Term
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Definition
| The objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and cash flows in conformity with Generally Accepted Accounting Principles |
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Term
| 5 Steps to develop Audit Objectives |
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Definition
1) Understand Objectives and Responsibilities for the Audit
2) Divide Financial Statements into Cycles
3) Know Management Assertions about Financial Statments
4)Know general audit objectives for classes of transactions, accounts, and disclosures.
5) Know specific audit objectives for classes of transactions, accounts and disclosures. |
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Term
| Managements Responsibilities |
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Definition
| The responsibility for adopting sound accounting policies, maintaining adequate internal control, and making fair representations in the financial statements rest with management rather than the auditor. |
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Term
| SOX and Management's Responsibility |
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Definition
| SOX requires public company executives to certify the quarterly and annual financial statements submitted to the SEC. It also allows for criminal punishment, with significant monetary fines or imprisonment pf up to 20 years. |
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Term
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Definition
| The auditor has a responsibility to plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable but not absolute assurance that the financial statements are free of material misstatement. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected. |
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Term
| Internal Control Reporting |
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Definition
| When the auditor also reports on the effectiveness of internal control over financial reporting, the auditor is also responsible for identifying material weaknesses in internal control over financial reporting. |
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Term
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Definition
| Indicates that reasonable assurance is a high, but not absolute, level of assurance that the financial statements are free of material misstatement. |
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Term
| Reasons for Reasonable Assurance, not Absolute. (3) |
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Definition
1) Sampling- Timing, extent, type. Requires estimation and judgment.
2) Accounting presentations contain complex estimates, which inherently involve uncertainty and can be affected by future events.
3)Fraudulently prepared Financial statements are often extremely difficult if not impossible to detect. Especially if their is collusion amongst management. |
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Term
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Definition
| Unintentional, can be either material or immaterial. |
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Term
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Definition
Intentional. 2 Types:
1) Management Fraud- often called financial statement fraud
2) Misappropriation of assets- usually by employees. |
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Term
| AU 230 and Professional Skepticism |
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Definition
| To Accomplish objectives of audit, the audit must be planned and performed with an attitude of professional skepticism in all aspects of the engagement. (Questioning mind and critical assessment) |
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Term
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Definition
| Defined in Auditing Standards (AU 317)- Violations of laws or government regulations other than fraud. |
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Term
| Two Types of Illegal Acts |
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Definition
| Direct Effect, Indirect Effect |
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Term
| Direct Effect Illegal Acts |
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Definition
| Violations of laws that directly affect the financial statements. An example of this is income tax evasion. |
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Term
| Indirect Effect Illegal Acts |
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Definition
| Violations of law that do not directly affect the financial statements. However are affected if there is a fine or sanction. Auditing Standards state that the auditor provides no assurance that indirect-effect illegal acts will be detected. |
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Term
| Responsibility for Finding and Reporting Illegal acts |
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Definition
Three Levels;
1)Evidence Accumulation when there is no reason to believe Indirect-Effect Illegal acts exists
2)Evidence Accumulation and other actions when there is reason to believe Indirect-Effect Illegal acts exists
3)Actions when the auditor knows of an Illegal act |
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Term
| Evidence Accumulation when there is no reason to believe Indirect-Effect Illegal acts exists |
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Definition
| Inquire management about policies, inquire attorneys, read minutes to the board. However, these are normal procedures, the auditor should not search for indirect effect illegal acts unless there is reason to believe they may exist. |
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Term
| Evidence Accumulation and other actions when there is reason to believe Indirect-Effect Illegal acts exists |
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Definition
1) The auditor should first inquire of management at a level above those likely to be involved in the potential illegal act.
2) The Auditor should consult with the clients legal council or other specialist who is knowledgeable about the potential illegal act.
3) The auditor should consider accumulating additional evidence to determine whether there actually is an illegal act. |
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Term
| Actions when the auditor knows of an Illegal act |
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Definition
| The Auditor must first consider the effects on the financial statements, including the adequacy of disclosures. If the auditor feels that the disclosures relative to the illegal act are inadequate, the auditor should modify the audit report accordingly. If management knew of the illegal act and failed to inform the auditor, it is questionable whether management can be believed in other discussions. The auditor should then communicate with the audit committee. If the client refuses to take action the auditor should withdraw from the engagement. If its a public company the auditor must report the act to the SEC. |
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Term
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Definition
| Dividing the audit into closely related types of accounts and transactions, called cycles or segments. |
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