Audit Basics
Who are financial statement users? Give 2 examples
A financial statement user is anyone who benefits from or "uses" the financial statements of an entity. There are many possible users of financial statements, all having different reasons for wanting access to this information.
Users of financial statements include:
-Financial Analysts
-Lenders / Creditor (e.g. banks)
-Investor / Donors
-Owners / Shareholders
-Current Employees
-Potential Employees
-Regulatory Agencies (e.g. SEC)
What does FASB stand for?
Financial Accounting Standards Board
What is the first stage of the Audit workflow?
Planning
Define Materiality
Materiality is the threshold above which missing or incorrect information in financial statements is considered to have an impact on the decision making of users.
What is a significant account?
“A significant account is an account where there is a reasonable possibility that the account could contain a misstatement that, individually or when aggregated with others, has a material effect on the financial statements, considering the risks of both overstatement and understatement. The determination of whether an account is significant is based on inherent risk, without regard to the effect of related controls.”
Define fairly
Fairly can also be referenced as "reasonable assurance" or "free of material misstatement"
Who determines GAAP for state and local governments?
GASB - Governmental Accounting Standards Board
What are 2 types of risks?
1. Audit Risk (includes ROMM and Detection Risk)
2. Fraud Risk
What are the levels of materiality?
1. Materiality
2. Performance Materiality (PM)
3. Audit Misstatement Posting Threshold (AMPT)
What are the financial statement assertions?
Completeness
Existence
Accuracy
Valuation
Rights and Obligations
Presentation and Disclosure
What are the 5 main financial statements?
1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows
4. Statement of Changes in Stockholders' Equity
5. Notes
Who audits KPMG?
What are entity level controls?
Internal controls that operate at the entity level rather than at the specific assertion level and therefore generally include all components of internal control except control activities
Which level of materiality influences the nature, timing and extent of audit procedures?
Performance Materiality (PM)
What is a significant risk?
A risk is an identified an and assessed risk of material misstatement that, in our professional judgment that requires special audit consideration due to its nature or the likelihood and potential magnitude of misstatements related to it.
Significant risks often relate to:
–Significant non-routine transactions – transactions that are unusual and occur infrequently.
–Significant judgmental matters – such as the development of accounting estimates where assumptions about future events are required.
What are the types of Audit Opinions? Explain each type.
1. Unqualified - Everything ok
2. Qualified - Everything ok EXCEPT FOR
3. Adverse - Everything not ok
4. Disclaimer - No opinion
What are the 3 categories of GAAS?
1. General Standards
2. Standards of Fieldwork
3. Standards of Reporting
What are the 5 components of the COSO Framework?
1. Control Environment
2. Risk Assessment Process
3. Information System & Communication
4. Monitoring of Controls
5. Control Activities
Name the 4 types of inputs in determining materiality
1. Professional Judgment
2. Qualitative Factors
3. Quantitative Factors
4. Quantitative Thresholds
What are 2 considerations when determining significant risks?
-Risk of fraud [ISA 315.28(a)]
-Recent significant economic, accounting or other developments and, therefore, requires specific attention [ISA 315.28(b)]
-The complexity of transactions [ISA 315.28(c)]
-Involvement of significant transactions with related parties [ISA 315.28(d)]
-The degree of subjectivity in the measurement of financial information related to the risk [ISA 315.28(e)]
-Significant transactions that are outside the normal course of business for the entity, or that otherwise appear to be unusual. [ISA 315.28(f)]
-Quantitative and qualitative risk factors used to identify significant accounts (i.e., size of the account, susceptibility to misstatements, etc.).