Term
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Definition
| Any action taken by a company or individual to reduce the likelihood or significance of risk |
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Term
| Key Attributes that Influence the Effectiveness of a Control Mechanism |
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Definition
-Diagnosticity
-Objectivity |
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Term
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Definition
| ability of a control activity to provide a reliable and timely warning of potential problems |
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Term
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Definition
| Refers to the potential bias inherent in the execution of a control |
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Term
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Definition
| The farther removed a control is from the source of the risk, the less likely it is to identify problems on a timely basis. |
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Term
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Definition
| A threat to an organization that reduces the likelihood that the organization will achieve one or more of its objecitves |
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Term
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Definition
| The risk that information used in decision making is inaccurate or insufficient |
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Term
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Definition
-Avoidance
-Acceptance
-Sharing
-Reduction |
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Term
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Definition
-Political
-Economic
-Social
-Technological Pressures |
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Term
| Strategic Risk Issues to Consider |
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Definition
-Likelihood of the risk causing negative outcomes for the organization
-Magnitude of negative outcomes if the problem actually occurs. |
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Term
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Definition
-Transactions
-Accounts
-Presentation and Disclosure |
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Term
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Definition
-Occurrence
-Completeness
-Accuracy
-Cutoff
-Classification |
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Term
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Definition
-Completeness
-Existence
-Rights and Obligations
-Valuation and Allocation |
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Term
| Presentation and Disclosure Assertions |
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Definition
-Occurrence, Rights, and Obligations
-Completeness
-Classification and Understandability
-Accuracy and Valuation |
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Term
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Definition
-Inspection or examination of tangible assets
-Confirmation
-Inspection of records or documents
-Observation
-Recalculation
-Analytical evidence or analysis
-Client Enquiry |
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Term
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Definition
1. Evaluate if financial statemetns are presented according to GAAP
2. Evaluate the possibility of fraudulent reporting
3. Evaluate the likelihood that the organization will continue as a going concern
4. Evaluate internal process in which financial reports are generated. |
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Term
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Definition
| The magnitude of an omission or misstatement that, in light of surrounding circumstances, would cause a reasonable person to have decided differently. |
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Term
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Definition
| The magnitude of an error that would make the financial statements misstated. |
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Term
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Definition
| The nature of a misstatement may be more important than its size. |
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Term
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Definition
| The nature of a misstatement may be more important than its size. (i.e. Fraud, Violations to debt covenants, Missing earnings target, Hitting Incentive goals) |
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Term
| Quantitative Misstatement |
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Definition
| The auditor must consider the magnitude of an error that would make the financial statement materially misstated. |
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Term
| Standard Unqualified Report |
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Definition
| Used when the auditor concludes that evidence obtained supports the fairness and completeness of all management assertions. |
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Term
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Definition
-Title
-Date
-Addressee
-Introductory Paragraph
-Scope Paragraph
-Opinion Paragraph
-Sign-Off |
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Term
| Standard Auditor's Report with Explanatory Paragraph |
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Definition
| Used when the auditor concludes that management assertions are correct and complete but for some reason the auditor wants to bring some specific information to the attention of the reader. |
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Term
| Qualified Auditor's Report |
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Definition
Issued when the auditor feels that he/she is unable to conclude that the assertions are completely reliable or fair.
Happens for two reasons:
-Scope Limitations
-Departures from GAAP |
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Term
| Denial of Opinion (Disclaimer) |
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Definition
Auditor states that no opinion can be expressed.
Causes: Scope Limitation, Conflict of interest, etc. |
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Term
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Definition
| Issued when auditor concludes the financial statement assertions are largely incorrect or misleading. |
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Term
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Definition
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Term
| Elements Statements on Quality Control Standards |
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Definition
-Independent
-Human Resources
-Acceptance and Continuance of Clients
-Engagement Performance
-Monitoring of Performance
-Leadership |
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Term
| Communication with the Predecessor Auditor |
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Definition
Predecessor is required by standards to respond to reasonable inquiries.
-Ask reasons for auditor change
-Nature of any disagreements w/ management
-Access to work papers from prior year audit
-Important risk areas, including internal control weaknesses
-Prior experience w/ fraud or illegal acts |
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Term
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Definition
| Audit Risk= Inherent Risk X Control Risk X Detection Risk |
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Term
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Definition
| The Risk that misstatements might occur if there were no internal controls. |
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Term
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Definition
| The Likelihood that the controls present in the system will not prevent or detect a material error in the financial statements. (Management has some control over this) |
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Term
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Definition
| The risk that an auditor may fail to discover an existing misstatement that exists in an assertions. (Auditor has some control over this) |
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Term
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Definition
| The likelihood or probability that the auditor will conclude that all material assertions made by management are true, when in fact, at least one material assertion is incorrect. |
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Term
Industry Forces-External Threats
(Porter's 5 Forces) |
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Definition
-Competitors
-Potential Entrants
-Substitutes
-Suppliers
-Customers |
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Term
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Definition
| General, Fieldwork, Reporting |
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Term
| General Auditing Standards |
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Definition
-Audit must be performed by persons having adequate training and proficiency
-Auditors must maintain independence in mental attitude
-Auditors must exercise due professional care |
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Term
| Fieldwork Auditing Standards |
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Definition
-Audit must be properly planned and supervised
-Auditor must gain a sufficient understanding of the entity, including internal control
-Auditor must obtain sufficient competent evidence |
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Term
| Reporting Auditing Standards |
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Definition
-Auditor must express an opinion on the financial statements as a whole
-Auditor must indicate those situations where GAAP is not consistently applied
-Auditor must evaluate the adequacy of informative disclosures
-Auditor must state whether statements were prepared in accordance w/ GAAP |
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Term
| 3 Requirements for a CPA to take on an Audit |
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Definition
1. He/she must have adequate knowledge of the context in which assurance is to be given
2. The subject matter of the assurance can be examined with an objective evaluation process
3. The assurance provider must be independent and objective in regards to the information and its context |
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Term
| Criteria for Offering Attestation Services |
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Definition
1. There must be an assertion being made by one party, the accuracy of which is of interest to another party.
2. There must exist agreed-upon and objective criteria which can be utilized to assess the accuracy of the assertion.
3. The assertion must be amendable to verification by an independent party.
4. The accountant should prepare a written conclusion about the accuracy of the assertion. |
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Term
| Stressors to an Organization |
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Definition
-Rapid Growth
-Shortage of Employees
-Economic Downturns |
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Term
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Definition
| Involves tracing the steps of an actual transactions, or small set of transactions, through the accounting system from start to finish, including the completion of documents and updating of computer records. |
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Term
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Definition
-Substantive Testing ($$$$)
-Compliance Testing (Attribute) |
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Term
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Definition
| The comparison of quantitative relationship among account balances and other indicators to an auditor's expectations |
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Term
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Definition
| Assuracne about compliance with laws and regulations. (Includes: Securities Laws, Consumer Protections, etc.) |
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Term
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Definition
| Serve as a contract between a public accounting firm and the company and explicitly states the terms of the engagement |
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Term
| Parts of Engagement Letter |
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Definition
-Addressee
-Identification of services to be rendered
-Specification of the respective responsibilities
-Constraints of the audit firm
-Deadlines
-Description of any assistance
-Interactions with Specialists
-Disclaimer
-Fees
-Ownership and accessibility |
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Term
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Definition
Examples: Reserves for uncollectible receivables, or loan losses, etc.
-Should be areas of risk for the auditor because they are only estimates and usually they are the outcome of a future event
-Auditors should be worried about non-routine transactions and the accounting of these |
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Term
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Definition
| Collection of processes designed to carry out the operations and activities of an organization in an effective and controlled manner, a value chain describes how the organization creates value for all stakeholders, including shareholders, customers, and so forth. |
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Term
| 2 Dimensions of a Value Chain |
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Definition
-Primary Processes
-Support Processes |
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Term
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Definition
| Those that are performed to directly create value in the form of a product of service |
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Term
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Definition
| Those that are performed in order for the organization to function properly but have an indirect effect on the creation of product value |
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Term
| 5 Primary Processes of a Value Chain |
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Definition
-Inbound Logistics
-Operations
-Marketing and Sales
-Outbound Logistics
-Service |
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Term
| Value Chain Support Processes |
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Definition
-Infrastructure and Financial management
-Procurement and Supply Chain Management
-Human Resource Management
-Technology and Information Management |
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Term
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Definition
| Components of an organization's enterprise risk management framework that have audit implications. |
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Term
| 3 Key Attributes of Internal Control |
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Definition
-Internal Controls needs to be a continuous activity
-Internal control is ultimately part of management's responsibility
-Internal controls have inherent limitations that prevent them from eliminating all risk |
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Term
| 5 Components of Internal Controls |
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Definition
1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring |
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Term
| Effectiveness of Controls can be Limited By: |
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Definition
-Failure by employees to internalize the organization's mission and objectives.
-Inaccurate or out-of-date assumptions
-Undue focus on current conditions
-Rigid organizational structure
-Failure to enforce accountability
-Communication breakdowns
-Top management failure |
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Term
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Definition
| Refers to the control activities that are performed as part of the various processes within the organization. Process contorls are usually performed by staff employees and low-level management, process control activities tend to focus on specific risks within a process |
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Term
| Types of Process Controls |
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Definition
-Key Verification
-Check Digits
-Reconciling Data
-Batch Controls |
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