Auditing, Quality, Fraud, and Corporate Governance

Vocabulary practice flashcards covering audit quality, ethical decision frameworks, CRISP-DM data analytics, the fraud triangle, SOX provisions, and corporate governance based on Chapter 1 and Chapter 2 lecture material.

Financial Statement Audit

A systematic process of objectively obtaining and evaluating evidence about assertions concerning economic activities and events to provide reasonable assurance that financial statements are free from material misstatement.

Reasons for Independent Assurance

The four key factors driving decision makers' demand for audited financial information: potential bias, remoteness, complexity, and consequences.

Audit Quality

An audit performed in accordance with Generally Accepted Auditing Standards (GAAS) to provide reasonable assurance that financial statements and related disclosures comply with GAAP and are not materially misstated.

Five Drivers of Audit Quality

The primary factors in the FRC framework: audit firm culture, skills and qualities of the engagement team, effectiveness of the audit process, reliability and usefulness of audit reporting, and factors outside auditors' control.

Auditor Independence

The requirement that auditors remain free from relationships or interests that could compromise their professional judgment or create the appearance of bias.

Engagement Letter

An agreement established upon client acceptance that outlines audit objectives, scope, responsibilities of auditors and management, inherent limitations, applicable reporting framework, and expected audit reports.

Professional Skepticism

An attitude that includes a questioning mindset and a critical assessment of audit evidence rather than blindly accepting management explanations.

Utilitarian Theory

An ethical framework that directs decision-makers to choose the action that achieves the greatest good for the greatest number of people.

Rights Theory

An ethical decision-making framework focused on evaluating choices based on whether they respect and protect fundamental human and legal rights.

Framework for Ethical Decision Making

A seven-step structured decision process: 1. Structure the audit problem, 2. Assess consequences, 3. Assess risks/uncertainties, 4. Evaluate alternatives, 5. Conduct sensitivity analysis, 6. Gather evidence, and 7. Make the decision.

CRISP-DM Framework

Cross-Industry Standard Process for Data Mining; a 6-phase process framework for data analytics comprising Business Issue Understanding, Data Understanding, Data Preparation, Exploratory Analysis, Validation, and Visualization & Presentation.

Misappropriation of Assets

A type of fraud involving the theft or misuse of an organization's assets, primarily perpetrated by employees in small businesses.

Fraudulent Financial Reporting

Intentional manipulation, falsification, or misrepresentation of accounting records and financial results to misstate an organization's economic condition.

Fraud Triangle

A framework outlining the three conditions commonly present when fraud occurs: Incentive/Pressure, Opportunity, and Rationalization.

Sarbanes-Oxley Act of 2002 (SOX)

Legislation applying to publicly traded companies designed to prevent fraud by increasing oversight, strengthening auditor independence, and enhancing management and audit committee accountability.

Public Company Accounting Oversight Board (PCAOB)

An independent oversight board established under SOX Title 1 to monitor auditors of public companies and replace industry self-regulation.

SOX Section 404

A provision requiring management to evaluate internal controls over financial reporting and requiring an independent external auditor to attest to that assessment.

Corporate Governance

The overarching system used to provide control and accountability within an organization among owners, directors, management, audit committees, and auditors.

Audit Committee

A subgroup of independent corporate board members responsible for overseeing financial reporting, internal controls, and the hiring, compensation, and work of external auditors.