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Exam #1

by: Janice Beach
Janice Beach
Isenberg School of Management
GPA 3.93

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About this Document

This study guide included Chapter 1, 2, 3, 4 & 18. The materials on it are considered as main point and should be focus more.
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This 5 page Study Guide was uploaded by Janice Beach on Saturday October 24, 2015. The Study Guide belongs to SOM 541 at University of Massachusetts taught by in Fall 2015. Since its upload, it has received 52 views. For similar materials see Auditing in Business, management at University of Massachusetts.

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Date Created: 10/24/15
Chapter 1 Information asymmetry manager generally has more information about the true financial position and result of operations of the entity than does the owner Information asymmetry and con icts of interest lead to information risk for the principal Assurance Services are the broadest category Attest Services are a subset of assurance services Auditing Services are specialized types of attest services Auditing is a systematic process of 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 communicating the results to interested users Attest Services issue a report on subject matter or an assertion about subject matter that is the responsibility of another party Assurance Services independent professional services that improve the quality of information or its context for decision makers Materiality the amount by which a set of financial statements could be misstated without affecting the judgment of reasonable people Audit Risk The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated Audit Evidence must be sufficient and appropriate determined by materiality and audit risk Chapter 18 Explanatory Language Reference to the report on the audit of internal control for public companies Substantial doubt about an entity s ability to continue as a going concern Lack of consistency in the application of accounting principles Change in accounting principle Depreciation Method Change in reporting entity Consolidation on Cost Equity Basis Correction of a misstatement in previously issued financial statements Account for Inventory FIFO gt LIFO Adjustments to correct a previously issued material misstatement The need of additional emphasis Emphasis of matter paragraph a matter that has been appropriately presented or disclosed in the financial statements Other matter paragraph a matter that the auditor s judgment is relevant to user understanding of the audit the auditor s responsibilities or the audit report Conditions for Departure Scope Limitation an inability to collect sufficient competent evidence Qualified for Material but not Pervasive Disclaimer for Pervasively Material Departure from GAAP financial statements are prepared presented in a manner that con icts with GAAP Qualified for Material but not Pervasive Adverse for Pervasively Material Lack of Independence of the auditor Disclaimer Chapter 2 Types of Auditors External Independent Auditors Sole proprietor member of a CPA firm Internal Auditors employees of a entity Operational Audits Government Auditors Forensic Auditors Internal Control Audits Compliance Audits Determines the extent to rules policies laws covenants or government regulations Operational Audits Assess performance identify areas for improvement and develop recommendations Forensic Audits Detect or deter Fraudulent activities A model of Business ll Organizations Securities and Exchange Commission SEC oversees all publicly traded companies regulates reporting for public companies Public Companies Accounting Oversight Board PCAOB PUBLIC COMPANIES audit auditors oversees audits of public companies Financial Accounting Standards Board FASB Relegations International Accounting Standard Board IASB Accounting Standards Codification ASC Auditing Standards Board ASB NONPUBLIC COMPANIES Generally Accepted Auditing Standards GAAS 10 Standards I 3 themes General Standards Qualifications and Quality Adequate Technical Training amp Proficiency Due Professional Care Independence Standards of Fieldwork Adequate Planning amp Supervised Assistants Obtain Sufficient Understanding of Internal Control Obtain Sufficient Appropriate Evidential Matter Standards of Reporting GAAP Consistency Disclosures Opinion International Auditing and Assurance Standards Board IAASB gt100 countries International Companies American Institute of Certified Public Accountants AICPA CPA Exams Chapter 3 Phase 1 Client Acceptance and Continuance Phase 2 Preliminary Engagement Activities Determines the audit engagement team requirements Ensure the audit team and audit firm are in compliance with ethical and independence requirements Establishing an understanding with the entity Engagement Letter helps reducing risk of misunderstanding Phase 3 Planning the Audit Assess Business Risk Establish Materiality A level of overall materiality for evaluating financial Statements Performance Materiality Tolerable misstatement the amount of overall materiality used to plan and perform audit procedures Consider Multilocations or Business Units Assess the Need for Specialists Consider Violations of Laws and Regulations Identify Related Parties Consider Additional Value Added Services Document the Overall Audit Strategy Audit Plan and Prepare Audit Programs Types of Audit Tests Risk assessment procedures used to obtain an understanding of the entity and its environment including internal control Test of Controls test the operationating effectiveness of internal controls Inquiries of management Inspection of documents Observation Walkthroughs Reperformance Substantive Procedures detect material misstatement in a transaction class account balance Test of Details Substantive Test of Transactions test for error fraud Tests of Details of Account Balances and Disclosures Substantive Analytical Procedures Evaluating financial information through analysis of plausible relationship example trends amp ratios Dual Purpose Tests Test of Controls Substantive Test of Transactions through Documents Materiality Step 1 Determine overall Materiality Step 2 Determine Tolerable Misstatement Performance Materiality Clearly Trivial Threshold 1 of Performance Materiality Misstatement amount that do not care about Step 3 Evaluate audit findings Estimates should fall within the closest reasonable estimates Chapter 4 Audit Risk the risk that an auditor eXpresses an inappropriate audit opinion on materially misstated financial statements Financial statement level amp Individual account balance Class of transactions level Audit Risk Model Client Risk Risk of Material Misstatement RMM Audit Risk IR X CR X DR Inherent Risk IR Risk of misstatement due to error or fraud Control Risk CR Risk of misstatement will not be prevented detected and corrected by internal control Detection Risk DR Risk that auditor will not detect misstatement Audit Effort Effectiveness nonsampling risk inappropriate methods sampling risk Inverse relationship of RMM and DR Assessing the Risk of Material Misstatement Error Unintentional Factual Misstatements misstatement with no doubt Judgmental Misstatements misstatement from the difference of auditor s estimates and manager s Projected Misstatements the projection of misstatements in an audit sample to the entire population Fraud Intentional Fraudulent Financial Reporting Misappropriation of Assets Professional Skepticism an attitude that includes a questioning mind and a critical assessment of audit eVidence


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