LSU Audit Exam 1

Assurance Services

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

Attest Services

Services provided by a practitioner engaged to issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. Encompasses financial statement audits.

Audit Evidence

All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements, as well as other information.

Audit Risk

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Auditing

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.

Financial Statement assertions

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

information asymmetry

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.

Materiality

The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users.

Misstatement

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).

Reasonable Assurance

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 auditing context this term has been defined to mean a high but not absolute level of assurance.

Reporting

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 (e.g., GAAP).

Risk of material misstatement

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

Unqualified/unmodified audit report

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

Audit committee

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.

Board of directors

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

Business Processes

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.

Code of Professional Conduct

A set of principles, rules, and interpretations that establish guidance for acceptable behavior for accountants and auditors.

Corporate Governance

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.

Ethics

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

Generally Accepted Accounting Principles (GAAP)

Accounting principles that are generally accepted for the preparation of financial statements in the United States. GAAP standards are currently issued primarily by the FASB, with oversight and influence by the SEC. International Financial Reporting Standards (IFRS) are set by the International Accounting Standards Board.

Generally Accepted Auditing Standards (GAAS)

Ten broad statements guiding the conduct of financial statement auditing. The 10 GAAS are still found in PCAOB standards but they have been replaced in the ASB standards by the "Principles Underlying an Audit Conducted in Accordance with Generally Accepted Auditing Standards."

Illegal acts

Violations of laws or government regulations

Independence

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

Integrated Audit

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

International Standards on Auditing (ISA)

Statements issued by IFAC's International Auditing and Assurance Standards Board.

Management advisory services

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

Principles Underlying an Audit Performed in Accordance with GAAS

The ASB replaced the 10 GAAS with these principles, organized into four parts: Purpose of an Audit and the premise upon which an audit is conducted, Auditor responsibilities, Audit performance, and audit reporting

Public accounting firm

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

Standards (AS) of the PCAOB

Standards regarding the conduct of financial statement audits for public companies. Currently consist of a mix of standards and statements established by the ASB, as these statements and standards were adopted by the PCAOB in 2003 on an interim basis, together with Auditing Standards (AS) issued by the PCAOB since 2003.

Statements on Auditing Standards (SAS)

Statements issued by the AICPA's Auditing Standards Board.

Analytical Procedures

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.

Audit committee

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

Audit procedures

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

Audit strategy

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

Auditor specialist

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor's specialist may be either an auditor's internal specialist (who is a partner or staff, including temporary staff, of the auditor's firm or a network firm) or an auditor's external specialist.

Dual-purpose tests

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

Engagement Letter

A letter that formalizes the contract between the auditor and the entity and outlines the responsibilities of both parties.

Illegal act

A violation of laws or government regulations.

Internal Audit Function

An independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Overall materiality (planning materiality)

The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users.

Substantive procedures

Audit procedures performed to test material misstatements in an account balance or disclosure component of the financial statements.

Substantive tests of transactions

Tests to detect errors or fraud in individual transactions.

Tests of controls

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

Tests of details

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

Tolerable Misstatement (Performance Materiality)

The amount of the overall materiality that is used to establish a scope for the audit procedures for the individual account balance or disclosures.

Audit Procedures

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

Audit Risk

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Business risks

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

Control risk

The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

Detection Risk

The risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements

Engagement risk

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

Errors

the unintentional misstatements or omissions of amounts or disclosures in financial statements

Factual Misstatements

These are misstatements about which there is no doubt. For example, an auditor may test a sales invoice and determine that the prices applied to the products ordered are incorrect. Once the products are correctly priced, the amount of misstatement is known. In such cases, the auditor knows the exact amount of the misstatement.

Fraud

An intentional act by one or more among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements

Inherent Risk

The susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

Judgemental misstatements

These are misstatements that arise from the judgements of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate

Nonsampling risk

The risk that auditors will make judgment errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation.

Projected misstatements

These are the auditor's best estimate of misstatements in populations, involving the projection of misstatements identified in an audit sample to the entire population from which the sample was drawn.

risk assessment

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

Risk of Material Misstatement

the risk that the financial statements are materially misstated prior to the audit. It represents the combination of inherent and control risk

Scope of the audit

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.

Significant risk

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

Adverse Opinion

The auditor's opinion that the financial statements do not present fairly in accordance with generally accepted accounting principles (or other basis of accounting) due to a pervasively material misstatement.

Disclaimer of Opinion

The auditor's indication that no opinion is expressed on the financial statements. The auditor will disclaim an opinion if a pervasive scope limitation arises or if it is determined that the auditor lacks independence.

explanatory paragraph

A paragraph that is used under certain circumstances to provide additional explanation to users of the financial statements. Explanatory paragraphs do not affect the auditor's unqualified/unmodified opinion. Under GAAS, an explanatory paragraph that refers to a matter appropriately presented or disclosed in the financial statements is known as an emphasis-of-matter paragraph, while a paragraph that refers to matters other than those presented or disclosed in the financial statements is known as an other-matter paragraph.

Generally Accepted Auditing Standards (GAAS)

Standards against which the quality of the auditor's performance is measured.

Materiality

The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users.

Qualified Opinion

The auditor's opinion that the financial statements present fairly, in all material respects, in accordance with generally accepted accounting principles (or other basis of accounting), except for a material misstatement that does not, however, pervasively affect users' ability to rely on the financial statements. Can also be issued for a scope limitation that is of limited significance.

Reasonable Assurance

A term that implies some risk that a material misstatement could be present in the financial statements without the auditor detecting it, even when the auditor has exercised due care.

Representation Letter

A letter that corroborates oral representations made to the auditor by management or by other auditors and documents the continued appropriateness of such representations.

Scope Limitation

A lack of evidence that may preclude the auditor from issuing a clean opinion, usually resulting from an inability to conduct an audit procedure considered necessary.

Special purpose financial statements

Financial statements prepared under cash basis, tax basis, regulatory basis, or contractual basis (formerly referred to as "other comprehensive basis of accounting").

Unqualified/Unmodified Opinion

The auditor's opinion that the financial statements present fairly, in all material respects, the client's financial position, results of operations, and cash flows in accordance with generally accepted accounting principles (or other basis of accounting)—i.e., a "clean" opinion.