Auditing and Assurance Services: Chapters 1 & 2 Study Guide

Comprehensive vocabulary flashcards covering auditing concepts, GAAS principles, assertions, risk assessment, quality management, and professional standards from Chapters 1 and 2.

Generally Accepted Auditing Standards (GAAS)

Auditing standards that identify necessary qualifications and characteristics of auditors and guide the conduct of the audit examination, designed to obtain reasonable assurance about whether financial statements as a whole are free of material misstatement and to issue an audit report.

Auditing Standards vs. Audit Procedures

Auditing standards are quality guides that apply to all audits, whereas audit procedures are the specialized, specific actions auditors take to obtain evidence on a particular engagement.

Fundamental Principles of GAAS

The $3$ core principles identified by the Auditing Standards Board (ASB) that underlie all audits: (1) Responsibilities, (2) Performance, and (3) Reporting.

Responsibilities Principle

The fundamental principle relating to the personal integrity and professional qualifications of auditors, requiring competence and capabilities, compliance with relevant ethical requirements, and the maintenance of professional skepticism and professional judgment.

Five Stages of an Audit

The chronological sequence followed on an engagement: (1) Obtain (or Retain) Engagement, (2) Engagement Planning, (3) Risk Assessment, (4) Audit Evidence, and (5) Reporting.

Competence and Capabilities

The professional qualifications of auditors beginning with specialized accounting education, developed through hands-on supervised experience, and maintained through continuing professional education (CPE).

Independence in Fact

The auditor's actual mental state of being genuinely unbiased and impartial with respect to the client's financial statements.

Independence in Appearance

The extent to which external parties, particularly financial statement users, perceive the auditor to be free of compromising financial or managerial relationships with the audited client.

Due Care

The level of performance that a reasonable, prudent auditor would exercise in similar circumstances; requires auditors to possess standard professional skill and knowledge without expecting infallibility.

Professional Skepticism

A state of mind characterized by appropriate questioning and a critical assessment of audit evidence, neither assuming management is dishonest nor assuming unquestioned honesty.

Professional Judgment

The application of relevant training, knowledge, and experience in making informed audit decisions, which must be documented so an experienced independent auditor can understand them.

Performance Principle

The fundamental principle setting general conduct criteria: planning and supervising work, determining and applying materiality, assessing risks of material misstatement, and obtaining sufficient appropriate evidence to achieve reasonable assurance.

Reasonable Assurance

A high, but not absolute, level of assurance that financial statements as a whole are free of material misstatement; acknowledges that a GAAS audit may not detect all misstatements and that auditors are not insurers or guarantors.

Audit Plan

A comprehensive, written list of the specific audit procedures the audit team must perform to gather sufficient appropriate evidence to support the audit opinion, prepared during engagement planning.

Interim Date

A date some weeks or months before the client's year-end at which the audit team performs audit procedures, enabling the auditor to evaluate remaining activity during the roll-forward period to complete the audit timelier.

Materiality

An amount or event that has a substantial likelihood of influencing the decisions of reasonable financial statement users, evaluated quantitatively and qualitatively.

Risk of Material Misstatement (RMM)

The combined likelihood that a material error or fraud exists in the financial statements prior to the auditor's substantive work, defined as the product of Inherent Risk and Control Risk ($\text{IR} \times \text{CR}$).

Inherent Risk (IR)

The probability that, in the absence of internal controls, a material error or fraud could enter the accounting system.

Control Risk (CR)

The probability that the client's internal control policies and procedures will fail to prevent or detect a material misstatement on a timely basis.

Detection Risk (DR)

The risk that the audit team's substantive procedures will fail to detect a material misstatement that exists; the only component of audit risk directly controlled by the auditor.

Substantive Procedures

Detailed audit and analytical procedures designed to substantiate account balances and footnote disclosures to detect material misstatements.

Audit Evidence

The underlying accounting data and all corroborating information (such as confirmations, invoices, and minutes) used by auditors to arrive at the conclusions on which the audit opinion is based.

Sufficiency (Audit Evidence)

The measure of the quantity of audit evidence, reflected in the number of transactions or components evaluated.

Appropriateness (Audit Evidence)

The measure of the quality of audit evidence, consisting of both relevance (what the evidence addresses) and reliability (whether the evidence can be trusted).

Reporting Principle

The fundamental principle requiring the auditor to express a written opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework, or state that an opinion cannot be expressed.

Financial Reporting Framework

The set of criteria used to determine the measurement, recognition, presentation, and disclosure of items in financial statements (e.g., GAAP, IFRS, or a special-purpose cash/tax basis).

Critical Audit Matters (CAMs)

Matters communicated to the audit committee that relate to material accounts or disclosures and involved especially challenging, subjective, or complex auditor judgment.

Unmodified (Unqualified) Opinion

The "clean" audit opinion concluding that the financial statements present fairly, in all material respects, in conformity with GAAP (or other applicable framework).

Qualified Opinion

An audit opinion concluding that "except for" a relatively isolated or limited departure, the financial statements are presented in conformity with GAAP.

Adverse Opinion

An audit opinion concluding that the financial statements are NOT presented in conformity with GAAP due to a material and pervasive departure.

Disclaimer of Opinion

A report stating that an opinion cannot be expressed, typically triggered by a severe lack of auditor independence or pervasive lack of sufficient evidence/scope limitation.

System of Quality Management (SQM)

The policies and procedures a public accounting firm implements to provide reasonable assurance that the firm and personnel comply with professional standards and regulatory requirements, and issue appropriate reports.

Public Company Accounting Oversight Board (PCAOB)

The regulatory board created by Sarbanes-Oxley ($2002$) to establish auditing standards for public entities (issuers), register accounting firms, and inspect firm audit quality.

Auditing Standards Board (ASB)

The AICPA technical committee that issues Statements on Auditing Standards (SASs) governing the audits of nonissuers (private companies).

PCAOB Inspection Frequencies

Firms auditing more than $100$ issuers are inspected annually; firms auditing $100$ or fewer issuers are inspected at least once every $3$ years (triennially).

Business Risk

The factors, events, and conditions that could prevent an entity from achieving its operational and strategic business objectives.

Information Risk

The probability that the information circulated by an entity will be false or misleading to decision makers.

Four Environmental Conditions Increasing Information Demand

The conditions in big data environments driving demand for verified information: (1) Complexity, (2) Remoteness, (3) Time sensitivity, and (4) Consequences.

Assurance Services

Any independent professional service that improves the quality of information, or its context, for decision makers.

Attestation Engagement

A service where a practitioner examines whether management's assertion about subject matter can be relied upon and issues a report on that assertion.

Auditing (AAA Definition)

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.

Existence or Occurrence

Management's assertion that reported balance sheet assets and liabilities actually exist, and recorded income statement transactions and events genuinely happened during the period.

Completeness

Management's assertion that all transactions, events, assets, liabilities, and disclosures that should have been recorded in the financial statements are included.

Cutoff

A detailed component of completeness referring to accounting for revenue, expenses, and transactions in the proper period, generally bounded by the year-end balance sheet date.

Valuation or Allocation

Management's assertion that assets, liabilities, and equities are recorded at correct amounts in accordance with GAAP/IFRS, with appropriate allocations (e.g., depreciation) applied.

Rights and Obligations

Management's assertion that the company holds legal title/rights to all recorded assets and that all recorded liabilities are the legal debts of the company.

Presentation and Disclosure

Management's assertion that financial statement items are correctly classified, described, and understandable, and that all required footnote disclosures are fully provided.

Relevant Assertion

A management assertion for which there is a reasonable possibility of containing a material misstatement that would cause the financial statements to be materially misstated.

Compilation

A nonaudit service where a CPA prepares financial statements from a client's books and records without gathering audit evidence and without providing any assurance.

Review (Nonaudit Engagement)

A service narrower in scope than an audit where a CPA performs limited procedures (chiefly inquiry and analytical procedures) to provide limited (negative) assurance.

Section 302 of Sarbanes-Oxley

The SOX provision requiring corporate CEOs and CFOs to personally certify that they have reviewed the financial reports, that no false statements or material omissions exist, and that statements fairly present company condition.

Section 404 of Sarbanes-Oxley

The SOX provision requiring management to assert responsibility for and assess internal control over financial reporting, and requiring the external auditor to attest to those controls.

Prohibited Nonaudit Services under SOX

The $8$ services barred for public audit clients: bookkeeping, financial information system design/implementation, appraisal/valuation, actuarial, internal audit outsourcing, management/HR, broker/dealer/investment, and unrelated legal/expert services.

Operational Auditing

The examination of business operations to evaluate the efficient and effective use of resources, achievement of objectives, and compliance with company policies.

Generally Accepted Government Auditing Standards (GAGAS / Yellow Book)

Standards issued by the U.S. GAO defining $3$ broad categories of government audits: financial audits, attestation engagements, and performance audits.

Substantial Equivalency

The framework allowing a CPA licensed in one jurisdiction to practice in another substantial equivalency jurisdiction without obtaining a separate license.