Exam 2

Inquiry

Inquiry

________: obtaining written or oral information from the client in response to questions from the auditor.

Observation

________: consists of looking at a process or procedure being done or performed by others.

Confirmation

________: tendency to put more weight on information that is consistent with initial preferences; make the opposing case and consider alternative explanations; consider potentially disconfirming or conflicting information.

Recalculation

________: Involves rechecking a sample of calculations make by the client.

External users

________ reliance on financial statements: examine the financial statements, footnotes, and 10- K, reading minutes of BOD meetings, reading financial analysts reports for a publically held company, discuss financing plans with management.

Availability

________: tendency to consider information that is easily accessible as being more likely or more relevant; consider why something comes to mind, obtain and consider objective data, consult with others and make the opposing case.

Non routine

________ transactions: transactions that are unusual, due to size or nature, and that are infrequent in occurrence.

Presentation

________ and Disclosure: the components of the financial statements are properly classified, described, and disclosed.

Reperformance

________: auditors independent tests of client accounting procedures or controls that were originally done as part of teh entitiy accounting and internal control system.

Analytical procedures

________: required during in the planning phase, done during the testing phase of the audit as substantial test in support of account balances, also required during the completion phase of the audit; industry data, similar prior period data, client determined expected results, auditor determined expected results.

Management integrity

________: follow the procedures discussed in chapter 8 for client acceptance and continuance.

Preliminary judgements

________ about materiality: maximum amount by which auditor believes statements could be misstated and not affect the decisions of reasonable users; materiality is relative rather than an absolute concept; need to benchmark.

Overconfidence

________: tendency to overestimate ones own abilities to perform tasks or to make accurate assessments of risks or other judgements and decisions; challenges opinions and experts, challenge underlying assumptions.

Artificial intelligence

________: computers performing routine repetitive processes and learn patterns.

Acquisition

________ and payment: ________ journal, cash disbersments journal, general journal, cash In bank, inventories, prepaid expense, land, builidngs, equipment, furniture, accumuleted depreciation, trade accounts payable, accrued payables, income tax, deferred tax, advertising, travel, sales meetings and traindings, promotional expenses, miscellaneuos sales expense, travel, supplies, postage, telecommunications, depreciation, rent, legal fees, auditing fees, insurance, repairs, office expense, miscellaneous general expense, gain on sales, income tax.

Inventory

________ and warehousing: acquisitions journal, sales journal, general journal, ________, cost of goods sold.

CR

Relationship between ________ and evidence: effectiveness of internal controls, planned reliance.

Rights

________ and Obligations: the public company holds or controls ________ to the assets, and liabillies are obligations of teh company at a given date.

Inspection

________: auditors examination of clients documents and records to substantiate teh information that is or should be included in financial statements.

Physical examination

________: Inspection or count by auditor of a tangible asset.

audit documentation

Organized ________: client name, period covered, description, preparer, date, index code, cross referenced, state the work performed, tick marks, fufill objectives, plainly stated conclusion.

appropriate amounts

Valuation or Allocation: assets, liabilities, equity, revenue, and expense components have been Included in the financial statements at ________.

financial statements

Use of evidence: effects of medicine, guilt or innocence of accused, fairly presented ________.

Auditors responsibility

________ for material fraud: fraud is harder to detect because they are actively trying to hid it.

Professional skepticism

________: two primary components, a questioning minds and critical assessment of the audit evidence; trust but verify, suspension of judgement, search for knowledge, interpersonal understanding, autonomy, self esteem.

Robotics

________: manufacturing uses ________ to streamline many processes.

Reasonable assurance

________: evidence taken from testing a sample of a population, evaluating complex estimates and detecting fraud from collusions is difficult.

Material errors

________: most of the time is spend on detecting miscalculations, omissions, misunderstandings and misapplication of standards.

magnitude of misstatments

Materiality to an audit: the ________ that individually, or when agrregated with other misstatements could be expected to influence economic decisions of users.

Significant risk

________: an identified and assessed risk of material misstatement that, in the auditors professional judgement, requires special audit consideration.

Internal control objective

________: to make sure that the the controls in place are designed to keep things in order and to detect or prevent fraud and error.

Professional judgement

________ process: Identify and define the issue, gather facts and information and Identify relevant literature, perform analysis and identify alternatives, make the decision, review and complete the documentation and rationale for the conclusion.

Sample size

________: size of data that is being analyzed for procedure, varies from one to all.

Material misstatements

________: If combined uncorrected errors and fraud would change or inflience the decisions of a reasonable person; calculated on a materiality threshold.

Audit program

________: Audit procedures; sample size; items to select; timing.

Analytical procedures

________: helps to better understand the entity and to assess client business risks, identify unusual amounts, ratios or trends.

Observation

________ and inspection: looking through the information to get better understanding.

external users

Relationship between AAR and evidence: reliance by ________, likelihood of financial failure, integrity of the management.

Confirmation

________: the receipt of a direct written response from a third party verifying the information.

Analytical procedures

________: evaluations of financial statements through analysis of plausible relationships among both financial and non- financial data.

audit objective

provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with appropriate framework, which enhances the degree of confidence that users can place in the financial statements

internal control objective

to make sure that the the controls in place are designed to keep things in order and to detect or prevent fraud and error

management responsibility for financial statements

adopting sound accounting policies, maintaining adequate internal controls, and making fair representations in the financial statements; extensive knowledge about the company transactions and related assets and accounts; integrity and fairness lies with the privilege of determining which presentations and disclosures considers necessary

auditor responsibility for financial statements

determining if financial statement disclosures are unacceptable, auditor issues adverse or qualified or drops out of engagement; makes sure they are compliant with rules and regulations

auditors responsibilities for material misstatements

according to aicpa standards, auditor must obtain reasonable assurance that statements are free from material misstaments, enabling the auditor to express an opinion, and report on statements and communicate findings based on auditing standards

material misstatements

If combined uncorrected errors and fraud would change or inflience the decisions of a reasonable person; calculated on a materiality threshold

reasonable assurance

evidence taken from testing a sample of a population, evaluating complex estimates and detecting fraud from collusions is difficult

material errors

most of the time is spend on detecting miscalculations, omissions, misunderstandings and misapplication of standards

auditors responsibility for material fraud

fraud is harder to detect because they are actively trying to hid it

professional skepticism

two primary components, a questioning minds and critical assessment of the audit evidence; trust but verify, suspension of judgement, search for knowledge, interpersonal understanding, autonomy, self esteem

professional judgement process

Identify and define the issue, gather facts and information and Identify relevant literature, perform analysis and identify alternatives, make the decision, review and complete the documentation and rationale for the conclusion

confirmation

tendency to put more weight on information that is consistent with initial preferences; make the opposing case and consider alternative explanations; consider potentially disconfirming or conflicting information

overconfidence

tendency to overestimate ones own abilities to perform tasks or to make accurate assessments of risks or other judgements and decisions; challenges opinions and experts, challenge underlying assumptions

anchoring

tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value; solicit input from others, consider management bias, including the potential for fraud or material misstatements

availability

tendency to consider information that is easily accessible as being more likely or more relevant; consider why something comes to mind, obtain and consider objective data, consult with others and make the opposing case

sales and collection

sales journal, cash receipts journal, general journal, cash in bank, trade accounts receiveable, other accounts receivable, allowance for uncollectible accounts, saIes, sales returns and allowances, bad debt expense

acquisition and payment

acquisitions journal, cash disbersments journal, general journal, cash In bank, inventories, prepaid expense, land, builidngs, equipment, furniture, accumuleted depreciation, trade accounts payable, accrued payables, income tax, deferred tax, advertising, travel, sales meetings and traindings, promotional expenses, miscellaneuos sales expense, travel, supplies, postage, telecommunications, depreciation, rent, legal fees, auditing fees, insurance, repairs, office expense, miscellaneous general expense, gain on sales, income tax

payroll and personell

payroll journal, general journal, cash in bank, accrued payroll, accrued payroll taxes, salaries and commisions, sales payroll taxes, executive and office salaries, administrative payroll taxes

inventory and warehousing

acquisitions journal, sales journal, general journal, inventories, cost of goods sold

capital acquisitions and repayment

acquisitions journal, cash disbursements journal, general journal, cash in bank, notes payable, long term notes payable, accrued interest, capital stock, capital in excess of par value, retained earnings, dividends, dividends payable, interest expense

segmented audit

keeps the cycles apart and makes it easier to follow along the cycle and check over each account, way to organize the audit and keep things clean

transaction related audit objectives

objectives that must be met in terms of the transactions

balance related audit objectives

objectives that must be met in terms of the account balances

Existence or Occurrence

assest or liabilites of the public company exist at a given date, recorded transacitons have occurred during the period

Completeness

all transactions and accounts that should be presented in the financial statements are also included

Valuation or Allocation

assets, liabilities, equity, revenue, and expense components have been Included in the financial statements at appropriate amounts

Rights and Obligations

the public company holds or controls rights to the assets, and liabillies are obligations of teh company at a given date

Presentation and Disclosure

the components of the financial statements are properly classified, described, and disclosed

audit objectives and evidence

the audit objectives determines the amount of evidence needed to perform the audit

use of evidence

effects of medicine, guilt or innocence of accused, fairly presented financial statements

nature of evidence used

results of experiments, evidence and testimony by witnesses, evidence gathered by auditor third party and client

party evaluating evidence

scientist, jury and judge, auditor

certainty of conclusions

vary from uncertain to near certain, requires guilt beyond reasonable doubt, high level of assurance

nature of conclusions

recommend or not recommend medicine, innocence or guilt of party, issue one of several alternate audit reports

typical consequence of incorrect conclusions from evidence

distribution of ineffective or harmful medicine, guilty party is not penalized or innocent party is found guilty, statement users make incorrect decisions and auditor may be sued

audit procedure

detailed instruction that explains the evidence to be obtained during the audit

sample size

size of data that is being analyzed for procedure, varies from one to all

items to select

must decide which items in the population to test

timing

determines when the audit needs to be completed based on the time in the accounting period

audit program

Audit procedures; sample size; items to select; timing

persuasiveness of evidence

the degree to which the auditor is convinced that the evidence supports the audit opinion, the two determinants of persuasiveness are the appropriateness and sufficiency of evidence

appropriateness of evidence

measure of the quality of evidence, meaning its relevance and reliability in meeting audit objectives for transactions

physical examination

Inspection or count by auditor of a tangible asset

confirmation

the receipt of a direct written response from a third party verifying the information

inspection

auditors examination of clients documents and records to substantiate teh information that is or should be included in financial statements

analytical procedures

evaluations of financial statements through analysis of plausible relationships among both financial and non-financial data

inquiry

obtaining written or oral information from the client in response to questions from the auditor

recalculation

Involves rechecking a sample of calculations make by the client

reperformance

auditors independent tests of client accounting procedures or controls that were originally done as part of teh entitiy accounting and internal control system

observation

consists of looking at a process or procedure being done or performed by others

analytical procedures

required during in the planning phase, done during the testing phase of the audit as substantial test in support of account balances, also required during the completion phase of the audit; industry data, similar prior period data, client determined expected results, auditor determined expected results

audit data analytics

allows auditors to obtain and evaluate audit evidence

artificial intelligence

computers performing routine repetitive processes and learn patterns

robotics

manufacturing uses robotics to streamline many processes

cash ratio

cash + marketable securities / current liabilities

quick ratio

cash + marketable securities + net accounts receiveable / current liabilities

current ratio

current assets/ current liabilities

act rec. turnover

net sales / average gross receivables

inventory turnover

cogs / avg inventory

days to sell inventory

365 / inventory turnover