Audit - ACC 401

WCU - Fall 2026

Auditing - identify definition and 4 keywords

checking information against established criteria using evidence, then reporting the conclusion.

information, criteria, evidence, conclusion

the tax return

If an IRS agent is auditing your federal tax return, what is the information being audited?

GAAP

An auditor is determining whether a company’s financial statements are properly prepared under U.S. accounting standards. What are the established criteria?

evidence

Information :$500,000 sales reported in financial statements

Criteria : GAAP

Evidence : sales transaction records

A company’s financial statements report $500,000 of sales. The auditor examines the company sales transaction record to determine whether that amount is supported. In this situation, what are the sales transaction records : information, criteria, or evidence?

Evidence

The balance sheet reports $2 million of cash. The auditor obtains a confirmation directly from the company’s bank showing the bank balance. What is the bank confirmation? (Information, Evidence, Criteria)

Independence

The auditor has an unbiased mental attitude when evaluation evidence and reaching conclusions.

Competence - having the knowledge and ability to perform

Independence - being unbiased and objective toward the thing

Competence vs. independence?

Audit Report communicates the auditor’s findings about how well the information being audited corresponds to the established criteria.

What is the purpose of an audit report?

1) Information

2) Criteria

3) Evidence

4) Audit Report

1)______= What we are checking

2)______= Rules we are checking it against

3)______= What we use to check it (cross reference identify what we are checking & actually checking)

4) ______= communication of what we concluded

A) Evidence

B) Information

C) Criteria

D) Audit Report

A. ________ = what the auditor uses to check whether something is correct (seeing the claimed item & actually auditing/seeing the claimed item)

B. ________ = what the auditor is actually checking

C. ________ = the standards/rules defining what is correct

D. ________ = how the auditor communicates the findings

evidence - the data/documents/observations used to CHECK something.

information - the thing being checked

example : company reports inventory = $750,000

Information : reported $750,000

Criteria : GAAP

Evidence : inventory records & auditor physically observing inventory

The difference between evidence and information.

example : company reports inventory = $750,000

information risk

A bank is deciding whether to lend money to a company. The bank is worried that the company’s financial statements mights contain inaccurate information.

What types of risk is the bank concerned about?

Remoteness

An investor owns stock in a company operating hundreds of locations worldwide. The investor can’t personally observe the company’s operations and has to rely o information management provides.

Which cause of information risk is this?

Think “ I can’t see this myself”

Biases and movtives of the provider

A company is applying for a large bank loan. Management has an incentive to make the company financial position appear stronger than it actually is.

Which cause of information risk is this?

Think “The person giving me the information has a reason to make it look better”

voluminous data

A corporation processes millions of transactions each year. A number of incorrectly recorded transactions go unnoticed because they’re buried within the enormous volume of records.

Which cause of information risk is this?

Think “There’s so much data that mistakes can hide in it”

Complex Exchange Transactions

A multinational company enters into complicated derivative contracts. Determining how to value and report those contracts correctly required difficult accounting judgements.

Which cause of information risk does this represent, and why?

Think “This is difficult to account for correctly”

User verifies :

+Firsthand verifiecation

-expensive/inefficient

Reducing information risk :

What does user verifies information mean as a method of reducing information risk? name positive and negative

What is the main disadvantage of having each user personally verify a company financial information?

Think “I’ll check it myself”

user shares information risk with management

Reducing information risk :

An investor relies on financial statements prepared by management. The statements contain inaccurate information, causing the investor to suffer a financial loss. The investor the seeks to recover the loss from management through legal action.

Which method of dealing with information risk is this? (what does the user do)

Audited Financial Statements (Independent Auditor)

Reducing information risk :

A bank is considering lending a company money. Rather than examining all of the company accounting records itself, the bank relies on financial statements that have been examined by an independent CPA firm.

Which method of reducing information risk is being used?

Business Risk

A company operated in an industry experiencing a severe recession, making it more likely that the company won’t generate enough cash o repay its bank loan.

Is this risk-free interest rate, business res, or information risk?

information risk

A bank is concerned that the financial statements it’s using to evaluate a borrower might contain inaccurate information.

Risk-free(or low risk) interest rate

A bank could earn 4% by investing in U.S. Treasury notes instead of lending money to a company. Which factor affecting the loan’s interest rate does that 4% represent?

A) Risk-free interest rate

B) Business risk

C) Information risk

b) quality of information

What does an assurance service improve?

a) Company’s profitability

b) quality of information

c) business risk

d) management’s performance

audit - fs & IC (if public), report opinion on reasonable assurance based on evidence

review - lower level of assurance, less evidence, limited assurance

other attestation - written assurance abt something that isn’t std audit or review (ex. loan agreement requires maintaining certain financial requirements)

audit vs. review vs. other attestation

internal control over financial reporting (ICFR)

An auditor evaluates whether a company controls designed to prevent or detect financial-statement misstatements are effective.

What type of engagement is this?

Financial statement audit

An auditor gathers evidence to determine whether a company financial statements are fairly stated in accordance with accounting standards.
What type of audit is this?

Issuer

A publicly traded company would be classified as an issuer or nonissuer?

nonissuer

A privately held company whose stock is not publicly traded is an issuer or nonissuer?

Larger public companies

accelerated diner public companies (section 404 SOX)

What type of public company, according to Ch. 1, is required to have the auditor report on the effectiveness of IC?

B) Attestation

Management makes an assertion about information. A CPA evaluates that subject matter/assertion and issues a report about it.

Is this:

a) Assurance, but not attestation

B) Attestation service

C) Management consulting

D) Bookkeeping

True

Assurance

• attestation

  • audit

  • review

  • other attestation

Every attestation service is an assurance service, but not every assurance service is an attestation service? T/F & Order

improve quality of information for decision makers.

Assurance’s primary purpose is to

Management consulting/nonassurance service

A CPA firm is hired to design and install a new information technology system for a company.

Is this primarily :

A) Assurance Service

B) Attestation Service

C) Management consulting/nonassurance service

D) Financial statement audit

Review

A company wants aloe CPA assurance on its historical financial statements but wants a lower-cost engagement requiring less evidence than an audit.

Which engagement would best fit?

Independent auditors/CPA firms

type of auditor :

external to the company, they audit historical financial statements, and express opinions on FS must be licensed CPAs

Internal revenue agents

type of auditor :

works for the IRS and examine tax returns to determine compliance with tax laws. Their audits are compliance audits.

GAO Auditors

type of auditor :

work for the U.S. Government Accountability Office, which reports to Congress. They do substantial government financial, compliance, and operational auditing.

Internal Auditor

type of auditor :

are employees of the organization they audit. They work for management with board overusing and can perform compliance, operational, internal-control, computer-system, etc. work. Their employer-employee relationship means they cannot be as independent as external CPA auditors.

plan and design

phase of financial statement audit :

determine the audit approach and evidence needed.

Accept client/initial planning; understand business & industry; assess business risk; preliminary analytical procedures; set materiality; assess audit/inherent risk; understand internal control & control risk; assess fraud risk; develop audit plan/program

Test controls & transactions

phase of financial statement audit :

evaluate internal controls and test recorded transactions.

Test effectiveness of controls when appropriate; test transactions for monetary correctness; assess likelihood of FS misstatements

Analytical procedures & test balances

phase of financial statement audit :

evaluate financial relationships and test account balances/details.

Perform substantive analytical procedures; test key items; perform additional detailed testing of account balances

complete & report

phase of financial statement audit :

evaluate results, reach conclusions, and issue the audit report.

Additional presentation/disclosure testing; accumulate final evidence; evaluate results; issue audit report; communicate with management/audit committee