Audit Chapter 3

Analytical Procedures

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

Audit Committee

a subcommittee of the board of directors that is responsible for the financial reporting and disclosure process

Audit data analytics (ADA)

using analysis, modeling, and visualization to discover and analyze patters, anomalies, and other information in data in the context of an audit

Audit procedures

specific acts performed as the auditor gathers evidence to determine if specific audit objectives are being met

Audit strategy

the auditor's plan for the expected conduct, organization, and staffing of the audit

Dual-purpose tests

tests of transactions that both evaluate the effectiveness of controls and detect monetary errors

Engagement letter

a letter that formalizes the contract between the auditor and the entity and outlines the responsibilities of both parties

Illegal Act

a violation of laws or government regulations

Internal Audit Function (IAF)

An independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Misstatement

a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be presented fairly in accordance with the applicable financial reporting framework

Overall Materiality (Planning materiality)

the maximum amount by which the auditor believe the financial statements could be misstated and still not affect the decision of the users

Risk assessment procedures

the audit procedures designed and performed to identify and assess the risks of material misstatement, whether due to fraud or error, a the financial statement and assertion levels

Specialist

a person or firm possessing special skill or knowledge in a field other that accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence; an auditor's specialist may be either an auditor's employed specialist or an auditor's engaged specialist

Substantive Procedures

audit procedures performed to detect material misstatements in an account balance or disclosure component of the financial statements

Substantive tests of transactions

tests to detect errors or fraud in individual transactions

Tests of controls

audit procedures performed to test the operating effectiveness of of controls in preventing, or detecting and correction, material misstatements at the relevant assertion level

Test software details

substantive tests that concentrate on the details of items contained in the account balance and disclosure

Tolerable Misstatement (Performance Materiality)

the amount of the overall materiality that is used to establish a scope for the audit procedures for the individual account balance or disclosures

Major Phases of an Audit

1. client acceptance/continuance 2. preliminary engagement activities 3. plan the audit 4. consider and audit internal control 5. audit business processes and related accounts 6. complete the audit 7. evaluate results and issue audit report

What should a public accounting firm consider before accepting a new client?

does the firm have the ability to perform the engagement? does the entity comply with legal and relevant ethical requirements? has the firm considered the integrity of the client?

Three general preliminary engagement activities include:

1. determining the audit engagement team requirements 2. ensuring that the audit team and audit firm are in compliance with ethical and independence requirements 3. establishing an understanding with the entity

What three topics should be discussed in establishing an understanding with the client?

1. the engagement letter 2. using the work of the internal auditors 3. the role of the audit committee

When the entity has an internal audit function (IAF) the auditor may:

use the work of the IAF to obtain audit evidence and/or use the internal auditors to provide direct assistance in conducting the audit under the direction, supervision, and review of the external auditor

The extent to which auditors may be able to use the work of the IAF in obtaining evidence depends on:

the level of competency of the IAF, whether the IAFs organizational status and relevant policies adequately support the objectivity of the internal auditors, and whether the IAF applies a systematic and disciplined approach, including quality control