Audit Planning and Internal Controls Review

A set of vocabulary flashcards covering audit planning, risk components, internal controls, audit procedures, and reporting standards as described in the lecture notes.

Audit Planning Benefits

Assists the auditor in devoting attention to important auditing areas, identifying potential problems timely, organizing the engagement efficiently, and selecting team members with appropriate capabilities.

Audit Engagement Letter Purpose

Aims to minimize the risk of misunderstanding between the auditor and client, acts as an acceptance of the engagement, and forms the basis of the contract by outlining terms and conditions.

Audit Risk

The risk that an auditor expresses an inappropriate opinion when the financial statements are materially misstated.

Inherent Risk

The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a material misstatement before consideration of any related control.

Control Risk

The risk that a material misstatement will not be prevented, detected, or corrected on a timely basis by the entity's internal control.

Detection Risk

The risk that procedures performed by the auditor to reduce risk to an acceptable low level will not detect a misstatement that could be material.

Nominee Auditor Procedures

Ensuring professional qualification, verifying resource adequacy, obtaining references, and communicating with the previous year's auditor regarding ethical reasons for not accepting the engagement.

Analytical Procedures Stages

Includes Planning (risk assessment), Execution (substantive analytical procedures to find unusual relationships), and Conclusion (ensuring framework consistency and forming an overall conclusion).

Internal Control Limitations

Includes human error, ineffective controls against fraud, management override (abuse of power), and collusion of staff to bypass segregation of duties.

Materiality

Misstatements or omissions considered material if they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

Performance Materiality

The amount set by the auditor at less than the materiality level for a particular class of transaction, account balance, or disclosure.

Control Environment

A component of internal control referring to the set of processes and structures addressing management oversight and the assignment of authority and responsibility.

Entity's Risk Assessment Process

How an entity identifies business risks relevant to the financial reporting framework, assesses their significance and likelihood, and addresses them.

Audit Limitations

Auditing is not objective as judgment is required, not all items are tested, the audit report has inherent limitations, and evidence indicates what is possible rather than certain.

Document Counts

An information processing control where the number of invoices entered is checked against an initial count to ensure completeness of input.

One-for-one Checking

Manually agreeing entered invoices back to original purchase invoices one by one to ensure completeness and accuracy.

Existence Checks

A system setup requiring certain key data, such as a supplier name, to be entered or else the invoice is rejected.

Preconditions for Audit

The auditor determines if the financial reporting framework is acceptable and obtains management's agreement on its responsibility for preparation, internal controls, and providing access to information.

Reliability of Audit Evidence

Evidence is more reliable when obtained directly by the auditor, in documentary form (paper or electronic), from original documents, or from independent outside sources.

Key Audit Matters (KAM)

Matters that were communicated with those charged with governance and were of most significance in the audit of the financial statements.

Professional Scepticism

The attitude maintained by the auditor when obtaining reasonable assurance to identify and assess risks of material misstatement due to fraud or error.

Segregation of Duties

Assigning different individuals the tasks of authorizing transactions, recording transactions, and maintaining custody of assets to reduce fraud risk.

Narrative Notes

Written descriptions of a system detailing what occurs at each stage, which are simple for junior staff to understand but can be cumbersome for complex systems.

Internal Control Questionnaire (ICQ)

A list of questions for major transaction cycles used to assess if controls exist; they are quick to prepare but may miss unusual controls.

External Audit vs. Internal Audit Objective

External audit enables an opinion on the truth and fairness of financial statements, while internal audit reviews the efficiency and effectiveness of the internal control system.

Value for Money Review

An Internal Audit Department assignment assessing whether an organization is obtaining value for money in areas such as asset expenditure.

Interim Audit

An audit phase occurring before the year-end to carry out procedures like documentation, testing internal controls, and assessing risks that will affect final audit work.

Final Audit

The audit phase taking place after the year-end that concludes with the auditor forming and expressing an opinion on the financial statements as a whole.

CAAT (Computer-Assisted Audit Techniques)

Tools that enable auditors to test items accurately and quickly by obtaining evidence directly from the system, though they involve high setup costs.

Review Engagement Assurance

Provides negative assurance, where the practitioner confirms nothing has come to their attention indicating the subject matter contains a material misstatement.

Reasonable Assurance

A high but not absolute level of assurance provided by an external audit, confirming financial statements are free from material misstatement.