AUDITING EXAM 1 QUIZLET

Why is there a demand for Auditing?

Investors and creditors need reliable financial information to make informed decisions.

Assurance Services

Independent evaluations by CPAs to improve information quality and reliability for decision-makers. -> Certified ballots, statistics, and reviews.

Attestation Services

Independent CPA evaluation of data resulting in a written report on its reliability. -> Contract compliance audits and examination of financial forecasts.

Variation Analysis

Comparing one period or amount to another.

Ratio Analysis

Comparing relationships between financial statement (F/S) amounts.

Reasonableness Testing

Comparing an independent auditor expectation to the client's recorded amount.

Projected Values

Auditor-developed projected amount based on available information.

Audit Documentation

The written or electronic record of the auditor's work.

Permanent File

Contains information expected to be useful for multiple years.

Current File

Contains information relating primarily to the current year's audit.

Four Major Stages of an Audit

1. Planning

2. Preliminary Fieldwork

3. Substantive Year-end Testing

4. Reporting

Planning Stage (Audit)

Auditor understands client risks, decides client acceptance/continuance, and develops the overall strategy.

Preliminary Fieldwork

Auditor evaluates internal controls, assesses control/inherent risk, and designs audit procedures.

Substantive Year-end Testing

Major testing phase where auditor tests F/S balances and gathers evidence for misstatements.

Reporting Stage (Audit)

Auditor evaluates evidence, determines fair presentation of F/S, and issues the audit report.

Inherent Risk Assessment Step 1: Client's Business

Understand the client's business to identify where risks are most likely.

Inherent Risk Assessment Step 2: Client's Industry

Understand industry context; e.g., highly regulated industries have higher compliance risk.

Inherent Risk Assessment Step 3: Management & Objectives

Understand management to evaluate incentives to manipulate financial statements.

Inherent Risk Assessment Step 4: Strategies & Business Risks

Understand client strategies, as business risks can lead to F/S risks.

Inherent Risk Assessment Step 5: Internal Control Design

Assess if controls are designed well to prevent or detect material misstatements.

Inherent Risk Assessment Step 6: Preliminary Analytical Procedures

Identify unexpected relationships or unusual changes in financial data.

Inherent Risk Assessment Step 7: Specific High Risk Areas

Identify areas of higher risk to determine nature, timing, and extent of procedures.

Inherent Risk Assessment: Internal Discussions

Discussions with employees, management, or internal auditors.

Inherent Risk Assessment: Internal Documentation

Review of internal files and documentation.

Inherent Risk Assessment: External Industry & Analyst Sources

Industry publications and reports from external analysts.

Inherent Risk Assessment: External Regulatory & Economic Sources

Government/regulatory agencies and general economic information.

Audit Committee

Composed of members of a company's BOD who are not involved in day-to-day operations of the company.

Audit Specialists

Experts in fields other than accounting or auditing who assist the auditor. ex. Appraisers, actuaries, and valuation specialists.

IT Auditors

Specialists who ensure IT and information systems are reliable and controlled during an audit.

Audit Plan

Describes how the audit will be conducted.

Audit Plan Contents

Budgeted hours, materiality thresholds, scheduling, and PBC requests establishing overall strategy.

Audit Program

A detailed list of specific audit procedures that will be performed.

Inspection

Examining documents, records, or physical assets.

Observation

Watching someone perform a process or procedure.

Inquiry

Asking questions of management or employees.

Confirmation

Obtaining information directly from an independent third party.

Recalculation

Independently performing a procedure or control originally performed by the client.

Analytical Procedures

Studying relationships and trends.

Vouching

Moving from accounting records to source documents to test existence and occurrence.

Tracing

Moving from source documents to accounting records to test completeness and understatement.

PCAOB Assertion: Existence or Occurrence

Assets and liabilities exist and recorded transactions actually occurred.

PCAOB Assertion: Completeness

All transactions and accounts that should be presented in the financial statements are included.

PCAOB Assertion: Valuation or Allocation

Assets, liabilities, equity, revenues, and expenses are recorded at appropriate financial values.

PCAOB Assertion: Rights & Obligations

The company holds or controls rights to assets, and liabilities are obligations of the entity.

PCAOB Assertion: Presentation & Disclosure

Financial statement components are properly classified, described, and disclosed.

Internal Auditing

Service assisting a company by evaluating risk management, control, and governance processes.

Operational Auditing

Evaluation of organizational processes to ensure efficient and effective operations.

Governmental Auditing

Independent examination of a public sector entity's financial statements, operations, or compliance.

Regulatory Auditing

Independent examination verifying an organization's compliance with laws, regulations, and industry standards.

Federal Bank Examiner

Government official auditing banks for legal operation, safety, and adequate capital reserves.

Independent (External) Auditors

Separate CPA firm auditing financial records to give an unbiased opinion on accuracy.

IRS Auditor

Official reviewing financial records to verify tax return accuracy and law compliance.

Information Risk

The risk that financial information is wrong or misleading.

Business Risks

The factors, events, and conditions that could prevent the organization from achieving its business objectives.

Financial Attestation Engagement

Focus on financial information, such as financial statements. Example: An auditor examines a company's financial statements and gives an opinion on whether they are fairly represented.

Non-Financial Attestation Engagements

Focus on other information rather than traditional F/S. Example: A CPA reports on whether a company's internal controls are operating effectively.

Financial Reporting

Process of providing statements of financial position. Examples: B/S, I/S, Statement of Cash Flows.

Relevant Assertion

An assertion with a reasonable possibility of containing a material misstatement.

Professional Judgment

Applying knowledge, training, and experience to make informed decisions during an audit.

Auditor Independence

Being objective and unbiased in both fact and appearance during an audit.

Auditor Independence Violations

Financial interests, loans, family ties, prohibited non-audit services, or acting as client advocate.

Prohibited Services for F/S Audit Clients

Bookkeeping, AIS design/implementation, management functions, valuation/actuarial, legal, investment banking, and advocacy services.

Basic Structure of a CPA Firm

Staff → Senior → Manager → Partner

CPA Firm Staff Tasks

Performs basic audit procedures, gathers evidence, tests transactions/accounts, and documents work.

CPA Firm Senior Tasks

Supervises staff, performs complex audit procedures, reviews staff work, and communicates with client.

CPA Firm Manager Tasks

Oversees the audit, reviews seniors' work, handles difficult issues, and manages client relationship.

CPA Firm Partner Tasks

Has ultimate responsibility for engagement, makes major decisions, reviews important issues, and signs report.

Requirements for Becoming a CPA

Complete required education, pass the CPA exam, fulfill work experience/ethics, and obtain a license.

Chargeability

The percentage of an employee's available work time billed to a client.

AICPA

American Institute of CPAs; oversees standard setting for private company audits.

AICPA Responsibilities

Establishes professional standards, supports the CPA profession, and sets ethical requirements.

PCAOB

Public Company Accounting Oversight Board; oversees auditing of public companies and SEC-registered broker-dealers.

PCAOB Responsibilities

Sets public company audit standards, inspects firms, investigates violations, and protects investors.

GAAS (Generally Accepted Auditing Standards)

Standards identifying auditor qualifications and guiding the conduct of an audit examination.

GAAS Standard Categories

1. Responsibilities

2. Performance

3. Reporting

GAAS: General Responsibilities Category

Focuses on auditor qualifications, independence, and due professional care.

GAAS Responsibilities: Technical Training

The audit must be performed by person(s) having adequate technical training and proficiency.

GAAS Responsibilities: Independence

The auditor must maintain independence in mental attitude in all matters relating to the assignment.

GAAS Responsibilities: Due Professional Care

The auditor must exercise due professional care in the performance of the audit and report preparation.

GAAS: Performance Category

Focuses on the execution and fieldwork requirements of the audit examination.

GAAS Performance: Planning & Supervision

The work must be adequately planned and assistants must be properly supervised.

GAAS Performance: Internal Control

A sufficient understanding of internal control must be obtained to plan the audit and determine nature, timing, and extent of tests.

GAAS Performance: Audit Evidence

Sufficient appropriate audit evidence must be obtained to afford a reasonable basis for an opinion.

GAAS: Reporting Category

Focuses on the requirements for issuing the final audit report.

GAAS Reporting: GAAP / Framework

The report shall state whether financial statements are presented in accordance with GAAP or an applicable financial reporting framework.

GAAS Reporting: Consistency

The report shall identify circumstances where principles have not been consistently observed in the current period.

GAAS Reporting: Disclosure

Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated.

GAAS Reporting: Opinion

The report shall contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion that an opinion cannot be expressed.

Stages of an Audit

Obtain/retain engagement → Engagement planning → Risk assessment → Audit evidence → Reporting

Quality Control Standards

Policies and procedures a CPA firm uses to ensure consistent, professional audits.

Engagement Team Review

Team members review each other's work to catch errors and ensure proper documentation.

Concurring Partner Review

An uninvolved partner reviews significant audit aspects before report issuance.

External CPA Firm Peer Review

Another firm evaluates a CPA firm's quality control system and selected engagements.

Unqualified / Clean Opinion

Auditor concludes financial statements are fairly presented overall.

Qualified Opinion

Auditor concludes F/S are fairly presented except for a material but not pervasive matter.

Adverse Opinion

Auditor concludes financial statements are materially wrong overall.

Disclaimer of Opinion

Auditor does not express an opinion due to insufficient evidence.

General Contents of Unqualified Audit Report

Opinion section, basis for opinion, management's responsibilities, and auditor's responsibilities.

Auditor's Responsibilities in Audit Report

Obtain reasonable assurance, perform procedures, evaluate policies/estimates, and sign/date report.

Critical Audit Matters (CAMs)

Material matters communicated to governance involving complex or subjective auditor judgment.