Auditing and Assurance Fundamentals

Flashcards covering key terminology, principles, assertions, and standards in auditing and public accounting from the lecture notes.

Pro Forma

A term used to describe financial information that is non-GAAP.

PCAOB (Public Company Accounting Oversight Board)

An organization established in April 2003 that governs audits of publicly traded companies, governed by $5$ people where each person holds $20\%$ of the vote.

Information Risk

The risk faced by decision-makers that the information they rely upon may not be reliable or accurate.

Assurance Services

The broadest category of professional services that includes attestation and financial statement auditing; non-accounting specific services that assure users about the quality or reliability of information (such as Amazon reviews).

Attestation Engagements

An accounting-specific subset of assurance services where a company hires a CPA to issue an opinion on a subject matter, which does not necessarily have to be financial-related.

Financial Statement Auditing

A specific subset of attestation engagements focused on examining financial statements to verify they follow GAAP, assess assertions, and communicate results to decision-makers such as investors, creditors, and competitors.

Sarbanes-Oxley Act of 2002

Legislation for publicly traded companies requiring CEOs and CFOs to sign statements confirming they read the financial statements, are unaware of false or misleading statements, and believe the statements accurately present the company's financial condition.

Existence or Occurrence

A financial statement assertion that everything recorded in the financial statements is real and actually occurred, rather than being made up.

Completeness

A financial statement assertion that everything that should be included in the financial statements is present, with nothing omitted.

Valuation or Allocation

A financial statement assertion that all asset, liability, equity, revenue, and expense values add up correctly and show proper actual amounts.

Rights and Obligations

A financial statement assertion that the company genuinely owns and holds rights to all reported assets and is responsible for all reported obligations.

Presentation and Disclosure

A financial statement assertion that all components of the financial statements are properly presented and disclosed in accordance with GAAP.

Professional Skepticism

An auditor mindset requiring questioning of management without accepting statements at face value, critically testing supporting evidence, and knowing when sufficient evidence has been gathered to stop questioning.

Professional Judgment

The decision-making process auditors use to determine what to test, how to test it, and when enough evidence has been gathered to conclude testing.

Public Accounting Practice Lines

The three primary service divisions in public accounting: audit (questioning client work to verify correctness), tax (client-pleasing), and advisory (client-pleasing).

Prohibited Professional Services

A list of $8$ non-audit services prohibited under the Sarbanes-Oxley Act that audit firms cannot provide to their audit clients in order to maintain independence.

AICPA

The governing body for audits of privately held companies (non-issuers) that issues Statements on Auditing Standards (SAS) and typically aligns with PCAOB standards.

GAAS (Generally Accepted Auditing Standards)

Guidelines designed to identify auditor qualifications and characteristics to direct audit conduct, organized around three principles: responsibilities, performance, and reporting.

Reasonable Assurance

A high level of confidence obtained by auditors indicating financial statements and footnotes are free of material misstatements, which does not require $100\%$ certainty.

Materiality

A threshold concept where an omitted or incorrect amount is large enough that it would alter the judgment or decision of a financial statement user.

Misstatement

An inaccuracy in financial statement information caused by error or fraud that results in a violation of a financial statement assertion.

Components of Auditing Standards

The framework of auditing guidelines consisting of Fundamental Principles, PCAOB standards, and Interpretive Publications.

Phases of an Audit Engagement

The $5$ sequential phases of an audit: Phase 1 (Obtain client / engagement overview), Phase 2 (Plan engagement), Phase 3 (Risk assessment), Phase 4 (Audit evidence), and Phase 5 (Reporting).

Responsibilities Principle

A GAAS principle requiring auditors to possess competence and capabilities, maintain independence in fact and appearance, exercise due care, and apply professional skepticism and judgment.

Independence in Fact vs. Appearance

Independence in fact requires an auditor to be genuinely unbiased in reality, while independence in appearance requires avoiding relationships that would lead users to question the auditor's impartiality.

Due Care

The requirement that auditors exert genuine effort and thoroughness in their work, stopping only when enough necessary work has actually been completed.

Performance Principle

A GAAS principle focusing on planning and supervision, establishing materiality, performing risk assessments, and gathering sufficient (quantity) and appropriate (quality) audit evidence.

Risk-Based Approach to Auditing

An audit strategy where auditors concentrate primary effort and evidence gathering on high-risk areas that are most likely to contain errors or violate financial statement assertions.