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Auditing Final Exam
Terms in this set (88)
Acceptable Audit Risk
A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.
Risk of Material Misstatement
The risk that the financial statements are materially misstated prior to the audit.
A written agreement between the public accounting firm and the client as to the terms of the engagement for the conduct of the audit and related services.
Any transaction between the client and a related party.
Articles of Incorporation
A legal document granted by the federal or provincial jurisdiction in which a company is incorporated that recognizes a corporation as a separate entity. It includes the name of the corporation, the date of incorporation, capital stock the corporation is authorized to issue, and the types of business activities the corporation is authorized to conduct.
The rules and procedures adopted by a corporation's shareholders, including the corporation's fiscal year and the duties and powers of its officers.
Represents the three conditions of fraud: incentives/pressures, opportunities, and attitudes/rationalization.
Fraud Risk Factors
Entity factors that increase the risk of fraud.
The magnitude of an omission or misstatement of accounting information that, in the light 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.
Materiality for the financial statements as a whole.
An amount less than materiality that the auditor uses to plan and conduct the financial statement audit engagement, to reduce the likelihood that uncorrected errors exceed materiality.
Specific Performance Materiality
The application of performance materiality to a specific class of transactions, balances, and disclosures; this is either equal to or less than performance materiality.
Risk of Material Misstatements
The expectation of misstatements after considering the effect of internal controls on inherent risk.
The application of performance materiality to a specific sampling procedure; it is either less than or equal to performance materiality.
Matters that are clearly inconsequential, whether taken individually or in aggregate and whether judged by any criteria of size, nature, or circumstances.
Audit Risk Model
A conceptual model which auditors use as a planning tool to determine how much and what type of evidence to collect for each relevant class of transactions, account balances, and disclosures. The model reflects the relationship among audit risk (AR), inherent risk (IR), control risk (CR), and detection risk (DR); AR = IR x CR x DR.
The risk that the auditor will express an inappropriate audit opinion when the financial statements are materially misstated.
The auditor's assessment of the susceptibility to material misstatement of an assertion about a class of transactions, an account balance, or a disclosure, either individually or in aggregate, before considering the effectiveness of related internal controls.
The auditor's assessment of the risk that a material misstatement could occur in an assertion about a class of transaction, an account balance, or a disclosure, and not be prevented or detected on a timely basis by the client's internal controls.
The risk that the audit evidence for an audit assertion will fail to detect misstatements exceeding performance materiality.
Audit procedures designed to detect material misstatements in accounts, classes of transactions, and disclosures.
The policies and procedures instituted and maintained by the management of an entity in order to provide reasonable assurance that management's objectives are met.
A cooperative effort among employees or management to defraud a business of cash, inventory, or other assets.
Controls that are implemented for multiple transaction cycles or for the entire organization; controls that are pervasive in nature and don't address particular transaction cycles but may prevent or detect and correct misstatements in several cycles.
Controls that are implemented for specific transaction risks and are designed to specifically prevent or detect and correct misstatements in classes of transactions, account balances, or disclosures and their related assertions.
Transaction Related Audit Objectives and Assertions
Five audit objectives that must be met before the auditor can conclude that the total for any given class of transactions is fairly stated; the assertions are occurrence, completeness, accuracy, cutoff, and classification.
The actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about control and its importance to the entity.
Management's identification and analysis of risks relevant to the preparation of financial statements in conformity with an applicable financial reporting framework.
Actions established by policies and procedures to mitigate risks for everyday activities related to transaction processing and safeguarding assets.
Controls designed to avoid errors or irregularities.
Controls that identify errors or irregularities after they have occurred so corrective action can be taken.
The set of manual and/or computerized procedures that collect, record, and process data and report the resulting output; also known as "application system."
Segregation of Duties
Segregation of the following activities in an organization: custody of assets, recording/data entry, systems development/acquisition and maintenance, computer operations, reconciliation, and authorization.
Internal control activities designed for the continuous internal verification of other controls.
Internal controls for automated information systems pertaining to more than one transaction cycle of group of accounts.
The policies, practices, and procedures that help IT resources add value while considering costs and benefits. In addition to adding value, the goal is to mitigate risk and prevent disastrous failures.
Accounting Information and Communication Systems
Entity systems that are used to initiate, record, process, and report the entity's transactions, events, and conditions and to maintain accountability for the related assets.
Management's ongoing and periodic assessment of the quality of internal control performance to determine that controls are operating as intended and modified when needed.
A written description of a client's internal controls, including the origin, processing, and disposition of documents and records, and the relevant control activities.
A diagrammatic representation of the client's documents and records, and the sequence in which they are processed.
Internal Control Questionnaire
A series of questions about the controls in each audit area used as a means of gaining an understanding of internal control.
The tracing of selected transactions through the accounting system.
Control Risk Matrix
A methodology used to help the auditor assess control risk by matching key internal controls and internal control weaknesses with transaction-related audit objectives.
Controls that are expected to have the greatest impact on meeting the transaction-related audit objectives.
Exists if the design or operation of controls does not detect and correct misstatements in timely manner.
Exists if one or more control deficiencies exist that are less severe than a material weakness.
Exists if a significant deficiency, by itself or in combination with other significant deficiencies, results in a reasonable possibility that internal control will not prevent or detect material financial misstatements on a timely basis.
Compensating (or Mitigating) Control
A control elsewhere in the system that offsets a weakness.
Internal Control Letter
A letter or report from the auditor to the audit committee or senior management detailing significant control deficiencies.
The auditor's written communication to management to point out less significant weaknesses in internal control and possibilities for operational improvements.
Tests of Controls
Audit procedures to test the effectiveness of controls in support of control risk assessed below maximum.
Fictitious transactions entered in controlled circumstances and processed through the client systems.
Generalized Audit Software
General purpose software capable of reading and testing client data using special-purpose modules such as extraction, sampling, and plotting.
Detailed instruction for the collection of a type of audit evidence.
Detailed instructions for the entire collection of evidence for an audit area or an entire audit; always includes audit procedures and may also include sample sizes, items to select, and timing of the tests.
Persuasiveness of Evidence
The degree to which the auditor is convinced that the evidence supports the audit opinion; the three determinants of this are the sufficiency, appropriateness, and timeliness of the evidence.
The degree to which evidence can be considered relevant and reliable.
The pertinence of the evidence to the audit objective being tested.
Reliability of Evidence
Evidence is reliable when it is obtained from (1) the auditor's direct knowledge, (2) an independent provider, (3) a client with effective internal controls, (4) qualified providers such as law firms and banks, (5) objective sources, or (6) consistent and multiple sources.
The quantity of evidence; appropriate sample size; degree of precision.
The timing of audit evidence in relation to the period covered by the audit.
The auditor's physical examination or count of a tangible asset, or inspection of a document.
Use of the senses to assess certain activities.
The auditor's receipts of a written or oral response from an independent third party verifying the accuracy of information requested.
Repeating or checking the mathematical accuracy of calculations completed by the client.
Reperformance or Parallel Simulation
The redoing of procedures and internal controls (other than mathematical calculations) of the client by the auditor.
Computer-Assisted Audit Tests (CAATs)
Tests that the auditor conducts using computer software or using the data or systems of the client.
The use of fictitious transactions to determine whether client programs are functioning as described.
Integrated Test Facility
The use of test data in a test environment where it does not affect the client accounting records.
Generalized Audit Software
A software package that is used by the auditor to run routines against client data.
Use of comparisons and relationships to determine whether account balances or other data appear reasonable.
Inquiry of the Client
Obtaining written or oral information from the client in response to questions during the audit.
A document, such as an employee time report, that is prepared and used within the client's organization and is retained without ever going to an outside party such as a customer or a vendor.
A document, such as a vendor's invoice, that has been used by an outside party to the transaction being documented and that the client now has or can easily obtain.
The use of documentation to support recorded transactions or amounts.
The use of documentation to determine if transactions or amounts are included in the accounting records.
Significant unexpected differences, indicated by analytical procedures, between the current year's unaudited financial data and other data used in comparisons.
Written records of the client's expectations for the period; a comparison of budgets with actual results may indicate whether or not misstatements are likely.
The written or electronic audit documentation kept by the auditor to support audit conclusions; this includes risk assessments, procedures or tests performed, information obtained, and conclusions reached.
Software used to automate preparation of audit working papers or the analysis of client data files.
Other Canadian Standards (OSC)
Standards issued by CPA Canada for engagements other than audits of historical financial statements.
Non-audit engagement that consists primarily of inquiry, analytical procedures, and discussion. The practitioner's conclusion is based upon the practitioner obtaining limited assurance. Limited assurance, which is expressed in the form of negative assurance as to the PA's awareness of any information indicating that the assertions are not presented in conformity with the applicable criteria, is the level of assurance obtained where engagement risk is reduced to a level that is acceptable in the circumstances of the engagement, but where the risk is greater than for a reasonable assurance engagement.
Non-audit engagement in which the public accountant provides assistance in compiling financial statements but is not expected to provide assurance about the statements.
Specified Procedures Engagements
Engagements in which the procedures are agreed upon by the PA, the responsible party making the assertions, and the intended users of report; there is no opinion or conclusion provided by the PA.
Engagements where there is an accountability relationship between two or more parties, and the practitioner is engaged to issue a written communication expressing a conclusion about subject matter for which the accountable party is responsible.
A special form of assurance engagement, such as financial statement audit, in which the auditor evaluates the information provided by one party, using suitable criteria, and issues a report about the reliability of this information to another party.
A special form of assurance engagement, such as the Report of the Auditor General of Canada, in which the auditor directly measures and evaluates the underlying subject matter against the criteria, and issues a report that includes the subject matter information and a conclusion as to whether the subject matter conforms to the applicable criteria.
Risk Assessment Procedures
Performed by the auditor to obtain information for identifying and assessing risks of material misstatement in the financial statements due to fraud or error.
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