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Audit Exam 1
Audit Exam 1
62
Accounting
Graduate
03/09/2010

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Term
Control Activities
Definition
Any action taken by a company or individual to reduce the likelihood or significance of risk
Term
Key Attributes that Influence the Effectiveness of a Control Mechanism
Definition
-Diagnosticity
-Objectivity
Term
Diagnosticity
Definition
ability of a control activity to provide a reliable and timely warning of potential problems
Term
Objectivity
Definition
Refers to the potential bias inherent in the execution of a control
Term
Proximity of Control
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.
Term
Risk
Definition
A threat to an organization that reduces the likelihood that the organization will achieve one or more of its objecitves
Term
Information Risk
Definition
The risk that information used in decision making is inaccurate or insufficient
Term
Dealing with Risk
Definition
-Avoidance
-Acceptance
-Sharing
-Reduction
Term
External Risk
Definition
-Political
-Economic
-Social
-Technological Pressures
Term
Strategic Risk Issues to Consider
Definition
-Likelihood of the risk causing negative outcomes for the organization
-Magnitude of negative outcomes if the problem actually occurs.
Term
Auditing Assertions
Definition
-Transactions
-Accounts
-Presentation and Disclosure
Term
Transaction Assertions
Definition
-Occurrence
-Completeness
-Accuracy
-Cutoff
-Classification
Term
Accounts Assertions
Definition
-Completeness
-Existence
-Rights and Obligations
-Valuation and Allocation
Term
Presentation and Disclosure Assertions
Definition
-Occurrence, Rights, and Obligations
-Completeness
-Classification and Understandability
-Accuracy and Valuation
Term
Audit Evidence
Definition
-Inspection or examination of tangible assets
-Confirmation
-Inspection of records or documents
-Observation
-Recalculation
-Analytical evidence or analysis
-Client Enquiry
Term
4 Objectives of Audit
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.
Term
Materiality
Definition
The magnitude of an omission or misstatement that, in light of surrounding circumstances, would cause a reasonable person to have decided differently.
Term
Quantitative Materiality
Definition
The magnitude of an error that would make the financial statements misstated.
Term
Qualitative Materiality
Definition
The nature of a misstatement may be more important than its size.
Term
Qualitative Misstatement
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)
Term
Quantitative Misstatement
Definition
The auditor must consider the magnitude of an error that would make the financial statement materially misstated.
Term
Standard Unqualified Report
Definition
Used when the auditor concludes that evidence obtained supports the fairness and completeness of all management assertions.
Term
Unqualified Report Parts
Definition
-Title
-Date
-Addressee
-Introductory Paragraph
-Scope Paragraph
-Opinion Paragraph
-Sign-Off
Term
Standard Auditor's Report with Explanatory Paragraph
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.
Term
Qualified Auditor's Report
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
Term
Denial of Opinion (Disclaimer)
Definition
Auditor states that no opinion can be expressed.
Causes: Scope Limitation, Conflict of interest, etc.
Term
Adverse Auditor's Report
Definition
Issued when auditor concludes the financial statement assertions are largely incorrect or misleading.
Term
Information must be:
Definition
Relevant and Reliable
Term
Elements Statements on Quality Control Standards
Definition
-Independent
-Human Resources
-Acceptance and Continuance of Clients
-Engagement Performance
-Monitoring of Performance
-Leadership
Term
Communication with the Predecessor Auditor
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
Term
Audit Risk Model
Definition
Audit Risk= Inherent Risk X Control Risk X Detection Risk
Term
Inherent Risk
Definition
The Risk that misstatements might occur if there were no internal controls.
Term
Control Risk
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)
Term
Detection Risk
Definition
The risk that an auditor may fail to discover an existing misstatement that exists in an assertions. (Auditor has some control over this)
Term
Audit Risk
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.
Term
Industry Forces-External Threats
(Porter's 5 Forces)
Definition
-Competitors
-Potential Entrants
-Substitutes
-Suppliers
-Customers
Term
Auditing Standards
Definition
General, Fieldwork, Reporting
Term
General Auditing Standards
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
Term
Fieldwork Auditing Standards
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
Term
Reporting Auditing Standards
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
Term
3 Requirements for a CPA to take on an Audit
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
Term
Criteria for Offering Attestation Services
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.
Term
Stressors to an Organization
Definition
-Rapid Growth
-Shortage of Employees
-Economic Downturns
Term
Walk Through
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.
Term
Types of Testing
Definition
-Substantive Testing ($$$$)
-Compliance Testing (Attribute)
Term
Substantive Testing
Definition
The comparison of quantitative relationship among account balances and other indicators to an auditor's expectations
Term
Compliance Testing
Definition
Assuracne about compliance with laws and regulations. (Includes: Securities Laws, Consumer Protections, etc.)
Term
Engagement Letter
Definition
Serve as a contract between a public accounting firm and the company and explicitly states the terms of the engagement
Term
Parts of Engagement Letter
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
Term
Accounting Estimates
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
Term
Value Chain
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.
Term
2 Dimensions of a Value Chain
Definition
-Primary Processes
-Support Processes
Term
Primary Processes
Definition
Those that are performed to directly create value in the form of a product of service
Term
Support Processes
Definition
Those that are performed in order for the organization to function properly but have an indirect effect on the creation of product value
Term
5 Primary Processes of a Value Chain
Definition
-Inbound Logistics
-Operations
-Marketing and Sales
-Outbound Logistics
-Service
Term
Value Chain Support Processes
Definition
-Infrastructure and Financial management
-Procurement and Supply Chain Management
-Human Resource Management
-Technology and Information Management
Term
Internal Control
Definition
Components of an organization's enterprise risk management framework that have audit implications.
Term
3 Key Attributes of Internal Control
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
Term
5 Components of Internal Controls
Definition
1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring
Term
Effectiveness of Controls can be Limited By:
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
Term
Process Controls
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
Term
Types of Process Controls
Definition
-Key Verification
-Check Digits
-Reconciling Data
-Batch Controls
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