General Standards

Qualifications of the auditor and quality of his work

Competence, Independence, Due Professional Care
Competence
adequate technical training,
reliable and relevant
Field Work Standards
basis to judge the fairness of financial statements
Planning and supervision, internal control structure, evidence
Evidence
must be sufficient and competent, and obtained through inspection, observations,
inquiries, confirmations
Reporting Standards
provide guidance and structure for communicating the result of audit
financial statements, GAAP, Informative Disclosures, Expression of an opinion
Audit Process
Planning and Supervision, Review of Internal Control Structure, Performance of
Substantive Tests, Audit report
Planning and Supervision
Understanding of; (nature of business and industry, accounting procedures, internal
control system) Methods used to process info, assess audit risk, make estimates of
materiality levels, perform analytic procedures to focus, consider special issues
Internal Control System
control environment, risk assessment, control activities, information and communication,
and monitoring
audit risk
the risk that the auditor may unknowingly fail to appropriately modify his or her opinion
on financial statements that are materially mistated
materiality
the magnitude of an omission or misstatement of accounting information that, in light of
surrounding circumstances, makes it probable that the judgment of a reasonable person
relying on the information would have been changed or influenced
fraud
Intentional misstatement of financial statements by management (management fraud),
or theft of assets by employees (employee fraud). Fraud also is referred to as
irregularities.
assertion
A representation or declaration made by the responsible party, typically management of
the entity.
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Information Risk
The risk that the information used by investors, creditors, and others to assess business
risk is not accurate.
Adverse Opinion
An opinion issued by the auditors that the financial statements they have audited do not
present fairly the financial position, results of operation, or cash flows in conformity with
accounting principles generally accepted in the United States of America.
Consistency
The concept of using the same accounting principles from year to year so that the
successive financial statements issued by a business entity will be comparable.
Independence
A most important auditing standard, which prohibits CPAs from expressing an opinion
on financial statements of an enterprise unless they are independent with respect to
such enterprise; independence is impaired by a direct financial interest, service as an
officer or trustee, certain loans to or from the enterprise, and various other relationships.
Internal Control
A process, effected by the entity's board of directors, management, and other
personnel, designed to provide reasonable assurance regarding the achievement of
objectives in the following categories: (1) reliability of financial reporting; (2)
effectiveness and efficiency of operations; and (3) compliance with applicable laws and
regulations.
Qualified Opinion
The appropriate form of audit report when there is a limitation in the scope of the audit
or when the financial statements depart from GAAP significantly enough to require
mention in the auditors' report, but not so significantly as to necessitate disclaiming an
opinion or expressing an adverse opinion.
Unqualified Opinion
The form of audit report issued when the examination was adequate in scope and the
auditors believe that the financial statements present fairly the financial position,
operating results, and cash flows in conformity with generally accepted accounting
principles.
Direct Financial Interest
A personal investment under the direct control of the investor. The Code of Professional
Conduct prohibits CPAs from having any direct financial interests in their attest clients.
Investments made by a CPA's spouse or dependents also are regarded as direct
financial interests of the CPA.
Audit Committee
A committee of a corporation's board of directors that engages, compensates, and
oversees the work of the independent auditors, monitors activities of the internal
auditing staff, and intervenes in any disputes between management and the
independent auditors. Members of the audit committee must be independent directors,
that is, members of the board of directors who do not also serve as corporate officers,
or have other relationships that might impair independence.
Indirect Financial Interest
An investment in which the specific investment decisions are not under the direct control
of the investor. An example is an investment in a professionally managed mutual fund.
The Code of Professional Conduct allows CPAs to have indirect financial interests in
attest clients, as long as the investment is not material in relation to the CPA's net
worth.
Audit File
The unit of storage for a specific audit engagement. The audit documentation for each
year's audit of a company is included in its audit file.
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.
Cross Sectional Analysis
A technique that involves comparing the client's ratios for the current year with those of
similar firms in the same industry.
Detection Risk
The risk that the auditors' procedures will lead them to conclude that a financial
statement assertion is not materially misstated when in fact such misstatement does
exist.
Horizontal Analysis
A technique that involves comparing financial statement amounts and ratios for a
particular company from year to year.
Inherent Risk
The risk of material misstatement of a financial statement assertion, assuming there
were no related controls.
Permanent File
A file of working papers containing relatively unchanging data, such as copies of articles
of incorporation and bylaws; copies of minutes of directors', stockholders', and
committee meetings; and analyses of such ledger accounts as land and retained
earnings.
Substantive Tests
Tests of account balances and transactions designed to detect any material
misstatements in the financial statements. Substantive tests directly affect detection risk
Vertical Analysis
A form of analysis that presents financial statement amounts for a period as a
percentage of some financial statement base. This analysis involves the preparation of
common-size financial statements.
Working Papers
Papers that document the evidence gathered by auditors to show the work they have
done, the methods and procedures they have followed, and the conclusions they have
developed in an audit of financial statements or other type of engagement
Analytical Procedures
Tests that involve comparisons of financial data for the current year to that of prior
years, budgets, nonfinancial data, or industry averages. From a planning standpoint,
analytical procedures help the auditors obtain an understanding of the client's business,
identify financial statement amounts that appear to be affected by errors or fraud, or
identify other potential problems.
Dual Purpose Procedures
An audit procedure that serves as a test of controls and as a substantive test. For
example, a test of controls over equipment acquisitions may address authorization
(providing evidence on control effectiveness) 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 test 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.
Engagement Risk
The risk of loss or injury to the auditors' reputation by association with a client that goes
bankrupt or one whose management lacks integrity.
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 client's major transaction cycles.
Compensating Control
A control that reduces the risk that an existing or potential control weakness will result in
a failure to meet a control objective (e.g., avoiding misstatements). Compensating
controls are ordinarily controls performed to detect, rather than prevent, the original
misstatement from occurring.
Complimentary Controls
Controls that function together to achieve the same control objective.
Incompatible Duties
Assigned duties that place an individual in a position to both perpetrate and conceal
errors or fraud in the normal course of job performance.