Auditing Chapter 6
Three fundamental conditions outlined by the fraud risk triangle for the commission of fraud
1. some type of incentive or pressure 2. an opportunity to commit the fraud 3. an attitude that allows the individual to rationalize the act
Many firms have developed a(n) ______ _______ that uses a combination of financial and nonfinancial performance measures to assess the organization
balanced scorecard
The auditor's consideration of _______ risk involved analyzing the design and implementation of internal control to decide if the system appears adequate to detect and correct material misstatements
control
Analytical procedures provide _____ evidence as to the reasonableness of various revenues and expenses
direct
If the auditors' objective is to test _____, they follow the stream of evidence back to its source
existence
The time interval from the beginning of audit work to the balance sheet date is called the ____ period
interim
The concept ______ recognizes that some matters are important to the fair presentation of financial statements while others are not
materiality
When materiality is allocated to a particular account, it is referred to _____ materiality
performance
Inherent risk
risk of material misstatement of an assertion about an account without considering internal controls
The three fundamental conditions of the fraud _____ ______ are (1) incentive or pressure (2) opportunity or (3) attitude to rationalize the act
risk triangle
The ______ portion of the audit program is aimed at confirming financial statement amounts, and is usually organized around the balance sheet accounts
substantive procedures
substantive portion of the audit
tests of financial statement account balances
A basis for estimating fees, communicating areas of high risk and measuring the efficiency of staff is provided by the ____ _____
time budget
The application of performance materiality to a particular audit procedures is _____ ______
tolerable misstatement
The planning materiality amount that will require the auditors to gather the most audit evidence is:
10,000
Fraudulent Financial Reporting
Material misstatement of financial statements by management with the intent to mislead financial statement users
Misappropriation of Assets
Theft of client assets by an employee or officer of the organization
The risk of material misstatement of an assertion without considering internal control is called ____ risk
inherent
The audit ______ is a description of the nature, timing, and extent of the audit procedures to be performed
plan
Systems portion of the audit
procedures to assess the effectiveness of the internal controls
If auditors identify fraud risks, the auditors may modify their overall approach to the audit by:
-professional skepticism and audit evidence -assigning personnel and supervision -accounting principles -predictability of auditing procedures
overall audit strategy
defines audit scope, reporting objectives, timing, etc.
The sequence of procedures applied by the company (client) in processing a particular type of recurring event is called a(n) _____ cycle
transaction
Auditors indirectly verify revenue, cost of goods sold and expenses by substantiating changes in the ______ and _______ accounts
asset;liability
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 is known as a(n) ____ procedure
dual-purpose
Direct evidence as to the reasonableness of various revenues and expenses is provided by the auditor's _____ procedures
analytical
Significant risks often relate to transaction that are
-nonroutine -estimation
Following specific transactions from their source documents forward to their inclusion in the financial statement summary figures is a test of the _____ assertion
completeness
Auditors should document several elements of risk assessment including:
-the discussion of the audit team concerning the risk of material misstatements due to error or fraud -The key elements of the understanding of the entity and its environment -the assessment of the risk of material misstatement at both the financial statement level and the relevant assertion level -the risks identified
Many inherent risks arise because of _____ risks faced by management, such as the possibility of material misstatement due to fraud
business
The auditor's selection of ______ audit procedures is based on the materiality of the account balances, transactions, and disclosures being audited and the assessed risk of material misstatement
further