Auditing Chapter 6

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

Successor Auditors

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 an auditor

Misappropriation of Assets

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

Time Budget

estimate of the time required to perform each step in the audit

Significant Risks

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

Overall Audit Strategy

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

Fraudulent Financial Reporting

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

Assertions

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

Engagement Risk

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

Further Audit Procedures

substantive procedures for all relevant assertions and tests of controls when the auditors' risk assessment includes an expectation that controls are operating effectively, or when substantive procedures alone do not provide sufficient appropriate audit evidence

Opening Balances

account balances that exist at beginning of period

Engagement Letter

agreement between CPA firm and client to terms of audit; objectives and scope, auditor and management responsibilities, inherent limitations of audit, applicable financial reporting framework, expected form and content of reports to be issued

Performance Materiality

amount set by auditors at less than materiality for accounts (or individual financial statements) to reduce an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole

Dual-Purpose Procedure Test

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

Audit Committee

composed of outside directors (members of board of directors that are not officers or employees) charged with responsibility for appointing, compensating, and overseeing the auditors

Shopping for Accounting Principles

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

Audit Plan

description of the nature, timing, and extent of the audit procedures to be performed; often documented with audit program

Audit Program

detailed listing of specific audit procedures to be performed in the course of audit engagement; provide bases for assigning and scheduling audit work for determining what work remains to be done; tailored to risks and internal controls of each engagement

Relevant Assertion

financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated; based on inherent risk without regard to effect of controls

Inherent Risk

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

Control Risk

risk that a material misstatement that could occur in an account will not be prevented or detected on a timely basis by internal control

Transaction Cycle

sequence of procedures applied by the client in processing a particular type of recurring transaction; "cycle" reflects idea that the same sequence of procedures is applied to each similar transaction; consideration of internal control often is organized around the client's major transaction cycles

Substantive Procedures

tests of account balances and transactions designed to detect any material misstatements in the financial statements; nature, timing, and extent of substantive procedures are determined by the auditors assessment of risks and their consideration of the client's internal control

Audit Risk

at the overall engagement level, this is the risk that the auditors may unknowingly fail to appropriately modify their opinion on the financial statements that are materially misstated; at financial statement assertion level, risk that a particular assertion about an account balance is materially misstated

Risk Assessment Procedures

audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control; includes inquiries of management and others in entity, analytical procedures, and observation

Tests of Controls

tests directed toward the design or operation of a control to assess its effectiveness in preventing or detecting material misstatements of financial statement assertions

Analytical Procedures

tests involving comparisons of financial data for the current year to that of prior years, budgets, nonfinancial data, or industry averages; help auditors obtain understanding of client's business and identify problems

Business Risks

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

Interim Period

time interval from beginning of an audit work to the balance sheet date; many audit procedures can be performed to facilitate early issuance of audit report