CHAPTER 1 An Introduction to Assurance and Financial Statement Auditing

what is a public company

a company that sells its shares or bonds to the public, giving the public a valid interest in the proper use of the company’s resources.

List the assertions for classes of transactions and events.

Occurrence, Completeness, Authorization, Accuracy, Cutoff, Classification, Presentation.

What does Occurrence mean?

Recorded transactions/events actually happened and belong to the entity.

What does Completeness mean?

All transactions/events that should be recorded are recorded.

What does Authorization mean?

Transactions/events were properly approved.

What does Cutoff mean?

Transactions/events were recorded in the correct accounting period.

What does Classification mean?

Transactions/events were recorded in the proper accounts.

What does Presentation mean?

Transactions/events and disclosures are clearly described, properly grouped, relevant, and understandable.

List the assertions for account balances at period end.

Existence, Rights and Obligations, Completeness, Accuracy/Valuation/Allocation, Classification, Presentation.

What does Existence mean?

Assets, liabilities, and equity interests actually exist.

What does Rights and Obligations mean?

The entity owns/controls the assets, and the liabilities are the entity’s obligations.

What does Accuracy, Valuation, and Allocation mean?

Account balances are recorded at appropriate amounts, with proper valuation/allocation adjustments.

An auditor performs a vouching test on accounts receivable by looking through the general ledger, identifying sample accounts, and finding original supporting documentation for those balances. This test deals with which of the following management assertions?

A.Existence

B.Occurrence

C.Completeness

D.Accuracy, Valuation, and Allocation

Existence

what is auditing

A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

what are Attest services?

occur when a practitioner is engaged to issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.

what is assurance?

Independent professional services that improve the quality of information, or its context, for decision makers.

Income Statement Assertions

• Completeness

• Accuracy

• Cut-off

• Classification

• Occurrence

Balance Sheet Assertions

• valuation

• existence

• rights and Obligations

• completeness

what is materiality?

how big or important an omission/misstatement is. It is material if it would probably change or influence a reasonable person’s decision.

What is audit risk?

The risk that the auditor gives a clean audit opinion when the financial statements are materially misstated.

Audit risk = Wrong clean opinion.

What does reasonable assurance mean in auditing?

The audit gives a high level of assurance, but not a guarantee, that the financial statements are free from material misstatement

Why does audit risk still exist?

Because a material misstatement could exist and the auditor may fail to detect it.

Which of the following best describes the concept of audit risk?

A.The risk of the auditor being sued because of association with an auditee.

B.The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated.

C.The overall risk that a material misstatement exists in the financial statements.

D.The risk that auditors use audit procedures that are inappropriate.

B.The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated.

What is audit evidence?

Information that helps the auditor evaluate management’s financial statement assertions.

What two types of information can audit evidence include?

Underlying accounting data and additional information from the client or external sources.

What is the difference between relevance and reliability?

Relevance = evidence relates to the assertion being tested. Reliability = evidence can be trusted.

What is sampling in auditing?

Sampling is when auditors test a subset of transactions and use it to make conclusions about the whole population.

Why do auditors use sampling?

Because it would be too costly and time-consuming to examine every transaction.

What can data analytics sometimes allow auditors to do?

Test the entire population instead of only a sample.

Why do auditors generally use a sampling approach to evidence gathering?

A.Auditors are experts and do not need to look at much to know whether the financial statements are correct or not.

B.Auditors must balance the cost of the audit with the need for precision.

C.Auditors must limit their exposure to their auditee to maintain independence.

The auditor's relationship with the auditee is generally adversarial, so the auditor will not have access to all of the financial information of the company.

B.Auditors must balance the cost of the audit with the need for precision.

List the main stages of the audit process.

1. Client acceptance/continuance

2. Preliminary engagement activities

3. Plan the audit

4. Consider/audit internal control

5. Audit business processes and related accounts

6. Complete the audit

7. Evaluate results and issue audit report

What is the title of a public company audit report?

Independent Auditor’s Report.

Who is the audit report usually addressed to?

The shareholders and board of directors.

List the main sections of the audit report.

Opinion on the Financial Statements, Basis for Opinion, Critical Audit Matters, and sometimes an internal controls paragraph/report.

What does the audit report conclude with?

The auditor/audit firm’s signature, the addressee, and the date of the report.

What is an unqualified/clean audit report?

The most common audit report, issued when the financial statements are free from material misstatement.

What does unqualified mean in an audit opinion?

The auditor does not need to qualify/change the opinion because the financial statements are fairly presented.

What is the main output/product of an audit?

The auditor’s report/audit opinion.

What is a qualified audit report?

An audit report stating the financial statements are fairly presented except for a specific material issue.

When might an auditor issue a qualified opinion?

When there is a material misstatement management won’t fix, or the auditor cannot get enough appropriate evidence for a specific account.

What phrase helps you remember a qualified opinion?

Fair except for…

What is an adverse audit opinion?

An opinion issued when the financial statements are not fairly stated and should not be relied upon.

Adverse = Avoid relying on the statements.

When is an adverse opinion issued?

When a misstatement is material and pervasive, meaning it affects the overall interpretation of the financial statements.

What is a disclaimer of opinion?

The auditor cannot give an opinion because they could not get enough evidence.

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that:

A.Any disputes over significant accounting issues have been settled to the auditor's satisfaction.

B.The auditor is satisfied that Stankey will be highly profitable in the future.

C.The auditor is certain that Stankey's financial statements have been prepared accurately and that all account balances are precisely correct.

D.The auditor has determined that Stankey's management is not qualified to lead the company.

A.Any disputes over significant accounting issues have been settled to the auditor's satisfaction.