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20 Cards in this Set
- Front
- Back
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What is the definition of auditing?
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Gather evidence about the financial statements to determine whether they can conform to GAAP.
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What are the General Standards of GAAS?
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1. Auditor must have adequate training and proficiency to perform the audit.
2. Auditor must maintain independence in mental attitude related to the audit. 3. Auditor must exercise due professional care during the performance of the audit. |
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What are the Fieldwork Standards of GAAS?
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1. Auditor must adequately plan + supervise any assistants.
2. Auditor must obtain sufficient understanding of its entity and environment including internal control. 3. Auditor must gather sufficient and appropriate evidence to form a reasonable opinion. |
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What are the Reporting standards of GAAS?
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1. Auditor must state whether financial statement are presented in accordance to GAAP.
2. Auditor must show circumstances where principles are not consistent on current period relative to preceding periods. 3. Auditor must have reasonably adequate informative disclosures or state otherwise. 4. Auditor must expressed an opinion regarding the financial statements as a whole. |
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What is a unqualified opinion?
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A "clean", immaterial opinion which states:
1) Audit is GAAS 2) Financial statements are GAAP In this context, unqualified means that, since F/S are free from material misstatements, the auditor does not find it necessary to qualify his or her opinion about the fairness of the F/S. |
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What is a qualified opinion?
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A material opinion which states:
1) Audit is GAAS except for 2) Financial statements are GAAP except for. - Basically says that F/S are fairly stated except for the misstatement identified by the auditor. |
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What is an adverse opinion?
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An adverse opinion (super material) states that:
1) Financial statements are not GAAP. - If the misstatement is considered so material, auditor uses this opinion to indicate that the F/S are not fairly stated and should not be relied upon. |
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What is a disclaimer opinion?
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No opinion which states:
Audit is not GAAS. Ex: Lack of independence. |
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What are the 3 things that can affect company's financial statements?
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1. Errors (unintentional mistakes)
2. Fraud (intentional distortions) a. FFR (Fraudulent financial reporting) - purpose is to misstate the financial statement. b. MA (Misappropriation of assets) - theft, embezzlement, ex: taking company jet on personal trips. 3. Illegal Acts - violations of law. ex: - income tax evasion - direct effect illegal act - illegal dumping - contingent loss (indirect effect) illegal acts - affects expenses. |
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What is the auditor's responsibility for detecting errors, fraud, and illegal acts?
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For errors, fraud, and the direct effect of illegal acts:
Auditors are responsible for designing the audit to provide reasonable assurance of detecting material error. - As for indirect effects of illegal acts, auditors carry no responsibility. |
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What is the auditor's responsibility for reporting errors, fraud, and illegal acts?
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1. Errors - inform management to correct financial statements.
- Inform audit committee (sub-committee of Board of Directors) 2. Fraud - inform audit committee, similar to with errors except need to make sure that SEC is notified. 3. Illegal Acts: - Direct Effect - Like Fraud - Indirect effect - Investigate and possibly enlist an expert. |
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What are reasons for the demand for audits on existing investors/creditors?
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1) Performance evaluation
2) Risk sharing with the auditor |
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Reasons for demand for audits on the company itself includes what?
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1) Fraud deterrence (prevention)
2) Employer might be more careful 3) Thwart price-protection |
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Reasons for demand for audits on potential investors/creditors include what?
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1) Reduce information risk in making initial decision to invest.
- Investors can price-protect themselves by demanding a higher rate of return if not audited. |
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What are the four stages of the 4-stage model for auditing?
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1) Planning
2) Testing Control 3) Gathering Evidence 4) Issuing opinion |
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Who has primary responsibility for the fairness of the representations made in financial statements?
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Client's management.
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Which of these organization is designed to issue attestation standards?
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American Institute of Certified Public Accountants. (AICPA)
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What best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements?
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Management has the primary responsibility to ensure the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.
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An independent audit aids in the communication of economic data because the audit does what?
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Lends credibility to the financial statements.
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What best describes why an independent auditor is often retained to report on financial statements?
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Different interests may exists 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.
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