Chapter 01
Chapter 01
1. advisory services Services offered to improve client's 10. Audit Risk Probability that auditor will render
operational effectiveness and efficiency. unqualified (clean) opinion on financial
statements that are, in fact, materially
2. advisory services SOX greatly restricts the types of non-
misstated.
restrictions audit services auditors may render to
audit clients. 11. audit rules Strict rules must be followed.
Unlawful to provide many accounting, Defined by SEC, FASB, AICPA and SOX.
financial, internal audit, management,
12. Control risk Likelihood the control structure is flawed
human resource or legal services
(CR) because controls are either absent or
unrelated to the audit.
inadequate to prevent or detect errors.
3. attest services 1- Written assertions and practitioner's
13. corrective Fix the identified problems.
requirements written report.
controls
2- Formal establishment of measurement
criteria. 14. COSO- Policies and procedures to ensure actions to
3- Limited to examination, review, and control deal with identified risk.
application of agreed-upon procedures. activities
34. Internal Management required by law to establish and maintain Accounting that of
adequate system provide an audit trail.
internal
Control controls. records Information needed for day to day
operations and essential in the financial
35. Internal 1933 and 1934- SEC Acts
audit process.
Control 1976- Copyright Law
history 45. PC-
1977- Foreign Corrupt Practices (FCPA) requires companies registereda- Separate
with the SEC transaction
to: authorization from
Segregation processing.
a- Keep records that fairly and reasonably reflect firm's transactions and financial
position. of duties b- Separate asset custody from
recordkeeping.
b- Maintain a system of internal control that provides reasonable assurance that
organization objectives are met. c- No collusion between individuals with
1992- Committee of Sponsoring Organizations (COSO) incompatible responsibilities.
2002- Sarbanes-Oxley Act of (SOX) requires management
46. PC- of public companies to control for small
Compensating
implement adequate internal control system over their financial
Supervision reporting process.
organizations that cannot achieve adequate
36. Internal 1- Possibility of error segregation of duties.
Controls 2- Circumvention
Limitation 3- Management override
4- Changing conditions.
47. PC - Independent checks to identify errors and 57. who can initiate a-management who suspect employee
Verification misrepresentations in the accounting system. fraud audit fraud
Procedures Management can assess b-the board of directors who suspect
1- the performance of individuals executive fraud.
2- the integrity of the transaction processing
system
3- data correctness.
48. PDC Model Preventive controls
Detective controls
Corrective controls
49. Physical 1- Transaction authorization
controls 2- Segregation of duties
3- Supervision
4- Accounting records
5- Access controls
6- Verification procedures
50. Physical All processed transactions are valid.
Control-
Transaction
authorization
51. Preventive Passive techniques designed to reduce
controls frequency of undesirable events occurring.
More cost effective than detecting and
correcting problems after they occur.
52. Role of audit 1- Subcommittee of the board of directors
committee Usually three members who are outsiders.
2- SOX requires at least one member must be
a "financial expert".
3- Serves as independent "check and
balance" for the internal audit function.
4- SOX mandates that external auditors
report to the audit committee:
Committee hires and fires auditors and
resolve disputes.
53. SOX Section Managers must certify organization's internal
302 controls quarterly and annually.
External auditors must perform certain
procedures quarterly to identify any material
control modifications that may impact
financial reporting.
54. SOX Section Management of public companies to assess
404 the effectiveness of their internal controls in
an annual report.
55. Substantive Third phase focuses on financial data and a
testing phase detailed investigation of specific account
balances and transactions through
substantive tests.
Files may be extracted using Computer-
Assisted-Audit Tools and Techniques
(CAATTs) software.
56. tests of Determine if adequate controls are in place
controls and functioning.
phase