Auditing Review

Audit Risk

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

Sampling Risk

the possibility that the sample drawn is not representative of the population and that, as a result, the auditor will reach an incorrect conclusion about the account balance or class of transactions based on the sample.

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.

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.

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.

Control Risk

The risk that a misstatement that could occur in an assertion about an account 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.

Business Risk

A risk resulting from significant conditions, events, circumstances, and actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies or from the setting of inappropriate objectives and strategies.

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.

Significant Risk

An identified risk of material misstatement for which the assessment of inherent risk is close to the upper end of the spectrum of inherent risk due to the degree to which inherent risk factors affect the combination of the likelihood of a misstatement occurring and the magnitude of the potential misstatement should that misstatement occur, or that is to be treated as a significant risk in accordance with the requirements of other auditing standards.

Risk of material misstatement

The risk that the financial statements are materially misstated prior to the audit. It represents the combination of inherent risk and control risk. (Alias: Client Risk)

PCAOB; Public Company Accounting Oversight Board

A nonprofit quasi-governmental regulatory agency overseen by the SEC, established by Congress via SOX to oversee public company audits, set auditing standards, register firms, and conduct regular inspections.

ACFE; Association of Certified Fraud Examiners

the primary professional organization supporting fraud auditors. a 90,000-member professional organization dedicated to reducing the incidence of fraud and white-collar crime and assisting its members in fraud detection and deterrence. The ACFE offers a certification program for individuals wanting to become CFEs. An individual interested in becoming a CFE must pass the CFE Examination.

AICPA; American Institute of Certified Public Accountants

a private professional association that greatly influences the activities of member CPAs. One of its important roles is the promulgation of rules and standards that guide audit and related services provided to nonpublic companies. houses several standing committees that issue professional rules and standards relevant to assurance providers.

FASB; Federal Accounting Standards Board

a privately funded body whose mission is to establish standards for financial accounting and reporting.

IRS; Internal Revenue Service

A federal agency that uses auditors extensively; handles tax collection and enforcement.

IIASB; International Auditing and Assurance Standards Board

issues International Standards on Auditing (ISA) and is the predominantly recognized auditing standard setter outside the United States, with its standards being used in over 130 international jurisdictions, as of 2024.

GAAS; Generally accepted auditing standards

Standards against which the quality of the auditor’s performance is measured

GAAP; Generally accepted accounting principles

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.

SEC; Securities and Exchange Commission

a federal government agency that administers the Securities Act of 1933, the Securities Exchange Act of 1934, and the Sarbanes-Oxley Act of 2002, among others. The Securities Act of 1933 regulates disclosure of material information in a registration statement for an initial public offering of securities. The most common documents encountered by auditors under the Securities Exchange Act of 1934 are the 10K, 10Q, and 8K. The 10K and 10Q are, respectively, annual and quarterly reports, which include the financial statements that are filed with the SEC by a publicly traded company.

Standards issued by the ASB are called

Statements on Auditing Standards (SAS)

SOX; Sarbanes Oxley Act

Created the PCAOB, Administered by the SEC, created by congress. The act does not prohibit the SEC from extending the rules beyond what is required by the Act. Some of the most important provisions of the Sarbanes-Oxley Act are aimed at increasing the responsibility of corporate officers and directors for the reliability of their company’s financial statements.

Dodd Frank Act

called for the U.S. Comptroller General to reexamine the impact of allowing the aiding and abetting approach to find professionals, such as bankers and accountants, liable under the securities laws

Materiality

The amount by which a set of financial statements could be misstated without affecting the judgment of a reasonable person. Materiality is the magnitude of a misstatement or omission of accounting information that, in light of surrounding circumstances, makes it probable that the judgment or decision of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

Misstatement

A departure from the applicable reporting framework (e.g., GAAP) that, if material, causes the financial statements to not be presented fairly. Misstatements may be classified as fraud (intentional), other illegal acts such as noncompliance with laws and regulations (intentional or unintentional), and errors (unintentional).

Material Misstatement

an error, omission, or inaccuracy in financial statements or reports that is significant enough to influence the economic decisions of anyone relying on that information, such as investors, lenders, or regulators.

Factual Misstatement

misstatements about which there is no doubt. Once the products are correctly priced, the amount of misstatement is known. In such cases, the auditor knows the exact amount of the misstatement.

Projected Misstatement

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.

Judgmental Misstatement

misstatements that arise from the judgments of management, including those concerning recognition, measurement, presentation, and disclosure in the financial statements (including the selection or application of accounting policies) that the auditor considers unreasonable or inappropriate.

Misappropriation

the intentional, illegal, or unauthorized use of someone else’s property, funds, or intellectual property for one's own benefit or for an unintended purpose.

Unqualified Opinion

the best report an auditor can give. It means the financial statements present fairly, in all material respects, the company's financial position and results in accordance with accounting standards (such as GAAP or IFRS). It implies that there are no material misstatements, omissions, or significant limitations encountered during the audit.

Qualified Opinion

A qualified opinion indicates that the financial statements are mostly accurate, except for a specific issue or limited area. It implies that the auditor encountered either a specific departure from accounting standards or a limitation in scope (unable to audit a particular item), but the issue is isolated (not pervasive) and does not invalidate the entire set of financial statements.

Adverse Opinion

An adverse opinion is the most negative report an auditor can issue. It states that the financial statements do not present fairly the financial position of the company. It implies that the company's financial records contain widespread (pervasive) and material misstatements or misrepresentations. Investors and lenders should not rely on these financial reports.

Disclaimer Opinion

A disclaimer of opinion occurs when the auditor refuses or is unable to state an opinion on the financial statements altogether. It implies that this happens when the auditor faces severe restrictions on their audit work (such as the company refusing to provide records) or if there is immense uncertainty (e.g., regarding the company's ongoing existence). Because they could not gather sufficient evidence, they cannot take a stance on the accuracy of the financial reports.

Contents of Engagement Letters

•Integrated Audit of the Financial Statements and Internal Control Over Financial Reporting—Services and Related Report

•Responsibilities and Limitations

•Management’s Responsibilities

•Document Retention

•Other Documents

•Timing and Fees

The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with

the management of the company.

The audit committee generally does not include

senior executives of the organization.

Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying?

Completeness

The auditor's relationship with management is strained is

not a reason for management to commit fraud. Because it’s talking about the auditor, whose whole thing is integrity.

The entity using different inventory accounting methods for internal and external reporting is

not a misstatement of financial statements. A departure from GAAP can be labeled a misstatement because the management may not be following the proper procedures of the business.

A related party transaction is

A nonmonetary transaction between two different firms.

The Sarbanes Oxley act

Does not have a time requirement based on company scale.

In the context of an audit of financial statements, substantive procedures are

audit procedures that may be either tests of details of transactions, tests of details of account balances, or analytical procedures.

The combination of inherent risk and control risk is called…

Risk of Material Misstatements/Client Risk

Engagement letters do not include

A list of adjusting journal entries.

A Successor auditor needs to get ________ from a predecessor auditor.

only facts that might bear on management integrity

Audit documentation prepared on audits of public entities is the property of the

auditor

An example of an analytical procedure is

the comparison of financial information with similar information regarding the industry in which the entity operates.

Best term to describe generally accepted auditing standards:

standards of quality for the auditor's performance

Pervasive Risk

Risks that apply to multiple components in the financial statements rather than just specific assertions.

Aggregate

A total sum or combination of separate items, figures, or data points brought together to form a single, overall measure.

Disaggregation

The process of breaking down a large aggregate (a whole, summary number, or combined data set) into its smaller, more detailed component parts or individual units.