Auditing is the process of investigating information that’s prepared by someone else — such as a company’s financial statements — to determine whether the information is fairly stated and free of material misstatement. Having a certified public accountant (CPA) perform an audit is a requirement of doing business for many companies because of regulatory- or compliance-related matters. For example, potential investors or lenders use audited financial statements to decide whether they want to purchase stock or loan money to a business.
>
>
Important Auditing Vocabulary and Key Terms
Every profession has its own lexicon. To communicate with your audit peers and supervisors, you must know key auditing phrases. Knowing these buzzwords is also helpful if you’re a business owner, because auditors sometimes forget to switch from audit-geek talk to regular language when speaking with you.
Audit evidence: Facts gathered during the audit procedures that provide a reasonable basis for forming an opinion regarding the financial statements under audit.
Audit risk: The risk of forming an inappropriate opinion on the financial statements under audit.
Control risk: The risk that a company’s internal controls won’t detect or prevent mistakes.
Due professional care: Taking the time to gather reasonable audit evidence to support the fact that the financial statements are free of material misstatement.
Generally accepted accounting principles (GAAP): Standard U.S. accounting guidelines for reporting financial statement transactions.
Generally accepted auditing standards (GAAS): Standard U.S. auditing guidelines for planning, conducting, and reporting on audits.
Going concern: The expectation that a business will remain operating for at least another 12 months.
Independence: Having an arm’s-length relationship — meaning no special or close relationship — with the client under audit.
Inherent risk: The likelihood of arriving at an inaccurate audit conclusion based on the nature of the client’s business.
Internal controls: The operating standards a client uses to prevent or uncover mistakes.
Management assertions: Representations the managers of a company make on the financial statements.
Materiality: The importance placed on an area of financial reporting based on its overall significance.
Objectivity: The ability to evaluate client records with no preconceived notions or prejudices.
Professional skepticism: Approaching an audit with a questioning mind-set.
Sampling: Selecting a small but pertinent and representative number of records to represent the entire population of records.
>
>
>
Generally Accepted Auditing Standards
The generally accepted auditing standards (GAAS) are the standards you use for auditing private companies. GAAS come in three categories: general standards, standards of fieldwork, and standards of reporting.
Keep in mind that the GAAS are the minimum standards you use for auditing private companies. Additionally, the Public Company Accounting Oversight Board (PCAOB) has adopted these standards for public (traded on the open market) companies. Each audit engagement you work on may require you to perform audit work beyond what’s specified in the GAAS in order to appropriately issue an opinion that a set of financial statements is fairly presented. You need to use professional judgment and exercise due care in following all standards.
General standards: The first three GAAS are general standards that address your qualifications to be an auditor and the minimum standards for your work product:
As an auditor, you must have both adequate training and proficiency.
You are independent in both fact and appearance.
You exercise due professional care in performing your auditing tasks.
Standards of fieldwork: The next three GAAS govern how you actually do your job:
Your work is adequately planned, and all assistants are properly supervised.
You gain an understanding of the client and its environment, including internal controls, to assess the risk of material misstatement in the financial statements and to plan your audit.
The evidence you gather during the audit is appropriate and sufficient to evaluate management’s assertions on the financial statements.
Standards of reporting: The last four GAAS concern information you must consider prior to issuing your audit report:
You have to state whether the financial statements are prepared using generally accepted accounting principles (GAAP).
Just as important is to report whether GAAP are consistently applied for all financial accounting. Should this not be the case, you have to report any departures.
You also have to make sure that disclosures — any additional information needed to explain the numbers on the financial statements — are provided.
Lastly, you have to include your opinion as to whether the financial statements present fairly in all material respects the financial position of the company under audit.
>
>
>
The Four Concepts of Audit Evidence
Audit evidence consists of the documents you use during an audit to substantiate your audit opinion. While working on an audit, you encounter many different types of evidence (written, oral, and so on). Documents can be prepared by employees of the client or by outside parties. To properly evaluate the strength of evidence you gather, you have to understand the four concepts of evidence:
Nature: The form of the evidence — for example, oral, visual, or written.
Appropriateness: The quality, relevancy, and reliability of the evidence.
Sufficiency: The quantity of audit evidence — enough evidence to evaluate the audit client’s management assertions.
Evaluation: A decision on whether the evidence is compelling enough to allow you to form an opinion.
>
>
>
Gathering Audit Evidence
While you work on your client’s audit, you gather sufficient appropriate evidence to come to a determination on whatever it is you’re auditing. The methods you use to gather audit evidence aren’t one-size-fits-all. Part of your obligation to exercise due professional care is to select the most appropriate method(s) for the type of client and auditing task at hand.
Analytical procedures: Comparing what’s on the client’s books to what’s expected to be on the books.
Confirmations: Asking for independent verification supporting management assertions.
Inspection of records: Asking the company for relevant documents in support of management assertions.
Observation: Watching the client’s employees do their jobs to obtain an understanding of how each job is done.
Recalculation: Verifying the mathematical accuracy of your client’s computations.
Reperformance: Doing the client’s accounting or internal control procedure to make sure the company is following its own rules.
Scanning: Looking over client transactions on the general ledger or other accounting reports.
Client tour: Checking to make sure all assets shown on the client’s balance sheet exist.
>
>
dummies
Source:http://www.dummies.com/how-to/content/auditing-for-dummies-cheat-sheet.html
No comments:
Post a Comment