Auditing Chapter 5

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Analytical Procedures

evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data

Audit Committee

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

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 client and outlines the responsibilities of both parties

Illegal Act

a violation of laws or government regulation

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 controls in preventing or detecting material misstatements at the relevant assertion level

Tests of Details of Account Balances and Disclosures

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

Specialist

a person or firm possessing special skill or knowledge in a field other than accounting or auditing

Overall Audit Strategy

engagement planning involves all the issues the auditor should consider in developing this; in determining this, the auditor should determine the scope of the engagement, ascertain the reporting objectives to plan the timing of the audit, consider the factors that will determine the focus of the audit team's efforts.

Audit Plan

more detailed than the audit strategy; in this the auditor documents a description of 1) the nature, timing, and extent of the planned risk assessment procedures to be used, 2)the nature, timing, and extent, of further audit procedures at the assertion level for each class of transactions, account balance, and disclosure, and 3) a description of other audit procedures to be performed in order to comply with auditing standards.

Illegal Acts

refers to violations of laws or governmental regulations

"Direct and material" Laws and Regulations

are generally recognized as having a direct and material affect on the determination of financial statement amounts. (Ex: Tax laws) responsibility of auditor for detecting these are the same as that for errors or fraud.

"Material but indirect" Laws and Regulations

indirectly affect the financial statements. (Ex: Food and Drug Administration) auditor should be aware that such illegal acts have occurred.

Auditor Risk Assessment Procedures

used to obtain an understanding of the entity and its environment, including its internal control.

Preliminary Analytical Procedures

used to assist the auditor to better understand the business and to plan the nature, timing, and extent of audit procedures

Substantive Analytical Procedures

used as a substantive procedure to obtain evidential matter about particular assertions related to account balances or classes of transactions

Final Analytical Procedures

used as an overall review of the financial information in the final review stage of the audit

Trend Analysis

the examination of changes in an account over time

Ratio Analysis

the comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data

Reasonableness Analysis

development of a model to form an expectation using financial data, nonfinancial data, or both, to test account balances or changes in account balances between accounting periods.

"Precision of the Expectation"

the quality of an expectation; is a measure of the potential effectiveness of an analytical procedure; it represents the degree of reliance that can be placed on the procedure; is a function of the materiality and required detection risk for the assertion being tested.

Quantification

involves determining whether the explanation or error can explain the observed difference. This may require the recalculation of the expectation after considering the additional information.

Corroboration

auditors must do this in explanations for unexpected differences by obtaining sufficient competent audit evidence linking the explanation to the difference and substantiating that the information supporting the explanation is reliable.

Evaluation

must have a mind-set of professional skepticism combined with the desire to obtain sufficient appropriate audit evidence, similar to other auditing procedures. The auditor should evaluate the results of the substantive analytical procedures to conclude whether the desired level of assurance has been achieved.

Audit Testing Hierarchy

overall decision approach used to gather evidence that starts with tests of controls and substantive analytical procedures which is generally more effective and efficient than starting with tests of details

Short-Term Liquidity Ratios

indicate the entity's ability to meet its current obligations

Activity Ratios

indicate how effectively the entity's assets are managed

Profitability Ratios

indicate the entity's success or failure for a given period

Coverage Ratios

provide information on the long-term solvency of the entity

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