Audit and Attestation Process Flashcards

A comprehensive set of vocabulary flashcards covering audit risk, strategic analysis, internal controls (ICFR), and substantive testing based on the lecture transcript.

PCAOB Auditing Standard #3

The standard that establishes the principle: “Not documented, not done” regarding audit documentation.

Materiality

A difference that could affect the decisions of a party using the financial statements, often calculated as a percentage of net income, revenue, or total assets.

Tolerable misstatement

The amount of misstatement within an individual account that auditors use to accumulate audit differences, typically a percentage of planning or overall materiality.

Strategic Analysis (SA)

The process of understanding how a client adds value to its environment, utilizes business processes to achieve objectives, and reacts to external threats.

Differentiation strategy

A strategic position featuring unique or high-quality products for a broad market where research and innovation are keys to long-term success.

Low cost strategy

A strategic position where success depends on efficient production and economies of scale for price-sensitive demand.

PEST Analysis

A framework used to analyze external risks categorized as Political-legal, Economic, Social, and Technological.

Porter’s Five Forces

A model used to assess threats from existing competitors, potential entrants, substitutes, suppliers, and customers.

Core Business Processes (CBP)

Processes performed to directly create value in the form of a product or service, such as inbound logistics, operations, and marketing/sales.

Resource Management Processes (RMP)

Support processes that allow an organization to function but have only an indirect effect on the creation of product value, such as financial or human resource management.

Audit Sensitive Process

A process critical to the audit that is likely to have a significant impact on evidence, such as those related to major classes of transactions or strategic objectives.

Audit Risk Model

The mathematical relationship expressed as $AR=IRxCRxDR$

Risk of Material Misstatement (RMM)

The combination of inherent risk and control risk, represented as $IR\cdot CR$ .

Inherent Risk (IR)

The susceptibility of an assertion to material misstatement, individually or in aggregate, assuming there are no related internal controls.

Control Risk (CR)

The risk that a material misstatement will not be prevented, or detected and corrected, by the entity's internal control on a timely basis.

Detection Risk (DR)

The risk that the auditor fails to detect a material misstatement, which is the only component of the audit risk model directly influenced by the auditor.

Non-sampling risk (NSR)

Auditor judgment risk arising from factors like misinterpretation of evidence or faulty belief formation rather than from the size of the sample.

Strategic Systems Auditing (SSA)

A top-down audit approach that emphasizes interdependencies, entity business states (EBS), and the sustainability of value creation.

Reductionism

The study of an organization by decomposing it into its atomic parts to understand how things work by themselves.

Analytical Procedures

Evaluations of financial information made by a study of plausible relationships among both financial and non-financial data, as defined by SAS No. 56.

SOC 1 Report

An audit report that evaluates Internal Control over Financial Reporting (ICFR) at a service organization.

SOC 2 Report

An audit report evaluating controls related to IT security, privacy, processing integrity, and confidentiality at a service organization.

Walkthrough

The process of tracing a transaction through its entire cycle from initiation to the financial statements to create a narrative or flowchart.

Tracing

A substantive procedure moving forward in time from source documents to the general ledger to test for completeness.

Vouching

A substantive procedure moving backward in time from the general ledger to source documents to test for existence.

Positive Confirmation

A request requiring a reply from a third party whether the balance is correct or incorrect, providing strong evidence for existence.

Material Weakness

A deficiency in internal control over financial reporting with more than a remote likelihood of leading to a material misstatement.

Significant Deficiency

A control deficiency with more than a remote likelihood of leading to a misstatement that is consequential but not material.

Going Concern Evaluation

An audit wrap-up procedure assessing whether the client will likely survive and continue operations through the next year.