Audit Section 1

Independent professional services that improve the quality of information, or its context, for decision makers. Encompasses attest services and financial statement audits.

A service when a practioner is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. Encompasses financial statement audits.

All the information used by the auditor in arriving at the conclusions on which the audit opinion is based; includes the info contained in the acct records underlying the financial statements and other information

The risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated.

A systematic process of (1) 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 (2) communicating the results to interested users

Expressed or implied representation by management that are reflected in the financial statement components

The concept that the manager generally has more information about the true financial position and results of operations of the entity than the absentee owner does

The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced.

An instance where a financial statement assertion is not in accordance with the criteria against which it is audited (e.g., GAAP). Misstatements may be classified as fraud (intentional), other illegal acts such as noncompliance with laws and regulations (intentional or unintentional), and errors (unintentional).

The concept that an audit done in accordance with auditing standards may fail to detect a material misstatement in a client's financial statements. In an auding context this term has been defined to mean a high but not absolute level of assurance.

The end product of the auditor's work, indicating the auditing standards followed, and expressing an opinion as to whether an entity's financial statements are fairly presented in accordance with agreed-upon criteria (GAAP)

The risk that the entity's financial statements will contain a material misstatement whether caused by error or fraud.

A "clean" audit report, indicating the auditor's opinion that a client's financial statements are fairly presented in accordance with agreed-upon criteria (GAAP)

A committee consisting of members of the board of directors, charged with overseeing the entity's system of internal control over financial reporting, internal and external auditors, and the financial reporting process. Members typically must be independent of management.

Persons elected by the stockholders of a corporation to oversee management and to direct the affairs of the corporation

Processes implemented by management to achieve entity objectives. Business processes are typically organized into the following categories: revenue, purchasing, human resource management, inventory management, and financing processes.

The oversight mechanisms in place to help ensure the proper stewardship over an entity's assets. Management and the board of directors play primary roles, and the independent auditor plays a key facilitating role.

A system or code of conduct based on moral duties and obligations that indicates how an individual should behave.

Expressed or implied representations by management about information that is reflected in the financial statements. The three sets of assertions relate to ending account balances, transactions, and presentation and disclosure.

Accounting principles that are generally accepted for the preparation of financial statements in the US. GAAP standards are currently issued primarily by the FASB, with oversight and influence by the SEC.

Ten broad statements guiding the conduct of financial statement auditing.

Violations of law or govt. regulation

A state of objectivity in fact and in apprearance, including the absence of any significant conflicts of interest.

An audit of both financial statements and internal control over financial reporting, provided by the external auditor. Required for public companies.

Consulting services that may provide advice and assistance concerning an entity's organization, personnel, finances, operations, systems, or other activities.

An organization created to provide professional accounting-related services, including auditing. Usually formed as a proprietorship or as a form of partnership.

Standards regarding the conduct of financial statement auditing for public companies. Currently consist primarily of standards and statements established by the AICPA's Auditing Standards Board, as these statements and standards were adopted by the PCAOB in 2003 on an interim basis, though the PCAOB has added a few significant standards.

Statements issued by the AICPA's Auditing Standards Board, considered as interpretations of the 10 GAAS statements.

1. The auditor must have adequate technical training and proficiency to perform the audit. 2. The Auditor must maintain independence in mental attitude in all matters relating to the audit. 3. The auditor must exercise due professional care in the performance of the audit and the preparation of the report.

1. The auditor must adequately plan the work and must properly supervise any assistants. 2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. 3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

1. The auditor must state in the auditor's report whether the financial statements are presented in accordance with GAAP. 2. The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. 3. When the auditor determines that informative disclosures are not reasonably adequte, the auditor must so state in the auditor's report. 4. The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor's report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor's report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report.

Determines the extent to which rules, policies, laws, covenants, or governemtn regulations are being followed by the entity.

A systematic review of part or all of an organization's activities to evaluate whether resources are being used effectively and efficiently. The purpose is to assess performce, identify areas for improvement and develop recommendations.

The purpose it to detect or deter fraudulent activities.

Testing controls to obtain indirect evidence about the fairness of the financial statements.

Evaluations of financial information made by a study of plausible relationships amond both financial and nonfinancial data.

Specific acts performed by the auditor in gathering evidence to determine if specific assertations are being met.

The risk that the auditor may unknowingly fail to appropriately modify the opinion on materially misstated financial statements

Risks resulting from significant conditions, events, circumstances, and actions or inactions that could adversely affect managements's ability to execute its strategies and to achieve its objectives, or through the setting of inappropriate objectives or strategies.

A range of acceptable amounts or a precisely determined point estimate for an estimate (e.g. uncollectible receivables), if that is a better estimate than any other amount.

The risk that material misstatements that could occur will not be prevented, or detected and corrected, by internal controls.

The risk that the auditor will not detect a material misstatement that exists in the financial statements.

The risk that the auditor is exposed to financial loss or damage to his or her professional reputation from lititgation, adverse publicity, or other events arising in connection with financial statements audited and reported on.

Unintentional misstatements or omissions of amounts or disclosures.

Intentional misstatements that can be classified as fraudulent financial reporting and/or misappropriation of assets.

The susceptibility of an assertion to material misstatement, assuming no related controls.

An attitude that includes a questioning mind and a critical assessment of audit evidence. The auditor should not assume that management is either honest or dishonest.

The identification, analysis, and management of risks relevant to the preparation of financial statements that are fairly presented in conformity with GAAP.

The auditor's combined assessment of inherent risk and control risk.

Refers to the nature, timing, and extent of audit procedures, where nature refers to the type of evidence; timing refers to when the evidence will be gathered; and extent refers to how much of the type of evidence will be evaluated.

A risk of material misstatement that is important enough to require special audit consideration.

The amount of the planning materiality that is allocated to a financial statement account.

The risk that the auditor might select an inappropriate audit procedure, misapply the appropriate audit procedure, or misinterpret the audit results.

Audit Risk = Inherent Risk x Control Risk x Detection Risk

The records of initital entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries, and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations, and disclosures.

Evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data

Expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in financial statements and related disclosures

The auditor's principal record of the work performed and the basis for the conclusions in the auditor's report. It also facilitates the planning, performance, and supervision of the engagement and provides the basis for the review of the quality of the work providing the reviewer with written documentation of the evidence supporting the auditor's significant conclusions

All information used by the auditor in arriving at the conclusions on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information such as minutes of meetings; confirmations from third parties; industry analysts' reports; control manuals; information obtained by the auditor through audit procedures such as inquiry, observation, and inspection

Specific acts performed by the auditor in gathering evidence to determine if specific assertations are being met.

The process of obtaining and evaluating a direct communication from a third party in response to a request for info about a particular item affecting financial statement assertions.

Seeking info of knowledgeable persons, both financial and nonfinancial, throughout the entity or outside the entity

Examination of internal or external records or documents that are in paper form, electronic form, or other media

Physical examination of tangible assets

Process of watching a process or procedure being performed by others

Audit evidence that includes minutes of meetings; confirmations from third parties; industry analysts' reports; comparable data about competitors (benchmarking); controls manuals; info obtained by the auditor from such audit procedures as inquiry, observation, and inspection; and other info developed by, or available to, the auditor that permits the auditor to reach conclusions through valid reasoning

Determination of the mathematical accuracy of documents or records

refers to evidences relationship to the assertion or to the objective of the control being tested

The diagnosticity of evidence; that is, whether the type of evidence can be relied on to signal the true state of the assertion

The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control, either manually or through the use of computer-assisted audit techniques

Reviewing accounting data to identify significant or unusual items; including the identification of anomalous individual items within account balances or other client data through the scanning or analysis of entries in transaction listings, subsidiary ledgers, general ledger control accounts, adjusting entries, suspense accounts, reconciliation, and other detailed reports

The accounts and transactions that should be included are included; thus, the financial statements are complete.

Assets, liabilities, equity revenues, and expenses are appropriately valued and are allocated to the proper accounting period

The assets are the rights of the entity, and the liabilities are its obligations

The assets and liabilities exist, and the recorded transactions have occured

transactions and events that have been recorded have occurred and pertain to the entity (sometimes referred to as validity)

all transactions and events that should have been recorded have been recorded

all transactions and events have been properly authorized

amounts and other data relating to recorded transactions and events have been recorded appropriately and properly accumulated from journals and ledgers

transactions and events have been recorded in the correct acct period

assets, liabilities, and equity interests exist

the entity holds or controls the right to assets, and liabilities are the obligations of the entity

all assets, liabilities, and equity interests that should have been recorded have been recorded

assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded

disclosed events, transactions, and other matters have occured and pertain to the entity

all disclosures that should have been included in the financial statements have been included

financial information is appropriately presented and described, and disclosures are clearly expressed

financial and other info are disclosed fairly and at appropriate amounts

evaluations of financial info made by a study of plausible relationships among both financial and nonfinancial data

a subcommittee of the board of directs that is responsible for the financial reporting and disclosure process

specific acts performed as the auditor gathers evidence to determine if specific audit objectives are being met

the auditor's plan for the expected conduct, organization, and staffing of the audit

tests of transactions that both evaluate the effectiveness of controls and detect monetary errors

a letter that formalizes the contract between the auditor and the client and outlines the responsibilities of both parties

a violation of laws or government procedures

audit procedures performed to test material misstatements in an account balance, transaction class, or disclosure component of the financial statements

tests to detect errors or fraud in individual transactions

audit procedures performed to test the operating effectiveness of controls in preventing or detecting and correcting, material misstatements at the relevant assertion level

substantive tests that concentrate on the details of items contained in the account balance and disclosure

risk that info circulated by a company will be false or misleading

they possess the required training, expertise, and experience to evaluate the financial information

they have no reason to side with the client; they are independent of the client's influence

they will conduct themselves with integrity and will share share all of their findings with the public

they will not simply take the client's assertions at face value; they will conduct their own analysis and testing

they should stand behind their assessment with a guarantee and/or be subject to litigation if they fail to act with due care

the results of the audit are reported in time to benefit the decision makers

the costs of the services must not exceed the benefits. for this to occur the service provider will likely need to focus attention on the most important and risky assertions and likely can't provide absolute assurance

the audit addresses all of the most important and risky assertions made by the client

the service provides some degree of certainty that it will uncover significant risks or problems

the audit is based on a systematic process, and the conclusions are based on reliable evidence. In other words, another comparable auditor would likely find similar things and come to similar conclusions.

the service provides a sense for how the company is performing and how likely failure in the near future will occur

assists auditors in evaluating management's financial statement assertions by evaluating underlying accounting data

the information is related to the specific assertion being tested

the information can be relied on to signal the true state of the specific assertion being tested

1. Client acceptance/continuance and establishing an understanding with the client 2. preliminary engagement activities 3. plan the audit 4. consider and audit internal control 5. audit business processes and related account (e.g. accounts receivables) 6. complete the audit 7. evaluate results and issue an audit report

standard clean audit report

fairly stated audit report except for the misstatement identified by the auditor

the financial statements are not fairly stated and should not be relied upon

quantitative base for materiality is. .

qualitative amounts of materiality are. .

inventory concern for objects that may be out of date (computers)

inventory concern for objects they may not be valued properly (jewelry)

system or code based on moral duties and obligations that indicate how we should behave

conduct, aims, or qualities that characterize or mark a profession or professional person

state of objectivity in fact and in appearance, including the absence of significant conflicts of interest

unintentional misstatements due to omission(exlusions) or commission (inclusions)

intentional misstatements-misappropriation or cooking the books

incentive/pressure, opportunity, rationalization

how we acted and how we should have acted

when establishing the terms of the engagement, what topics should be discussed?

this is documented in the engagement letter and should included the objectives of the engagement, management's responsibilities, the auditor's responsibilities, and the limitations of the engagement

the audit committee should:

quality and accuracy

used to explain why accts appear the way they do, evidence must be shown for accts that appear misstated

1. risk assessment procedures 2. tests of controls 3. substantive analytical procedures 4. remaining assurance needed from tests of details

types of audit procedures

refers to selecting an item for testing from the accounting journals or ledgers and then examining the underlying source documents. Tests occurrenc

Refers to first selecting a source document and then following it into the journal or ledger. Tests completeness