Auditing Core Concepts and Risk-Based Approach

Vocabulary practice flashcards covering core auditing concepts, risk assessment, risk response, and the revenue cycle.

Auditing

A systematic process where a competent, independent person objectively obtains and evaluates evidence about assertions on economic actions and events, to determine correspondence between those assertions and established criteria, then communicates results to interested users.

Professional Skepticism

An attitude involving a questioning mind and critical assessment of audit evidence validity, including alertness to evidence that contradicts or questions the reliability of documents, inquiry responses, and other information.

Reasonable Assurance

A high, but not absolute, level of assurance obtained when the auditor has gathered sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.

Audit Risk

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

Risk-based Audit Approach

An audit approach that begins with assessing types and likelihood of misstatement, then adjusts the amount and type of audit work to match the likelihood of material misstatement.

Account-based Audit Approach

An audit approach where the auditor understands internal controls and assesses control risk for specific accounts or cycles regarding errors and fraud.

Engagement Risk

Economic risk to a CPA firm from association with a client, such as reputation loss, non-payment, or financial loss from dishonest management, controlled through careful client selection and retention.

Financial Reporting Risk

Risks directly related to recording transactions and presenting financial statement data.

Business Risk

Non-deliberate risk resulting from significant conditions, events, circumstances, actions, or inactions that could adversely affect an entity's ability to achieve its objectives and execute strategies.

Inherent Risk (IR)

The initial susceptibility of a transaction or adjustment to error or misstatement in the absence of internal controls.

Control Risk (CR)

The risk that a client's internal controls fail to prevent, or detect and correct, a misstatement on a timely basis.

Detection Risk (DR)

The risk that the auditor's substantive procedures fail to detect a material misstatement.

Detection Risk Formula

The mathematical formula rearranged from the audit risk model expressed as $DR = \frac{AR}{IR \times CR}$, where DR is Detection Risk, AR is Audit Risk, IR is Inherent Risk, and CR is Control Risk.

Predecessor Auditor

The previous auditor of a client who must be consulted by the successor auditor (with client consent) prior to engagement acceptance to inquire about client integrity and past disputes.

Prepared By Client (PBC)

Working papers prepared by the client's staff to reduce audit costs and routine work, which the auditor must independently review and test rather than accept at face value.

Overall Materiality

The threshold set for the financial statements as a whole representing the highest misstatement amount that would not affect the economic decisions of users as a group.

Specific Materiality

Materiality set for particular classes of transactions, account balances, or disclosures where misstatements smaller than overall materiality could still influence user decisions.

Performance Materiality

An amount set lower than overall or specific materiality to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall or specific materiality.

Overall Audit Strategy

An overarching planning component that sets the scope, timing, and direction of the audit and guides the development of the detailed audit plan.

Detailed Audit Plan

An operational planning document detailing the specific nature, timing, and extent of risk assessment procedures and further audit procedures at the assertion level.

Fraud Risk

A risk resulting from deliberate action and intentional deception by management, TCWG, employees, or third parties to obtain an unjust or illegal advantage.

Fraud Triangle

A model outlining the three conditions that strongly indicate fraud is occurring: Pressure, Opportunity, and Rationalization.

Significant Risk

An assessed risk of material misstatement so high that, in the auditor's judgment, it requires special audit consideration.

Tests of Controls

Audit compliance procedures designed to evaluate the operating effectiveness of internal controls in preventing, or detecting and correcting, material misstatements at the assertion level.

Substantive Procedures

Audit procedures designed to detect material misstatements at the assertion level, comprising tests of details (transactions/balances/disclosures) and substantive analytical procedures.

Dual Purpose Test

An audit procedure that simultaneously serves as a compliance test of controls and a substantive test on the same group of documents.

Vouching

An audit testing direction moving from final accounting records back to original source documentation to verify the existence or occurrence assertion.

Tracing

An audit testing direction moving from originating source documentation forward into final accounting records to verify the completeness assertion.

Lapping

A fraudulent cash receipts scheme used to cover up cash embezzlement by applying subsequent customer receipts to conceal prior unrecorded misappropriations.