Assurance and Risk: Chapter 4 - Process of Assurance: Evidence and Reporting

Flashcards covering key terms and concepts from the lecture on the process of assurance, focusing on evidence, reporting, and types of assurance engagements.

Audit Evidence

The information auditors use to form their opinion on financial statements.

Tests of Controls

Procedures auditors perform to check if a company's internal controls are working well enough to prevent or find major errors in financial records.

Substantive Procedures

Audit procedures designed to directly find major errors in the financial statements, including detailed checks and looking for unusual patterns.

Sufficient and Appropriate Audit Evidence

Evidence must be enough in amount (sufficient) and be of good quality, meaning it's relevant and reliable (appropriate), to support the auditor's findings.

Evidence gathering procedures (AEIOU)

Analytical Procedures - studying relationships among financial and non-financial data
Enquiry - ask internal persons 
Inspection - of a document
Observation - of a process (e.g inventory check)
U RecalcUlation - check mathematical accuracy of a document 

Financial Statement Assertions

These are claims that a company's management makes about the numbers and disclosures in their financial statements.

Assertions used by the auditors (COCOA + P)

These are key claims auditors verify:

• Completeness: All transactions are recorded.

• Ownership/Rights & Obligations: Assets belong to the entity, liabilities are owed.

• Cut-off: Transactions are in the correct period.

• Occurrence: Transactions actually happened.

• Accuracy: Amounts are correct.

• Presentation & Disclosure: Information is properly shown and explained.

Types of Assurance Engagement

There are two main types:

• Reasonable Assurance: Gives a high level of confidence, resulting in a positive statement (e.g., 'the financial statements are fairly presented').

• Limited Assurance: Gives less confidence, resulting in a conclusion that usually states nothing significant suggests otherwise (e.g., 'nothing has come to our attention that causes us to believe…').

Explicit reporting

Clearly and directly stating information in an audit report, without leaving anything unsaid or implied.

Implicit Reporting

Information that is understood to be true in an audit report without being explicitly stated, but must be reported out if found to be false.

Report by exception

Only reporting issues or things that are unusual or wrong, instead of detailing everything that is correct.

Expectation Gap

The gap between what people expect from auditors and what auditors actually do.