The accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be done by a competent, independent person.
The provisions of the act apply to publicly held companies and their audit firms, and include the requirement in section 404 that the external audit report on the effectiveness of the company's internal control over financial reporting.
Any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria. Could be oral testimony, written communications, electronic data.....
An independent professional service that improves the quality of information for decision makers.
A type of assurance service in which the CPA firm issues a report about the reliability of an assertion that is made by another party.
American Institute of Certified Public Accountants, a voluntary organization of CPAs that sets professional requirements, conducts research, and publishes materials relevant to accounting, auditing, management consulting services, and taxes
Generally Accepted Auditing Standards (GAAS)
10 Auditing standards, developed by the AICPA, consisting of general standards, standards of field work, and standards of reporting, along with interpretations; often called auditing standards.
Public Company Accounting Oversight Board (PCAOB)
Board created by the Sarbanes-Oxley Act to oversee auditors of public companies, including establishing auditing and quality control standards and performing inspections of registered accounting firms
Statements on Auditing Standards
pronouncements issued by the AICPA to interpret generally accepted auditing standards
A report issued when the auditor believes the financial statements are so materially misstated or misleading as a whole that they do not present fairly the entity's financial position or the results of its operations and cash flows in conformity with GAAP.
Disclaimer of Opinion
A report issued when the auditor is not able to become satisfied that the overall financial statements are fairly presented or the auditor is not independent.
A report issued when the auditor believes that the overall financial statements are fairly stated but that either the scope of the audit was limited or the financial data indicated a failure to follow GAAP.
Unqualified Audit Report
The report a CPA issues when all auditing conditions have been met, no significant misstatements have been discovered and left uncorrected, and it is the auditor's opinion that the financial statements are fairly stated in accordance with GAAP.
Unqualified Report with Explanatory Paragraph
An unqualified report in which the financial statements are fairly presented, but the auditor believes it is important, or is required, to provide additional information
The risk that the auditor will conclude after conducting an adequate audit that the financial statements are fairly stated and an unqualified opinion can therefore be issued when, in fact, they are materially misstated.
Use of comparisons and relationships to assess whether account balances or other data appear reasonable
1. Plan and design an audit approach
2. Perform tests of controls and substantive tests of transactions
3. Perform analytical procedures and details of balances
4. Complete the audit an issue an audit report
Substantive Tests of Transactions
Audit procedures testing for monetary misstatements to determine whether the six transaction-related audit objectives have been satisfied for each class of transaction.
Tests of Controls
Audit procedures to test the effectiveness of controls in support of a reduced assessed control risk
Tests of Details of Balances
Audit procedures testing for monetary misstatements to determine whether the eight balance-related audit objectives have been satisfied for each significant account balance
The auditor's receipt of a written or oral response from an independent third party verifying the accuracy of information requested
Negative- response from debtor only if they disagree
Positive- response from debtor whether or not info is accurate
The auditor's inspection of the client's documents and records to substantiate the information that is or should be included in the financial statements
The obtaining of written or oral information from the client in response to specific questions during the audit
The use of the senses to asses client activities
The auditor's inspection or count of a tangible asset
The rechecking of a sample of the computations made by the client, including mathematical accuracy of individual transactions and amounts and the adding of journals and subsidiary records
The auditor's independent tests of client accounting procedures or controls that were originally done as part of the entity's accounting and internal control system.
Acceptable Audit Risk
A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued
A measure of the auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control
A complement to acceptable audit risk; an acceptable audit risk of 2 percent is the same as audit assurance of 98 percent
Audit Risk Model
PDR=AAR/(IR x CR)
A measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the client's internal controls
Planned Detection Risk
A measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist.
Risk of Material Misstatement
IR x CR
Lapping of Accounts Receivable
The postponement of entries for the collection of receivables to conceal an existing cash shortage
Acceptable Risk of Assessing Control Risk Too Low (ARACR)
The risk that the auditor is willing to take of accepting a control as effective or a rate of monetary misstatements as tolerable when the true population exception rate is greater than the tolerable exception rate.
Estimated Population Exception Rate (EPER)
Exception rate that the auditor expects to find in the population before testing begins
The percent of items in a population that include exceptions in prescribed controls or monetary correctness
The risk that the auditor fails to identify existing exceptions in the sample; caused by failure to recognize exceptions and by inappropriate or ineffective audit procedures
Sample Exception Rate (SER)
Number of exceptions in the sample divided by the sample size
Risk of reaching an incorrect conclusion inherent in tests of less than the entire population because the sample is not representative of the population; sampling risk may be reduced by using an increased sample size and an appropriate method of selecting sample items from the population
Tolerable Exception Rate (TER)
The exception rate that the auditor will permit in the population and still be willing to conclude the control is operating effectively and/or the amount of monetary misstatements in the transactions established during planning is acceptable.
Aged Trial Balance
A listing of the balances in the accounts receivable master file at the balance sheet date broken down according to the amount of time passed between the date of sale and the balance sheet date
Acceptable Risk of Incorrect Acceptance (ARIA)
The risk that the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance is equal to or greater than tolerable misstatement
ARIA= AAR/(IR x CR x AP), where AP is risk involved in the substantive tests.
Acceptable Risk of Incorrect Rejection (ARIR)
The risk that the auditor is willing to take of rejecting a balance as incorrect when it is not misstated by a material amount
A method of projecting from the sample to the population to estimate the population misstatement, commonly by assuming that misstatements in the unaudited population are proportional to the misstatements found in the sample
A method of sampling in which all the elements in the total population are divided into two or more subpopulations that are independently tested and statistically measured
Agreements that the entity will hold to a fixed set of conditions, such as the purchase or sale of merchandise at a stated price, at a future date, regardless of what happens to profits or to the economy as a whole
A potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place
On letterhead, client sends letter to legal counsel. Letter includes a list of pending threatened litigation, asserted claims, or unasserted claims. Ask for attorney to asses risk of litigation.
Management Representation Letter
Written letter from mgmt to auditor that addresses financial statements, completeness of information, disclosure, subsequent events, and internal control. Auditor, however, cannot use this letter as evidence.
Enables auditor to quantify sampling risk
Select items auditor thinks will be most useful in testing; conclusions are reached about populations on judgmental basis
Probabilistic Sample Select
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