Auditing Concepts and Terminology, Exams of Nursing

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Audit and Assurance Test 1

Analytical Procedures - correct answer ✔✔the reasonableness tests used to gain an understanding of financial statement accounts and relationships Audit Documentation - correct answer ✔✔written basis for the auditor's conclusions Audit Plan - correct answer ✔✔the audit procedures that auditors need to perform to gather sufficient and appropriate evidence on which to base their opinion of financial statements Audit Trail - correct answer ✔✔the chain of evidence provided through coding, cross-references and documentation connecting account balances and other summary results with original transaction source documents Continuing Audit Files (or permanent files) - correct answer ✔✔the audit documentation containing information of continuing audit significance for current and past audits of the same client Engagement Letter - correct answer ✔✔a letter from the public accounting firm to the management of an engagement client setting forth the terms of the engagement Form 8-K - correct answer ✔✔the "special events report" filed with the SEC whenever certain significant corporate events occur such as changes in control, legal proceedings, and changes of auditor Independence in Appearance - correct answer ✔✔the extent to which others perceive auditors to be independent Independence in Fact - correct answer ✔✔auditor's mental attitude and impartiality with respect to clients Interim Audit Work - correct answer ✔✔the procedures performed weeks or months before the balance sheet date

Lead Schedule - correct answer ✔✔a summary of the accounts in or components of account group Materiality - correct answer ✔✔an amount or event that is likely to influence financial statements user's decisions Planning Memorandum - correct answer ✔✔the document summarizing the preliminary analytical procedures and the materiality assessment with specific directions about the effect on the audit Predecessor Auditor - correct answer ✔✔the public accounting firm that has been terminated or has voluntarily withdrawn from an audit engagement Quality Assurance Partner - correct answer ✔✔the second partner on the audit team as required for audits filed with the SEC and who reviews the audit teams work in critical audit areas Specialists - correct answer ✔✔the persons skilled in fields other than accounting and auditing- engineers, actuaries, geologists, attorneys, appraisers- who are not members of the public accounting firm Substantive Audit Plan - correct answer ✔✔the specification of substantive procedures for gathering direct evidence on management's assertions Termination Letter - correct answer ✔✔the documentation provided to former clients dealing with the subject of future service in particular 1) asses to audit documentation by new auditors 2) reissuance of the auditors reports when required for SEC reporting or comparative financial reporting, and 3) fee arrangements for such future services. It can also contain a report of the auditors understanding of the circumstances of termination Tracing - correct answer ✔✔an audit procedure in which the auditor selects a basic source document and follows its processing path forward to find its final recording in a summary journal or ledger Vouching - correct answer ✔✔an audit procedure in which an auditor selects an item of financial information usually from a journal or ledger and follows its path back through the processing steps to its origin

Year-end Audit Work - correct answer ✔✔the procedures performed shortly before and after the balance sheet date Accounting Estimates - correct answer ✔✔the approcimations of financial statement numbers often included in financial statments Audit Committee - correct answer ✔✔a subset of a company's board of directors composed of outside members (those not involved in the day to day operations of the company) who can provide a buffer between the audit firm and management Audit Risk - correct answer ✔✔the tisk that the auditor express an inappropriate audit opinion when the financial statements are materially misstated (e.g. giving an unqualified opinion on financial statemtns that are misleading because of the material misstatments the auditors failed to discover Audit Strategy - correct answer ✔✔the scope, timing and direction for auditing each relevant assertion based on the results of the audit risk model Business Risks - correct answer ✔✔the risks that result from significant conditions, events, circumstances, actions, or inactions that could adversely affect a company's ability to achieve its objectives and execute its strategies as well as from setting inappropriate objectives and strategies or from changes or complexities in the company's operations or management Control Risk - correct answer ✔✔the probability that the client's internal control activities will fail to prevent or detect material misstatements provided that they enter or would have entered the accounting system in the first place Defalcation - correct answer ✔✔another name for employee fraud or embezzlement Detection Risk - correct answer ✔✔The probability that audit procedures will fail to produce evidence of material misstatements, provided any have entered or would have entered the accounting system in the first place

Direct-Effect noncompliance - correct answer ✔✔the violations of laws or government refulations by the entity or its management or employees that produce direct and material effects on dollar amounts in financial statements Embezzlement - correct answer ✔✔a type of fraud involving employees or nonemployees wrongfully taking money or property entrusted to their care, custody, and control, often accompanied by false accounting entries and other forms of lying and covering up Employee Fraud - correct answer ✔✔the use of fraudulent means to take money or other property from an employer. It consists of three phases 1) the fraudulent act, 2) the conversion of the money or property to the fraudsters use, and 3) the cover up Enterprise Risk Management - correct answer ✔✔a process effected by an entity's board of directors, management and other personnel applied in strategy setting and across the enterprise that is designed to identify potential events that may affect the entity and to manage risks to be within its risk appetite to provide reasonable assurance regarding the achievement of entity objectives Errors - correct answer ✔✔the unintentional misstatements or omissions of amounts or disclosures in financial statements Extended Procedures - correct answer ✔✔the audit procedures used in response to heightened fraud awareness as the result of the identification of significant risks Fraud - correct answer ✔✔The act of knowingly making material misrepresentations of fact with the intent of inducing someone to believe the falsehood and act on it and thus suffer a loss or damage Fraudulent Financial Reporting - correct answer ✔✔The intentional or reckless conduct whether by act or omission that results in materially misstated financial statements Horizontal Analysis - correct answer ✔✔the comparative analysis of year to year changes in balance sheet and income statement accounts Indirect-effect Noncompliance - correct answer ✔✔the violation of laws and regulations that does not directly affect specific financial statement accounts or disclosures (e.g. violations relating to insider

securities trading, occupational health and safety, food and drug administration regulations, environmental protection, and equal employment opportunity) Information Risk - correct answer ✔✔The probability that the information circulated by an entity will be false or misleading Inherent Risk - correct answer ✔✔The probability that in absence of internal controls, material errors or frauds could enter the accounting system used to develop financial statements Larceny - correct answer ✔✔The simple theft of an employer's property that is not entrusted to an employee's care, custody or control Management Fraud - correct answer ✔✔the deliberate fraud committed by management that injures investors and creditors though materially misleading information Relevant Assertion - correct answer ✔✔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 Related Parties - correct answer ✔✔Those individuals or organizations that are closely tied to the auditee, possibly through family ties or investment relationships Risk of Material Misstatement - correct answer ✔✔the combined inherent and control risk; in other words, the likelihood that material misstatements may have entered the accounting system and not been detected or corrected by the client's internal control Significant Account or Disclosure - correct answer ✔✔an account or disclosure that has a reasonable possibility of containing a material misstatement individually or when aggregated with others regardless of the effect of controls Assurance - correct answer ✔✔the lending of credibility to information

Assurance Services - correct answer ✔✔the provision of independent professional information, opinion, or report concerning the quality of information or its context for decisions makers Attest Engagement - correct answer ✔✔The provision of an opinion on subject matter or an assertion about the subject matter that is the responsibility of another party Attestation - correct answer ✔✔the lending of credibility to assertions made by a third party Auditing - correct answer ✔✔The systematic process of objectivity obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to interested users Business Risk - correct answer ✔✔The probability that an entity will fail to meet its objectives and, ultimately, fail. Cutoff (or cutoff date) - correct answer ✔✔A date, normally the client's year end balance sheet date, around which transactions should be recorded in the proper period (year) financial reporting - correct answer ✔✔Broad-based process of providing statements of financial position (balance sheets), results of operations (income statements, statements of shareholders' equity, and statements of comprehensive income), changes in cash flows (statements of cash flows), and accompanying disclosure notes (footnotes) to outside decisions makers who have no internal source of information Information Risk - correct answer ✔✔the probability that the information circulated by a company will be false or misleading Internal Auditing - correct answer ✔✔An assurance and consulting activity that provides management information regarding efficient and effective operations; compliance with laws, regulations, policies, and procedures; and other organizational performance issues designed to reduce risk and ass value to the organization

operational auditing - correct answer ✔✔the study of business operations for the purpose of making recommendations about the efficient use of resources, effective achievement of business objectives, and compliance with company policies. Professional Skepticism - correct answer ✔✔an auditor's tendency not to believe management's assertions without sufficient corroboration Substantial Equivalency - correct answer ✔✔The process through which CPAs licenses in one state can practice in another state Adverse Opinion - correct answer ✔✔a report stating that the financial statements are not presented in conformity with GAAP; the opposite of an unqualified opinion American Institute of Certified Public Accountants (AICPA) - correct answer ✔✔as related to professional auditing standards, the body charged with establishing auditing standards for the audits of nonpublic entities through statements on auditing standards (SASs) issued by the Auditing Standards Board appropriate (audit evidence) - correct answer ✔✔Characteristics related to the quality (relevance and reliability) of audit evidence Attestation Standards - correct answer ✔✔A general set of standards intended to guide attestation work in areas other than audits of financial statements Audit Procedures - correct answer ✔✔the specialized actions auditors take to obtain evidence in an engagement Audit Plan - correct answer ✔✔a list of the audit procedures auditors need to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements Auditing Standards - correct answer ✔✔The audit quality guidelines that apply to all audits Control Risk - correct answer ✔✔the probability that a material misstatement (error or fraud) will not be prevented or detected on a timely basis by the entity's internal controls

date of the financial statements - correct answer ✔✔the date of the end of the latest period covered by the financial statements departure from GAAP - correct answer ✔✔a situation in which entity's financial statements (or elements within those financial statements) are materially misstated and do not present the entity's financial condition, results of operations, and cash flows in conformity with GAAP. detection risk - correct answer ✔✔the risk that the audit team's substantive procedures will fail to detect a material misstatement disclaimer of opinion - correct answer ✔✔the explicit statement by auditors that they express no opinion and no assurance on the fair presentation of the financial statements in accordance with GAAP due care - correct answer ✔✔a level of performance that would be exercised by reasonable auditors in similar circumstances; auditors are expected to possess the skills and knowledge of others in their profession and are not expected to be infallible Engagement quality control review - correct answer ✔✔an internal evaluation of the significant judgements made by the audit team and the conclusions reached in formulating its report evidence - correct answer ✔✔the information used by auditors in arriving at the conclusion on which the audit opinion is based, which includes the underlying accounting date and all available corroborating information external evidence - correct answer ✔✔the documentary evidence obtained directly from independent external sources external-internal service - correct answer ✔✔documentary evidence that has originated outside the client's information processing system but that has been received and processed by the client financial reporting framework - correct answer ✔✔a set of criteria used to determine the measurement, recognition, presentation, and disclosure of material items in the financial statements

generally accepted auditing standards (GAAS) - correct answer ✔✔standards that identify necessary qualifications and characteristics of auditors and guide the conduct of the audit examination independence (in fact) - correct answer ✔✔an auditor's mental attitude and impartiality with respect to the client inherent risk - correct answer ✔✔the probability that a material misstatement will occur inspection - correct answer ✔✔an evaluation of an accounting firm's audit engagements and system of quality control conducted by the PCAOB and required for any firms providing auditing services to public entities internal control - correct answer ✔✔the policies and procedures implemented by an entity to prevent or detect material accounting errors or frauds and provide for their correction on a timely basis internal evidence - correct answer ✔✔documentary evidence that is produced, circulated, and maintained within the client's information systems materiality - correct answer ✔✔as it relates to financial reporting, the dollar amount that would influence the lending or investing decisions of financial statement users persuasiveness - correct answer ✔✔an overall measure of the ability of evidence to support the auditors' opinion. Persuasive audit evidence reflects evidence that is both sufficient and appropriate peer review - correct answer ✔✔a study of firm's quality quality control policies and procedures followed by a report on the quality of the firm's audit practice in accordance with its system of quality control. Peer reviews are conducted through the AICPA's Center for Public Company Audit Firms Peer Review Program and are generally performed for firms that do not audit public entities professional judgement - correct answer ✔✔the application of relevant training, knowledge, and experience in making informed decisions about appropriate courses of action during the audit engagement

professional skepticism - correct answer ✔✔a state of mind that is characterized by appropriate questioning and a critical assessment of audit evidence Public Company Accounting Oversight Board (PCAOB) - correct answer ✔✔as related to professional auditing standards, the body charged with establishing auditing standards for the audits of public entities through the issuance of Auditing Standards. Theses standards are subject to approval by the SEC. public entity - correct answer ✔✔an entity that offers registered securities, such as stock and bonds, for sale to the general public qualified opinion - correct answer ✔✔an auditor's report of issued when the financial statements contain departures from GAAP or a scope limitation was encountered in the audit examination reasonable assurance - correct answer ✔✔concept that a GAAS audit may not detect all material misstatements and auditors are not "insurers" or "guarantors" regarding the fairness of the entity's financial statements relevant - correct answer ✔✔the characteristic of audit evidence related to the nature of the evidence and the information it provides to the auditors reliable - correct answer ✔✔the characteristic of audit evidence related to the level of trust that can be placed with respect to evidence risk of material misstatement - correct answer ✔✔the combined probability that a material misstatements will occur and not be prevented or detected on a timely basis by the entity's internal controls substantive procedures - correct answer ✔✔procedures used by auditors to obtain assurance as to the fairness of the entity's financial statements sufficiency (audit evidence) - correct answer ✔✔the measure of the quantity of audit evidence (the number of transactions or components evaluated)

system of quality control - correct answer ✔✔the policies and procedures implemented by firms to provide a firm with reasonable assurance that the firm and its personnel 1) comply with professional standards and applicable regulatory and legal requirements and 2) issue reports that are appropriate in the circumstances unqualified opinion - correct answer ✔✔a "clean" opinion that makes no mention of accounting or auditing deficiencies. the conclusion of an unqualified opinion is that the financial statements present the financial condition, results of operations, and cash flows in accordance with GAAP verbal evidence - correct answer ✔✔responses to audit inquiries provided by the client's officers, directors, owners, and employees written presentations - correct answer ✔✔written assertions provided by management to auditors on matters such as the fairness of the entity's financial statements, availability of all financial records and related data, internal control over financial reporting, and other specific representations about the financial statements adverse opinion - correct answer ✔✔opinion issued when the auditors conclude that the financial statements do not present the financial condition, results of operations, and cash flows in conformity with GAAP associated (association) with financial statements - correct answer ✔✔cases when auditors consent to the use of their name in some form of communication containing the entity's financial statements or submit to their clients or others (such as third party users) financial statements they have prepared or assisted in preparing. Auditors should issue a one paragraph disclaimer when they are associated with (but did not audit) financial statements auditee - correct answer ✔✔the company or other entity whose financial statements are being audited circumstance-imposed scope limitation - correct answer ✔✔a restriction on auditors from gathering sufficient appropriate evidence because of a situation beyond control of both the auditors and client, such as late appointment of the auditor

client - correct answer ✔✔the person (entity, board of directors, agency, or some other person or group) who retains the auditors and pays the fee client-imposed scope limitation - correct answer ✔✔a restriction on auditors from gathering sufficient appropriate evidence because of the client's deliberate refusal to provide them access to documents or to otherwise limit the auditors' application of auditing procedures component auditor - correct answer ✔✔the auditor who audits divisions, subsidiaries, or components that are included in the group financial statements date of the auditors' report - correct answer ✔✔the date on which auditors have obtained sufficient appropriate evidence to support their opinion departure from GAAP - correct answer ✔✔situation in which an entity does not follow GAAP in preparing its financial statements. Auditors can issue qualified or adverse opinions for material departures from GAAP disclaimer of opinion - correct answer ✔✔issued when auditors do not express an opinion on the fairness of the entity's financial statements. disclaimers of opinion are issued for pervasive going- concern uncertainties, pervasive scope limitations, situations in which auditors' are associated with financial statements, and situations in which the auditors are not independent division of responsibility - correct answer ✔✔situation in which the component auditors are involved with the examination of a subsidiary, branch, component, or investment that is included in the financial statements audited by group auditors emphasis-of-matter paragraph - correct answer ✔✔a paragraph added to an auditor's report that provides information fundamental to users' understanding of the financial statements (such as consistency, going-concern uncertainties, or justified departures from GAAP) explanatory paragraph - correct answer ✔✔a paragraph added to an auditors' report that either provides information fundamental to users' understanding of the financial statements (emphasis-of- matter paragraph) or relevance to users' understanding of the audit, the auditor's responsibility, or auditors' report (other-matter paragraph)

going-concern uncertainty - correct answer ✔✔situation in which questions are raised about an entity's ability to continue operations and meet its obligations as they become due group auditors - correct answer ✔✔also known as principal auditors, these auditors perform the audit of a material portion of the assets, liabilities, revenues, and expenses of an entity's group financial statements group financial statements - correct answer ✔✔the financial statemetns of more than one component (division, subsidiary, or other segment) integrated report - correct answer ✔✔a single report issued by auditors expressing their opinion on the fairness of the financial statements and effectiveness of internal control over financial reporting introductory paragraph - correct answer ✔✔paragraph in the auditors' report that identifies the financial statements examined by the auditors and the responsibility of auditors and management with respect to the financial statements internal control paragraph - correct answer ✔✔paragraph in the auditors' report that refers tot he auditors' report on the effectiveness of the entity's internal control over financial reporting justified departure from GAAP - correct answer ✔✔situation in which an entity does not follow GAAP in preparing its financial statements because the use of GAAP would result in materially misleading financial statements. if auditors agree with the departure, and unqualified opinion is issued mitigating factors - correct answer ✔✔elements of financial flexibility (salability of assets, lines of credit, debt extensions, dividend elimination) available as survival strategies in circumstances of going-concern uncertainty that may reduce financial difficulty problems modified opinions - correct answer ✔✔any opinion other than an unqualified opinion on an entity's financial statements opinion paragraph - correct answer ✔✔a paragraph in the auditors' report that expresses the auditors' opinion on whether the financial statements are presented in conformity with GAAP

other-matter paragraph - correct answer ✔✔a paragraph added to the auditors' report that is relevant to users' understanding of the audit, the auditor's responsibility, or the auditors' report qualified opinion - correct answer ✔✔issued when auditors conclude that, with the exception of one or more issues, the financial statements present the financial condition, results of operations, and cash flows in conformity with GAAP. Qualified opinions can be issued for material departures from GAAP and material scope limitations reissued report - correct answer ✔✔a copy of a previously issued report that auditors provide or grant clients permission to use in another document after its original date; the report is not modified to consider events occurring subsequent to the date of the original report report on financial statements and related disclosures - correct answer ✔✔a report prepared by the auditors that expresses an opinion on whether the entity's financial statements and disclosures are prepared and presented in conformity with GAAP report on internal control over financial reporting (prepared by auditors) - correct answer ✔✔report that expresses an opinion on the effectiveness of the entity's internal control over financial reporting report on internal control over financial reporting (prepared by management) - correct answer ✔✔report that describes the process through which management assesses its internal control over financial reporting and that provides management's conclusion with respect to the effectiveness of its internal control over financial reporting scope limitation - correct answer ✔✔a situation in which the auditors' are unable to obtain sufficient appropriate evidence. if material, scope limitation results in the issuance of either a qualified opinion or disclaimer of opinion scope paragraph - correct answer ✔✔a paragraph in the auditors' report indicating that the engagement was performed in accordance with the the standards of the PCAOB and provides a general description of an audit unqualified opinion - correct answer ✔✔issued when the auditors conclude that the financial statements present the financial condition, results of operations, and cash flow in conformity with GAAP

updated report - correct answer ✔✔Auditors' report on prior-year financial statements that is based on both the prior year audit and information that has come to the auditors' attention in the most recent audit