Audit Holt Exam 1 Ch. 1

what does an audit do?

provides assurance to investors, creditors, and other stakeholders that a company's financial information is reliable

before they were required by law, were audits still sought after?

yes; in 1926, 82% of companies on the New York stock exchange were audited by independent auditors

why do we need to audit?

to solve principle-agent information asymmetry

management assertions

expressed/implied claims about info in the financial statements

auditors collect and evaluate evidence to determine how reliable these claims are

2 different types of assertions

assertions about classes of transactions and assertions about account balances

7 assertions about classes of transactions

-occurence

-completeness

-authorization

-accuracy

-cutoff

-classification

-presentation

occurence (class)

all recorded events have happened and are relevant (everything that happened actually happened)

ex: make sure all transactions regarding revenues actually occurred

completeness (class)

all events that happened have been recorded (nothing that happened is left off financial statements)

ex: make sure no transactions regarding expenses were left out

authorization (class)

all transactions and events were properly authorized

accuracy (class)

all amounts and disclosures are accurately measured, recorded, and described

cutoff (class)

Transactions and events have been recorded in the correct accounting period

classification (class)

transactions and events have been recorded in the proper accounts

presentation (class)

all transactions are properly aggregated/disaggregated and described, and required disclosures are present and relevant

6 assertions about account balances and related disclosures

-existence

-rights and obligations

-completeness

-accuracy, valuation, and allocation

-classification

-presentation

existence (balance)

all amounts (assets, liabilities, and equity interests) included exist; similar to occurrence

ex: car that is recorded on the balance sheet actually exists

rights and obligations (balance)

the entity actually holds the rights to the assets that it records, and is obligated to perform the liabilities that it records

completeness (balance)

same as completeness (class); every amount that is relevant is recorded (nothing is left out)

ex: cannot leave out a liability from the balance sheet

accuracy, allocation, and valuation (balance)

appropriate amounts and any allocation/valuation adjustments have been properly recorded and disclosed

*lots of subjectivity*

classification and presentation (balance)

same as class

management responsibilities in the audit process

-implement internal controls

-conduct transactions

-accumulate transactions into account balances

-prepare financial statements

-issues financial statements

audition responsibilities in the audit process

-obtain evidence

-test management assertions against GAAP criteria

-determine overall fairness of financial statements

-issue audit report to accompany financial statements

3 fundamental concepts in conducting a FS audit

-materiality

-audit risk

-management assertions

sampling

cannot look at every single transactions, so you must look at smaller random sample; more accurate that your opinion needs to be, the larger the sample you should take

is it possible to test the entire population?

sometimes it is with data analytics

major phases of the audit (7 steps)

1 - client acceptance/continuance

2 - preliminary engagement activities

3 - plan the audit

4 - consider and audit internal controls

5 - audit business processes and related accounts

6 - complete the audit

7 - evaluate results and issue audit report

audit report

main output of the audit; auditors opinion on the reliableness of the financial information

3 sections of an audit report

- opinion on the financial statements

-basis for opinion

-critical audit matters

opinion on the financial statements

auditors opinion on the fairness of the information presented in the financial statements

basis for opinion

communicates to the users, in a general sense, what the audit entailed and how they came to their conclusions

critical audit matters

highlight matters that required complex, challenging, and subjective auditor judgement, and how they responded to them

who is the audit report addressed to?

shareholders and board of directors of the company

what is the audit report concluded with? (4 lines)

-signature of audit firm

-year that the firm began serving as company's auditor

-city and state of office responsible for issuing report

-date of report

types of audit opinions

-unqualified

-qualified

-adverse

-disclaimer

unqualified opinion

The statements are presented fairly in conformity with GAAP

qualified opinion

the statements are presented fairly *except* for a non-pervasive departure from GAAP

adverse opinion

the financial statements do not present fairly

disclaimer

the audit firm is not able to come to an opinion regarding the financial statements

emerging technologies that affect the audit process

-automation

-blockchain databases

-AI