ACG4632 Study Guide for Final Exam Author s Note Final round lezzgo Anything in red print like this is my own additional information to help make some concepts more concrete If you re like me you didn t pay attention in class because it sucked so hopefully these notes will help In most instances you can figure out the right answer by accepting a simple fact everything an auditor does during an audit is done in order to not get sued An auditor is covering his her own ass the ENTIRE TIME A lot of the material is tedious but put some effort in and you ll be fine Good luck on the exam Oh yeah Please pay for this and don t give it to get it from your friends I m reducing the price on the previous two study guides to the lowest amount it will allow Good luck And if you re graduating congratulations EXAM 1 MATERIAL Chapter 1 An Introduction to Assurance and Financial Statement Auditing 1 the Lemons Dilemma in class Be sure to understand the issues involved Information asymmetry and the role of auditing assurance services We talked about Information asymmetry means that the manager generally has more information about the true financial position and results of operations of the entity than does the absentee owner Because their goals may not coincide there is a natural conflict of interest between the manager and the absentee owner If both parties seek to maximize their self interest the manager may not always act in the best interest of the owner Lemon Dilemma Think about selling your used car You will undoubtedly have more information about your used car than someone purchasing it this represents information asymmetry You may want to purchase an inspection to reduce the cost of information If buyers cannot spot the quality difference though as is often the case in the real world there will be only one market for all used cars and buyers will be ready to pay only the average price of a good car and a lemon This result when bad quality pushes good quality from the market because of an information gap is known as adverse selection 2 Differences among Audit Attest and Assurance engagements Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users Audits provide positive assurance that the financial statements are presented fairly in accordance with GAAP and give reasonable assurance that the financial statements are free from material misstatement whether from error or fraud Attest services occur when a practitioner is engaged to issue a report on subject matter or an assertion 2 about subject matter that is the responsibility of another party The subject matter of attest services can take many forms including prospective information analyses systems and processes and even the actions of specified parties Note that financial statement auditing is a specialized form of an attest service The three types of attest engagements are 1 Examination 2 Review 3 Agreed Upon Procedures Assurance services are independent professional services that improve the quality of information or its context for decision makers To summarize assurance services can capture information improve its quality and enhance its usefulness for decision makers What is positive and negative assurance Simply put it s how sure you are of something If you re giving someone positive assurance you re saying Yeah dude it s right I checked it When you give someone negative assurance it s because you didn t research the material enough and you say Ummm I don t know for sure if it s right but I sure as heck didn t see anything wrong with it 3 Concepts of Materiality and Risk and why they are relevant to an audit Materiality is the magnitude of an omission or misstatement of accounting information that in the light of surrounding circumstances makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement A common rule of thumb is that total aggregated misstatements of more than about 3 to 5 percent of net income before tax would cause the financial statements to be materially misstated The auditor provides no assurance that immaterial misstatements will be detected Material it matters Material witness ever heard of it The witness saw something VERY IMPORTANT In an AUDIT the auditor is looking for material misstatements Nothing else matters as long as not material Audit risk is the risk that the auditor may unknowingly give a clean opinion on financial statements that are materially misstated implies some risk that a material misstatement could be present in the The auditor s standard report states that the audit provides only reasonable assurance that the financial statements do not contain material misstatements Reasonable assurance financial statements and the auditor will fail to detect it The auditor controls the level of audit risk by the effectiveness and extent of audit work conducted D The risk that an auditor will mistakenly issue a clean opinion on financial statements that are materially misstated cannot be driven to zero Ever 4 Understand what audit evidence is and relevance reliability trade off A major concept involved in auditing is evidence regarding management s assertions Audit evidence consists of the underlying accounting data and any additional information available to the auditor whether originating from the client or externally Audit evidence provides the basis for the auditor s opinion on whether or not the financial statements are presented fairly Once the auditor has obtained sufficient appropriate evidence that the management assertions can be relied upon for each significant account and disclosure the auditor has reasonable assurance that the financial statements are fairly represented 3 Relevance refers to whether the evidence relates to the specific management assertion being tested Reliability refers to the diagnosticity of the evidence Simply can a particular type of evidence be relied upon to signal the true state of the account balance or assertion being examined Understand the relation between sample size and materiality as well as the relation 5 between sample size and desired level of assurance I love to test students on conceptual relationships such as these To deal with the problem of not