Consideration of Fraud, Error, and Noncompliance in Financial Audits

Comprehensive practice flashcards covering audit responsibilities, types of misstatements (fraud vs error), fraud risk factors, substantive testing, audit evidence types, and documentation requirements.

Error

Mistakes or unintentional misstatements or omissions of amounts or disclosures in the financial statements.

Fraud

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

Fraudulent Financial Reporting

Also known as management fraud, it involves intentional misstatements or omissions of amounts or disclosures to deceive financial statement users.

Misappropriation of Assets

Also known as employee fraud, it involves the theft of an entity's assets, such as embezzling receipts, stealing cash or inventory, and lapping accounts receivable.

PSA 240

The standard that requires management to establish a control environment and implement internal control policies to ensure the detection and prevention of fraud and error.

Fraud Risk Factors

Conditions categorized into incentives or pressures, opportunity, and attitudes or rationalizations that could heighten an auditor's concern about risk of material misstatement.

Noncompliance with Laws and Regulations

Also known as illegal acts, these refer to acts of omission or commission by the entity, whether intentional or unintentional, which are contrary to prevailing laws and regulations.

Substantive Tests

Audit procedures designed to substantiate account balances or detect material misstatements in the financial statements regarding management's assertions.

Existence or Occurrence

An audit objective to determine whether assets and liabilities exist at a given point in time and recorded transactions represent economic events that actually occurred.

Analytical Procedures

Evaluations of financial information made by a study of plausible relationships among both financial and non-financial data, involving comparison with auditor's expectations.

Test of Details

An approach to substantive testing that involves examining the actual details making up an account balance via tests of balances or tests of transactions.

Tests of Balances

A procedure used when account balances are affected by a large volume of relatively immaterial transactions, such as cash, accounts receivable, and inventory.

Tests of Transactions

A procedure used when account balances comprise a smaller volume of transactions representing relatively material amounts, such as property, plant and equipment, or bonds.

Nature (of Substantive Tests)

A factor affecting effectiveness that relates to the specific audit procedures to be performed.

Timing (of Substantive Tests)

A factor affecting effectiveness that relates to when the audit procedures are performed, such as at year-end or at an interim date.

Extent (of Substantive Tests)

A factor affecting effectiveness that relates to the quantity of audit evidence gathered, such as the size of the sample.

Audit Program

A set of audit procedures prepared to test a specific component of the financial statements.

Risk Assessment Procedures (RAP)

Procedures used during the planning and internal control phases to obtain an understanding of the client entity and its environment.

Tests of Controls

Procedures used to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements.

External Confirmation

A direct written response to the auditor from a third party (the confirming party) in paper, electronic, or other medium.

Inquiry

The most extensively used audit procedure, consisting of seeking information from knowledgeable persons within or outside the entity.

Accounting Records

Data underlying the financial statements, such as books of accounts, fund transfer records, worksheets, and reconciliations.

Corroborating Information

Information supporting accounting records obtained from the client and other sources, such as invoices, bank statements, and contracts.

Sufficiency

The measure of the quantity of audit evidence, which is affected by the assessed risk of misstatement and the quality of the evidence.

Appropriateness

The measure of the quality of audit evidence, defined by its relevance and its reliability in providing support for the auditor's opinion.

Management's Expert

A person or firm possessing special skill, knowledge, and experience in a field other than accounting or auditing, used by the entity to assist in preparing the financial statements.

Audit Documentation

Also known as working papers, these are the records kept by the auditor that document the procedures applied, information obtained, and conclusions reached.

Permanent File

A classification of working papers containing information of continuing significance to recurring audits, such as articles of incorporation and major contracts.

Current File

A classification of working papers containing evidence and conclusions relevant to the audit of a particular year, such as the financial statements and audit program.

Ownership of Working Papers

The principle that working papers are the personal property of the auditor, not the client.