Chapter six- AUDITING

predecessor auditors

a CPA firm that formerly served as auditor but has resigned from the engagement or has been notified that its services have been terminated

audit committe

a committee composed of outside directors charged responsibility for appointing, compensating, and overseeing the auditors

relevant assertion

a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated

engagement letter

accepted by the authorized client official, it presents an executor contract between the auditor and the client

dual purpose procedures (tests)

an audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year.

test of controls

are performed to determine whether key controls are properly deigned and operating effectively

substantive procedures

are performed to restrict detection risk, the risk that auditors will not detect a material misstatement

further audit procedures

based on the materiality of the account balances, transactions, and disclosures being audited and the assessed risk of material misstatement

shopping for accounting principles

conduct by some enterprise that discharge one independent auditing firm after speaking out another firm that will sanction a disputed accounting principle or financial statement presentation

significant risk

identified and assessed risks of material misstatement that in the auditor's judgment, require special audit consideration

analytical procedures

involve comparisons of financial statement balanced and ratios for the period under audit with auditor expectations developed from sources such as the client's prior years' financial statements, published industry statistics, and budgets

control risk

involves analyzing the design and implementation of internal control to decide whether the internal control system appears adequate to prevent or detect and correct material misstatement

audit program

is a detailed list of the audit procedures to be performed in the course of the audit

time budget

is constructed by estimating the time required for each step in the audit program for each of the various levels of auditors and totaling those estimated amounts

audit plan

is more detailed than the audit strategy and includes the nature, timing, and extent of audit procedures to be performed by the audit team members in order to obtain sufficient audit evidence

fraudulent financial reporting (management fraud)

material misstatement of financial statements by management with the intent to mislead financial statement users

assertion

representations of management that are communicated, explicitly or implicitly, by the financial statements

business risk

risks that threaten management's ability to achieve the organization's objectives

successor auditors

the auditors who have accepted an engagement or who have been invited to make a proposal for an engagement to replace the CPA firm that formerly served as auditor

interim period

the period before the balance sheet date

audit risk

the possibility that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated

engagement risk

the risk of loss or injury to the auditors' reputation by association with a client that goes bankrupt or one whose management lacks integrity

inherent risk

the risk of material misstatement of an assertion about an account without considering internal control

transaction cycle

the sequence of procedures applied by the client in processing a particular type of recurring transaction

misappropriation of assets (defalcations)

theft of client assets by an employee or officer of the organization

overall audit strategy

this strategy involves determining overall characteristics of the engagement that define its scope, determining the engagement's reporting objectives to plan the timing of procedures, and considering important factors that will determine the focus of the audit team's efforts

opening balances

those account balances that exists at the beginning of the period

risk assessment procedures

used to gather this information and include inquiries of management, analytical procedures, observation and inspection, and other procedures

performance materiality

when materiality is allocated to a particular account