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ACCOUNTING TEST 1
ACCOUNTING TEST 1
238
Accounting
Undergraduate 1
02/04/2012

Additional Accounting Flashcards

 


 

Cards

Term
Describe the two primary functions of financial accounting
Definition
1. To measure the activities of the company
2. Communicate those measurements to external parties for decision making purposes
a. Two external parties are investors and creditors
Term
Identify the 3 fundamental business activities that financial accounting measures
Definition
1. Financing activities – transactions with creditors and owners
a. Activities related to borrowing, stockholder’s investment, distribution to stockholders
b. Measurement category: liabilities, stockholder’s equity, dividends
2. Investing activities – the purchase or disposal of productive assets
a. Resources owned by the company; assets
3. Operating activities – earning revenues and incurring expenses
a. Sales to customers, costs of selling to customers
Term
Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in accounting
Definition
• All companies that sell their stock to the public must follow these rules and must publish financial statements in accordance with those rules
• It allows companies to accurately compare financial information among companies when they are making decisions about where to lend or invest their resources
• The rules of financial accounting are called generally accepted accounting principles (GAAP). The Financial Accounting Standards board (FASB) is an independent, private body that has primary responsibility for the establishment of GAAP in the United States
Term
Financial accounting
Definition
measurement of business activities of a company and communication of those measurements to external parties for decision-making purposes
Term
Assets
Definition
resources owned by a company
Term
Liabilities
Definition
amounts owed to creditors
Term
Stockholder’s equity
Definition
the owner’s claims to resources
Term
Revenues
Definition
the amounts earned from selling products or services to customers
Term
Expenses
Definition
the costs of providing products and services
Term
Financial statements
Definition
periodic reports published by the company for the purpose of providing information to external users
Term
Investing Activities
Definition
transactions involving purchase and sale of (1) long term resources such as land, buildings, equipment, machinery, and (2) any resources not directly related to a company’s normal operations
Term
Operating activities
Definition
transactions involving the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance.
Term
Financing activities
Definition
transactions involving external sources of funding
Term
GAAP
Definition
the rules of financial accounting
Term
Balance Sheet
Definition
a financial statement that presents the financial position of the company on a particular date
Term
Income Statement
Definition
a financial statement that reports the company’s revenues and expenses over an interval of time
Term
Statement of Cash Flows
Definition
a financial statement that measures activities involving cash receipts and cash payments over an interval of time
Term
Statement of Stockholder’s Equity
Definition
a financial statement that summarizes the changes in the stockholder’s equity over an interval of time
Term
Dividends
Definition
distribution of some of the profits to the stockholders, or owners
Term
Creditor
Definition
make decisions related to lending money to the company
Term
Investor
Definition
makes decisions related to buying and selling the company’s stock (shares of ownership)
Term
Auditor
Definition
trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that company’s financial statements
Term
Corporation
Definition
an entity that is legally separate from its owners
Term
Net income
Definition
the difference between revenues and expenses
Term
Retained Earnings
Definition
the cumulative amount of net income, earned over the life of the company, that has not been distributed to stockholders as dividends
Term
Common Stock
Definition
amounts invested by stockholders
Term
identify the basic steps in measuring external transactions
Definition
1. Use source documents to identify accounts affected by an external transaction
o Source documents are invoices, bills from suppliers, and signed contracts, etc.
2. Analyze the impact of the transaction on the accounting equation
3. Assess whether the transaction results in a debit or a credit to the account balance
4. Record the transaction
5. Post the transaction to the T-account in the general ledger
6. Prepare a trial balance
Term
General Ledger
Definition
all accounts used to record the company’s transactions
Term
Chart of accounts
Definition
a list of all account names used to record transactions of a company
Term
Trial balance
Definition
a list of all accounts and their balances at a particular date, showing that total debits equal total credits
Term
Account
Definition
provides a summary of the effects of all transactions related to a particular item over a period of time
Term
Journal
Definition
a chronological record of all transactions affecting a firm
Term
Debit
Definition
left side of T account
Term
Posting
Definition
the process of transferring the debit and credit information from the journal to individual accounts in the general ledger
Term
T-account
Definition
a simplified presentation of an account in the shape of a T; left side is debit column and right side is credit column
Term
Dual Effect
Definition
what affects one account affects another
Term
Credit
Definition
right side of T account
Term
Journal Entry
Definition
the format for recording transactions in a journal
Term
Distinguish between accrual-basis and cash-basis accounting
Definition
• Accrual:
o Record revenues when earn them and not necessarily when we receive cash
o Record expenses with related revenues and not necessarily when we pay cash
• Cash basis accounting violates both revenue recognition and matching principles so it is generally not accepted on most financial statements
• The difference between the two methods is in the timing of when we record those revenues and expenses
Term
Accrual-basis accounting
Definition
record revenue when we earn them and record expenses with related revenues
Term
Closing entries
Definition
transfer the balances of all temporary accounts to the balance of retained earnings
Term
Contra account
Definition
an account with a balance that is opposite to that of its related accounts
Term
Unearned revenue
Definition
a company receives cash in advance from a customer for products or services to be provided in the future
Term
Depreciation
Definition
the process of allocating the cost of an asset to an expense
Term
Current asset
Definition
provide benefit over the next year
Term
Long-term asset
Definition
provide benefit for more than one year
Term
Cash-basis accounting
Definition
record revenues at the time we receive cash and expenses the time we pay cash
Term
Revenue recognition principle
Definition
we record revenue in the period in which we EARN it
Term
Accrued expenses
Definition
when a company has incurred an expense but hasn’t yet paid cash or recorded an obligation to pay, it should still record the expense
Term
Prepaid expenses
Definition
the costs of assets acquired in one period that will be expensed in a future period
Term
Adjusted trial balance
Definition
a list of all accounts and their balances after we have updated account balances for adjusting entries
Term
Current liabilities
Definition
liabilities during the next year
Term
Accumulated depreciation
Definition
the contra account that reduces assets indirectly and shows how the depreciation of an asset has accumulated over a certain period of time
Term
Adjusting entries
Definition
record events that have occurred but that have not yet been recorded
Term
Matching principle
Definition
recognize expenses in the same period as the revenues they help generate
Term
Accrued revenues
Definition
when a company has earned revenue but hasn’t yet received cash or recorded an amount receivable, it should still record the revenue
Term
Post-closing trial balance
Definition
a list of all accounts and their balances at a particular date after we have updated account balances for closing entries
Term
Classified balance sheet
Definition
groups a company’s assets, liabilities, and stockholders’ equity accounts into several categories
Term
Long-Term Liability
Definition
liabilities due in more than one year
Term
Property, plant, & equipment
Definition
long term productive assets used in the normal course of business such as land, buildings, equipment, and machinery
Term

Materiality- considering in planning the audit

 

Definition
  • in order to plan the nature, timing, and extent of audit procedures to be performed, an auditor should establish a materiality level for the financial statements as a whole that is appropriate in light of the particular circumstances
  • materiality for the financial statements as a whole need to be thought of first (using the top-down approach)
  • Auditor should establish materiality level for the f/s as a whole that is appropriate in light of the particular circumstance; Info is material if it is likely to influence financial statement
  • think what is most important to the financial statement users
  • preliminary amount that is used as a benchmark
Term
materiality in evaluating evidence/deciding on audit report
Definition
  • must examine qualitative and quantitative factors for materiality
  • performance materiality - amount less than materiality for the f/s as a whole= tolerable misstatement
  • must evaluate aggregate sum of all potential misstatements b/c if that # is high, it could be immaterial
  • serious material departures could result in an adverse opinion audit report
Term
materiality at financial statement vs. account balance level
Definition
  • financial statement benchmark is usually higher than account balance level
  • F/S looked at from users' perspective
  • specific account balances may be looked at more than others due to materiality and at different amounts
Term
Audit Procedures: Inspection of Records and Documents
Definition
  • Assertion: Existence
  • documents provide evdience of varying degrees of reliability depending on their source and nature:
    • outside parties - more reliable
    • internal - depends on quality control

 

Term
Vouching
Definition
  • Assertion: Existence/occurence
  • follows its path back through the processing steps to its origin or source document
  • (backwards)
Term
Tracing
Definition
  • Assertion: completeness
  • auditor selects a basic source document and follows its processing path forward to find its final recording in a summary journal or ledger
  • (forward)
Term
Scanning
Definition
  • how auditors exercise their general alertness to unusual items and events in clients' documentation
  • "eyes open" looking for anything unusual
Term
Inspection of Tangible Assets
Definition
  • inspection of property, plant, equipment, inventory, and securities certificates
  • Assertion: Existence
Term
Audit Procedures: Observation
Definition
  • Assertions: Existence, Valuation
  • view the client's physical facilities and personnel on an inspection tour
  • watch personnel carry out accounting and control activities
  • surprise payroll distribution
  • commonly used as a test of controls
Term
Audit Procedures: Inquiry
Definition
  • Assertions: existence/occurence, completeness, rights/obligations, valuation and allocation, presentation and disclosure (ALL)
  • collection of oral and sometimes written evidence from independent parties and management
Term

Audit Procedures: Confirmation

 

Definition
  • Assertions: existence, rights, sometimes valuation
  • confirmation by direct correspondence with independent parties 
  • printed on client's letterhead and signed by client officer
  • responses returned directly to audit firm, not client
  • examples:
    • banks - cash and loan balances
    • customers - receivables balances
    • borrowers - note terms and balances
    • agents - inventory on consignment or in warehouses
    • lenders - note terms and balances
    • policyholders - life insurance contracts
    • vendors - accounts payable balances
    • registrar - # of shares of stock outstanding
    • attorneys - litigation in progress
    • trustees - securities held, terms of agreement
    • lessors - lease terms
Term
Audit Procedures: Re-Calculation
Definition
  • Assertions: valuation, existence
  • auditor does the calculations previously performed by client personnel
  • a client calculation is either right or wrong
  • can re-calculate:
    • depreciation
    • interest expense
    • pension liabilities
    • actuarial reserves
    • bad debt reserves
    • product guarantee liabilities
Term
Audit Procedures: Re-performance
Definition
  • Assertions: mostly used in tests of controls
  • similar to re-calculation but broader in approach
  • client control procedure - matching vendor invoices with supporting purchase orders and receiving reports
Term
Audit Procedures: Analytical Procedures
Definition
  • Assertions: Existence, completeness, valuation
  • method of studying and comparing financial information and nonfinancial data
  • required to use them when planning the audit and final review of the financial statements before the audit report is issued

 

  • can take the following 5 forms
  1. comparison of current year account balances to balances of one or more comparable periods
  2. comparison of the current year account balances to anticipated results found in the company's budgets and forecasts
  3. evaluation of the relationships of current year account balances to other current year account balances for conformity
  4. comparison of current year account balances and financial relationships
  5. study of the relationships of current year account balances with relevant nonfinancial information
Term
Risk Assessment in audit planning
Definition
  • provides the basis to determine nature, timing, and extent of internal control tests and substantive tests of account balances and disclosures at an audit client
  • must determine the combination of control and substantive tests necessary to gather enough evidence
  • obtain an understanding of entity and their internal controls
  • reliance on internal auditors:
    • high judgment/risk -  auditors should not rely on Internal Auditor's work
    • low judgment/risk: low competence of Internal Auditor= reperform 50% of their work; high competence= reperform 30% of their work
Term
Audit Procedures: Test of Controls
Definition
Used to test the effectiveness of Internal controls
Term
Audit Procedures: Substantive Procedures
Definition
  • used to verify (substantiate) account balances and detect material misstatement or fraud at the assertion level
  • substantive analytical tests
  • test of details of account balances and transactions (similar to tests of controls)
Term
Evidence in Engagement Planning
Definition
  • sufficiency - quantity
  • appropriateness - quality
  • sufficient, appropriate evidence is a tradeoff between the two factors and varies from account to account and situation to situation
Term
Communication with Predecessor Auditor in Engagement Planning
Definition
  • required to attempt
  • requires consent of client for predecessor to speak freely
  • ask: understanding for change in auditors, any disagreements with clients, integrity of management, required communications
Term
Audit Documentation in engagement planning
Definition
  • provides the auditors; record of compliance with generally accepted auditing standards
  • should contain support for decisions regarding planning and performing the audit, procedures performed, evidence obtained, and conclusions reached
  • permanent files (continuing files) contain information of continuing signifance over many years of the audit of the same client
  • current files: current year audit information that has client acceptance and continuance documentation along with planning documentation
Term
Pre-Engagement: Engagement Letters
Definition

  • Auditors and management must reach an understanding concerning expectations and requirements that are documented (spelled out in the engagement letter)
  • Engagement letter includes:
  • Objectives of the engagement
  • Management’s responsibilities
  • Auditors’ responsibilities
  • Limitations of the engagement
  • Termination letters to former clients; indicating potential future services:
  • Access to audit documentation by successor auditor
  • Reissuance of the auditor’s report when required for SEC reporting/comparative reporting
  • Fee arrangements for future services
  • Report of auditor’s understanding of the circumstances of termination
Term
Pre-Engagement: Independent and Ethical Requirements
Definition

  • Responsibilities principle – competence, independence, due care

 

  • Independence in fact: independent in mental attitude – unbiased and impartial to information; form an opinion without any influences that would compromise that opinion

 

  • Independence in appearance: others’ (users of the f/s) perceptions of the auditors’ independence

 

Term
Client Acceptance/Continuance
Definition

  • Firms not obligated to accept/continue providing services to clients

 

  • Predecessor auditor is generally contacted, with permission from the client, to obtain basic information regarding issues that directly reflect the client’s integrity and mgmt.

 

  • Client can refuse/not permit this but should be a red flag to auditor if that’s the case

 

  • Other acceptance policies include:

 

  • Reviewing annual reports, interim financials, 10-K’s, criminal background checks of managers, inquiries of who the client does business with, consideration of special attention of unusual risks to the firm, considering need for individual’s processing skills and knowledge to complete the audit

 

  • Sometimes hire private investigators to conduct additional searches

 

Term
General Risk Management Activites for Pre-Engagement Planning
Definition

  • Risk management activities – several activities performed before beginning any audit engagement to reduce their own business risks

 

  • Risk to the audit firm – issuing a clean opinion when in fact there is material misstatement

 

  • AU/ISA 300, AS 10 state an auditor should :

 

  1. Perform procedures regarding acceptance/continuance of the audit client relationship
  2. Determine compliance with independence and ethics requirements
  3. Reach a contractual understanding with the client for the terms and conditions of the audit engagement

 

Term
Work of a Specialist
Definition
  • Persons skilled in fields other than accounting and auditing – actuaries, appraisers, attorneys, engineers, geologists, etc.
  • Must know about specialists qualifications, experience, and reputation
Term
Electronic Environment
Definition
  • possibility of temporary transaction trails
  • uniform processing transactions
  • potential for errors and frauds
  • potential for increased management supervision
  • initiation or subsequent execution of transaction by a computer
  • use of cloud computing applications
Term
CAATS
Definition
  • Computer Assisted Audit Techniques
  • allow auditor to complete a number of tasks from their laptop
  • directly access the complete set of a client's dataset for the year under audit
  • software consists of set of pre-programmed editing, operating, and output subroutines so that original programming is not required and the same software can be used on different client's computerized systems
  • can also accomplish:
    • recalculation
    • confirmation
    • document examination
    • scanning
    • analytical procedures
    • fraud investigation
Term
Types of Fraud
Definition
  • misappropriation of assets
  • fraudulent financial reporting (management fraud)
Term
Fraud Triangle
Definition
  • PRESSURE: usually financial pressure and un=shareable
  • OPPORTUNITY: ususally weak IC or high level manager with authority to override controls
  • RATIONALIZATION: usually rationalized before committing fraud
Term
Audit Risk: Definition
Definition
  • the risk the auditor will not appropriately modify the opinion on materially misstated financial statements
Term
Audit Risk equation
Definition
  • must be considered in planning the audit
  • AR = IR X CR X DR

Where:

  • IR= inherent risk - susceptibility of account balances to error
  • CR= control risk - risk of internal controls will not prevent or detect a material error
  • DR= detection risk - risk the auditor will not prevent or detect a material error
Term
Assessment of RMM
Definition
  • RMM = risk of material misstatement, IR x CR
  • DR = AR/(IR X CR)
  • this shows the amount of risk the auditors can allow and still maintain overall audit risk of whatever amount
Term
relationship of RMM and DR
Definition
  •  inverse relationship
  • DR = AR / (RMM)
  • the greather the risk of material misstatement, the lower the detection risk that auditors could allow in order to maintain the level of audit risk with which they feel comfortable
Term
Auditors responsiblity for errors and fraud
Definition
design and conduct the audit to provide reasonable assurance that material errors and frauds will be discovered
Term
Auditor's Responsbility for noncompliance
Definition
  • direct effect: same as for errors and fraud; they are required to plan their work to provide reasonable assurance there are no material misstatements
  • indirect effect: violations of laws and regulations that are not directly connected to the financial statements and need to have a general level of awareness and act on the ones discovered
Term
When are Analytical Procedures Required
Definition
  • required at the beginning of an audit - the planning stage application of analytical proecures and
  • at the end of the audit when the partner in charge reviews the overall quality of the work and looks for apparent problems
  • optional to use as substantive analytical procedures
Term
Analytical Procedures
Definition
  • reasonableness tests; 5 steps in analytical procedures:
  1. develop an expectation
  2. define a significant difference
  3. compare expectation with the recorded amount
  4. investigate significant differences
  5. document each of the preceding steps
  • study of relationships among the data
  • can use financial or nonfinancial information
Term
Internal Control definition
Definition

a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

  1. reliability of financial reporting
  2. effectiveness and efficiency of operations
  3. compliance with applicable laws and regulations

 

Term

Purpose of studying and evaluating Internal Controls

 

Definition
  • so the auditor can plan the further audit tests necessary
  • if internal controls are effective - must
Term
responsibility for internal controls
Definition

SOX section 302: Management is responsible for the organization’s internal control system:

·         Establishing control environment (tone at the top)

·         Assessing risks it wishes to control

·         Specifying information and communication channels and content

·         Designing and implementing ICs

·         Monitoring/supervising/maintaining

·         Make judgments about costs and benefits

·         Must include in their annual report:

o   Statement stating mgmt. is responsible for establishing IC of financial reporting

o   Statement stating framework used for IC

o   Statement stating mgmt’s assessment of the effectiveness of the ICs

Term
auditor's responsibility in internal controls
Definition

·         SOX requires audit of the effectiveness of ICs which is part of the integrated audit process when auditing their financial statements

·         For each fraud risk identified in the planning stage, they need to assess internal control that affects those risks

·         To assess the risk of material misstatement

o   Higher control risk implies the controls are not effective so that will affect the substantive tests of details for high quality evidence (nature) at or near the fiscal year end (timing) and with larger sample sizes for more evidence (extent)

Term
timing of internal control evaluation in an audit
Definition
early in the audit during the interim period; must assess RMM before can plan substantive tests and tests of controls
Term
elements of internal control (COSO framework)
Definition
  1. control environment
  2. risk assessment
  3. information and communication
  4. control activities
  5. monitoring
Term
COSO: control environment
Definition
  • most important because of pervasive effect
  • o   Tone at the top

    o   Integrity and ethical values, board of directors, management’s philosophy and operating style, organizational structure, financial reporting competencies, authority and responsibility, human resources

Term
COSO: Risk assessment
Definition

o   Business risk – factors, events, and conditions that can prevent the organization from achieving its business objectives including effective financial reporting

o   Audit committee – subcommittee of board of directors, usually 3-6 members outside the company, acts as a buffer between management and the operating team; responsible for appointing external auditors, resolving disagreements, overseeing the internal auditors, etc.

Term
COSO: control activities
Definition

o   Information technology

o   Level of integration with their risk assessment process

o   Selection and development of each activity

o   Policies and procedures

o   Designed to prevent, detect, and correct errors and frauds that could enter and flow through to the financial statements

 

Performance reviews: ensure organization’s objectives are being met; require management’s active participation in the supervision of operations

 

Separation of duties: four types of responsibilities should be performed by different people or departments: authorization to execute transactions, recording transactions, custody of assets involved in the transaction, periodic reconciliation of existing assets to recorded amounts

Term
COSO: information and communication
Definition

o   The information system including the relevant business processes, relevant to financial reporting

o   How the system captures events and conditions, other than transactions, that affect the financial statements

o   Timely, reliable, and relevant information

o   Report production/distribution:

§  Account balances are summarized in internal management reports and external financial statements

§  Internal: management’s feedback for monitoring operations

§  External: financial information for investors, creditors, etc.

§  Expectations and responsibilities to groups and workers

o   Information system provides an audit trail, beginning with source documents and proceeding through to the financial statements

Term
COSO: monitoring
Definition

o   To allow for continuous improvement and consider changes in the entity’s operating environment

§  Ongoing and separate evaluations of controls

§  Reporting deficiencies of controls

Term
3 phases of assessing control risk
Definition

1.       Understand and document the client’s internal control

2.       Assess the control risk (preliminary)

3.       Identify controls to test and perform tests of control

Term
limitations of internal controls
Definition

·         Human error

·         Deliberate circumvention

·         Management override

·         Collusion (not enough separation of duties)

Term
obtaining an understanding of the internal controls
Definition
  • required in all audits
  • ·         Evaluate the design of the IC and determine whether controls have been implemented over all relevant assertions related to each material account balance, class of transactions, or disclosures

    ·         Top down risk assessment – first identifies significant accounts and disclosures and their relevant assertions

    o   Significant = based on inherent risk

    o   Relevant assertions are those that represent the possibility of material misstatement

Term
entity level controls (ELC)
Definition

o   Controls that are pervasive to the internal control system and the reliability of the financial statements taken as a whole

Term
Transaction Level Controls
Definition

o   Controls that pertain to specific classes of transactions, account balances, and disclosures

o   Generally have a walkthrough of the process of one or a few transactions so the auditor can gain and understanding of the internal control to evaluate design effectiveness

o   Design effectiveness – determines whether the controls over financial reporting, if operating effectively, would be expected to prevent or detect errors or fraud that would result in a material misstatement in the FS

o   Walkthrough – combination of inquiry of personnel, observation of an entity’s operations, and document examination while tracing one or more transactions through the audit trail from initiation of the transaction to its inclusion in the FS

o   Operating effectiveness – refers to whether the control is operating as designed and whether the person performing the control possesses the necessary authority and qualifications to perform the control effectively

Term
Documentation of internal control understanding
Definition

·         Document internal control understanding:

o   Can be summarized in questionnaires, narratives, flowcharts, etc.

·         Internal control questionnaire – formal interview with knowledgeable managers and the most efficient means to begin gathering evidence about IC

o   Not sufficient to only do the questionnaire

o   Useful for detecting control weaknesses

·         Narrative description – describes all environmental elements, the accounting system, and control activities

·         Flowchart – shows various duties performed by person or group and also shows graphic evidence of any conflicting responsibilities

Term
Deciding to continue to test the controls or not
Definition

 

 

o   NOT to continue:

§  If controls are too ineffective and would not prevent or detect misstatements; control risk = highest level and specifying extensive substantive procedures would be necessary

§  Take more time to test the operating effectiveness of the control than to just perform substantive tests necessary for a relevant assertion even if the controls turn out to be working well

§  Basically if it isn’t efficient to continue, they would just do substantive testing

Term
Assessing the control risk
Definition

·         Must document the strengths and weaknesses in a bridge work paper

·         Strengths indicated by an S

·         Weaknesses indicated by a W

·         Tests of controls are performed for control strengths to prove and test their operating effectiveness; no CONTROL tests needed for weak controls

·         For weak controls, they do substantive testing to obtain sufficient appropriate evidence to reach a conclusion

Term
identify controls to test
Definition

·         Already identified which controls risk below the maximum of 100%

o   Controls on which the audit team relies = 100%

·         Testing controls throughout the period under audit, so must have samples that cover entire period

·         Can rely on previous audits for tests if there is evidence the control has not changed and there is no significant risk in doing so

·         Must test some controls every year and controls must be tested every 3 years

Term
assessing IC at max
Definition
not relying on internal control to control audit risk
Term
assessing internal control below max
Definition
planning to rely on controls to reduce substantive testing, required testing controls
Term
Performing the internal control tests
Definition

·         Purpose: to determine the effectiveness of company's policies and procedures

 

o   Inquiry (least persuasive)

o   Observation

o   Document examination

o   Re-performance (most persuasive)

·         Completeness direction: from source to end

·         Occurrence direction: from end to source

Term
Re-assessing control risk afer testing
Definition

o   After all the extra testing, etc. if the control risk and related RMM is very low, the substantive procedures can be limited

o   If RMM is high, need to perform substantive testing to lower risk

o   Final evaluation of the IC is the assessment of the control risk related to each relevant assertion

·         Dual purpose testing – a single audit test can produce both control testing and substantive testing evidence

Term
effect of nature, timing, and extent of substantive tests
Definition
inverse relationship between RMM and DR
Term
requirements for audit of public company under AS 5
Definition

tests of controls are required

auditor must give an opinion on the IC

Term
Communications of internal control matters
Definition
  • deficiency may be in design or operation
  • material weaknesses and significant deficiencies must be communicated
  • material weakness, a deficiency, or combinatino of deficiencies such that there is a reasonable possiblity that a matieral misstatement of the f/s will not be prevented or detected
Term
Sampling Risks
Definition
  • sampling risks may not represent the population just by chance; the conclusion might be different based on a sample than it would be based on an entire population
  • attribute sampling (tests of controls)
    • risk of assessing CR too low (risk of over-reliance)= (most important)
    • risk of assessing CR too high (risk of under-reliance)
  • variables sampling (substantive tests)
    • risk of incorrect acceptance (most important)
    • risk of incorrect rejection
  • nonsampling risks= human errors controlled by training, review, working accurately
Term
Attribute Sampling
Definition
  • calculation of sample size
  • parameters:
    • risk of overliance- risk of asessing CR too low
  • risk of under-reliance - risk of assessing CR too high;
    • tolerable rate= when evaluating the effectiveness of the client's controls, auditors typically think in terms of the maximum rate of devation that would exist before they would reduce reliance on that control

 

    • expected rate: must be less than the tolerable rate; audit teams usually know or suspect that some level of deviation occurs in the client internal control policies or procedures
Term
evaluation of results
Definition
  1. identify either the rate of deviation or difference between audited values and recorded values from the sample items
  2. adjust the info in step 1 to contorl auditor's exposure to sampling risk (allowance for sampling risk)
  3. compare the adjusted estimate in step 2 to either tolerable rate of deviation or the tolerable misstatement
  4. based on the comparison in step 3, make the decision with regard to the effectiveness of the client's internal control or fairness of the account balance
Term
Types of sampling
Definition
  • attribute used in tests of controls - nonmonetary method
  • variables used in substantive testing- monetary methods
Term
sample selection
Definition
  • any method that results in a random sample; random number generators, systematic selection, not block sampling
Term
statistical sampling v. nonstatistical sampling
Definition

statistical: plans apply the laws of probability to selecting sample items for examination and evaluating sample results; enable the audit team to make quantitative statements about the results and to measure the sufficiency of evidence gathered and evaluate the results in such a way to control sampling risk

 

non-statistical: plans to not meet the statistical criteria

 

both are acceptable alternatives

Term
steps involved with sampling
Definition

PLANNING:

  1. determine the objective of sampling
  2. define the characteristic of interest
  3. define the population

PERFORMING:

  1. determine the sample size
  2. select the sample items
  3. measure the sample items

EVALUATING:

  1. evaluate the sample results

 

Term
Financial Statement Auditing
Definition
A process of obtaining and evaluating evidence that begins with the financial statements, footnotes, & other disclosures of proof they're fairly representated to the applicable reporting framework
Term
Compliance Audit
Definition
Test with compliance of policies, procedures, laws, and regulations
Term
Operational Audits
Definition
auditor's study of business operations for the purpose of making recommendations about economic and efficient use of resources, effective achievement of business objectives, and compliance with company policies
Term
Which type of auditors can conduct a financial statement audit
Definition

auditor; CPA; practitioner; must be:

  • independent
  • professional service
  • improving the quality of information or its context
  • context
  • for decision makers
Term
Integrated Audit, basic requirements
Definition
public accounting firm employs one integrated audit process that culminates in the issuance of 2 opinions: one on the entity's financial statements and one on the effectiveness of the entity's internal control system
Term
types of auditors
Definition

external

internal

governmental

Term
Conditions that cause demand for audits
Definition
  • complexity
  • remoteness
  • time sensitivity
  • consequences
  • conflict of interest
Term
PCAOB Assertions
Definition
  • Existence or Occurrence
  • Rights and Obligations
  • Completeness
  • Valuation or Allocation
  • Presentation and disclosure
Term
Existence or occurence
Definition
  • faithfully represent actual transactions and accounts
  • existance of account balances; occurence of transactions

 

Term
Rights/Obligations
Definition
  • obtaining evidence about owning/owing
  • or property and legal rights to assets
  • also to ensure details are disclosed in the footnotes of any obligations
Term
Completeness (Cutoff)
Definition
  • Management asserts all transactions, events, assets, liabilities, and equities are recorded in full
  • auditors need persuasive evidence about completeness
  • cuttoff = accounting for revenue, expenses, and other transactions in the proper period
Term
valuation and allocation (accuracy or valuation)
Definition
  • mgmt asserts transactions/events are recorded accurately and account balances are correctly valued
  • audit objective - determine whether proper values are assigned to certain accounts and appropriate recordings
  • to test: compare vendor invoices to inventory accounts/recalculate depreciation schedules
Term
Presentation and Disclosure (Classification and understandability)
Definition
  • mgmt asserts all transactions and events are presented correctly and all relevent information is disclosed in the footnotes;
  • disclosure must be: relevent, reliable, transactions classified in correct accounts, understandable and transparent
Term
Information Risk
Definition
probability that information circulated by a company will be false or misleading
Term
Professional Skepticism & Auditor's judgment
Definition
  • auditor's responsibility NOT to accept management's assertions without corrobation - proving it with evidence
  • a potential conflict of interest always exists between the auditors and the mgmt of the enterprise under audit
Term
Auditing, Attestation, & Assurance services
Definition
  • audits - financial statements only
  • attestation - issue report on a financial subject matter
  • assurance services - any type of information
Term
Examples of Attestation Engagements
Definition
  • agreed upon procedures
  • financial forecasts and projections
  • reporting on pro forma financial information
  • compliance attestation
  • EMD&A
  • internal controls
Term
Examples of Assurance Services
Definition
  • XBRL
  • enterprise risk management assessment
  • information risk assessment
  • third party reimbursement maximization
  • rental property operations review
  • customer satisfaction surveys
  • evaluation of investment mgmt policies
  • fraud and illegal acts prevention/deterrence
  • a/r overview and cash enhancement
  • internal auditing outsourcing
Term
Certification/Licensing
Definition
  • Education
  • Exam - 4 parts - prepared and graded by the AICPA
  • Experience - 2 years public or 3 years private
  • State Certificate issued by the state board of accountacy
Term
PCAOB, ASB, AICPA, SEC, state board of accountacy, state society of CPAs
Definition

PACAOB - public company accounting oversight board

 

ASB - Auditing Standards Board

 

AICPA - American institute of CPAs

 

SEC - Securities and exchange commission - government entity that oversees the PCAOB

 

state board of accountacy - issues licenses/certificates and supervises CPEs

 

 

Term
Sources of professional ethics standards
Definition
  • U.S. SEC
  • PCAOB - public company accounting oversight board
  • IFAC - international federation of accountants
  • AICPA
  • State society of CPAs
  • State Board of Accountacy
Term
US SEC rules of conduct
Definition
  • persons who practice before the SEC as accountants and auditors for SEC registrated companies
  • protects reliability and integrity of the f/s
  • promotes investor confidence in f/s and the securities market
Term
PCAOB Rules of Conduct
Definition
  • registered firms and individuals who perform audits of companies under the jurisdiction of the PCAOB
  • set standards for public accounting firms and oversee quality control, ethics, independence issues, etc; SEC must approve all PCAOB proposed rules
Term
IFAC rules of conduct
Definition
  • public accounting firms and CPAs performing audits of multinational companies
  • code of ethics for international companies
Term
AICPA
Definition
  • members of AICPA
  • principles and rules of professional conduct
  • responsibilties; public interest; integrity; objectivity and independence; due care; scope and nature of services
Term
covered member
Definition
prohibited from having any financial interest in clients that could affect their audit judgment (independence in fact) or would appear to others to have an influence on their judgment (independence in appearance)
Term
covered member's immediate family cannot...
Definition
  • have a direct financial interest in a client
  • have a material indirect financial interest in a client
  • have vested retireent benefits at a client
Term
a covered member's close relatives cannot...
Definition
  • have a key mgmt level position with a client
  • have a material financial interest in a client that is known to the covered member
  • have a financial interest in a client that allows the relative to have significant influence in a client
  • be in a position to influence the audit
Term
effect of partner ownership in another entity that involves that audit client
Definition
if the covered member's investment is a direct investment or materially indirect investment idependence is impaired
Term
effect of former employment
Definition
public accounting firm cannot perform an audit of a company in which an individual with financial reporting oversight responsibilities was a member of the audit engagement team for the audit period, up to the audit date
Term
confidentiality rule from AICPA
Definition
  • rule 301
  • member in public practice shall not disclose any confidential information without the specific consent of the client
Term
when work papers must be turned over to a third party
Definition
  • in dealings with mergers and acquisitions
Term
consequences to violating code of conduct
Definition
  • self-regulatory: quality control reviews & disciplinary actions by fellow CPAs; they can acquit the CPA, issue a letter of required corrective action, and refer serios cases to an AICPA trial board
  • Public Regulation: state board of accountacy can admonish the holder, suspend or revoke their license, can conduct disciplinary action
Term
Difference between AICPA and SEC engagement team independence rules
Definition

AICPA: they are the ppl in the audit engagement and those who perform the reviews; all employees and contractors who participate; exlcudes specialists and routine clerical functions

 

SEC: all partners, principals, shareholders, and emloyees participating in the audit

Term
Difference between AICPA and SEC chain of command independence rules
Definition

AICPA: partner- assumes the risk and benefits of a firm ownership or who is held out bythe firm to be the owner/partner;

manager - continuing responsibility of overall planning and supervision of engagement and authority to determine an engagement is complete subject to partner approval

 

SEC- all ppl who supervise or have direct mgmt responsibilities for the audit and they evaluate the performance or recommend the compensation of the audit engagement partner or provide quality control or other oversight of the audit

Term
Difference between AICPA and SEC close family member independence rules
Definition

AICPA: parents, siblings, or nondependent child

 

SEC: person's spouse or equivalent, parent, non/dependent child, sibling

Term
Difference between AICPA and SEC immediate family member  independence rules
Definition

AICPA: spouse or equivalent, dependents whether related or not

 

SEC: person's spouse or equivalent, dependents

Term
Difference between AICPA and SEC covered persons independence rules
Definition
  • AICPA:individual on the audit team; in a position to influence the audit; partners, the firm itself, any entity who's operations can be controlled by anyone mentioned above

 

  • SEC:partners, shareholders, principals, employees on engagement team, someone on the chain of command
Term
Generally Accepted Auditing Standards
Definition
  • GAAS - auditing standards and pronouncements given by the PCAOB and AICPA
  • necessary qualifications and characteristics of auditors and guide conduct of audit examination
Term

Standards given by the PCAOB (Public Company Oversight Board)

 

Definition
Auditing Standards.  (ASs) for public entities (issuers)
Term
standards given by the ASB (AICPA Auditing Standards Board)
Definition

Statements on Auditing Standards (SASs)

For nonpublic entities (nonissuers)

Term
Standards given by the US Government Accountability Office (GAO)
Definition

Government Auditing Standards (The Yellow Book)

 

for Governmental Entities

Term
Standards given by the IFAC (International Auditing and Assurance Standards Board IIASB)
Definition

International Standards on Auditing (ISAs)

 

For foreign entities

Term
GAAS General Standards
Definition

 

  1. Auditor must have adequate technical training and proficiency to perform the audit
  2. auditor must maintain independence in mental attitude in all matters relating to the audit
  3. the auditor must exercise due professional care in the performance of the audit and the prepareation of the report
Term
GAAS Standards of Field Work
Definition
  1. The auditor must adequately plan the work and must properly supervise any assistants
  2. the auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further procedures
  3. the auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit
Term
GAAS Standards of Reporting
Definition
  1. auditor must state in the auditor's report whether the financial statements are presented in accordance with GAAP
  2. must identify in auditor's report those circumstances which principles have not been consistently observed in the curren period in relation to the preceeding period
  3. when the auditor determines that informative disclosures are not reasonable adequate, must state so in the report
  4. auditor must either express an opinion regarding the f/s taken as a whole or state that an opinion cannot be expressed in auditor's report.  if they can't issue an opinio they have to state why and in all cases where an auditor's name is associated with f/s the auditor should clearly indiciate the character of their work and the degree of responsibility the auditor is taking in the report
Term
GAAS 10 basic standards
Definition
  1. general standards
  2. standards of field work
  3. standards of reporting
Term

GAAS Fundamental Principles

 

Definition

Responsibilities PRinciple

 

performance principle

 

reporting principle

 

Term
GAAS Responsibilities Principle
Definition

Auditors are responsible for:

  • having appropriate competence and capabilities to perform the audit
  • complying with relevent ethical requirements
  • maintaining professional skepticism and exercising professional judgment throughout the planning and performance of the audit
Term
GAAS Performance Principle
Definition
  • needs reasonable assurance to express opinion, auditor needs to:
  • plan the work and properly supervise assistants
  • determine and apply appropriate materiality level or levels throughout the audit
  • identify and assess risk of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment including their internal controls
  • obtain sufficient appropriate evidence about whether material misstatements exist though designing and implementing appropriate responses to the assessed risks
Term
GAAS Reporting Principle
Definition
Based on evaluation of the evidence obtained, the auditor expresses in the form of a written report, an opinion in accordance with the auditor's findings, or states that an opinion cannot be expressed.  the opinion states whether the f/s are presented fairely, in all material respects, in accordance with the applicable financial reporting framework
Term
stages of an audit
Definition
  1. Obtain or retain audit engagement
  2. engagement planning
  3. risk assessment
  4. audit evidence
  5. reporting
Term
inherent risk
Definition
probability that a material misstatement, either error or fraud, will occur
Term
control risk
Definition
probability that material misstatement either error or fraud will not be prevented or detected on a timely basis by the entity's internal controls
Term
quality control over CPA firms
Definition
  1. system of quality control
  2. peer review
  3. PCAOB inspection of firms
Term
6 elements of system of quality control
Definition
  1. leadership responsibilities for quality within the firm (tone at the top)
  2. relevant ethical requirements
  3. acceptance and continuance of client relationships and specific engagements
  4. human resources
  5. engagement performance
  6. monitoring
Term
peer review of CPA firm
Definition
public accounting firms engage other firms to study and report on quality control policies and procedures and whether the quality of the firm's audit practice was consistent with its system of quality control
Term
PCAOB inspection of firms
Definition
  • for firms performing audits of 100+ public entities, annual inspections (only 9)
  • for firms performing audits for <100 public entities, inspected every 3 years
Term
appropriate Audit evidence
Definition
  • must be relevant: refers to the nature of the information provided by the audit evidence
  • must be reliable: extent of trust that auditors can place in evidence
Term
audit evidence quality (hierarchy)
Definition
  1. auditors direct, personal knowledge obtained through physical observation and the auditor's own mathematical computations
  2. external evidence
  3. external-internal evidence
  4. internal evidence
  5. verbal evidence
Term
detection risk
Definition
  • Sufficiency (quantity of evidence)
  • appropriateness (quality of evidence) - relevant and reliable
Term
unqualified opinion
Definition
a clean opnion that makes no mention of accounting or auditing deficiencies.  this conclusion is that the f/s are presented in accordance with GAAP
Term
adverse opinion
Definition
a report stating the f/s are not presented in conformity with GAAP
Term
qualified opinion
Definition
auditor's report issued when the f/s contain departures from GAAP or a scope limitation was encountered in the audit examination
Term
disclaimer of opinion
Definition
the explicit statement by auditors that they express no opinion and no assurane on the fair presentation of the f/s in accordance with GAAP
Term
Reports accompanying the entity's financial statements
Definition

report on financial statements and related disclosures

 

&

 

report on internal controls over financial reporting

Term
Standard, Unmodified Report
Definition
  • intro paragraph
  • scope paragraph
  • opinion paragraph
  • internal control paragraph;

standard report always has:

  • title containing "independent"
  • address the client (not always the auditee)
  • notice of audit
  • responsibiltiies
  • description of the audit
  • opinion (unqualified)
  • internal controls
  • signature
  • date
Term
standard, unmodified report, intro paragraph
Definition

-indicates an audit has been conducted

-indicates the specific f/s examined

-explicity states preparation and presentation of f/s are mgmts responsibility

Term
standard, unmodified report, scope paragraph
Definition
  • description of character of work
  • statement saying following GASS by PCAOB, which means auditors:
  1.  had competence/capabilities to perform the audit
  2. compiled relevant, ethical information with independence and due care
  3. maintained professional skepticism/professional judgment
  4. planned and supervised the work
  5. identified and assessed risks of material misstatements & ICs
  6. gathered sufficient and approrpriate evidence
  • if one of the above was not actually satisfied, the scope needs to be modified
Term
standard, unmodified report, opinion paragraph
Definition
  • users are most interested in this one
  • contains conclusions/opinions on the f/s present in its financial condition, results of operations, and cash flows in conformity with GAAP
  • unqualified, qualified, adverse, disclaimer
Term
standard, unmodified report, internal control paragraph
Definition
  • effectiveness of entity's internal controls over financial reporting
  • two options:
  1. 2 separate reports on ICs and F/S but each includes a reference of the other
  2. single, integrated report that expresses opinion on both items

 

Term
reporting options when there is a scope limitation
Definition
  • unqualified
  • qualified
  • disclaimer
Term
reporting options when there is a departure from GAAP
Definition
  • unqualified
  • qualified
  • adverse
Term
explanatory paragraph
Definition
  • if the auditor believes there is something important to bring to the users' attention they can have an unqualified report but have an explanatory paragraph with the extra needed comments
  • also if the departures from GAAP are not materially pervasive
Term
Modifications to standard report when departures from GAAP exist: (qualified vs. adverse)
Definition

Qualified Opinion:

  • intro - no change
  • scope - no change
  • opinion - modified to note that "except for" a specific departure, f/s are presented with GAAP
  • additional paragraph - identifies the departures and dollar effects

 

Adverse Opinion:

  • intro - no change
  • scope - no change
  • opinion - modified to note that f/s are not presented according to GAAP
  • additional paragraph - identifies departure from GAAP and dollar effects

 

Term
other paragraphs that may be added to the end of an unqualified report
Definition
  • consistency - change in acct principles
  • going concern - draws attention to ability to continue
  • justified departures from GAAP: appropriate b/c GAAP would be misleading
  • division of responsibility in the audit of group f/s - intro, scope, and opinion paragraphs modified to note division
  • emphasis paragraph - emphasize a matter of importance
Term
explanatory paragraphs: emphasis of matter and other matter paragraphs
Definition
  • emphasis of matter: provide information to users' understanding of the f/s
  • other matter: info that relates to users' understanding of the audit
Term
Rule 203
Definition

allowing the unqualified opinion to obtain a justified departure from GAAP b/c reporting with GAAP would be misleasing

 

-permits the auditors to explain why the departure was necessary and allow that departure to be in conformity with GAAP

Term
scope limitations changes in wording: qualified vs. disclaimer
Definition

qualified:

  • intro - no change
  • scope - modified to note that "except for" the scope limitation, a PCAOB audit was conducted
  • opinion- modified to note that "except for" the effects of adjustments identified, f/s are with GAAP
  • additional- identifies the scope limitation and dollar effects

 

disclaimer of opinion:

  • intro - modified to note that auditor was engaged to audit the f/s and sentence identifying their responsibility is omitted
  • scope - omitted
  • opinion - modified to indicate that an opinion cannot be expressed on the f/s
  • additional- identifies scope limitation and dollar effects
Term
materiality in identifying type of report
Definition
  • unqualified - immaterial
  • qualified opinion - material but not pervasive
  • adverse opinion (GAAP) or disclaimer of opinion (scope limitiation) - highly material and pervasive
Term
updated report
Definition
auditors' report on prior year financial statements that is based on both the prior year audit and information that has come to the auditor's attention in the most recent audit; carries the most recent date of the auditors' report
Term
reissued report
Definition
  • a copy of a previously issued report that auditors provide or grant clients permission to use in another document after its original date; the report is not modified to consider events occuring subsequent to the date of the original report
Term
condensed statements
Definition
  • may issue report on summary financial statements derived from full financial statements that have been audited
  • must refer to the auditors' report on the full financial statements giving date/opinion and whether info in summary is fairly stated in all material respects in relation to the complete f/s
Term
other information accompanying audited f/s
Definition
  • MD&A- management discussion and analysis; auditors have an obligation to read the other financial information and determine if its consistent with the audited f/s or contains any material misstatements
Term
supplmentary information to reports
Definition
  • information that is necessary to allow users to place the basic f/s in an appropriate operational, economic, or historical context; standard setting bodies have established authoritative guidelines for measuring and presenting this information

EX: FASB requires energy companies to present oil, gas, and other mineral reserve information as supplementary information

Term
compilation report
Definition
  • obtain engagement letter, understand entity's industry and business
  • assist management in presenting f/s
  • read F/S for errors
  • okay if not independent and if disclosures are omitted
  • no obligation of gathering evidence about accuracy and completeness or assess control risk
  • each page of the report should be marked "see accountants' compilation report"
  • very limited procedures performed
  • not to be seen by third party
  • no assurance or accuracy
Term
Review Services
Definition
  • analytical procedures
  • inquiry of mgmt
  • must be independent and f/s must contain full disclosures

review performed by auditor to obtain limited assurance that there are no material modifications; consist of obtaining review evidence by:

  • obtaining engagement letter
  • obtaining knowledge of entity's business and operations
  • inquiring to mgmt of the acct system
  • conducting analytical procedures
  • obtaining written representations by mgmt

 

Term
positive assurance
Definition
a forthright and factual statement of the auditor's opinion based on the audit
Term
negative assurance
Definition
"we are not aware of any material modifications"
Term
responsibilities related to interim financial statement reporting
Definition
  • quarterly f/s (less than a year)
  • issuers have to engage independent accountants to review their ICs and financial reporting in the interim
  • nonissuer enetities are required to file info with a regulatory agency in preparation for a public offering or listing, interim info. must be included
  • just to ensure interim financial info is in conformity with GAAP
Term
Special Reports
Definition
  • conducting engagements to report on specified elements, accounts, or items of a financial statement
  • reporting on accounting using a special purpose framework
  • reporting on the requirements of appropriate financial reporting frameworks
Term
specified elements or accounts
Definition
  • auditor may be requested to render special report on a single f/s or such elements
  • should consider disclosures only related to the element
  • express an opinion on single account/element whether it is in accordance with GAAP
Term
special purpose framework
Definition
  • other comprehensive bases of accounting (OCBOA)

Could be:

  • cash basis
  • tax basis
  • statements conforming to regulatory agency rules
  • some other method for contractual purposes
Term
opinion shopping
Definition
auditor-client disagreements after which the client said "if you won't agree with my accounting treatment, then I'll find an auditor who will"
Term
attestation engagement
Definition
  • practitioner is engaged to issue an examination, review, or an agreed upon procedure on the subject matter that is the responsibility of another party

(Practitioner - SSAES)

Term
3 types of attestation engagements
Definition
  • examination - evaluate internal ontrols and assess the risk of material misstatement, gather evidence in support of the assertions and render opinions that represent a higher level of assurance
  • review - limited level of assurance; making inquiries and performing analytical procedures
  • agreed upon procedures - client delineates exactly what procedures it wants; level of assurance varies
Term
subject matter of attestation engagements may take many forms, including:
Definition
  • historical or prospective performance or condition (backlog data)
  • physical characteristics (narrative descriptions, square footage of facilities)
  • historical events (price market basket of goods on certain date)
  • analyses (break even analysis)
  • systems and processes (internal control)
  • behavior (corporate governance, compliance with laws and regulations, human resources practices)
Term
attestation engagements include engagements related to:
Definition
  • agreed upon procedures
  • financial forecasts and projections
  • pro forma financial information
  • en entity's internal control over financial reporting
  • compliance attestation
  • MD&A
  • service organizations
Term
agreed upon procedures
Definition
  • clients engage accountants to perform specifid procedures to examine a particular element, account, or item in financial statements or perform a special engagement
  • clearly worded engagement letters specifically delieate the auditors procedures
  • reports are to be restricted to the users who participate and take responsibility for defining the work on the engagement
Term
financial forecasts
Definition
  • prospective financial information based on expected conditions and courses of action
  • has to obtain knowledge about the entity's business
  • obtain understanding of the process which info. was developed
  • evaluate assumptions used to prepare the info.
  • identify key factors affecting the information
Term
financial projections
Definition
  • prospective financial information based on the occurence of one or more hypothetical events that change the entity's existing business structure
  • has to obtain knowledge about the entity's business
  • obtain understanding of the process which info. was developed
  • evaluate assumptions used to prepare the info.
  • identify key factors affecting the information
Term
pro forma financial information
Definition
  • shows the effect of a proposed or consummated transaction on the historical financial statements "as if" that transaction had occurred by a specific date
  • has to obtain knowledge about the entity's business
  • obtain understanding of the process which info. was developed
  • evaluate assumptions used to prepare the info.
  • identify key factors affecting the information
Term
internal control effectiveness
Definition

before they can conduct this, following conditions must be met:

  • mgmt accepts responsibility for the effectiveness of its internal control
  • mgmt's evaluation of control is based on suitable and available criteria
  • mgmt's evaluation of control is supported by evidence
  • mgmt presents its assertion about the effectiveness of its ICs in a written report that accompanies the accountant's report

material weakness - adverse report

inability to complete the engagement - disclaimer

 

Term
compliance attestation engagement
Definition
  • compliance over effectiveness of internal controls or over compliance with government laws, regulations, and rules
  • 3 conditions must be met:
  1. mgmt accepts responsiblity for compliance
  2. compliance or the ICs over compliance is capable of evaluation and measurement against reasonable criteria
  3. sufficient evidence must be available to support mgmt's evaluation

can issue qualified report or

  1. modified report to disclose noncompliance event
  2. qualified report stating material noncompliance
  3. or adverse report stateing the entity is not in compliance
Term
major steps in a compliance examination
Definition
  1. understand the specific compliance requirements and assess palnning materiality
  2. plan the engagement and assess inherent risk
  3. understand relevant internal controls over complaince, assess control risk, design tests of compliance
  4. obtain sufficient evidence
  5. consider subsequent events
  6. form opinion and write report
Term
Management's Discussion and Analysis Attestation Engagement (ED&A)
Definition
  • compared to rules and regulations of the SEC
  • usually accompanies the annual report
  • required to ensure this info. accompanying the audited f/s is consistent with them
Term
service organization attestation engagement
Definition
  • examine controls over financial information
  • provides services ot user entities processes client's transactions that are likely to be relevant to users internal control over financial reporting

two types of reports:

  1. type 1- describes the service organization's internal controls placed in operation
  2. type 2 - includes description of controls and effectiveness of internal controls

 

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