Term
| 3 paragraphs of audit report |
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Definition
| intorductory (managment and auditor responisbility), scope (audit in accordance with PCAOB), opinion (statements present fairly) |
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Term
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Definition
| (1) management has incentive and opportunity to manipulate; (2)investors don't have time and expertise; (3) transactions are more complex |
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Term
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Definition
| General Standards (1)Auditors must possess adequate technical training and proficiency; (2) independent in fact and in appearance; (3) Due professional care; (4) adequate planning and proper supervision; (5) understand internal control structure; (6) sufficient(quantity), appropriate(competent/reliable/relevant) evidence; (7) express an opinion;(8) state whether statements present fairly in accordance with GAAP; (9) consistency (only mentioned if their is a change); (10) adequate disclosure |
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Term
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Definition
| Existence(occurrence); completeness; rights and obligations; Valuation and Allocation (accuracy); presentation and disclosure (classification) |
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Term
| Significant corporate governance provisions related to management from SOX |
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Definition
| CEO and CFO certify accuracy; penalties of 5 million and 20 years in prison; include a statement on internal controls and an assessment of the effectiveness of IC |
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Term
| Duties of the BOD /Audit committees |
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Definition
| (1) oversees the accounting process, (2)members need to be composed of outside directors and at least one a financial expert; (3) authority to hire/fire external auditor; (4) per-approve non-audit services; (5) notified by management for all significant decisions/changes; (6) review audit plan (auditors responsibilities, significant accounting policies, accounting estimates, audit adjustments, disagreements with management, difficulties in performing the audit) (7) establish whistle blowing program; |
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Term
| Ways SOX improved independence |
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Definition
| audit internal controls; prohibits certain non-audit services; requires rotation of partners every 5 years; 1 year cooling off period; have to keep audit papers for 7 years; |
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Term
PCAOB (Public Company Accounting Oversight Board) |
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Definition
| oversees audits of all public companies; sets standards for conduct of audit, reports for IC,and risk management; CPA firms must register and recommend penalties for bad firms |
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Term
| AICPA (American Institute of Certified Public Accountants) |
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Definition
| lobbies congress; administers CPA exam; voluntary memebrship |
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Term
| SEC (Securities and Exchange Commission) |
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Definition
| oversees PCAOB; requires yearly auditors for public traded company; suspend and revoke ability to audit publicly traded companies |
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Term
| State Board of Accountants |
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Definition
| certify and license CPA's; can suspend and revoke licenses |
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Term
| Factors that impair auditor independence |
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Definition
| compensation; client familiarity; time pressures; rationalization; auditing your own work |
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Term
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Definition
| must be in fact and appearance;any direct or material indirect financial interest (includes family members); no partner or professional employee may be employed by an attest client during engagement period or period covered by financial statements |
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Term
| rule (301)confidential client information |
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Definition
| not allowed to give information away unless: disclosures required by GAAP/GAAS; subpoenas/summons; respond to investigatory agencies(SEC, PCAOB,SBOA); provide information for outside quality review of audit firm |
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Term
| contingent fee (rule 302) |
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Definition
| fee paid by the client dependent on some client result; allow only for non-attest clients except for tax return preparation |
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Term
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Definition
| paid by third parties for recommending services.product; allowed for non-attest clients but must be disclosed to the client |
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Term
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Definition
| paid by one accountant to another for making client referral; can be for everyone but must be disclosed to client |
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Term
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Definition
| questing mindset and critical assessment of audit evidence; recognize possibility of material misstatement due to fraud |
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Term
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Definition
| contract that documents the understanding between auditor and client; indicates responsibilities of both parties; services to be performed; deadlines; fees |
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Term
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Definition
| risk that the auditor assumes by being associated with client |
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Term
| factors to consider when assessing engagement risk |
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Definition
| why client changed auditors; management and BOD integrity; independence & competence of audit committee and BOD; quality of managements risk management processes; legal or regulatory agency proceedings; financial condition/trends; existence of related party transactions; weak controls; client industry; |
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Term
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Definition
| risk that the auditor will issue unqualified opinions on material misstatement; determines the rigor of the audit; inversely related to engagement risk |
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Term
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Definition
| inital susceptibility of a transaction or accounting adjustment to be recorded in error, or for the transaction not to be recorded in the absense of internal controls; high risk for (complex entries; estimated balances; related party transactions); based on auditors knowledge of client and industry |
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Term
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Definition
| construction contracts, real estate, land development, casino/gaming, financial institutions, pharmaceutical companies |
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Term
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Definition
| risk that client controls will fail to prevent or detect material misstatement |
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Term
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Definition
| risk that the audit procedures will fail to detect material misstatement; inverse compared to IR and CR; drives rigor of substantive audit work |
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Term
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Definition
| larger sample sizes; more experienced auditors assigned with close supervision; more persuasive evidence; more year end work rather than on interim testing |
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Term
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Definition
| The magnitude of an omission of accounting information that, in light of surrounding circumstnaces, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by an omission or misstatement; level of materiality set during planning and then dollar level of materiality is allocated to individual accounts and transactions based on their susceptibility to misstatement; lowering dollar amount of materiality increases the rigor of the audit |
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Term
| 3 dimensions of materiality |
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Definition
| size of misstatement ($ amount); circumstances (some transactions/accounts viewed more critically); user impact (the $ amount and/or nature of the information that would affect the judgement of a reasonable user) |
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Term
| Small misstatements to be considered material |
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Definition
| changes loss into an income; hides a failure to meet analysts consensus expectations; increases management compensation; masks a change in earnings or other trends; affects compliance with regulatory requirements |
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Term
| Business Risks Audit Approach |
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Definition
| (1) Develop understanding of client business and risks, (2) Develop understanding of client key processes, (3) Develop understanding of client risk management process, (4) Develop Expectations, (5) Assess quality of internal controls, (6) Determine residual risk associated with account balances (risk remaining after IR+CR), (7) Manage Remaining Audit risk (if high residual risk, lower DR, increase substantive testing |
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Term
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Definition
| required by GAAS during planning in order to identify potential areas of material misstatement; trend analysis (comparison of account balances over 3-5 years), comparative statements (horizontal analysis put %change and dollar change and compare year to year), common-size statements (vertical analysis % of significant total compares companies to industry), ratio analysis focus on relationships between 2 or more accounts |
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Term
| Internal Controls designed to? |
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Definition
| generate reliable information, operate effectively, safeguard assets, complies with laws and regulations |
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Term
| Why auditors evaluate IC? |
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Definition
| the design and implementation review because SOX requires auditors to issue an opinion about the effectiveness of the controls; where controls are weak there are more opportunities for material misstatement; minimum level is necessary for a company to be auditable |
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Term
| COSO IC integrated framework |
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Definition
| (1) Control environment (; (2) Risk Assessment; (3) Information and Communication Systems; (4) Control Activities; (5) Monitoring |
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Term
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Definition
| attitude, awareness, and actions of significant internal groups to maintain a well controlled organization; Auditors consider whether management and BOD are committed to effective IC; BOD and audit committee are independent, active, and competent; management is not dominated by one person; internal audit function is competent and effective; organizational structure clearly defines responsibilities, authority, and accountability; organization's ethical values are adequately communicated and reinforced to employees |
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Term
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Definition
| management ability to identify, assess, and manage risks that could negatively affect operations and financial reporting |
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Term
| Information and Communication Systems |
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Definition
| designed to identify, record, and report information; must develop an understanding of each significant accounting application, including how transactions are entered and processed, and key internal control procedures |
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Term
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Definition
| designed to safeguard assets and ensure reliable information is generated; Some controls to that should be present in most accounting applications are: (a)segregation of duties of authorizing transactions, recording transactions, and custody of assets; (b) procedures to insure only authorized transactions occur (limit access to employees); (c) adequate documents and records to insure timely, proper recording of transactions (pre-numbered documents and turnaround documents); (d) physical controls to limit access to assets; (e) independent checks on recording and valuation (cash with register tape) |
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Term
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Definition
| used to evaluate operating effectiveness of company controls |
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Term
| 4 Interdependent steps in assessing control risk |
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Definition
| (1) obtain and document understanding of how each significant accounting application operates and the control procedures used; (2) Make a preliminary assessment of control risk for each application based on the IC design; (3) Test the operation of the controls (make sure controls are operating like designed; (4) Update assessment of control risk and need for substantive testing |
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Term
| SOX requirements for reporting on internal control |
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Definition
| statement of management responsibilities for assessing and reporting on the effectiveness of IC; management assessment of the effectiveness of IC; identification of criteria used by management in assessing controls (COSO); limitations in internal controls; description of IC process; description of any material deficiencies; statement that the report has been audited |
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Term
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Definition
| is a deficiency or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a materiel misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis |
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Term
| Indicators of material weakness |
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Definition
| identification of fraud by any member of senior management; restatement of financial statements to correct a material misstatement; identification by the auditor of a material misstatement not detected by IC |
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Term
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Definition
| inadequate segregation of duties; inadequate controls over safeguarding assets; inadequate design of IC over a significant account or process; inadequate documentation of IC components |
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Term
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Definition
| failure of IC to provide timely, complete, and accurate information; failure of IC to safeguard assets; failure to perform reconciliations of significant accounts; management override of controls |
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Term
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Definition
| less severe then a material weakness but still needs to be reported to audit committee and BOD |
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Term
| Integrated audit significant AS 5 changes |
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Definition
| encourages management and auditors to implement a top-down, risk based approach; emphasizes the need to document the auditor's thought process linking control deficiencies to specific test of account balances; improved audit efficiency by allowing auditors to place greater reliance on effective internal controls (work done by internal auditors); |
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Term
| Steps in an Integrated Audit |
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Definition
| (1) Identify/update information about risks that could affect the FS (potential cause of misstatements); (2)Consider the possibility of account misstatements; (3) perform preliminary analytical procedures; (4)Develop and document an understanding of those IC that are designed to address the risks identified in steps 1-3; (5) Decide which controls to test; (6) Test the controls to see if they are operating effectively; (7)Consider the results of control testing; (8) consider which accounts balances are likely to contain misstatements ; (9) Conduct substantive audit testing |
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Term
| Reliability of audit evidence |
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Definition
| evidence from: independent outside source> client information; auditor's direct knowledge/observation> indirect evidence; area of strong internal control> area of weak IC; documentary> verbal; original docs> copies |
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Term
| Evidence gathering techniques |
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Definition
| (1) Inquiry; (2) Observation; (3) Physical examination of assets; (4) confirmations; (5) examine documents; (6) tests of transactions (vouching [validity and existence overstated assets/revenues] and reprocessing [completeness understating expense/liabilities); (7) recalculation (footing); (8) analytics (ratios, industry data, expected results) |
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Term
Bank cut off statement
Bank confirmation |
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Definition
| cutoff statement verifies year-end account balances and the outstanding items on the year-end bank reconciliation; confirmations verifies year-end balance and any liabilities to the bank |
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Term
| 2 ways to test an account balance |
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Definition
| test year-end balance (direct test); test of the transactions that make up the balance |
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Term
| Why perform year-end direct tests of account balances rather than tests of transactions? |
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Definition
| Usually fewer items in year-end balances than the number of transactions occurring during the year; more reliable evidence available for ending balances (confirmations, observation), where testing of transactions typically involve client records |
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Term
| Describe efficiencies in gathering audit evidence (other than directional testing or testing balance sheet accounts)? |
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Definition
| (1) Double entry bookkeeping; (2) linked accounts; (3) if auditor establishes a consistent relationship between a non-accounting item and an account balance, auditor can estimate the account balance and compare to recorded account balance for reasonableness; (4) clients with strong IC are less likely to have material misstatements, so auditor can use tests of controls to reduce amount of substantive testing |
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Term
| Interim testing is feasible when? |
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Definition
| client has strong IC; low probability of significant change in account balances between interim work and year-end; there are accounts which auditor focuses on test of transactions rather than year-end balances (non-current assets) |
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Term
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Definition
| detail the procedures used to obtain, document, and evaluate audit evidence |
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Term
| Characteristics of well-developed work papers? |
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Definition
| audit documentation must contain sufficient information such that an experienced auditor, having no prior connection with the engagement, will understand the nature, timing, extent, and results of the procedures performed, evidence gathered, and conclusions reached without supplementary oral explanation; include the following: heading; initials of auditor who prepared docs; initials of reviewer and date; reference related docs; tick-marks and legend; description of tests performed and the findings; conclusion as to whether account balance presents fairly |
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Term
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Definition
| positive: financials present fairly; limited (negative) assurance: states accountant is not aware of any material modifications that should be made; no assurance: states we have not audited or reviewed the statements and do not express an opinion or any other form of assurance |
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Term
| Acts Discreditable (rule 501) |
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Definition
| shall not commit acts discreditable to profession including criminal acts, failing to file a tax return, retaining client records because fees have not been paid; negligence in preparing financial statements or records, any form of prohibited discrimination |
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Term
| Advertising and other forms of solicitation (rule 502) |
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Definition
| member in public practice may not advertise or solicit in any way that is false, misleading, deceptive, harassing, or coercive |
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Term
| When auditors detect intentional misstatement they should,? |
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Definition
| reconsider the level of audit risk for the client; consider revising the nature, timing, and extent of the audit procedures; evaluate whether to resign from engagement |
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