Term
| first standard of fieldwork |
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Definition
| The auditor must adequately plan the work and must properly supervise any assistants in order to plan and perform the audit to provide reasonable assurance about whether the F/S are free of material misstatement, whether caused by error or fraud. |
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Term
| appointment of the auditor |
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Definition
early appointment of auditor- plan before the B/S date.
Before accepting engagement near or after the close of the fiscal year, an independent auditor should determine whether circumstances permit an adequate audit and expression of an unqualified opinion.
Auditor must determine that ethical requirements, including independence, can be met. |
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Term
|
Definition
Continually evaluate auditor for management integrity,
Communicate w/predecessor auditor if client gives permission. Auditor must initiate communication. Failure of the client to give this permission should be a red flag. |
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Term
| communication w/predecessor auditors |
|
Definition
Inquiries should include:
Facts that bear on the integrity of management
Disagreements w/management about accounting principles, audit procedures, or other similar matters
Findings of fraud or illegal acts, or internal control problems communicated by predecessors to audit committee
Predecessor's understanding as to the reason for the change in auditors.
Working papers of the predecessor auditor should be available. |
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Term
|
Definition
The auditor should establish an understanding with the client through a written communication regarding the services to be performed.
The objectives and limitations of the audit and the responsibilities of the auditor and management should be stated in a contract evidenced by an engagement letter. |
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Term
| What does the engagement letter? |
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Definition
| May address the overall audit strategy, additional services, limits on liability (auditor or client), involvement of the predecessor, internal auditors, or specialists; access to audit documentation; and fees. |
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Term
| Should the client be able to anticipate the nature, timing, and extent of audit procedures? |
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Definition
|
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Term
| Who sends the engagement letter? How is a contract created? |
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Definition
| The CPA sends it to the client for each engagement. If the client agrees to the terms of the letter by signing a copy and returning it to the CPA, a written contract is created. |
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Term
| Who is responsible for correcting material misstatements? |
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Definition
| Management. Furthermore, management's representation letter must assert that the effects of any uncorrected misstatements are immaterial individually or in the aggregate. |
|
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Term
| predecessor's working papers (ISAs) |
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Definition
| Under the ISAs, an auditor may obtain sufficient appropriate evidence about opening by reviewing the predecessor's working papers. |
|
|
Term
| terms of engagement (ISAs) |
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Definition
| Under the ISAs, if the terms of engagement are changed, for example, from an audit to a review, the auditor and client may not be able to agree to the change. The auditor should withdraw. |
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Term
|
Definition
| beginning point of planning, which occurs throughout the audit |
|
|
Term
| What should the auditor consider when forming the audit strategy? |
|
Definition
Size and complexity of entity
Auditor's experience w/entity
Auditor's understanding of the entity and its environment (including IC)
Characteristics of the engagement and reporting objectives
Appropriate materiality levels
Areas of high risk of material misstatement
Material client locations and account balances
Whether to seek evidence of the operating effectiveness of controls
Relevant, entity-specific, industry, or financial developments
Consideration of the audit resources is required |
|
|
Term
| Who is responsible for the engagement and its performance? |
|
Definition
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Term
|
Definition
| includes the nature, timing, and extent of audit procedures expected to reduce audit risk to an acceptably low level; must be developed and documented for all audit engagements |
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Term
| risk assessment procedures |
|
Definition
| performed to obtain an understanding of the entity and its environment, including its IC, to identify and assess the RMMs at the levels of the financial statements as a whole and relevant assertions. |
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Term
| three elements of the audit plan |
|
Definition
1. Description of risk assessment procedures directed towards the RMM.
2. Description of further procedures at the relevant assertions for material classes of transactions, account balances, and disclosures.
3. Other procedures required by GAAP or PCAOB standards. |
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Term
|
Definition
| risk of material misstatement |
|
|
Term
|
Definition
at the relevant assertion levels for material classes of transactions, account balances, and disclosures. These are performed in response to assessed risks and evaluations of audit evidence.
This element is based on the decision whether to test the operating effectiveness of controls and the nature, timing, and extent of planned substantive procedures. |
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Term
| Is the audit plan static or dynamic? |
|
Definition
Audit plan will likely be adjusted as the audit progresses. As a result, the accepted level of detection risk may change, and the auditor may need to alter the nature, timing, and extent of further procedures.
Based on audit strategy, the auditor develops a detailed audit plan, but the two planning activities are not necessarily discrete or sequential. |
|
|
Term
| audit planning procedures |
|
Definition
Reviewing prior work papers
Discussing audit matters w/firm personnel
Inquiring about current business developments
Reading current interim F/S
Considering the effects of accounting and auditing pronouncements
Coordinating the assistance of entity personnel in data preparation
Determining the involvement of consultants, specialists, and internal auditors, or other specialists
Establishing the timing of the work
Establishing and coordinating staffing requirements |
|
|
Term
| The auditor should have sufficient knowledge to... |
|
Definition
Communicate objectives.
Evaluate whether their planned procedures will achieve the objectives.
Evaluate results.
Additional: supervise specialists. |
|
|
Term
| risk assessment procedures |
|
Definition
| performed to obtain an understanding of the entity and its environment, including its IC, to identify and assess the RMMs at the levels of the financial statements as a whole and relevant assertions. |
|
|
Term
| three elements of the audit plan |
|
Definition
1. Description of risk assessment procedures directed towards the RMM.
2. Description of further procedures at the relevant assertions for material classes of transactions, account balances, and disclosures.
3. Other procedures required by GAAP or PCAOB standards. |
|
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Term
|
Definition
| risk of material misstatement |
|
|
Term
|
Definition
at the relevant assertion levels for material classes of transactions, account balances, and disclosures. These are performed in response to assessed risks and evaluations of audit evidence.
This element is based on the decision whether to test the operating effectiveness of controls and the nature, timing, and extent of planned substantive procedures. |
|
|
Term
| Is the audit plan static or dynamic? |
|
Definition
Audit plan will likely be adjusted as the audit progresses. As a result, the accepted level of detection risk may change, and the auditor may need to alter the nature, timing, and extent of further procedures.
Based on audit strategy, the auditor develops a detailed audit plan, but the two planning activities are not necessarily discrete or sequential. |
|
|
Term
| audit planning procedures |
|
Definition
Reviewing prior work papers
Discussing audit matters w/firm personnel
Inquiring about current business developments
Reading current interim F/S
Considering the effects of accounting and auditing pronouncements
Coordinating the assistance of entity personnel in data preparation
Determining the involvement of consultants, specialists, and internal auditors, or other specialists
Establishing the timing of the work
Establishing and coordinating staffing requirements |
|
|
Term
| The auditor should have sufficient knowledge to... |
|
Definition
Communicate objectives.
Evaluate whether their planned procedures will achieve the objectives.
Evaluate results.
Additional: supervise specialists. |
|
|
Term
| communication of audit plan/strategy |
|
Definition
| The planned scope and timing of the audit should be communicated to the BOD or audit committee, but don't make those procedures too predictable. |
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Term
| planning considerations for initial audits |
|
Definition
Performance of procedures in accordance with the quality control element of acceptance of clients and specific engagements.
Communication w/ predecessor auditor
Major issues discussed w/management
Planned audit procedures regarding opening balances
Assignment of firm personnel w/appropriate capabilities and competence |
|
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Term
|
Definition
recognizes that some but not all matters, evaluated individually or in the aggregate, are important for fair presentation of the F/S in conformity w/GAAP.
Is a matter of professional judgment by auditors and influenced by users of F/S.
should be established for planning purposes; may be adjusted as audit evidence is collected and material balances and locations should be determined. |
|
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Term
|
Definition
| involves directing the efforts of assistants who are involved in accomplishing the objectives of the audit and determining whether those objectives were accomplished. |
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Term
| On what is the extent of supervision based? |
|
Definition
| The qualifications of personnel and the subject matter of the work. |
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Term
|
Definition
Instructing assistants
Keeping informed of significant issues encountered
Reviewing the work of each assistance to determine adequate performance and documentation that is consistent with conclusions in the report
Resolve differences of opinion. |
|
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Term
|
Definition
| questioning mind in a critical assessment of audit evidence- as part of due professional care. |
|
|
Term
| On what should audit assistants be informed? |
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Definition
| their audit responsibilities, objectives of procedures, matters affecting those procedures, and their duty to report significant auditing and accounting issues and difficulties in audit performance. |
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Term
| internal auditing (according to IIA) |
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Definition
| independent, objective assurance, and consulting function that adds value and improves an organization's operations. |
|
|
Term
| What do internal auditors do? |
|
Definition
| According to the IIA, internal auditing is an independent, objective assurance, and consulting function that adds value and improves an organization's operations. IAs evaluate and improve the effectiveness of governance, risk management, and control processes. They evaluate risks and the adequacy and effectiveness of controls regarding the reliability and integrity of financial and operational information, the effectiveness and efficiency of operations; safeguarding of assets, and compliance. |
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Term
| Are external or internal audit plans more detailed? |
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Definition
| Internal audit plans, because they cover areas- including operations and internal controls- that are not normally considered by the independent/external auditor. |
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Term
| Do audit risk and materiality affect the application of GAAS? |
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Definition
| Yes, especially the field work and reporting the standards, and are reflected in the auditor's standard report. |
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|
Term
| Why reasonable and not absolute assurance? |
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Definition
| The characteristics of audit evidence and fraud prevent the auditor from providing more than reasonable assurance that all material misstatements are detected. Thus, audit risk is implicit in reasonable assurance. |
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|
Term
| audit risk & what should be done about it |
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Definition
risk that the auditor expresses an inappropriate audit opinion when the F/S are materially misstated
The audit should reduce audit risk to an appropriately low level for expressing an opinion. |
|
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Term
|
Definition
| those who have a reasonable understanding of business and economic activities and who are willing to study the information with appropriate diligence |
|
|
Term
| qualitative vs. quantitative facts for materiality |
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Definition
Materiality judgments consider surrounding circumstances and involve qualitative and quantitative factors.
Not practical to design audit features to detect misstatements solely based on qualitative factors. |
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|
Term
| Do materiality considerations differ between IC and F/S audits? |
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Definition
|
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Term
|
Definition
| Arise from inaccuracies in data processing, omissions, departures from GAAP, or unreasonable management judgments about accounting estimates or principles. |
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Term
|
Definition
| specifically identified during the audit |
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Term
|
Definition
| derive from differences between auditor's and management's judgments about accounting estimates or extrapolations from audit evidence |
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Term
|
Definition
| unintentional misstatements |
|
|
Term
|
Definition
| intentional act involving deception to obtain an unjust or illegal advantage |
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|
Term
| audit risk and materiality levels |
|
Definition
Considered at overall F/S and individual balance, class, or disclosure level.
Risk assessment procedures performed at all levels.
For statements as whole, auditor considers RMMs that may affect many relevant assertions.
Audit risk and materiality should be considered at every step of the audit process. |
|
|
Term
| Are audit risk and materiality directly related? Inversely related? Or not statistically related? |
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Definition
| Inversely related. Thus, the risk of a large misstatement may be low, but the risk of a small misstatement may be high. |
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|
Term
| How do you decrease audit risk? |
|
Definition
Do at least one of the following:
-Perform more effective procedures,
-Perform procedures nearer to year-end, or
-Increase the extent of certain procedures. |
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|
Term
| What should audit procedures do at the balance, transaction class, or disclosure level (BTCDL)? |
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Definition
| At the BTCDL, procedures should provide reasonable assurance concerning misstatements material to statements as a whole when aggregated with other misstatements. |
|
|
Term
| three components of audit risk |
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Definition
| inherent, control, and detection risk |
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|
Term
|
Definition
| susceptibility of relevant assertion to material misstatement in absence of related controls |
|
|
Term
|
Definition
| inherent and control risks, which together are inversely related to detection risk |
|
|
Term
|
Definition
| risk that controls will not prevent or detect on a timely basis a material misstatement. |
|
|
Term
|
Definition
| risk that an auditor will not detect a material misstatement that exists in a relevant assertion. Inversely related to RMM; relates to substantive procedures. |
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Term
|
Definition
|
|
Term
|
Definition
|
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Term
|
Definition
divides detection risk into the risk for the test of details and the risk for substantive analytical procedures.
AR = RMM * AP * TD
TD = AR / (RMM * AP) |
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|
Term
| How do qualitative considerations factor into the materiality judgment? |
|
Definition
The auditor establishes a materiality level for the statements as a whole when developing the overall audit strategy.
Due to qualitative considerations, identified misstatements below this level may still be material. |
|
|
Term
| qualitative considerations |
|
Definition
| mgmt. bias, cumulative future effect, regulatory or contractual requirements, occurrence of fraud or illegal acts, and whether the misstatement conceals a negative trend in profitability. |
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Term
|
Definition
| amount set by the auditor at less than F/S materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds F/S materiality. |
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Term
|
Definition
| application of performance materiality to a particular sampling procedure |
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|
Term
|
Definition
| Because an audit is a cumulative process, information obtained during the audit may lead to a revision of auditor judgments about audit risk and materiality. |
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Term
| communication of misstatements |
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Definition
Non-trivial misstatements should be timely communicated to appropriate managers for correction and review.
Significant findings should be communicated to those charged with governance.
Significant deficiencies and material weaknesses should be communicated both to those charged with governance and management. |
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Term
|
Definition
| In this process, auditors consider the individual and aggregate effects of misstatements not corrected by the entity. This consideration addresses qualitative and quantitative factors and it includes known and likely misstatements, unless trivial. |
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|
Term
| second standard of fieldwork |
|
Definition
the auditor must obtain a sufficient understanding of the entity and its environment, including its IC, to assess the risk of material misstatement due to errors or fraud, and to design the nature, timing, and extent of audit procedures.
This process, like planning (first standard), is continuous throughout the audit. |
|
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Term
| reasons for obtaining understand of entity's IC |
|
Definition
Determining materiality for planning the audit and evaluating it during the audit
Considering accounting policies and disclosures
Identifying areas of audit emphasis
Designing further audit procedures
Evaluating audit evidence |
|
|
Term
| categories of risk assessment procedures |
|
Definition
Inquiries of management and others within the entity
Analytical procedures
Observation and inspection
Use of prior period information about the entity and its environment
Assessment of RMM
Predecessor auditor information |
|
|
Term
| Aside from management, inquiries can be directed to... |
|
Definition
Those responsible for financial reporting
Those charged with governance
Internal auditors
Legal counsel
Marketing, sales, and production managers and
Others w/ different levels of authority who may have information about RMMs |
|
|
Term
| observation and inspection activities include... |
|
Definition
Observing activities and operations
Inspecting documents and records
Reading reports
Tours of facilities; and
Tracing financial transactions during a walk-through |
|
|
Term
| understanding the entity pertains to |
|
Definition
External factors
Nature of the entity
Objectives, strategies, and business risks
Financial performance measurement and review.
Internal control. |
|
|
Term
| objectives vs. strategies |
|
Definition
| overall plans (objectives), operational approaches to achieving objectives (strategies) |
|
|
Term
| How does an auditor utilize its understanding of IC? |
|
Definition
| to determine the types of possible misstatements, identify what affects the RMMs, and design further procedures. |
|
|
Term
| Special concerns of auditor for issuers |
|
Definition
Reading public information about the company
Obtaining information from earnings calls to investors and rating agencies
Gaining an understanding of compensation for senior management
Obtaining information about trading services in the company's securities
The auditor should consider company performance measures that could create incentives or pressures on management to manipulate the financial information. |
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Term
|
Definition
| tests of details of transactions and balances; they are fairly narrow in scope- they are directed toward a particular assertion for a specific account. |
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|
Term
|
Definition
| evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data using models that range from simple to complex. |
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|
Term
| How to utilize analytical procedures |
|
Definition
Should be applied to some extent in planning all F/S audits for risk assessment to assist the auditor in determining the nature, timing, and extent of other auditing procedures.
Used as substantive tests may be more effective or efficient than tests of details in achieving an audit objective related to a specific F/S assertion.
Should be applied to some extent in the final stage of the audit as an overall review. |
|
|
Term
| five sources of information used to develop analytical procedures |
|
Definition
Financial information comparable prior periods.
Anticipated results prior to end of period
Relationships among data
Comparable information from the client's industry
Related nonfinancial information |
|
|
Term
|
Definition
| Significant differences between expectations and recorded amounts should be investigated and evaluated. Significance is largely a function of materiality and the desired degree of assurance to be provided. |
|
|
Term
| Can individually insignificant items be significant in the aggregate? |
|
Definition
|
|
Term
| using analytical procedures in the audit planning process |
|
Definition
| Analytical procedures applied in planning the audit emphasize improving the understanding of the business and the transactions and events since the last audit and identifying areas that may represent specific audit risks. |
|
|
Term
| objective of analytical procedures |
|
Definition
identify such things as the existence of unusual transactions and events, and amounts, ratios, and trends that might indicate matters that have F/S and audit planning ramifications.
They ordinarily use highly aggregated data. |
|
|
Term
| What determines the extent of analytical procedures and tests of details (a substantive test)? |
|
Definition
| The auditor's judgment about expected effectiveness and efficiency in providing the desired level of assurance determines the procedures chosen. For some assertions, analytical procedures alone may provide the necessary assurance. |
|
|
Term
| What determines the effectiveness and efficiency of analytical procedures performed? |
|
Definition
The nature of the assertion (analytical procedures better for some assertions- Completeness- than tests of details).
Plausibility and predictability of relationship (better in stable environments; I/S more predictable than B/S).
Availability and reliability of the data.
Precision of the expectation (better with more detailed data). |
|
|
Term
|
Definition
Data is more reliable when:
Obtained from independent sources outside the entity
Obtained from sources outside the entity independent of those responsible for the amount being audited
Developed under reliable internal control
Subjected to audit testing in the current or prior years
Obtained from a variety of sources |
|
|
Term
| Documentation with regards to auditor expectations |
|
Definition
The expectation, if not readily determinable from the documentation of the work
The factors used to develop the expectation
The results of the comparison of the expectation with the recorded amounts or ratios
Any additional auditing procedures performed to resolve differences and their results |
|
|
Term
| final review stage & analytical procedures |
|
Definition
They include the reading of F/S and notes and considering
The adequacy of evidence regarding unusual or unexpected balances detected in planning or performing the audit and
Such balances or relationships not detected previously. |
|
|
Term
| Who should perform analytical procedures in the final/overall review? |
|
Definition
| A manager or partner having a comprehensive knowledge of the client's business and industry. |
|
|
Term
| When should ratio analysis be applied? What should auditors know about ratios? |
|
Definition
| At all stages of the audit as analytical procedures. An auditor should understand not only how to calculate each ratio but also the potential explanations of changes in ratio from period to period. |
|
|
Term
|
Definition
| current assets/ current liabilties |
|
|
Term
| positively related vs. negatively related num. and denom. of current ratio |
|
Definition
If < 1.0, a transaction that results in equal increases (decreases) in the numerator and denominator increases (decreases) the ratio. positively related
If > 1.0, a transaction that results in equal increases (decreases) in the numerator and denominator decreases (increases) the ratio. inversely related |
|
|
Term
|
Definition
| (current assets – inventory) / current liabilities |
|
|
Term
|
Definition
net sales / avg. net receivables
Should be net credit sales if that amount is known.
Avg. net receivables is audited. |
|
|
Term
| days' sales in receivables |
|
Definition
356, 360 or 300 / receivables turnover
360 = bankers' year
300 = business year |
|
|
Term
|
Definition
CoGS / avg. inventory
Avg. inventory is audited.
High turnover- excess inventory is not held and the inventory is marketable, not obsolete. |
|
|
Term
|
Definition
| net sales / avg. total assets |
|
|
Term
|
Definition
total debt / total equity
measures how much external parties contribute to assets relative to owners. |
|
|
Term
|
Definition
(net income + interest expense + income tax expense) / interest expense
Interest is added back because it is part of the calculation of NI.
Taxes are added back because interest is paid before taxes.
Interest can be excluded to the numerator and add 1.0 to the quotient once the calculation is made.
Changes in interest and NI affect this ratio.
If earnings decline sufficiently, no income tax expense will be recognized. |
|
|
Term
|
Definition
|
|
Term
|
Definition
| (net sales - CoGS) / net sales |
|
|
Term
|
Definition
| operating income / net sales |
|
|
Term
|
Definition
NI / avg. total equity
This is an overall measure of a rate of ROI.
A return on avg. total equity or on common equity may also be calculated. |
|
|
Term
| Who is responsible for programs and controls that prevent, detect, and correct fraud? |
|
Definition
| Management. Management and governance must also set the proper tone and maintain a culture of honesty. |
|
|
Term
|
Definition
| pressure/incentive, opportunity, and rationalization. |
|
|
Term
|
Definition
fraudulent financial reporting
misappropriation of assets |
|
|
Term
| professional skepticism w/regards to fraud |
|
Definition
| Critical assessment of evidence, continually questioning whether fraud has occurred, and not accepting unpersuasive evidence on the basis on management honesty. |
|
|
Term
| What should fraud-based discussions between management and auditors cover? How often should such communication occur? |
|
Definition
brainstorming about factors that might create the conditions for fraud, how and where the statements might be misstated, how assets might be misappropriated or financial reports fraudulently misstated, concealment, and how to respond to fraud risk.
Such communication should be ongoing. |
|
|
Term
| How do you identify fraud risks? |
|
Definition
By inquiring of management, those charged with governance, the internal auditors, etc. It also involves considering the results of planning-stages analytical procedures and fraud risk factors.
Other information is derived from discussions among audit team members, procedures related to the acceptance and continuance of clients and engagements, reviews of interim statements, and identified inherent risks at the balance or class level. |
|
|
Term
|
Definition
| events or conditions indicating possible fraud. Auditors should judge for their presence. |
|
|
Term
| fraud risk characteristics |
|
Definition
Vary with entity's size, complexity, ownership, etc.
May relate to specific assertions or to the statements as a whole
High inherent risk of an assertion about an account balance or transaction class may exist when it is susceptible to management manipulation.
Identifying fraud risks entails considering the type of risk and its significance, likelihood, and pervasiveness.
The auditor must address the risk of management override of controls in all audits because of its unpredictability and ordinarily should assume the existence of a fraud risk relating to improper revenue recognition. |
|
|
Term
| identifying fraud risks entails... |
|
Definition
| considering the type of risk and its significance, likelihood, and pervasiveness. |
|
|
Term
| When are fraud risks identified? |
|
Definition
| After the auditor's evaluation of relevant anti-fraud programs and controls. As part of the IC understanding, the auditor should evaluate whether programs and controls have been suitably designed and implemented. The auditor then determines whether they mitigate or increase the risks. |
|
|
Term
| How should you respond to fraud risks? |
|
Definition
| The responses to the assessment of fraud risks should reflect a critical evaluation of the audit evidence. |
|
|
Term
| three effects of responses to fraud risk |
|
Definition
1. assign more experienced personnel, or individuals with special skills, or to increase supervision.
2. consider accounting principles, especially those involving subjective measurements and complex transactions, and whether they indicate a collective bias.
3. make unpredictable the choices of audit procedures. |
|
|
Term
| How do audit procedures vary? |
|
Definition
| Audit procedures vary with the risks and the balances, transactions, and assertions affected. |
|
|
Term
| How do audit procedures produce more reliable evidence? |
|
Definition
| Procedures may provide more reliable evidence or increased corroboration by being performed at year-end or throughout the reporting period, or involving larger samples or the use of computer-assisted techniques. |
|
|
Term
| How should an auditor handle material misstatements? |
|
Definition
Understand the financial reporting process and controls
Identify, select, and test entries and adjustments after considering the risk assessments, effectiveness of controls, nature of the reporting process, and audit evidence.
Choose whether to test entries during the period.
Make inquiries about inappropriate or unusual activity. |
|
|
Term
| evaluating audit evidence |
|
Definition
| At or near the end of field work, the auditor should evaluate earlier assessment of fraud risk. Additional procedures may be needed. Furthermore, the auditor responsible for the audit should determine that information about fraud risks has been properly communicated to team members. |
|
|
Term
| How do you handle identified misstatements? |
|
Definition
Auditor should consider whether identified misstatements indicate fraud, which consequent effects on materiality judgments. Implications should be evaluated even if fraud is immaterial.
Get additional evidence if material.
If fraud risk is great, consider withdrawing. |
|
|
Term
|
Definition
| Inconsequential fraud reported to management. Other fraud brought to those charged with governance. |
|
|
Term
| documentation of fraud risk assessment process |
|
Definition
Planning-stage discussions
Procedures for identifying and assessing fraud risks
Specific risks identified and the response
Reasons for not identifying improper revenue recognition as a fraud risk
Results of addressing management override
Responses to other conditions and analytical relationships
Fraud communications |
|
|
Term
|
Definition
| violations of laws or governmental regulations that do not include personal misconduct by the client's personnel unrelated to their business activities. |
|
|
Term
| Can auditors detect illegal acts? |
|
Definition
| Whether an act is illegal is a determination normally beyond the auditor's competence. |
|
|
Term
| How do illegal acts vary in relation to F/S? |
|
Definition
The further removed the act is from the F/S, the less likely it is that the auditor will spot it.
Auditor should consider laws and regulations recognized as having a direct and material effect on the F/S, such as tax laws. |
|
|
Term
| What is the auditor's responsibility w/regards to illegal acts? |
|
Definition
Auditor's responsibilities for detecting misstatements arising from illegal acts having direct and material effects is the same as that for material errors and fraud.
Audits are not designed to find indirect-effect illegal acts; it provides no assurance of finding them. |
|
|
Term
| indirect-effect illegal acts |
|
Definition
| relate more to an entity's operating aspects than to its financial and accounting aspects, and their F/S effect is indirect. Audits are not designed to detect these. |
|
|
Term
| What should an auditor do if an indirect-effect illegal act is discovered? |
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Definition
If evidence of one is found, auditors should apply specific audit procedures.
Auditor should inquire of management concerning compliance with laws and regulations and obtain written representations about the absence of violations.
Auditors should consider regulations from the perspective of their known relationship with the client and not our of legality per se. |
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Term
| the following results of normal procedures should raise questions... |
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Definition
Unauthorized or improperly recorded transactions
Investigation by a government or enforcement agency
Large unexplained payments
Large payments in cash or purchases of bank checks payable to bearer, etc.
Failure to file tax returns or pay governmental fees
Excessive sales commissions on agents' fees
Violations cited in reports by regulators |
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Term
| Do ISAs differentiate between violations of laws and regulations having direct and indirect effects? |
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Definition
| No, but U.S. auditing standards do. |
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Term
| responding to direct-effect illegal acts |
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Definition
Obtaining an understanding of the act, the circumstances in which it occurred, and sufficient other information to evaluate its F/S effects
Inquiring of management at a level above those involved
Consulting with client's legal counsel
Applying any other appropriate audit procedures |
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Term
| auditor considerations for direct-effect illegal acts |
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Definition
Consider the qualitative and quantitative materiality of the act
Consider the adequacy of disclosure
Communicate material problems to those charged with governance |
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Term
| opinion given for F/S affected by direct-effect illegal acts |
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Definition
If direct-effect illegal act has not been accounted for properly, qualified or adverse opinion should be given.
If unable to collect sufficient information, disclaimer of opinion. |
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Term
| disclosure of illegal acts to outside parties |
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Definition
Usu. not auditor's responsibility and would violate duty of confidentiality.
Auditor would need to
Comply with legal and regulatory requirements.
Communicate w/successor auditor.
Respond to a subpoena.
Report to a funding or other specified agency in accordance w/governmental audit requirements, such as those established by the Single Audit Act. |
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