Accounting and Auditing Terms: A Comprehensive Guide, Quizzes of Auditing

Download Accounting and Auditing Terms: A Comprehensive Guide and more Quizzes Auditing in PDF only on Docsity! TERM 1 What is Accounting DEFINITION 1 - the process of identifying, recording, processing, summarizing, and reporting information regarding economic states and events- In accordance with U.S GAAP TERM 2 What is Assurance? DEFINITION 2 - independent professional service that improves the quality of information for decision makersTypes of Assurance services:- audits - compliance- reviews- internal control over financial reporting- attestation- management consulting TERM 3 Auditing DEFINITION 3 - an investigation performed by professionals to establish whether things are as they are supposed to be- an investigation of an organization's accounting to ascertain whether it is "fair" and "in accordance with GAAP"TypesOperational; Compliance; IT Audit TERM 4 Financial Statement Audit DEFINITION 4 A financial audit, or more accurately, an audit of financial statements, is the verification of the financial statements of a legal entity, with a view to express an audit opinion. TERM 5 Why do we need Audit? DEFINITION 5 - increased need for assurance as an organization gets betterStart-Up Company's- single ownership- Management = OwnerIPOsPublic Company- multiple owners- management =/= owner TERM 6 Problems with Public Companies DEFINITION 6 - owners are not involved in day-to-day operations- management has all the information- Different interest in manager and owner - incentives for management to misstatements (**stock-options counteract fraud) - opportunity for misstatement - pressure to perform from outside (**analysis and the financial market) TERM 7 Principal --> Agent Model DEFINITION 7 Information Riskthe likelihood that information is not fairly stated (contains some sort of misstatement either error or fraud)Why?information asymmetry; different incentivesAssurance- a reduction of information risk- an increase in the quality of information TERM 8 Principal --> Agent Flow Chart DEFINITION 8 1. Principal Agent Model2. Use of accounting3. Information Risk4. Demand for assurance5. Demand for auditing TERM 9 Criteria to provide Assurance DEFINITION 9 - a neutral party is needed- independence- mitigates potential different interests (bias)- knowledge- mitigates the information asymmetry TERM 10 Other Assurance Methods DEFINITION 10 Internal Controls- a process designed to provide reasonable assurance regarding the achievement of objectives in... - reliability of financial reporting - effectiveness and efficiency of operations - compliance with applicable laws and regulations TERM 21 Materiality DEFINITION 21 - a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy. - something large enough or important enough to affect the behavior (decision) of a rational person (on average) TERM 22 Auditor's Responsibility for fraud DEFINITION 22 auditors are responsible for uncovering misstatements due to.....error- unintentional misstatementfraud- intentional misstatement -misappropriationof assets - fraudulent financial reportingillegal acts- violations of government regulations other than fraud - violation of federal tax laws - violation of federal environmental protection laws TERM 23 Error vs. Fraud DEFINITION 23 Common Errors- misinterpretation of event or GAAP- errors in estimates or judgmentsCommon Fraud- accelerate revenues- capitalization of expenses- cookie jar reserves TERM 24 Management Assertions DEFINITION 24 - a fact or truth stated explicitly or implicitly in or through accounting numbers or disclosures in the financial statements. TERM 25 Evidence DEFINITION 25 - anything that supports or refutes a management assertion- anything that causes an auditor to revise his or her belief regarding a management assertion TERM 26 Independence DEFINITION 26 - the degree to which one can make a decision without bias TERM 27 Skepticism DEFINITION 27 - an attitude that includes a questioning mind and critical assessment of evidenceOR- careful scrutiny of information: - source reliability; motives or bias; knowledge or competence- consistency - other information; reasonableness TERM 28 Analytical Procedures DEFINITION 28 - the analysis or comparison if financial and or non-financial information 1. to gain an understanding of something, or 2. to identify anomalies (risk) TERM 29 Sampling DEFINITION 29 - any time one looks at less than 100% of the items in a population (to make inferences about the entire population) TERM 30 What is fair accounting? DEFINITION 30 - the accounting principles are GAAP, and are applicable in the circumstances- financial statements are informative of matters that may affect their use, understanding, and interpretation- the information presented is classified and summarized in a simple manner- financial statements reflect normal accounting and are reasonable TERM 31 GAAS DEFINITION 31 General Accepted Auditing Standards (GAAS)General Standards- auditors...adequate technical training and proficiency; independence, due professional careFieldwork Standards- adequate planning and supervision; sufficient evidence- understanding of client, environment, and internal controlsReporting Standards- accordance with GAAP, lack inconsistencies or inadequacy- express opinion or why not TERM 32 Financial Statement Cycles DEFINITION 32 1. Treat every account balance as a separate segment2. Common Approach: separate into cycles- sales and collection (sales, cash, A/R)- Acquisition & payment (land, buildings, equipment, depreciation)- payroll & personnel (wages expense, salary expense)- inventory and warehousing (inventory, COGS)- Capital acquisition and repayment (common stocks, dividends, interest expense, Notes Payable, Retained Earnings) TERM 33 CEAVOP DEFINITION 33 MANAGEMENT ASSERTIONSCompleteness (all disclosures are recorded)Effectiveness(everything [assets, liabilities, equity] exist)Accuracy(recorded appropriately)Valuation(& allocation)Obligation( & rights; company has rights of items disclosed)Presentation(& disclosure; financial statements properly described, classified, and disclosed) TERM 34 The Audit Process DEFINITION 34 1. Plan the audit2. Perform the Audit3. Report (opinion) TERM 35 Plan the audit DEFINITION 35 - gain an understanding of client's business- identify risks (inherent; going-concern)- assess clients response to risk (internal controls, control risk)- develop an audit plan: - effective- focus on risk - efficient- focus on effort TERM 46 PCAOB DEFINITION 46 Public Companies Accounting Oversight Board (PCAOB)- inspect accounting firms to assess compliance with SEC and PCAOB rules, standards, and firm's quality control policies- annual inspections for firms who audit more than 100 issues- every three years inspections for other firms1. Set standards2. Inspections3. Investigation and disciplinary procedures4. research TERM 47 Statement on Auditing Standards (SAS DEFINITION 47 ASB issues SASsTwo codification SAS # AU #- beginning with 2 (general); 3 (fieldwork); 4,5,6 (reporting)- applicable to audits of private companies- specificity is not high- are perceived as minimum standards of performance rather than maximum standards or ideals. TERM 48 Auditing Standards (AS) & ISA DEFINITION 48 - issued by PCAOB; currently 15 ASs- apply to public companies- must be approved by SEC- trying to get closer to ISA (Int'l)- similar to GAAS- issued by International Auditing & Assurance Board (IAASB)- International Federation of Accountants (IFAC)- doesn't overrule home country laws TERM 49 Quality Control Standards DEFINITION 49 quality controls- methods used to ensure that the firm meets its professional responsibilities to clients and others- firms have to establish quality control policies- Peer Review- part of quality control - administered by state CPA boards - every 3 years - different from PCAOB reviews TERM 50 Elements of Quality Control DEFINITION 50 leadership- responsibilities for quality within the firm (tone at the top)- independence, integrity, objectivity (relevant ethical requirements)- acceptance and continuation of engagements - client evaluation form with clear thresholds for risks- Personnel Management (HR) - establish training procedures for employees- Engagement performance - establishing reviews and designating a consultant- Monitoring:monitor quality control procedures periodically to make sure they meet stds. TERM 51 Prospective Client Acceptance DEFINITION 51 - obtain and review financial information- communicate with previous auditor- consider unusual business risk or audit risks- determine if firm is independent- determine if firm has necessary skills and knowledge- determine if acceptance violates code of professional conduct for regulatory agency requirements- inquire 3rd parties TERM 52 Preliminary Analytical Procedures DEFINITION 52 - analysis of "preliminary" financial information during the planning stage of the audit to gain understanding of a client, recent changes, events, and risk- help understand the client- identify risks TERM 53 Business Risk DEFINITION 53 - risk related to a client- threat to managements ability to achieve its objectives resulting from significant conditions, events, circumstances, actions or inactions of the management TERM 54 Engagement Risk DEFINITION 54 auditor's risk- risk that the auditor will suffer harm after the audit is finished, even though the audit report was correct TERM 55 Going-concern Risk DEFINITION 55 - risk of entity ceasing to be a going-concernPerformance- losses; declining sales; increased competitionCash Flows:negative cash flows; debt problems; inability to raise capitalEvents: disasters; lawsuits; economic downturn TERM 56 Audit Risk DEFINITION 56 - risk related to auditor's work- risk of issuing an opinion that the financial statements are OK when in fact the aren't**did you do enough procedures, did you gather enough information to feel comfortable with the stance? TERM 57 Framework for Evaluating Business Risks DEFINITION 57 - centered around people, the company, processes, and accountingFactors such as:- social pressures - investors - competitors - technology - change in environment - suppliers - the economy - regulators- customers - legal/political pressures TERM 58 Internal Business Risk DEFINITION 58 Related to.....People- accidental error (lack of training or knowledge), intentional (monitoring turnover, lack of happy employees)Processes- revenue (how it is recognized), manufacturingAccounting- complex transactions (Enron), unusual (could be industry dependent), related parties TERM 59 Preliminary Analytical Procedures DEFINITION 59 - scan preliminary numbers- Inter-period comparisons -direct - trends; variance - common size - ratios: liquidity, profitability, activity, riskOther:- Budget; Forecasts; Industry/competitor*used mostly to get a simple and intro knowledge and idea of your client TERM 60 Inherent Risk DEFINITION 60 - the risk of material misstatement occurring in an assertion or account (independent of internal controls) TERM 71 Tolerable Misstatements DEFINITION 71 - some you audit fully, no threshold- allocated only to accounts not audited 100%- allocated to both balance sheet and income statement accounts. ***list all accounts and five tolerable misstatement- also a matter of personal judgment- can also be adjusted for qualitative factors TERM 72 Word of Caution DEFINITION 72 - Subjectivity can lead to bias - good friend of client- Auditors ignore or waive known misstatements - if not material, "don't worry about it"- Individually immaterial misstatements may add up to material misstatements (in one period or over time) - manipulating numbers over time - just below threshold- Tables oversimplify- Clients aware of materiality - especially recurring clients always them to do manipulations TERM 73 Rule of Thumb DEFINITION 73 - allocate 50% to 75% of preliminary materiality to each account- Account's TIM could add up to 3 to 4 times the preliminary materialityWhy?- not all accounts will be misstated by their TM- simultaneous audit of accounts- TM as percentage of PM is usually a very small amount for large accounts- PM is a safety net **has wiggle room- achieve smaller TIM during testing TERM 74 Proportion Approach DEFINITION 74 The base in this case is the total of audited accounts (excluding 100% audited)an allocation percentage is determinedAcct. Amt / Base = Allocation%Allocation % x Preliminary Materiality = Tolerable Misstatement (amt) TERM 75 Evaluative Materiality DEFINITION 75 - materiality during the second stepof the audit process1. perform procedures and gather evidence2. identify misstatements3. are they material individually4. are they material in total? (does the sum exceed PM)5. Must consider both qualitative and quantitative aspects6. resolve with client (during negotiation process)