Audit Ch 4
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Created by:
channingmartin on February 6, 2012
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17 terms
Terms | Definitions |
|---|---|
 Audit Risk | The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated, i.e., the financial statements are not presented fairly in conformity with the applicable financial reports framework |
| Business Risk | Those risks that affect the operations and potential outcomes of organizational activities |
| Control Risk | The risk that a misstatement because of error or fraud that could occur in an assertion and that could be material, individually or in combination with other misstatements, will not be prevented or detected on a timely basis by the company's internal control. Thus, control risk is the risk that the client's internal control system will fail to prevent or detect a misstatement |
| Debt Covenant | An agreement between an entity and its lender that places limitations on the organization; usually associated with debentures or large credit lines |
| Detection Risk | The risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material, individually or in combination with other misstatements. Detection risk is the risk that the audit procedures will fail to detect a material misstatement. The auditor controls detection risk after specifying audit risk and assessing inherent and control risk |
| Engagement Letter | Specifies the understanding between the client and the auditor as to the nature of audit services to be conducted and, in the absence of any other formal contract, is viewed by the courts as a contract between the auditor and the client; generally covers items such as client responsibilities, auditor responsibilities, billing procedures, and the timing and target completion date of the audit |
| Engagement Risk | The economic risk that a CPA firm is exposed to simply because it is associated with a client. Engagement risk is controlled by careful selection and retention of clients |
| Financial Reporting Risk | Those risks that relate directly to the recording of transactions and the presentation of financial data in an organization's financial statements |
| Inherent Risk | The susceptibility of an assertion to a misstatement, because of error of fraud, that could be material, individually or in combination with other misstatements, before consideration of any related controls. Stated simply, inherent risk is the initial susceptibility of a transaction or accounting adjustment to be recorded in error, or for the transaction not to be recorded in the absence of internal controls |
| Management Integrity | The honesty and trustworthiness of management as exemplified by past and current actions; auditors' assessment of management integrity reflects the extent to which the auditors believe they can trust management and its representations to be honest and forthright |
| Materiality | The magnitude of an omission or misstatement of accounting information that, in view 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 omission or misstatement |
| Planning Materiality | The materiality level that is relevant at the transaction or account balance level, which is typically less than overall materiality |
| Posting Materiality | An auditor's combined assessment of inherent and control risk |
| Risk of Material Misstatement | An auditor's combined assessment of inherent and control risk |
| Risk | A concept used to express uncertainty about events and/or their outcomes that could have a material effect on the organization |
| Risk-based Approach | An audit approach that begins with an assessment of the types and likelihood of misstatements in account balances and then adjusts the amount and type of audit work to the likelihood of material misstatements occurring in account balance |
| Tolerable Misstatement | The amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated |
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