Auditing Mock Midterm Examination Review

Practice vocabulary flashcards based on the Mock Midterm Exam transcript covering auditing fundamental concepts, risks, reports, and assertions.

Independent Audit Primary Purpose

To provide reasonable assurance that the financial statements are fairly presented.

Information Risk

The risk that arises because decision makers rely on inaccurate financial information.

Business Risk

The risk illustrated when a company loses market share because of new competitors.

Attestation Service

A service that requires a CPA to issue a report on another party’s assertion.

Assurance Services

Services designed to improve the quality of information for users.

Audit vs. Review Assurance

Audits provide reasonable assurance, whereas reviews provide limited assurance.

Public Company Accounting Oversight Board (PCAOB)

The organization that establishes auditing standards for public companies in the United States.

Auditing Standards Board (ASB)

The organization that issues auditing standards for most private companies.

Big Four

The group representing the four largest international accounting firms.

Deloitte

A firm that is categorized as one of the Big Four international accounting firms.

Management Responsibility

The party responsible for preparing the financial statements.

Operational Audit

An audit that primarily evaluates the efficiency and effectiveness of operations.

Compliance Audit

An audit focusing on whether specific rules or regulations are being obeyed.

Audit Committee

The party that hires the external auditor for a public company.

Reasonable Assurance

A level of assurance defined as high but not complete assurance; it is not absolute certainty.

Professional Skepticism

The requirement for auditors to maintain a questioning mind and critically evaluate evidence.

Four Principles Underlying an Audit

The fundamental categories include Responsibilities, Performance, and Reporting.

Acceptable Audit Risk Factors

A factor that most directly affects this risk is the likely users of the financial statements.

Engagement Letter

A document that primarily outlines the responsibilities of both the auditor and the client.

Client Acceptance Decisions

Decisions heavily influenced by management integrity concerns.

Audit Report Title

A requirement to emphasize independence within the title of the audit report.

Standard Unmodified Report Auditor Responsibility

The auditor's responsibility is to obtain reasonable assurance.

Qualified Opinion

An audit opinion typically indicated by the phrase “except for.”

Disclaimer of Opinion

An outcome that normally occurs when a client refuses access to records.

Adverse Opinion

An opinion meaning the financial statements are materially misstated overall.

Appropriateness of Evidence

A term referring to the relevance and reliability of audit evidence.

Vouching

The audit procedure involving the examination of underlying documents that support recorded amounts.

Analytical Procedures

The process of comparing current-year ratios to prior years to identify trends or anomalies.

Tests of Controls

Audit tests designed to evaluate the effectiveness of internal controls.

Physical Examination

An audit procedure that primarily provides evidence regarding existence.

Completeness Assertion

The assertion addressing whether all transactions that should be recorded actually are recorded.

Cutoff Violation

An error occurring when January sales are recorded in December.

Classification Violation

An error occurring when long-term debt is included in current liabilities.

Tracing Shipping Documents to Sales Journal

An audit procedure primarily used to test the completeness assertion.

Inherent Risk

The risk that material misstatements exist before considering the effectiveness of internal controls.

Risk of Material Misstatement

The combination of $\text{Inherent Risk} + \text{Control Risk}$.

Relationship of Acceptable Audit Risk and Planned Detection Risk

If acceptable audit risk decreases, planned detection risk should decrease.

Lower Planned Detection Risk Effect

An audit strategy that generally results in the need for more evidence.

Performance Materiality

The materiality levels set for individual segments or accounts to provide a basis for testing.

Known Misstatements

Misstatements that the auditor can specifically and accurately identify.

Audit Documentation Primary Purpose

To demonstrate compliance with auditing standards.

Permanent File

A file that normally includes long-term documents such as corporate bylaws.

Professional Judgment Components

A process involving defining issues, analyzing alternatives, and documenting conclusions.

Significant Risk

A risk that requires special audit consideration.

Acceptable Audit Risk Definition

The auditor’s willingness to accept that financial statements may still be misstated after the audit.

Errors vs. Fraud

Errors are characterized as unintentional, whereas fraud is intentional.

Auditor Fraud Responsibility

Auditors are required to plan audits to detect material misstatements.

Responsibility for Internal Control

The duty that rests primarily with management rather than the auditors.

Sarbanes-Oxley Act

The law requiring CEO and CFO certification of public company financial statements.

Strongest Protection Against Litigation

Performing the audit in accordance with auditing standards.