Auditing Theory Revision Flashcards

This set of vocabulary flashcards covers key concepts, risk models, and terminology from the Auditing Theory revision lecture, including assurance engagements, quality control elements, and types of audit opinions.

Assurance engagement

An engagement intended to enhance the credibility of information about a subject matter by evaluating whether the subject matter conforms in all material respects with suitable criteria.

Independent audit

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.

Suitable criteria for historical financial statements

The standard used for evaluation, which in the case of audits by CPA firms, is usually Generally Accepted Accounting Principles (GAAP).

Objectivity

A rule of professional conduct that requires an auditor to have an attitude of professional skepticism toward an auditee's management.

Professional skepticism

An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Audit risk

The probability that the auditor unknowingly fails to modify an opinion on materially misstated financial statements.

Compliance audit

An audit undertaken to determine whether the auditee is following specific procedures or rules laid down by some higher authority.

Neutral criteria

A characteristic of suitable criteria that contributes to conclusions that are free from bias.

Understandable criteria

Criteria that contribute to conclusions that are clear, comprehensive, and not subject to significantly different interpretations.

Reliable criteria

Criteria that allow reasonably consistent evaluation or measurement of the subject matter when used in similar circumstances by similarly qualified practitioners.

Engagement quality review

A review process automatically required for all listed public entities to evaluate the significant judgments and conclusions of the engagement team.

Fraud risk factor

Factors whose presence often has been observed in circumstances where frauds have occurred.

Reasonable assurance

The gathering of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements, taken as a whole.

Quality Control Elements (RARE C GEM)

Risk assessment, Acceptance and continuance, Resources, Engagement performance, Communication, Governance and leadership, Ethical requirements, and Monitoring.

Analytical procedures

The study of plausible relationships between financial and nonfinancial data, required during the planning and final review stages of an audit.

Materiality threshold

The smallest aggregate level of errors or fraud that could be considered material to any one of the financial statements.

Risk assessment procedures

Procedures performed to obtain an understanding of the entity and its environment, including internal control, to identify and assess the risks of material misstatement.

Control risk

The risk that a material misstatement could occur and not be prevented or detected by the company's internal control policies and procedures.

Detection risk

The risk that the auditor's procedures will not detect a material misstatement; it bears an inverse relationship to inherent and control risks.

Substantive procedures

Audit procedures performed to detect material misstatements at the assertion level, including tests of transactions, direct tests of balances, and analytical tests.

Tests of controls

Audit procedures performed to determine whether internal control policies and procedures are working as prescribed.

Confirmation

A specific type of inquiry involving the process of obtaining a representation of information or of an existing condition directly from a third party.

Completeness assertion

An assertion addressing whether all transactions and events that occurred during the period were actually recorded.

Sampling risk

The risk that the auditor's conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure.

Alpha risk (Incorrect rejection)

A sampling risk that leads to audit inefficiency, where the auditor concludes a material misstatement exists when in fact it does not.

Beta risk (Incorrect acceptance)

A sampling risk that leads to a wrong audit opinion, where the auditor concludes no material misstatement exists when one actually does.

Attribute sampling

A sampling method primarily used for tests of controls to evaluate the operating effectiveness of internal controls.

Variable sampling

A sampling method used in substantive testing to identify and measure the dollar amount of misstatements.

Subsequent events

Events occurring between the date of the financial statements and the date of the auditor's report, and facts that become known to the auditor after the date of the auditor's report.

Unqualified opinion

An opinion expressed when the auditor believes that, in all material respects, the financial statements are fairly presented.

Key Audit Matters

A section of the audit report that lists the matters the auditor determined to be the most significant in the audit.

Emphasis of matter paragraph

A paragraph included in the audit report to highlight significant information already presented in the financial statements, such as a major catastrophe or litigation.

Date of the financial statements

The date of the end of the latest period covered by the financial statements.

Date of the auditor's report

The date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statements.

Date of approval of the financial statements

The date on which those with the recognized authority assert they have prepared the complete set of financial statements and taken responsibility for them.