Term
| What is the objective of an audit? |
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Definition
-an expression of opinion on the fair presentation of the financial statements in conformity with GAAP (AU 110) |
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Term
| Management’s Responsibilities |
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Definition
-Management is responsible for the financial statement and for internal control
-SOX increases management's responsibility for the financial statements
-SOX provides for criminal penalties for anyone who knowingly falsely certifies the statements. |
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Term
| Auditor’s Responsibilities |
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Definition
-Material versus immaterial misstatements
-Reasonable assurance
-Errors versus fraud
-Professional skepticism
-fraud resulting from fraudulent financial reporting vs. misappropriation of assets. |
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Term
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Definition
-unintentional misstatements or omission
-mistakes in extending price times quantity on sales invoice
-overlooking older raw materials in determining lower of cost or market for inventory |
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Term
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Definition
-Intentional misstatements or omissions
-Fraudulent financial reporting by the management (Management Fraud)
-Theft of assets by employees (Employee Fraud) |
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Term
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Definition
-Is an attitude that includes a questioning mind and a critical assessment of audit evidence.
-An auditor should not assume that management is dishonest but the possibility of dishonesty must be considered |
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Term
| Why is auditor detection of fraud difficult? |
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Definition
-the auditor’s knowledge of client internal controls may be inferior to that of employees
-the fraud will be intentionally concealed
-client management may have the ability to override internal control
weak internal controls = greater risk of fraud |
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Term
| Actions when auditors know of fraud |
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Definition
-Inform higher levels of management
-Inform audit committee if senior management is involved
-Outside of the entity:
-subpoena
-SEC (auditor change, or if no action is taken by the audit committee or board)
-Successor auditor
-funding or other agency |
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Term
| Actions when auditors know of fraud w/ SEC Clients? |
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Definition
-Inform the Audit Committee or Board of Directors who should inform the SEC within 1 business day of receiving information about such FRAUD.
-Inform SEC within 1 business day (i.e.,within 2 business days from the day the auditor informs the audit committee) if the Audit Committee or Board of Directors don’t inform the SEC (see above paragraph) |
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Term
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Definition
-individual(s) within the client organization acting against the client organization |
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Term
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Definition
-intentional violation of law by the client organization
-example; violations of environmental laws
-The auditor must provide reasonable assurance of detection of illegal acts that have a direct effect on the financial statements.
-The auditor provides no assurance of detection of illegal acts that have an indirect effect on the financial statements. |
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Term
| Regarding illegal acts, auditors must, in all audits |
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Definition
-read minutes of board meetings
-inquire of client’s lawyers
-inquire of client management regarding the occurrence of illegal acts AND client policies regarding illegal acts |
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Term
| What should auditors do if they suspect that an illegal act has occurred? |
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Definition
-inquire of client management at a level above those involved
-consult with client’s lawyer
-gather evidence regarding the illegal act |
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Term
| What should auditors do if they know that an illegal act has occurred |
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Definition
-consider effects on financial statements (including footnotes), if inadequate, ask for modification
-consider client management integrity, withdraw if appropriate
-inform audit committee
-if the client is publicly held, inform the SEC |
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Term
| In an audit engagement, where does the auditor start? |
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Definition
-start with the client.
-inefficient to audit every line. better approach would be to group together similar accounts and audit each group (cycle approach) |
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Term
| Management Assertions SAS No. 10 |
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Definition
1.Assertions about classes of transactions and events for the period under audit
2.Assertions about account balances at period end 3.Assertions about presentation and disclosure |
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Term
| General Transactions-related Audit Objective |
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Definition
-Occurrence
-Recorded transactions exist
-Completeness
-Existing transactions are recorded
-Accuracy
-Recorded transactions are stated at the correct amounts.
-Posting and summarization
-Transactions are included in the master files and are correctly summarized.
-Classification
-Transactions are properly classified.
-Timing
-Transactions are recorded on the correct dates |
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Term
| General Balance-related Audit Objectives |
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Definition
-Existence
-Amounts included exist
-Completeness
-Existing amounts are included
-Accuracy
-Amounts included are stated at the correct amounts
-Classification
-Amounts are properly classified
-Cutoff
-Transactions are recorded in the proper period -Detail tie-in
-Account balances agree with master file amounts,and with the general ledger
-Realizable value
-Assets are included at estimated realizable value
-Rights and obligations
-Assets must be owned |
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Term
| How does an auditor address the specific audit objectives? |
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Definition
-obtain sufficient competent audit evidence |
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Term
| Audit can be divided into four phases: 1st phase |
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Definition
1. Plan and design an audit approach |
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Term
| Audit can be divided into four phases: 2nd phase |
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Definition
2. Perform tests of controls and substantive tests of transactions
-Tests of controls-examine the effectiveness of internal
-Substantive tests of transactions-examine monetary errors and irregularitiesin a class of transactions. |
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Term
| Audit can be divided into four phases: 3rd phase |
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Definition
3. Perform analytical procedures and tests of details of balances
-Analytical procedures-use comparisons and relationships to determine reasonableness of transactions and balances.
-Tests of details of balances-examine monetary errors and irregularities in details of financial statements |
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Term
| Audit can be divided into four phases: 14th phase |
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Definition
4. Complete the audit and issue an audit report |
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