Audit Midterm

Assurance engagement

Practitioner gives a conclusion that raises users' confidence in a subject matter (audit = reasonable assurance; review = limited)

Compilation engagement

Accountant helps management prepare financial statements; NO assurance is given

Compliance audit

Tests whether the entity follows laws, regulations, policies or contract terms

Comprehensive audit

Broad-scope audit covering financial statements plus compliance and operational/performance matters

Unmodified opinion

Statements present fairly, in all material respects, under the reporting framework

Qualified opinion

'Except for' - material but NOT pervasive misstatement or scope limitation

Adverse opinion

Statements are materially AND pervasively misstated

Disclaimer of opinion

Auditor can't get sufficient appropriate evidence and possible effects are material and pervasive; no opinion given

Assertions

Management's implicit claims about the financial statements (e.g., occurrence, completeness, accuracy, cut-off, classification, existence, rights and obligations, valuation, presentation)

Audit evidence

Information the auditor uses to reach conclusions and support the opinion

Audit file

Collection of working papers and documentation for an engagement

Audit plan

The overall audit strategy plus the detailed audit program

Audit risk

Risk of giving an inappropriate opinion when statements are materially misstated; AR = IR x CR x DR

Integrity

Being straightforward and honest in all professional dealings

Objectivity

No bias, conflict of interest or undue influence overriding professional judgement

Independence

Independence of mind and in appearance; free from threats that compromise objectivity

Confidentiality

Not disclosing client information without authority or a legal/professional duty

Due care

Acting diligently and in line with technical and professional standards

Professional competence

Maintaining the knowledge and skill needed to give competent service

Technical competence

Up-to-date knowledge of accounting and auditing standards and how to apply them

Negligence

Failure to exercise due care that causes loss to a party owed a duty (duty of care, breach, loss)

Engagement letter

Contract between auditor and client: objectives, scope, responsibilities, reporting framework, fees

Corporate governance

The system by which an organization is directed and controlled

Board of directors

Elected body that oversees management and represents shareholders

Audit committee

Board subcommittee of independent members overseeing financial reporting, the external auditor and internal audit

Internal auditors

Employees/contractors who evaluate operations, controls and compliance for management and the board

Fraud

Intentional act to obtain an unjust or illegal advantage (fraudulent financial reporting or misappropriation of assets)

Going concern

Assumption the entity will keep operating for the foreseeable future (at least 12 months)

Accounting estimates

Approximate amounts where precise measurement isn't possible (allowances, warranty, impairment, depreciation)

Professional scepticism

Questioning attitude and critical assessment of audit evidence

Materiality

Misstatements that could reasonably influence users' economic decisions

Audit strategy

Overall approach: substantive, or combined with control testing

Sufficient appropriate evidence

Enough (quantity) evidence that is relevant and reliable (quality) to support the opinion

Inherent risk

Susceptibility of an assertion to material misstatement BEFORE considering controls

Inherent risk factors

Complexity, subjectivity, change, uncertainty, susceptibility to bias or fraud

Control risk

Risk that controls won't prevent or detect a material misstatement

Detection risk

Risk that audit procedures won't detect a material misstatement; inversely related to IR and CR

Analytical procedures

Evaluations of financial information through plausible relationships among data

Quantitative materiality

Dollar threshold from a percentage of a base (profit, revenue, assets, equity, expenses)

Performance materiality

Amount below planning materiality (typically 60-75%) that lowers the chance uncorrected plus undetected errors exceed materiality

Specific materiality

Lower threshold for particular balances, transactions or disclosures that influence users

Substantive audit strategy

Relies mainly on substantive procedures (little or no reliance on controls)

Combined audit strategy

Tests controls and, if effective, reduces substantive testing

Walkthrough

Tracing one transaction through the process to confirm understanding of controls

Occurrence

Recorded transactions actually happened and relate to the entity

Completeness

Everything that should be recorded is recorded

Accuracy

Amounts and data are recorded correctly

Cut-off

Transactions are recorded in the correct period

Classification

Transactions are recorded in the proper accounts

Existence

Assets, liabilities and equity exist at the date

Rights and obligations

Entity holds rights to assets and owes the liabilities

Accuracy, valuation and allocation

Balances are at appropriate amounts and adjustments (write-downs, allowances) are properly recorded

Presentation

Items are properly aggregated, described and disclosed

Relevance

Evidence relates to the assertion being tested

Reliability

Evidence is trustworthy (source, independence, controls, form)

Physical evidence

Auditor's own inspection or count of tangible assets

Observation

Watching a procedure being performed (e.g., an inventory count)

Recalculation

Auditor independently checks arithmetic accuracy

Bank confirmation

Direct written confirmation from the bank of balances, loans, rates and security

Legal letter

Letter to the client's lawyers about litigation, claims and contingencies

Management representation letter

Written statements from management on its responsibilities and specific representations

Audit data analytics

Using technology to select, recalculate, analyze or visualize large data sets

Working paper

Record of procedures performed, evidence obtained and conclusions reached

Audit sampling

Applying procedures to less than 100% of a population so each item has a chance of selection

Statistical sampling

Random selection plus probability theory to evaluate results and measure sampling risk

Non-statistical sampling

Judgement-based selection and evaluation

Random selection

Every item has an equal, known chance of selection

Systematic selection

Every n-th item after a random start (interval = population / sample size)

Haphazard selection

Unstructured selection that avoids conscious bias (non-statistical)

Block selection

Selecting contiguous items (e.g., four consecutive months)

Judgemental selection

Selection by auditor judgement (value, risk, unusual items)

Stratification

Dividing a population into groups (often by value) and sampling each

Sampling risk

Risk the sample conclusion differs from the conclusion for the whole population

Non-sampling risk

Risk of a wrong conclusion for reasons unrelated to sampling (misinterpreting evidence, misapplying procedures)

Tolerable error (misstatement)

Maximum misstatement the auditor will accept in a balance

Projected error

Sample error extrapolated to the population

Rate of deviation

Percentage of sample items where a control did not operate

Tests of controls

Procedures that test whether controls operate effectively

Substantive procedures

Tests of details and analytical procedures that detect misstatements in balances and transactions

Nature of audit testing

The TYPE of procedure performed

Timing of audit testing

WHEN procedures are performed (interim vs. year end)

Extent of audit testing

HOW MUCH testing is done (e.g., sample size)

System of internal control

Policies and procedures giving reasonable assurance of reliable reporting, effective operations and compliance

Control environment

Tone at the top: integrity, governance, structure, authority, HR policies

Risk assessment process

How management identifies and responds to risks relevant to financial reporting

Control activities

Specific policies and procedures: authorization, reconciliations, segregation of duties, physical controls, reviews, processing

Entity-level controls

Pervasive controls such as governance, code of conduct and monitoring

Transaction-level controls

Controls within a specific process (sales, payroll, payments)

WCGWs

'What can go wrong' - risks of misstatement that controls are designed to address

Control exception

An instance where a control did not operate as designed

Attribute sampling

Sampling method used to estimate the rate of a characteristic (e.g., control deviations)

Management letter

Written communication of control deficiencies to management with recommendations (Observation, Implication, Recommendation)

Professional judgement

Applying training, knowledge and experience to decisions in the engagement

Audit program

Detailed procedures by account/assertion, with nature, timing and extent

Significant account

An account that is material or involves a significant risk

Tests of details of balances

Procedures on account balances (e.g., confirm receivables, count inventory)

Tests of details of transactions

Procedures on individual transactions (e.g., vouch a sample of sales)

Vouching

From the accounting record BACK to supporting documents; tests occurrence/existence (overstatement)

Tracing

From documents FORWARD into the accounting record; tests completeness (understatement)

Dual-purpose tests

One procedure tests both a control and a transaction or balance