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WGU - AUO: Auditing Chapter 6: Audit Planning, Understanding the Client, Assessing Risks, and Responding
Terms in this set (29)
Tests that involve comparisons of financial data for the current year to that of prior years, budgets, nonfinancial data, or industry averages. From a planning standpoint, analytical procedures help the auditors obtain an understanding of the client's business, identify financial statement amounts that appear to be affected by errors or fraud, or identify other potential problems.
Representations of management that are communicated, explicitly or implicitly, by the financial statements.
A committee composed of outside directors (members of the board of directors who are neither officers nor employees) charged with responsibility for appointing, compensating, and overseeing the auditors.
A description of the nature, timing, and extent of the audit procedures to be performed. It is often documented with an audit program.
A detailed listing of the specific audit procedures to be performed in the course of an audit engagement. Audit programs provide a basis for assigning and scheduling audit work and for determining what work remains to be done. Audit programs are specially tailored to the risks and internal controls of each engagement.
At the overall engagement level, this is the risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated. At the financial statement assertion level, it is the risk that a particular assertion about an account balance is materially misstated.
Risks that threaten management's ability to achieve the organization's objectives.
The risk that a material misstatement that could occur in an account will not be prevented or detected on a timely basis by internal control.
An audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year. For example, a test of controls over equipment acquisitions may address authorization (providing evidence on control effectiveness) and whether the transaction tested has been properly recorded in the year's acquisitions (providing substantive evidence on the dollar amounts). As another example, a substantive procedure may reveal a misstatement and be extended to determine the nature of the control that did not operate effectively, thereby providing evidence on operating effectiveness.
A formal letter sent by the auditors to the client at the beginning of an engagement summarizing such matters as the nature of the engagement, any limitations on the scope of audit work, work to be done by the client's staff, and the basis for the audit fee. The purpose of engagement letters is to avoid misunderstandings; they are essential on nonaudit engagements as well as audits.
The risk of loss or injury to the auditors' reputation by association with a client that goes bankrupt or one whose management lacks integrity.
Fraudulent financial reporting
Material misstatement of financial statements by management with the intent to mislead financial statement users.
Further audit procedures
Substantive procedures for all relevant assertions and tests of controls when the auditors' risk assessment includes an expectation that controls are operating effectively, or when substantive procedures alone do not provide sufficient appropriate audit evidence. The auditors perform risk assessment procedures to obtain an understanding of the client and its environment, including internal control. They then conduct a risk assessment and determine the appropriate further audit procedures.
The risk of material misstatement of an assertion about an account without considering internal control.
The time interval from the beginning of audit work to the balance sheet date. Many audit procedures can be performed during the interim period to facilitate early issuance of the audit report.
An international network of independently owned computers that operates as a giant computing network. Data on the Internet are stored on "Web servers," which are computers scattered throughout the world.
Misappropriation of assets
Theft of client assets by an employee or officer of the organization
Those account balances that exist at the beginning of the period. Opening balances are based upon the closing balances of the prior period and reflect the effects of transactions and events of prior periods and accounting policies applied in the prior period. Opening balances also include matters requiring disclosure that existed at the beginning of the period, such as contingencies and commitments.
Overall audit strategy
This strategy involves determining overall characteristics of the engagement that define its scope, determining the engagement's reporting objectives to plan the timing of procedures, and considering important factors that will determine the focus of the audit team's efforts. When the overall audit strategy has been established, the auditors start the development of a more detailed audit plan to address the various matters identified in the audit strategy.
A CPA firm that formerly served as auditor but has resigned from the engagement or has been notified that its services have been terminated.
A financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated. The determination of whether an assertion is a relevant assertion is based on inherent risk, without regard to the effect of controls.
Risk assessment procedures
The audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control. They are designed to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. Risk assessment procedures include (a) inquiries of management and others within the entity; (b) analytical procedures; and (c) observation and other procedures, including inquiries of others outside the entity
Shopping for accounting principles
Conduct by some enterprises that discharge one independent auditing firm after seeking out another firm that will sanction a disputed accounting principle or financial statement presentation.
Identified and assessed risks of material misstatement that, in the auditor's judgment, require special audit consideration.
Tests of account balances and transactions designed to detect any material misstatements in the financial statements. The nature, timing, and extent of substantive procedures are determined by the auditors' assessment of risks and their consideration of the client's internal control.
The auditors who have accepted an engagement or who have been invited to make a proposal for an engagement to replace the CPA firm that formerly served as auditor.
Tests of controls
Tests directed toward the design or operation of a control to assess its effectiveness in preventing or detecting material misstatements of financial statement assertions.
An estimate of the time required to perform each step in the audit.
The sequence of procedures applied by the client in processing a particular type of recurring transaction. The term cycle reflects the idea that the same sequence of procedures is applied to each similar transaction. The auditors' consideration of internal control often is organized around the client's major transaction cycles.
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