comparisons, and studies of relationships-required to do in all phases of audit
recalculation: computations and calculations rechecked; footing crossfooting |
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Term
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Definition
| physical and confirmation most costly |
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Term
| lapping of accounts receivable |
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Definition
| the postponement of entries for the collection of receivables to conceal an existing cash shortage |
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Term
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Definition
| estimate of likely misstatement in a population based on a sample |
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Term
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Definition
Which audit procedure to use
When to perform the procedures
What sample size to select for a given procedure
Which items to select from the population |
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Term
| Non-representative sample |
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Definition
non sampling error-the auditors failure to recognize an exception
sampling error-inappropriate of ineffective audit procedure |
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Term
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Definition
| the risk that audit tests do not uncover exisiting exceptions in the sample (controlled; auditors failure to recognize an exception and inappropriate of ineffective audit procedures |
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Term
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Definition
| the risk that an auditor reaches an incorrect conclusion because the sample is not representative of the population; cause inherent risk, (monitored) |
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Term
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Definition
| quantifies, uses mathermatical analysis; applied with due professional care |
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Term
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Definition
| does not quantify use and judgement; applied with due professional care |
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Term
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Definition
| when auditor randomly selects items so that each item in the pop has a known probability of being included in the sample |
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Term
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Definition
| auditor use professional judgement |
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Term
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Definition
| every possible combination of population items has an equal chance of being included |
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Term
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Definition
| a statistical probablistic method of sample evalution that results in an estimate of the proportion of items in a population containing a characteristic or attribute of interest |
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Term
| Detail first tie in; cant audit further until this is correct |
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Definition
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Term
| confirmation of accounts receivable |
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Definition
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Term
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Definition
| existence, accuracy, and cut off objectives |
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Term
| If a/r is clearly immaterial |
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Definition
the response rate will be inadequate or unreliable
any type of substantive evidence can be accumulated properly |
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Term
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Definition
| confirm a given balance; best |
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Term
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Definition
| reopened only if balance is wrong |
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Term
| giving a blank line and they fell it out |
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Definition
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Term
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Definition
| send at year end and to sample randomly |
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Term
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Definition
Step 1 Perform additional tests for presentation and disclosure
Step 2 Review for contingent liabilities and commitments
Step 3 Review for subsequence events(required up to the date of the audit report)
Step 4 Financial Evidence Accumulation
Step 5 Evaluate results
Step 6 Issue audit report
Step 7 Communicate with the audit committe & management |
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Term
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Definition
3 Conditions exist
Potential future payment to an outside party or the impairment of some other assetthat would resut from an existing condition
uncertainty about the $ amount of the future payment or impariment
the outcome will be resolved by some future event |
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Term
| Subsequent events that did not exst at the balance sheet require consideration by mgnt$auditor |
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Definition
Have a direct effect on financial statements and require adjustment
Have no direct effect on FS but disclosure is advisable |
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Term
| management letter is option, informs of improvement |
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Definition
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Term
| independent partner review |
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Definition
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Term
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Definition
Sufficiency/adequacy of evidence
Evidence supports auditors opinion
Prepare FS disclosures
Working paper review by partner |
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