| Term | Definition |
|---|
| information assymmetry | one party knows more about the quality of information provided than the other |
| accounting | process by which information about an activity is identified, recorded, classified, aggregated, & reported |
| risk | a threat to an organization that reduces the likelihood that the organization will achieve one or more of its objectives |
| monitoring | the continuous evaluation of risk management efforts is necessary to assure its effectiveness over time |
| endogenous | demand for assurance arises within the economy itself, with no outside intervention |
| exogenous | if demand for assurance is imposed as a result of outside intervention |
| conceptual reasons for endogenous demand | signaling, monitoring, information-risk reduction, insurance |
| two things present for signaling with audit | voluntary and costly |
| material | omitted fact or error if known would change the decision they would have made |
| verifiable assertions with an account | complete, presentation, existence, rights, valuations |
| reasonable assurance | a high but not absolute level of assurance that the info subject to an audit is free of a material misstatement |
| earnings management | delivered bias to meet a target or prepare to meet future targets 1. make company look better 2. meet or exceed analysts' expectations |
| independence | no definition, the ability to act with integrity and objectivity |
| skepticism | an attitude that includes a questioning mind and a critical assessment of audit evidence |
| objectivity | fair and not prejudice or bias, conflict of interest, or influence of others to override objectivity |
| independence in appearance | auditor should do nothing that creates a perception that he has vested interest in the outcome of an audit |
| independence in fact | may be tempted to bias the execution of the audit, which could manifest itself in poor decisions related to the gathering and evaluation of evidence or the nature and extent of disclosures in the financial statements |
| threats of Independence | self interest, self review, advocacy, familiarity, intimidation |
| attestation requires | verifiable assertion, establish criteria, an attester with adequate subject matter knowledge, an attester with procedural knowledge of evidence gathering and evaluation, and an attester who is independent |
| READING - Henry | "The numbers game" pro forma reporting allows companies to manipulate, using creative accounting and hocus pocus |
| READING - Levitt | "The numbers game", earnings mgmt not challenged enough, must try harder for transparency, 1. big bath 2. creative acquisition accounting 3. cookie jar 4. materiality 5. revenue recognition |
| READING - Dechow & Skinner | "Earnings Management.." academics and regulators have different opinions of earnings management, academics are not as concerend |
| READING - Kinney & Martin | "Does auditing reduce bias in financial reporting" audit related adjustments show an overwhelmingly (-) effect on preaudit net earnings and net assets. year end audit directly reduces positive bias. |
| READING - Blackwell, Noland, Winters | "The Value of Auditor Assurance" whether auditor association leads to reduced interest rates on revolving credit agreements, private firms with audits decreased int rates by 25 basis pts |
| READING - Bazerman, Morgan, and Lowenstein | "The impossibility of auditor independence" auditors find it psychologically impossible to remain independent. bias typically enters unconsciously and unintentionally. |
| READING - Mayew & Pike | "Does investor selection of auditors enhance independence" yes, significantly decreases independence violations |
| READING - Schaub & Lawrence | "Differences in auditors' professional skepticism across career levels" staff auditors demonstrate significantly increasing levels of skepticism in both though and behaviors then their superiors. |
| READING - Wells | "Why you ask" vital part of detecting fraud is auditor's ability to ask questions. most powerful audit technique. |
| READING - Hurtt | "An experimental examination of professional skepticism" whether related to four behaviors: expanded info search, increased contradiction detection, increased alternative generation, and increased scruinty of interpersonal info. less skeptical: increased info search and increased scruitny of interpersonal info. more skeptical: increased contradiction detection, but more consistent amt of searching behavior. |
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