Audit Process and Principles Flashcards

Vocabulary flashcards covering audit principles, engagement steps, risk models, internal controls, transaction cycles, assertions, and audit reporting.

Professional competence

An audit process principle requiring auditors to maintain the knowledge and skill necessary to provide professional services.

Integrity

An audit process principle requiring auditors to be straightforward and honest in all professional and business relationships.

Professional behaviour

An audit process principle requiring compliance with relevant laws and regulations and avoiding actions that discredit the profession.

Confidentiality

An audit process principle requiring auditors to respect the privacy of information acquired during professional relationships.

Objectivity

An audit process principle requiring auditors to not allow bias, conflict of interest, or undue influence to override professional judgments.

Three party relationship

A required element of Step 1: Assurance Criteria involving the auditor, the responsible party (management), and the intended users (shareholders).

Engagement risk

Factors considered during Step 1 regarding whether to accept an audit, including resources, money laundering, risk/industry, and auditor independence.

Ethical Threats

Threats to auditor independence that include Management, Advocacy, Self interest, Self review, Intimidation, and Familiarity.

Engagement letter

A document defining the scope and objective of the audit, responsibilities of the auditor and management, the financial reporting framework, and the expected content of reports.

Audit Risk Formula

$AR = (IR \times CR \times DR)$, representing the risk of giving the wrong opinion and missing a material misstatement.

Inherent Risk (IR)

The susceptibility of an assertion to a misstatement before consideration of any related controls.

Control Risk (CR)

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

Detection Risk (DR)

The risk that the procedures performed by the auditor will not detect a material misstatement.

Materiality

Information that is significant enough to influence the economic decisions of shareholders based on qualitative judgments or quantitative assessments.

Quantitative Materiality Guides

Revenue: $1-2\%$, Gross assets: $2-5\%$, Profit after tax: $5-10\%$. Based on judgment and risk assessment.

Management letter

A letter issued to the client detailing weaknesses in internal control, the consequences of those weaknesses, and recommendations for improvements.

Internal Control Tests

Procedures performed in Step 4 which include: Enquire, Inspect, Observe, and recalculation.

Segregation of duties

An internal control activity that ensures different individuals are responsible for different parts of a transaction cycle to prevent error or fraud.

SOCI Assertions

Substantive testing assertions for the Statement of Comprehensive Income: Completeness, Occurrence, Classification, Cut-off, and Accuracy.

SOFP Assertions

Substantive testing assertions for the Statement of Financial Position: Completeness, Right/obligation, Accuracy, Valuation, and Existence.

Management representation letter

A letter obtained in Step 6 (Final Review) confirming that transactions are complete and addressing specific assertions.

MURGC

Material uncertainty related to going concern; a specific section in the Audit Report.

Key audit matters

A section of the Audit Report describing the areas that were of most significance in the audit.

Unmodified Opinion

The auditor's report states that the financial statements "give a true and fair view."

Modified report (Emphasis of matter)

An audit report that draws shareholders' attention to a significant matter without qualifying the opinion.

Qualified except for

An opinion stating the financial statements are "true and fair except for X."

Disclaimer of opinion

A report stating "we do not express an opinion on the financial statements."

Adverse opinion

An opinion stating that the "financial statements do not give a true and fair view" because the disagreement is material and pervasive.