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Audit Exam 1
| Term | Definition |
|---|---|
| Assurance Services | Independent professional services that improve the quality of information for decision-makers |
| Attestation Services | A type of assurance service where the CPA issues a report about a subject matter or assertion that is the responsibility of another party (e.g., a review or an examination). |
| Auditing | 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 |
| Financial Statement Audit | Specifically focuses on whether the financial statements are presented fairly in accordance with the applicable financial reporting framework (e.g., GAAP or IFRS). |
| Types of Audit | Financial Statement, Compliance, Operational, Forensic |
| Types of Auditors | External (CPAs), Internal, Government (GAO), and IRS Auditors. |
| PCAOB | Oversees the audits of public companies. Sets Auditing Standards (AS) |
| AICPA | Sets Auditing Standards (AU-C) for private companies and non-profits. Also writes and grades the CPA exam. |
| SEC | Governs public companies and requires them to file audited financial statements |
| SOX | Created the PCAOB and mandated the integrated audit (SOX 404) |
| GAAS | provides the framework for performing an audit. Focus on the core principles: Responsibilities, Performance, and Reporting. |
| Professional Skepticism | A state of mind that includes a questioning mind and a critical assessment of audit evidence. Auditors must constantly question the quality and sufficiency of evidence. |
| Professional Judgement | The application of relevant training, knowledge, and experience in making informed decisions about the course of action that are appropriate in the circumstances of the audit engagement. |
| Due Professional Care | Requires the auditor to observe the profession's technical and ethical standards, perform the audit with competence and diligence, and reduce Audit Risk (AR) to an appropriately low level |
| Integrity and Objectivity | Be honest and candid, without subordinating professional judgment to others. |
| Peer Review | A mandatory external review of a firm's accounting and auditing practice conducted by another CPA firm, ensuring compliance with professional standards. |
| Quality Control | Firms maintain a system of quality control to ensure they meet professional standards. This system is reviewed periodically through Peer Review |
| Stages of the audit | Client Acceptance/Continuance, Preliminary Engagement Activities, Plan the Audit |
| Client Acceptance/Continuance | Evaluate auditor independence, firm competence, and client integrity (mandatory communication with predecessor auditor) |
| Preliminary Engagement Activities | Establish terms of engagement (Engagement Letter). |
| Plan the Audit | Develop an overall audit strategy (Assess risk, determine materiality). |
| Materiality | The magnitude of misstatement (individually or in the aggregate) that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the misstatement. |
| Preliminary Materiality | Set early in the audit based on a benchmark (e.g., 5% of Net Income, 0.5% of Assets) |
| Tolerable Misstatement (Performance Materiality | Allocated to individual accounts/segments; typically 50%-75% of Preliminary Materiality. |
| Qualitative Factors | Factors that make a misstatement material even if the dollar amount is small (e.g., related to fraud, affects trend analysis, impacts debt covenants). |
| Audit Assertions | Assertions are claims made by management embodied in the financial statements. Auditors test these claims. (Know the difference between Transaction Assertions and Balance Assertions. |
| Existence/Occurrence | Assets or liabilities exist, and transactions occurred |
| Completeness | All transactions and accounts are included. |
| Valuation/Allocation | Amounts are correct and recorded at the proper value. |
| Rights and Obligations | The entity holds the rights to assets and liabilities are obligations of the entity. |
| Presentation and Disclosure | Components are properly classified and disclosures are adequate. |
| ARM Formula | AR=IR×CR×DR |
| Audit Risk | The risk of giving a clean opinion on materially misstated financial statements. Must be set low |
| Risk of Material Misstatement | IR×CR. This is the risk that a misstatement exists before the audit. |
| Inherent Risk | Susceptibility of an assertion to misstatement, assuming no internal controls. IR cannot be zero |
| Control Risk | Risk that internal controls will fail to prevent or detect a misstatement. |
| Detection Risk | Risk that the auditor's procedures will fail to detect a misstatement. The only risk the auditor can control directly. |
| Inverse Relationship | High RMM (IR x CR) requires a Low acceptable DR (meaning more work is needed). |
| Auditor Responsibility | Auditing standards require auditors to assess RMM due to fraud. |
| Brainstorming Session | Auditors must hold a fraud brainstorming session (required by standards) to discuss how and where fraud could occur |
| Fraudulent Financial Reporting | Intentional misstatements to deceive users (e.g., fictitious revenue). |
| Misappropriation of Assets | Theft of company assets (e.g., skimming cash) |
| The Fraud Triangle | The three conditions usually present when fraud occurs: 1. Incentive/Pressure (Reason to commit fraud). 2. Opportunity (Lack of internal controls). 3. Rationalization (Justification of the act) |
| Preliminary Analytical Procedures | Required in the planning phase to identify unusual fluctuations or relationships, and to enhance the auditor's understanding of the client's business. |
| COSO Framework | The standard used by management to design and evaluate internal control |
| Control Environment | Tone at the top." Includes the integrity of management and the role of the Audit Committee (independent directors who oversee financial reporting). (COSO) |
| Risk Assessment | Management's process for identifying and analyzing risks. (COSO) |
| Control Activities | Specific policies and procedures (e.g., segregation of duties). (COSO) |
| Information and Communication | The entity's information system and how policies are communicated to employees (COSO) |
| Monitoring Activities | Ongoing evaluations of control effectiveness. (COSO) |
| Segregation of Duties | Four core duties that should be separated to prevent fraud and error: Authorization, Recording Entering data into the accounting system, Custody (Physical control of the asset, Periodic Reconciliation Comparing recorded amounts to physical assets |
| Material Weakness | A deficiency that has a reasonable possibility of resulting in a material misstatement of the financial statements. |
| Significant Deficiency | A deficiency that is less severe than a material weakness but is important enough to merit attention by those charged with governance. |
| Integrated audit | type of independent assessment that combines a financial statement audit with an audit of a company's internal controls over financial reporting (ICFR) into a single, unified process and report. |
| Compliance Audit | the systematic process of reviewing an organization's adherence to applicable laws, regulations, industry standards, and internal policies to identify and address potential gaps and weaknesses |
| Operational Audit | systematic and independent review of an organization's processes, controls, and activities to assess their efficiency, effectiveness, and alignment with business objectives |
| Audit Risk | likelihood that an auditor will issue an inappropriate opinion on financial statements that are actually materially misstated |
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