Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
70 Cards in this Set
- Front
- Back
auditing |
the process of gathering and evaluating evidence about information to determine the degree of correspondence between the information and the standards used to prepare the information |
|
materiality |
the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement |
|
preliminary judgement of materiality |
is defined by auditors as the amount of misstatement that could exist in the financial statements and not affect the decisions made by a reasonable user |
|
3 considerations when selecting the preliminary judgement: |
1. the presence of fraud-suspicion of fraud also affects audit procedures selected 2. consequences arising from contractual obligations-if a contractual obligation has serious consequences, the materiality amount may be lower and a more detailed audit is performed 3. misstatements that affect earnings trend |
|
tolerable misstatement |
the maximum amount of misstatement an auditor is willing to tolerate in a segment |
|
Audit risk- |
the likelihood that financial statements will contain material misstatements after the auditor has determined that the financial statements are free of material misstatementsnote- audit risk is a risk the auditor wants to avoid; acceptable audit risk is the level of audit risk the auditor is willing to accept |
|
inherent risk- |
the likelihood that an account or class of transactions is materially misstated before considering the effects of internal controls |
|
control risk (residual) |
the likelihood that the internal controls will not detect or correct a misstatement in an account or class of transactions. In other words, the likelihood that misstatements that exceed a tolerable level will not be prevented or detected in a timely manner by the audited company's internal controls. |
|
detection risk |
the likelihood that the auditor will not detect misstatements that exceed a tolerable level |
|
acceptable detection risk |
level of detection risk the auditor is willing to accept |
|
nature of tests |
the type of test conducted by the auditor |
|
timing |
the timing of the tests conducted by the auditor |
|
extent of testing |
refers to how much testing is performed; the sample size selected |
|
standard unqualified report |
contain the opinion that the financial statements present the financial position and results of operations according to a specified basis of accounting and that no significant departure from that basis exists clean opinion/clean report |
|
unqualified report with modified wording |
sometimes referred to as unqualified report with explanatory language contain the opinion that the financial statements present the financial position and results of operations fairly and contains additional information. additional information includes emphasis of matter, lack of consistency, opinion based in part on the report of another auditor, auditor agreement with a departure of GAAP, going concern status |
|
qualified report |
issued when two conditions exists: 1. departure from GAAP-financial statements contain a departure from GAAP but the departure is not egregious enough to issue an adverse opinion 2. scope limitation- the scope of the auditor's examination has been restricted but the restriction is not pervasive enough to issue a disclaimer |
|
adverse report |
Issued when the financial statements contain a departure from the basis specified and the departure has a material and pervasive effect such that the financial statements so not represent the financial position, results of operation, or cash flows. |
|
disclaimer report |
issued in one of the following three situations: 1. Auditor lack of independence (to be independent the auditor must have no direct or indirect financial interest in the client) 2. auditors inability to collect adequate evidence (client restricting the auditor's examination or just cant find enough) 3. the client is a publicly held company whose financial statements have not been audited or reviewed |
|
audit assertion |
a statement about a company's financial condition and results of operations that is implicitly contained in the financial statements |
|
Type of assertion: presentation and disclosure |
states that the components of the financial statements are properly combined, described and disclosed. audit issues that may occur with respect to this assertion is not adequately including information that is required in the footnotes |
|
Type of assertion: rights and obligations |
indicates that the company has a right to use the assets shown on its balance sheet and an obligation to pay the liabilities listed |
|
Type of assertion: existence or occurrence |
pertains to whether the assets and liabilities listed on the balance sheet exist and whether the transactions reported in the financial statements occurred during the period covered by the financial statements |
|
Type of assertion: completeness |
addresses whether all assets, liabilities, and operational items are included in the financial statement |
|
Type of assertion: valuation or allocation |
addresses the correctness of amounts in the financial statements |
|
sampling risk |
the risk that judgement based on the sample differs from the judgement that would be obtained from the entire population type I error- risk of incorrect rejection type II error- risk of incorrect acceptance |
|
attribute sampling- |
an item being sampled either will or will not possess certain qualities or attributes |
|
tolerable error rate or tolerable exception rate |
the rate of errors or deviations that the auditor is willing to accept |
|
expected error rate or expected exception rate |
the rate of deviations the auditor expects to exist in the populations |
|
low inherent and control risk means... |
low materiality misstatement |
|
high inherent and control risk means... |
higher possibility or materiality misstatement |
|
6 major phases of litigation |
pleadings, discovery, pre-trial conferences, trial, outcome, possible appeal |
|
pleadings |
complaint-plantiff files service of process- served on defendant answer- defendant must admit or deny allegations demurrer- no cause of action exists possible cross-complaint- defendant files |
|
discovery phase |
the formal process of exchanging information between the parties about the witnesses and evidence to be presented at trial` |
|
pre-trial conferences |
conferences to encourage settlement before trial in a settlement conference, both parties agree on certain facts called stipulations when pre-trial conferences fail, the case goes to trial |
|
frye standard |
generally accepted in that scientific community peer reviewed |
|
daubert standard |
peer reviewed and goes by the scientific method |
|
10 guidelines to help avoid legal challenges |
1. know the relevant professional standards 2. apply the relevant professional standards 3. know the relevant professional literture 4. know the relevant professional orgs 5. use generally accepted analytical methods 6. use multiple analytical methods 7. synthesize the conlcusions of the mupltiple analytcal methods 8. disclose all significant analytical assumptions and variables 9. subject the snalysis to peer review 10. tetst teh analysis and conclusions for reasonableness |
|
preparing to testify as an expert witness |
1. maintain independence from the client 2. evidence upon which experts may rely 3. use of confidential client information 4. expert reports 5. owrking papers 6. evaluation of other experts 7. ehibits and other demonstrative evidence |
|
fact oriented report- |
gathers and evaluates facts and uses them to prepare a report. check and re check the numbers and facts |
|
opinion report |
more subjective and relies more on the professional judgement of the expert |
|
experts report organization |
name and docket number of the case a statement of qualifications information considered in formulating opinions a list of other cases in which the individual has testified as an expert within the preceeding four years compensation to be received for expert consulting and testimony opinions to be expressed and the reasons for those opinions |
|
commericial damages |
relate to either a loss of profits or the reduction in value of a business entity |
|
proximate (direct) cause- |
the damages caused were a direct result of the offending party's actions or lack of actions |
|
reasonable certainty |
that it is reasonably certain that the injured party would have earned the claimed amount of damages but-for the actions of the other party |
|
forseeability |
that a product person could look into the future and see that the actions of the offending party would damage the other party to the litigation |
|
type of harm- tort |
the occurrence of the harmful act itself is wrongful (wrongful act - other than a breach of contract- that injures another party) |
|
breach of contract |
a failure wihtout excuse or jjustification to fulfill one's obligations under a contract |
|
type of damage- restitution |
when the harmful act unjustly enriches the defendant at the expense of the plaintiff - money damages awarded to an innocent party to compensate for the benefit that party gave restore the victims financial status prevent unjust enrichment of defendant |
|
reliance |
money damages awarded to an innocent party for the lossess sufference due to the reliance on a promise-the intent of damages is to restore the plaintiff to the position they would have been in had the contract or promise never been made |
|
damages calculation approach- out of pocket loss |
refers to the difference between the actual value received and the actual value conveyed. the plaintiff can recover nothing beyond his or her investment |
|
benefit of the bargain theory |
damages include not only the money invested, but also other expenses such as increased costss, lost profits, and decreased value of hte investment |
|
before and after method |
take sales or sales growth before the act and compare to the comparable figures afterward |
|
yardstick or benchmark method |
compare sales growth of the company to other companies or to other industry averages |
|
but for method |
the difference in the estimates profits and the actual profits |
|
direct method |
any agreement may indicate how to calculate |
|
combination method |
may use a combination of these methods |
|
in order to win an award for damages... |
injured party must prove 2 points: 1. the other party was liable for the damage 2. that the injured party suffered damages as a result of the actions or lack of actions of the offending party |
|
macroeconomic analysis |
looking at the overall economic performance also involves an analysis of regional performance |
|
industry analysis |
looks at the industry's recent performance, current status, and outlook a specific industry may experience its own peaks and valleys |
|
company specific analysis |
includes scrutinizing of financial statements, income statements, balance sheet, and statement of cash flows case specific data and financial ratio analysis may be performed |
|
financial analysis conclusion |
make conclusions about the company's financial position -was the companys performance tranding in a positive direction before hte harmful event? is there a strong correlation between the companys trends and the macro and industry trends |
|
deposition testimony |
out of court sworn oral testimony by the witness. the expert will be questioned, under oath about several issues including witness qualifications, how the report was developed |
|
cost behavior |
the way that cost change with respect to changes in the volume of activity |
|
fixed costs |
costs that are fundamentally unaffected by changes in the volume of activity. the cost is the same regardless of the number of units sold/produced |
|
variable costs- |
costs that change directly and proportionately with the volume of activity |
|
mixed costs |
costs that contain both a fixed and a variable component |
|
semi variable costs |
costs that change with the volume of activity but not proportionately |
|
semi fixed costs |
costs that increase or decrease in a step function |
|
cost behavior assumption- relevant range assumption |
the range of activity within which the cost behavior patterns are valid the further away from the range of activity used in the data analysis, the more likely the cost behavior pattern will differ from the analysis |
|
time assumption |
cost behavior patterns identified are true only over a specified period of time, beyond this period of time therefore, the cost may display a different cost behavior pattern in other words, as time passes, the business environment changes, and cost behavior may change as well |