ch 3 - planning, materiality, and audit evidence

analytical procedures

procedures that allow auditors to evaluate financial information by studying relationships among both financial and non-financial data; when used near the end of an audit, they allow auditors to assess the conclusions reached during the audit and evaluate the overall financial statement presentation

audit documentation

the written basis for the auditor’s conclusions that provides the necessary support for the auditor’s assertions and representations made in the auditor’s report

audit engagement partner

the person with the final responsibility for the audit, usually an industry specialist

audit plan

a comprehensive list of the specific audit procedures that the audit team needs to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements

continuing audit files (or permanent files)

the audit documentation containing information of continuing audit significance for current and past audits of the same client

engagement letter

this letter sets forth the understanding with the client, including in particular (1) the objectives of the engagement, (2) management’s responsibilities, (3) the auditor’s responsibilities, and (4) any limitations of the engagement

form 8-k

the “current events” report filed periodically at the occurrence of major events, such as earnings releases, major asset sales, acquisitions, and auditor changes

independence in appearance

the extent to which others (particularly financial statement users) perceive auditors to be independent

independence in fact

auditor’s mental attitude and impartiality with respect to the client

interim audit work

the procedures performed several weeks or months before the balance-sheet date

internal control audit plan

a plan that would contain a list of the specific procedures needed to obtain an understanding of the client’s internal control system and test that understanding for those controls that relate to the relevant financial statement assertions

lead schedule

a summary of the accounts in or components of an account group

materiality

an amount or event that has a substantial likelihood to influence financial statement users’ decisions; material information aka important information; emphasis is on the financial statement users’ point of view, not on the auditors’ or managers’ point of view

planning memorandum

the document summarizing the preliminary analytical procedures and the materiality assessment with specific directions about the effect on the audit

predecessor auditor

the public accounting firm that has been terminated or has voluntarily withdrawn from an audit engagement (whether the audit has been completed or not)

quality assurance partner

the second audit partner on the audit team as required for audits of financial statements filed with the SEC who reviews the audit team’s work in critical audit areas (those areas with the highest potential audit risk)

specialists

the persons skilled in fields other than accounting and auditing - actuaries, appraisers, attorneys, engineers, and geologists - who are not members of the public accounting firm

substantive audit plan

document that contains a list of audit procedures for gathering evidence related to the relevant assertions identified for the significant financial statement accounts and disclosures on an audit client

termination letter

the documentation provided to former clients dealing with the subject of future services, in particular (1) access to audit documentation by new auditors, (2) reissuance of the auditors’ report when required for SEC reporting or comparative financial reporting, and (3) fee arrangements for such future services; can also contain a report of the auditor’s understanding of the circumstances of termination (disagreements about accounting principles and audit procedures, fees, or other conflicts)

tracing

an audit procedure in which the auditor selects a basic source document and follows its processing path forward to find its final recording in a summary journal or ledger; in practice, the term may be used to describe following the path in either direction

vouching

an audit procedure in which an auditor selects an item of financial information, usually from a journal or ledger, and follows its path back through the processing steps to its origin (the source documentation that supports the item selected)

year-end audit work

the procedures performed shortly before and after the balance-sheet date