Auditing Ch 3

What is a "material" amount; give an example of how that may be different in nature

material is an amount that is sufficiently important to influence decisions made by reasonable users of the FS. Materiality is influenced by the size of the organization that is being audited.

Describe PCAOB inspection

1. an inspection and review of selected audit and review engagement 2.an evaluation of the sufficiency of the quality control system of the firm and the manner of the documentation and communication of the system 3. test of the audit, supervisory, and quality control procedures considered necessary

United States V. Simon (Continental vending)

A case in which auditors were held liable for criminal negligence

Rusch Factors, Inc. V. Levin

A case in which the court used the guidance of the Second Restatement of the law of torts to decide the auditors' liability to third parties under common law

Hochfelder V Ernst

A case that established that auditors should not be held liable under the securities Exchange act of 1934 unless there was intent to deceive

Rosenblum V. Adler

A case that established the precedent that auditors should be held liable under common law for ordinary negligence to all foreseeable third parties.

Credit Alliance V. Arthur Andersen & Co.

A common law case in which the court held that auditors should be held liable for ordinary negligence only to third parties they know will use the financial statements for a particular purpose

Ultramares V. Touche & Co.

A landmark case establishing that auditors should be held liable to third parties not in privity of contract for gross negligence, but not for ordinary negligence

Escott V BarChris Contruction Corp.

A landmark case in which the auditors were held liable under section 11 of the securities act of 1933

auditors have assessed inherent risk and control risk for valuation of inventories at 100 percent and 50 percent. calculate detection risk with restrict audit risk for the assertion to be 3%

AR = IR X CR X DR DR= AR / (IR X CR) DR= 3% / (100% X 50%) = 6%

identify two types of peer review

System review (involves peer reviewers' study and appraisal of a CPA firm's quality control) and engagement review (peer reviewer select a sample of a CPA firm's actual accounting work)

Define and differentiate between a test of controls and a substantive procedure

Test of control measures the effectiveness of a particular control in preventing or detecting a misstatement; it does not substantiate the dollar amount of an account balance. Substantive procedures are performed to restrict detection risk.

describe what is meant by the term "covered member." which part (or parts) of AICPA code of professional conduct standard 101 on independence relies on the concept of a covered member

a Covered member refers to an individual, firm, or entity that is capable of influencing an attest engagement. Section A of interpretation 101-1 applies to covered members

Audit risk

the risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated. Audit risk increases with increases to detection risk

Detection risk

the risk that the auditors' procedure will lead them to conclude that a financial statement assertion is not materially misstated when in fact such misstatement does exist