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ACG 4236: Auditing I

Terms in this set (24)

what is Information asymmetry?
Managers generally has more information about the "true" financial position and results of operations of the entity than does the absentee owner (shareholder).

EX: Lemons Dilemma
what is the purpose of auditing?
The purpose of an audit is to provide financial statement users with an opinion by the auditor regarding whether the financial statements are presented fair, in all material respects, in accordance with the applicable financial reporting framework.
What is an Audit?
A systematic process of objectively obtaining and evaluating evidence regarding assertions (Financial Statements) about economic actions and events, to ascertain the degree of correspondence between those assertions and established criteria (GAAP), and then communicating the results (Auditor's report) to interested users (Creditors/ Investors).
What is attest?
Attest services occur when a practitioner is engaged to issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
What are assurance services?
Independent professional services that improve the quality of information, or its context, for decision making.
What is materiality?
& how do auditors account for it?
Is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been charges of influenced by the omission or misstatement.

EX: EPS
What is audit risk?
the risk that the auditor expresses an appropriate audit opinion when the financial statements are materially misstated.

- Auditors only provide reasonable assurance
What is reasonable assurance?
implies some risk that a material misstatement could be present in the financial statements and the auditor will fail to detect it.
What is audit evidence?
Evidence that assists the auditor in evaluating management's financial statement assertions; consists of the underlying accounting data and any additional information available to the auditor, whether originating from the client or externally
What are the key descriptors of audit evidence?
1. Sufficiency
2. Appropriateness
What is relevance?
Is the information related to the specific assertion being tested?
What is reliability?
Can the informaion be relied upon to signal the true state of the specific assertion being tested?
What is the relationship between assurance and sample size?
Direct Relationship
What is the relationship between materiality and sample size?
Inverse relationshio
What are the major phases of auditing?
1.Client acceptance/ continuance
2. Preliminary engagement activities (3)
3. Plan the audit
4. Consider and audit internal controls
5. Audit business processes and related accounts
6. Complete the audit
7. Evaluate results and issue audit report
What happens during the client acceptance/continuance phase?
Professional standards require that public accounting firms establish policies and procedures for deciding whether to accept new clients and to retain current clients.
- The purpose of such policies is to minimize the likelihood that an auditor will be associated with clients who lack integrity.
- The knowledge that the auditor gathers during the acceptance/continuance process provides valuable understanding of the entity and its environment, thus helping the auditor assess risk and plan the audit.
What happens during the Preliminary engagement activities phase?
1. Determine the audit engagement team requirements
- Auditor updates his understanding of the entity and its environment. This understanding includes the nature of the entity and the industry in which it operates, how it measures its own performance, and the quality of its internal control. This helps in assessing the risk of material misstatement.
2. Ensure the independence of the audit team and audit firm
- The engagement partner forms an audit team composed of members who have the appropriate audit and industry experience for the engagement and makes sure those individuals are free from prohibited relationships that might threaten the auditor's objectivity.
3. Establish an understanding with client regarding the services to be performed and the other terms of engagement.
What happens during the plan the audit phase?
Proper planning is important to ensure that the audit is conducted in an effective and efficient manner.
- In order to plan the audit properly, the audit team must make a preliminary assessment of the client's business risks and determine materiality.
- The outcome of auditor's planning process is a written audit plan that sets forth the nature, extent, and timing of the audit work.
What happens during the audit internal control phase?
A company's system of internal control is put in place by the companies board of directors and management to help the company achieve reliable financial reporting, effective and efficient operations, and consistent compliance with applicable laws and regulations.
- Company's internal control over financial reporting is of direct relevance to auditors because auditors use this information to help them assess risk and identify areas where financial statements might be misstated.
What happens during the audit business processes and related accounts phase?
Auditors usually organize audits by grouping financial statement accounts to the business processes that primarily affect those accounts.
EX: sales revenue and accounts receivable are of part of a company's sales and collection process and are audited together.
- The auditor applies audit procedures to the accounts in order to obtain audit evidence about managements assertions relating to each account and reduce he risk of undetected material misstatements to an appropriately low level.
What happens during the complete audit phase?
The auditor must obtain sufficient appropriate evidence in order to reach and justify a conclusion on the fairness of the financial statements.
- After the auditor has finished gathering reliable evidence relating to management's financial statement assertions, the auditor assesses the sufficiency of the evidence and obtains addition evidence where deemed necessary.
- The auditor also addresses a number of issues, including the possibility of undisclosed contingent liabilities, such as lawsuits, and searches for any event subsequent to the balance sheet date that may impact financial statements.
What happens during the evaluate results and issue audit report phase?
This is the final phase in the audit process is to evaluate results and choose the appropriate audit report to issue. The auditor's report (auditor's opinion) is the main product or output of the audit.
- After completion of the audit work, the auditor determines if the preliminary assessments of risks were appropriate in light of the evidence collected and whether sufficient evidence was obtained. The auditor then aggregates the total uncorrected misstatements that were detected and determines if the cause the financial statements to be materially misstated.
What is the purpose of the unqualified report?
The unqualified report is issued when the auditor has gathered sufficient evidence, the audit has been performed in accordance with PCAOB standards, and the financial statements conform to GAAP.
What is the structure of the standard qualified report?
- Title: "Independent registered Public Accounting firm"
- Addressee: to the individuals or group that is intended recipient of the report.
- Introductory paragraph: indicates which financial statements are covered by the report, that statements are the responsibility of management, and that the auditor has a responsibility to express an opinion.
- Scope paragraph: Communicates to users, in very general terms, what an audit entitles.
- In addition to indicating that the audit was conducted in accordance with applicable auditing standards, it emphasizes the fact that the audit provides only reasonable assurance that the financial statements contain no material misstatement.
- Opinion paragraph: Concerns the fairness of the financial statements based on the audit evidence
- Explanatory evidence: When the auditor's opinion on a public company's financial statement is presented separately from the auditor's report on the client's internal control over financial reporting, the report must refer to the audit of internal control in the explanatory paragraph.
- Name & date: The financial statement audit report concludes with the manual or printed signature of the CPA firm providing the audit with the date of the report.
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