Exam 1 | ACIS 4414 - Financial Statement Auditing, Quizzes of Auditing

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TERM 1 Assurance DEFINITION 1 Independent professional service that improves the quality of information for decision makers TERM 2 Types of assurance services DEFINITION 2 Audits-reasonable assuranceReviewsInternal control over financial reportingAttestation servicesMgmt consultingOther: ISO 9000 certifications, compliance w/ contracts, etc. TERM 3 Auditing DEFINITION 3 An investigation performed by professionals to establish whether things are as they're supposed to be TERM 4 Financial Stmt Audit DEFINITION 4 An investigation of an organization's accounting to ascertain whether it is "fair" and "in accordance with GAAP."A systematic process of 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 communicating the results to interested users TERM 5 What is the objective of an audit? DEFINITION 5 To issue an opinion on the financial stmts of a company TERM 6 For public companies, the auditor also issues a ? DEFINITION 6 Report on internal controls over financial reporting (SOX 404) TERM 7 What is the result of an audit? DEFINITION 7 Auditor's report TERM 8 Plan the audit DEFINITION 8 Gain an understanding of client's businessIdentify risks (inherent, going-concern)Assess client response to risk (internal controls, control risk)Develop an audit plan- Effective-focus on risk-Efficient-focus on effort TERM 9 Perform the audit DEFINITION 9 Perform audit procedures-focus on mgmt assertions- Analytical procedures-Test of controls-Test of detailsGather audit evidenceEvaluate and document results TERM 10 Report results of the audit DEFINITION 10 Privately to the audit committeePublic through the audit reportTypes of audit reports: unqualified, qualified, adverse, disclaimer TERM 21 What are the quality control standards? DEFINITION 21 LeadershipClient acceptanceIndependenceMonitoring TERM 22 GAAS DEFINITION 22 Training & technical proficiencyIndependence in mental attitudeDue professional carePlanning and supervisionSufficient understanding of the entity and its environment including its ICAppropriate audit evidence TERM 23 SAS DEFINITION 23 Applicable to audits of private companiesSpecificy is not highPerceived as minimum standards of performance rather than maximum standards or ideals TERM 24 What does SAS stand for? DEFINITION 24 Statement on Auditing StandardsASB issuesConvergence and clarify project2 codification numbers:-SAS number-order of issuance-AU-C number TERM 25 What did SOX establish? DEFINITION 25 PCAOB-Public Company Accounting Oversight Board-- overseen by SEC TERM 26 What kind of inspections does the PCAOB do? DEFINITION 26 Inspect accounting firms to assess compliance w/ SEC and PCAOB rules, standards, and firm's quality control policiesAnnual inspections for firms who audit more than 100 issuersEvery 3 yrs inspections for other firms TERM 27 The PCAOB does annual inspections for firms who audit more than ? issuers DEFINITION 27 100Every 3 yrs inspections for other firms TERM 28 Auditing Standards (AS) are issued by ? DEFINITION 28 PCAOB TERM 29 Auditing Standards (AS) apply to ? DEFINITION 29 Public companies TERM 30 How many AS are there currently? DEFINITION 30 16 (15 effectively) TERM 31 For an AS to become effective, it must be approved by: DEFINITION 31 The SEC TERM 32 The SEC can influence the setting of ? DEFINITION 32 GAAPCan establish rules related to CPAs who audit F/S submitted to SECCan investigate any alleged frauds & does so for public companies TERM 33 Quality Controls DEFINITION 33 Methods used to ensure that the firm meets its professional responsibilities to clients and others TERM 34 Do firms have to establish quality control policies? DEFINITION 34 Yes. SAS 25. But no specific guidance on what these should be. TERM 35 Quality Control Standards Committee DEFINITION 35 Established 1978 by AICPAEstablished 6 elements of quality controlIncludes peer review TERM 46 More serious offense: DEFINITION 46 Before Joint Trial Board TERM 47 Consequences for a serious offense (person): DEFINITION 47 Suspend (2 yrs) or expel membersState board can revoke CPA certificate/license to practice TERM 48 Consequences for a serious offense (CPA firms): DEFINITION 48 SEC can suspend from taking new public clients and impose finesSEC can prohibit for firms to have any public clients TERM 49 Audit Risk (AR) DEFINITION 49 Risk of issuing an opinion that the F/S are OK (fair, in accordance w/ GAAP) when in fact they are not OK. TERM 50 Inherent Risk (IR) DEFINITION 50 The risk of material misstatement occurring in an assertion/account (independent of internal controls) TERM 51 Control Risk (CR) DEFINITION 51 The risk of material misstatement that could occur in an assertion/account not being prevented/detected by the client's internal controls on a timely basis TERM 52 Detection Risk (DR) DEFINITION 52 The risk of not detecting a material misstatement in an assertion/account using audit procedures TERM 53 ARM-Audit Risk Model DEFINITION 53 AR=IR X CR X DRorDR=AR / IR X CR TERM 54 RMM DEFINITION 54 (PCAOB)-Risk of Material MisstatementRisk remaining after we have evaluated the riskiness of an account/assertion/transaction and consider the effect of controls on that account/assertion/transactionRMM=IR X CR TERM 55 IR and CR DEFINITION 55 Inherent risks to the clientExist INDEPENDENTLY of the auditorAuditors can only ASSESS them (and not influence them) TERM 56 AR DEFINITION 56 Audit riskSet by auditor based on risk he/she is willing to take for failure in the audit TERM 57 DR DEFINITION 57 Detection riskCalculated based on IR, CR, ARHelps determine amount of work to be done by auditorsRELATED TO THE EVIDENCE TERM 58 For high-risk clients, AR is set: DEFINITION 58 Lower TERM 59 Lower DR= DEFINITION 59 More evidence we need to gather TERM 60 What is fraud? DEFINITION 60 An intentional misstatement of financial stmts TERM 71 Planning/Preliminary Materiality DEFINITION 71 Overall materiality level for the companyQualitative factors: history of misstmt, history of relationship w/ client, nearness to critical pointsQuantitative factor: size of the company TERM 72 Tolerable Misstatement DEFINITION 72 An estimate of the maximum monetary misstatement that may exist in an account balance without causing the financial statements to be materially misstated TERM 73 Tolerable misstmt is allocated only to accounts not audited ? DEFINITION 73 100%Allocated to both balance sheet & income stmt accounts TERM 74 Evaluative Materiality DEFINITION 74 Materiality during the second step of the audit process (performing) TERM 75 What is mgmt expected to correct? DEFINITION 75 "Known misstatements" TERM 76 Business failure DEFINITION 76 Occurs when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions TERM 77 Audit failure DEFINITION 77 Occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards TERM 78 Audit risk DEFINITION 78 Set this, don't assess itRepresents risk that the auditor will conclude that the F/S are fairly stated and an unqualified opinion can be issued when, in fact, they are materially misstated. TERM 79 Legal concepts affecting liability DEFINITION 79 Prudent person conceptLiability for the acts of othersLack of privileged communication TERM 80 Prudent person concept DEFINITION 80 Employment of skill with reasonable care and diligenceIf one offers his/her service, he/she must have the required skillsHe/she undertakes for good faith and integrity, but not for infallibilityHe/she is liable for acts resulting from negligence, bad faith/dishonesty, but not pure errors of judgment TERM 81 Liability for the acts of others DEFINITION 81 Jointly liable for the civil actions against any owner (except LLP or LLC)Liable for work performed by others: employees, other CPA firms engaged to do part of the work, specialists TERM 82 Lack of privileged communication DEFINITION 82 No right to withhold information from the courts on the grounds that the information is privileged-one of the exceptions from Code of conduct on confidentiality ruleFew exceptions in state courts but never in federal TERM 83 Ordinary negligence DEFINITION 83 Didn't do due diligenceWhat other competent auditors would have done TERM 84 Gross negligence DEFINITION 84 Lack of even slight care TERM 85 Constructive fraud DEFINITION 85 Extreme/unusual negligence; also reckless behaviorAuditor knowing adequate audit is not done but issued an opinion although no intention to deceive users TERM 96 Contributory negligence DEFINITION 96 Auditors claim client's own actions resulted in the loss and client prevented the auditor from discovering the cause of the loss/misstmt TERM 97 Absence of causal connection DEFINITION 97 Client should be able to show that there is a causal connection between the auditor's failure to follow standards and damages suffered by client TERM 98 What is audit documentation? DEFINITION 98 The principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement TERM 99 (ASB) Audit documentation provides the principal support for: DEFINITION 99 The auditor's opinionThe representation that the audit was conducted in accordance with GAAS TERM 100 (PCAOB) Audit documentation is: DEFINITION 100 the basis for the auditor's conclusionsfacilitates planning, performance, and supervision of the auditthe basis for a review of the quality of the audit work TERM 101 Purpose of audit documentation: DEFINITION 101 Assist in planning and performing the auditprovide a basis for review of workestablish accountability for workmaintain a record of matters of ongoing significance TERM 102 Rules related to audit documentation: DEFINITION 102 OwnershipRetention of documents"complete and final" TERM 103 Ownership rule DEFINITION 103 Auditor owns the documentscannot show to outside parties w/o permission of client (confidentiality rule)Exception- subpoena by a court as legal evidence TERM 104 Retention of documents rule DEFINITION 104 AS 3Retain for MINIMUM OF 7 YRS (5 for ASB) from the date of completion of the engagement TERM 105 "Complete and final" rule DEFINITION 105 Audit documentation must be complete and final no later than 45 (60 for ASB) days after release of audit reportNo documents may be deleted after thisDocumentation may be added if properly documented TERM 106 What must be at end of documentation? DEFINITION 106 Engagement completion document (PCAOB)List all significant matters/issues found throughout audit TERM 107 Experienced auditor test DEFINITION 107 Audit documentation must contain sufficient evidence to enable an experienced auditor w/ no knowledge of the engagement:to understand NTE and results of audit proceduresto understand evidence obtainedto understand conclusions TERM 108 Permanent files DEFINITION 108 Contain data of historical or continuing nature pertinent to the current audit-bylaws, contracts, AP results from prior year TERM 109 Current files DEFINITION 109 Current year audit documentation-audit program, working trial balance, supporting schedules TERM 110 Documentation-planning of audit: DEFINITION 110 audit plan primary document, client's bylaws TERM 121 Indirect tests DEFINITION 121 Ex: tests of controls over transaction/balance TERM 122 When must analytical procedures be applied? DEFINITION 122 Preliminary and final = required (understanding client)Substantive = optional TERM 123 Performing phase: which is the primary purpose of substan analyt procedures? DEFINITION 123 Reduce detailed tests TERM 124 Reporting phase: which is the primary purpose of substan analyt procedures? DEFINITION 124 Indicate possible misstatements (attention directing) TERM 125 Planning phase: which is the primary purpose of substan analyt procedures? DEFINITION 125 Understand client's businessIndicate possible misstatements (attention directing) TERM 126 4 Steps of Substan Analyt Procedures: DEFINITION 126 1. Expectation development2. Identify material discrepancies3. Investigate (if necessary)4. Evaluation of results TERM 127 Precision DEFINITION 127 Accuracy of expectation or closeness of expectations to the correct amount (not necessarily actual)-lower DR requires higher precision TERM 128 Pros of trend method: DEFINITION 128 Easy to usegood for stable accountsuses relationship over time TERM 129 Cons of trend method: DEFINITION 129 Uses only 1 predictor-timetoo simplisticneed stable accounts TERM 130 Pros of ratio method: DEFINITION 130 Relatively easy to useMore precise than trend because it relies on relationshipsUses 2 predictors-more information- higher precision TERM 131 Cons of ratio method: DEFINITION 131 Need to have a strong relationshipCould be manipulated easily TERM 132 Pros of reasonableness method: DEFINITION 132 Multiple predictors-higher precisionUse of nonfinancial date- allow for higher precisionCould use other data such as average or industry data TERM 133 Cons of reasonableness method: DEFINITION 133 Somewhat complexLess commonly used TERM 134 Pros of regression method: DEFINITION 134 Multiple predictors-higher precisionVery high precision TERM 135 Cons of regression method: DEFINITION 135 Extremely complexRequires usually technology useUncommonIs high precision worth the cost? TERM 146 Sampling-type 1 error: DEFINITION 146 Risk of concluding that a misstmt exists when it does notorConcluding that the control is not operating effectively when in fact it isFalse positiveRelates to efficiency-waste of time TERM 147 Sampling-type 2 error: DEFINITION 147 Risk of concluding that there is NO misstmt when in fact the misstmt existsorConcluding that the control is operating effectively when in fact it is notFalse negative TERM 148 The higher the acceptable risk of coming to the wrong conclusion.. DEFINITION 148 The smaller the sample size needed TERM 149 The higher the tolerable misstatement/deviation.. DEFINITION 149 The smaller the sample size needed TERM 150 The higher the expected problems.. DEFINITION 150 The larger the sample size needed TERM 151 The larger the population size.. DEFINITION 151 The larger the sample size needed TERM 152 The higher the population variance.. DEFINITION 152 The larger the sample size needed TERM 153 Statistical (probabilistic) sampling methods DEFINITION 153 Follow the rules. Every item must have an equal likelihood of being included in the sample-random sampling, systematic, stratified TERM 154 Non-statistical (nonprobabilistic) sampling methods DEFINITION 154 Relax the rules. Every item NEED NOT have an equal likelihood of being included in the sample.-blocked, haphazard, judgmental, random/systematic