audit exam one

flashcards

Information Risk

the risk that information used for business decisions is inaccurate

Attest

a type of assurance service in which the CPA firm issues a report about a subject matter or assertion that is the responsibility of a third party

Assurance

an independent professional service that improves the quality of information for decision makers

Non-assurance

auditor provides expertise (accounting and bookkeeping, tax, or management consulting services) without issuing on financial accuracy

Audit

the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria

PCAOB (Public Company Accounting Oversight Board)

oversees auditors of public companies; establishes auditing, attestation and quality control standards

AICPA (American Institute of Certified Public Accountants)

a voluntary organization of CPAS that develops standards for audits of private companies

SEC (Securities and Exchange Commission)

a federal agency that oversees the orderly conduct of the securities markets

Sarbanes Oxley (SOX)

U.S. federal law enacted to restore investor confidence by improving the accuracy, transparency, and reliability of corporate disclosures and financial reporting

Form S-1

when a company plans to issue new securities to the public

Form 8-K

filed to report significant events that are in interest of public investors

Form 10-K

must be filed annually with 60 to 90 days after close of each fiscal year, depending on the size of the company

Form 10-Q

must be filed quarterly for all publicly held companies

System of Quality Control

methods used by CPA firm to ensure that the firm meets its professional responsibilities to clients and others

Peer Review

is the review, by CPAs, of another CPA firm’s compliance with its quality control system

Parts of Standard Unmodified Opinion Audit Report

1. Report title

2. Audit report address

3. Auditor’s Opinion Section

4. Basis for opinion

5. Management’s responsibility

6. Auditor’s responsibility

7. Signature and address of CPA firm

8. Audit report date

Report title

auditing standards require that the report be titled and that the title include the word independent

Auditor’s opinion

states the auditor’s conclusions based on the results of the audit, is presented first due to its importance and must include the heading “Opinion”

Standard unmodified opinion report

all auditing conditions have been met, no significant misstatements have been discovered and left uncorrected

Unmodified Opinion with Emphasis-of-matter Paragraph

meets the criteria of a complete audit with satisfactory results and financial statements that are fairly presented, but the auditor believes it’s important to draw the reader’s attention to certain matters

Qualified opinion (least severe)

the auditor believes the overall financial statements are fairly stated but that either the scope of the audit was limited or financial data indicated a failure to follow GAAP

Adverse opinion

used when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position

Disclaimer of opinion

issued when the auditor has been unable to become satisfied that the overall financial statements are fairly presented or the auditor is not independent

Under what circumstance would a disclaimer be used?

unable to obtain sufficient evidence to form an opinion, and is both material and pervasive (scope issue)

Going Concern

indicates that a company is making enough money to stay afloat for the foreseeable future

Reasonable Assurance

intended to indicate that an audit cannot be expected to completely eliminate the possibility that a material misstatement will exist in the financial statements

Critical Audit Matter (CAMs)

intended to inform investors and other financial statement users about matters identified in the audit that represent issues that involved especially challenging, subjective, or complex auditor judgment and how the auditor addressed those matters

Financial Statement Audit

an independent, professional examination of a company’s financial records, ensuring they fairly represent its financial position in accordance with GAAP

Internal Control Audit

the processes, rules, and procedures implemented by a company’s management to ensure reliable financial reporting, efficient operations, and compliance with laws

Scope Limitation

when the auditor cannot obtain enough evidence to conclude whether the financial statements are stated in accordance with appropriate financial reporting framework

Materiality

the more significant missing or incorrect information to an entity, the larger impact the error or omission may have on the decision-making of users of the affected financial statements

Material misstatement

error, omission, or fraud discovered that exceeds the materiality limit

Modified opinion

issued when the auditor concludes, that based on evidence, the statements contain material misstatements

PCAOB auditing standards require the disclosure of the audit engagement partner’s name and other accounting firms participating in the audit report

False

Auditor Independence

users expectation of unbiased viewpoint

Ethics

a set of moral principals or values

AICPA Code of Professional Conduct

1. Responsibilities

2. The Public Interest

3. Integrity

4. Objectivity and Independence

5. Due Care

6. Scope and Nature of Services

Direct Financial Interest

the AICPA code prohibits covered members from owning any stock or other direct investment in audit clients regardless of materiality

Audit Committee

selected members of a client’s board of directors whose responsibilities include helping auditors to remain independent of management

Independence of Mind/Fact

the auditor’s state of mind that enables an unbiased viewpoint in the performance of professional services

Independence in Appearance

auditor’s ability to maintain an unbiased viewpoint in the eyes of others

Professional Skepticism

consists of two primary components: a questioning mind and a critical assessment of the audit evidence

Professional Judgment

illustrate an effective decision-making process and guide auditors’ thinking to help make them aware of their own judgment, tendencies, traps, and biases

Five key elements of a professional judgement

1. Identify and Define the Issue

2. Gather the facts and Information and Identify the Relevant Literature

3. Perform the Analysis and Identify Potential Alternatives

4. Make the Decision

5. Review and Complete the Documentation and Rationale for the Conclusion

Six characteristics of skepticism

1. A questioning mindset

2. Suspension of judgement- withholding judgement until appropriate evidence is obtained

3. Search for knowledge

4. Interpersonal understanding

5. Autonomy

6. Self-esteem- the self-confidence to resist persuasion and to challenge assumptions

Availability

the tendency to place more weight on events that immediately come to mind

Confirmation

tendency to put more weight on information that corroborates an existing belief than information that contradicts doubt on that belief

Overconfidence

tendency to overestimate one’s ability to make accurate assessments of risks or other judgments

Anchoring

tendency to use initial piece of information as an anchor against which subsequent information is inadequately assessed

Automation

tendency to favor output generated from automated systems, even when human reasoning or contradictory information raises questions about whether such output is reliable

Financial Statement Cycles

the division makes the audit more manageable and aids in the assignment of tasks to different members of the audit team

Cycle appproach

a common way to divide an audit is to keep closely related type of transactions and account balances in the same segment

Management Assertion

implied or expressed representations by management about classes of transactions and the related accounts and disclosures in the financial statements

Existence or occurrence

whether recorded or disclosed transactions have actually occurred and pertain to the entity

Completeness

all transactions and accounts that should be presented in the financial statements are included

Valuation or allocation (accuracy)

assets, liabilities, equity, revenue, and expense components have been included in the financial statements at appropriate amounts

Rights and obligations

the company holds or controls rights to the assets, and liabilities are obligations of the company at a given date

Presentation & Disclosure

the components of the financial statements are properly classified, described, and disclosed

Cutoff

the auditor’s objective is to determine whether transactions are recorded and included in account balances in the proper period