Chapter Six

Audit Plan

A description of the nature, timing, and extent of the audit procedures to be performed. It is often documented with an audit program.

Time Budget

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

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

Fraudulent financial reporting (management fraud)

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

Assertions

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

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 Committee

A committee of outside directors (members of the board of directors who are neither employees or officers) charged with responsibility for appointing, compensating, and overseeing auditors.

Audit Program

A detailed listing of the specific audit procedures to be performed in the course of an audit engagement. This provides a basis for assigning and scheduling audit work and for determining what work remains to be done. These are specially tailored to the risks and internal controls of each engagement.

Relevant Assertion

A financial statement assertion that has a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated. The determination of whether an assertion is a relevant assertion is a relevant assertion is based on inherent risk without regard to the effect of controls

Significant Risks

Identified and assessed risks of material misstatement that in the auditors judgement require special audit consideration

Tests of controls

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

Inherent Risk

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

Interim period

the time interval from the beginning of audit work to the balance sheet date. Many audit procedures can be performed during this period to facilitate the early issuance of the audit report

Engagement Letter

An agreement between the CPA firm and the client as to the terms of the audit engagement. The terms of the engagement should include: 1) the objectives and scope of the audit 2) auditor and management responsibilities 3) inherent limitations of the audit 4) the applicable financial reporting framework and 5) the expected form and content of reports to be issued by the auditors

Dual Purpose Procedure (test)

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. For example, a test of controls over equipment acquisitions may address authorization and whether the transaction tested has been properly recorded in the year's acquisitions (providing substantive evidence on the dollar amounts). As another example, a substantive procedure may reveal a misstatement and be extended to determine the nature of the control that did not operate effectively, thereby providing evidence on operating effectiveness

Internet

An international network of independently owned computers that operates as a giant computing network.

Audit Risk

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

Transaction Cycle

The sequence of procedures applied by the client in processing a particular type of recurring transaction. The term cycle reflects the idea that the same sequence of procedures is applied to each similar transaction. The auditors consideration of internal control often is organized around the clients major transaction cycles

Missappropriation of assets (defalcations)

Theft of client assets by an employee or officer of the organizations

Opening Balances

Those account balances that exist at the beginning of the period. Opening balances are based upon the closing balances of the prior period and reflect the effects of transactions and events of prior periods and accounting policies applied in the prior period. Opening balances also include matters requiring disclosure that existed at the beginning of the period such as contingencies and commitments

Business Risks

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

Performance Materiality

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

Further audit procedures

Substantive procedures for all relevant assertions and tests of controls when the auditors risk assessment includes and expectation that controls are operating effectively, or when substantive procedures alone do not provide sufficient appropriate audit evidence. The auditors perform risk assessment procedures to obtain an understanding of the client and its environment, including internal control. They then conduct a risk assessment and determine the appropriate further audit procedures.

Substantive Procedures

Tests of account balances and transactions designed to detect any material misstatements in the financial statements. The nature, timing, and extent of substantive procedures are determined by the auditors assessment of risks and their consideration of the clients internal control.

Analytical Procedures

Tests that involve comparisons of financial data for the current year to that of the prior years budgets, non-financial data, or industry averages. From a planning standpoint, analytical procedures help the auditors obtain an understanding of the clients business, identify financial statement amounts that appear to be affected by errors or fraud, or identify other potential problems

Risk Assessment Procedures

The audit procedures performed to obtain an understanding of the entity and its environment, including the internal control. They are designed to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. These procedures include 1) inquiries of management and others within the entity 2) analytical procedures, 3) observation and other procedures, including inquiries of others outside the entity.

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

Control Risk

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

Overall Audit Strategy

This strategy involves determining overall characteristics of the engagement that define its scope, determining the engagements reporting objectives to plan the times of procedures, and considering important factors that will determine the focus of the audit teams efforts. When this strategy has been established, the auditors start the development of a more detailed audit plan to address the various matters identified by this strategy