A424 Chapter 1 – Flashcards

Independent professional services that improve the quality of information, or its context, for decision makers. Encompasses attest services and financial statement audits.

A service when a practitioner is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. Encompasses financial statement audits.

All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements, as well as other information.

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

A systematic process of 1) objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and 2) communicating the results to interested users.

Expressed or implied representations by management that are reflected in the financial statement components.

The concept that the manager generally has more information about the true financial position and results of operations of the entity than the absentee owner does.

The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a resonable person relying on the information would have been changed or influenced.

An instance where a financial statement assertion is not in accordance with the criteria against which it is audited. Misstatements may be classified as fraud(intentional), other illegal acts such as non-compliance with laws and regulations(intentional or unintentional), and errors(unintentional)

The concept that an audit done in accordance with auditing standards may fail to detect a material misstatement in a client's financial statements. In an auditing contet this term has been defined to mean a high but not absolute level of assurance.

The end product of the auditor's work, indicating the auditing standards followed and expressing an opinion as to whether an entity's financial statements are fairly presented in accordance with agreed-upon criteria

The pre-audit risk that the entity's financial statements contain a material misstatement whether caused by error or fraud

A clean audit report, indicating the auditor's opinion that a client's financial statements are fairly presented in accordance with agreed-upon criteria

There is a demand for auditing in a free-market economy because the agency relationship between an absentee owner and a manager produces a natural conflict of interest due to the information asymmetry that exists between the owner and manager. As a result, the agent agrees to be monitored as part of his/her employment contract. Auditing appears to be a cost effective form of monitoring. The empirical evidence suggests auditing was demanded prior to government regulation. In 1926, before it was required by law, independent auditors audited 82 percent of the companies on the New York Stock Exchange. Additionally, many private companies and municipalities not subject to government regulations, such as the Securities Act of 1933 and Securities Exchange Act of 1934, also purchase various forms of auditing and assurance services.

The agency relationship between an owner and manager produces a natural conflict of interest because of differences in the two parties' goals and because of the information asymmetry that exists between them. That is, the manager may well have different goals than the owner, and generally has more information about the true financial position and results of operations of the entity than the absentee owner does. If both parties seek to maximize their own self-interest, it is likely that the manager will not act in the best interest of the owner and may manipulate the information provided to the owner accordingly.

b) Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements.

c) Auditing is a type of assurance service.

c) To plan the audit and determine the scope of audit procedures to be performed.

Evidence that assists the auditor in evaluating financial statement assertions consists of the underlying accounting data and any additional information available to the auditor, whether originating from the client or externally.

Management makes assertions about components of the financial statements. For example, an entity's financial statements may contain a line item that accounts receivable amount to $1,750,000. In this instance, management is asserting, among other things, that the receivables exist, the entity owns the receivables, and the receivables are properly valued. Audit evidence helps the auditor determine whether management's assertions are being met. If the auditor is comfortable that he or she can provide reasonable assurance that all assertions are met for all accounts, he or she can issue a clean audit report. In short, the assertions are a conceptual tool to help the auditor ensure that she or he has covered all the bases.

In searching for an evaluating evidence, the auditor should be concerned with the relevance and reliability of evidence. if the auditor mistakenly relies on evidence that does not relate to the assertion being tested, an incorrect conclusion may be reached about the management assertions. Reliability refers to the ability of evidence to signal the true state of the assertion.