less than 150wrds more than 100!! try using key terms if applicable please and thank you.

7. You are working on the audits of financial statements for two different companies. You are responsible for auditing accounts receivable, where confirmation is required. In auditing Company A, you used Positive 1 and negative confirmation. In auditing Company B, you used Positive 2 and negative confirmation. Why?

Corporate minutes the official record Preliminary judgment about material- of the meetings of a corporation's board itythe maximum amount by which the of directors and stockholders, in which auditor believes that the statements could corporate issues such as the declaration of be misstated and still not affect the deci- dividends and the approval of contracts are sions of reasonable users; used in audit documented planning Engagement letteran agreement be- Related party-affiliated company, prin- tween the CPA firm and the client as to the cipal owner of the client company, or any terms of the engagement for the conduct of other party with which the client deals, the audit and related services where one of the parties can influence the Initial audit planning involves deciding management or operating policies of the whether to accept or continue doing the other audit for the client, identifying the client's Related party transaction-any transac- reasons for the audit, obtaining an engage- tion between the client and a related party ment letter, and developing an audit strategy Revised judgment about materiality- Known misstatements specific mis- a change in the auditor's preliminary judg- statements in a class of transactions or ment made when the auditor determines account balance identified during the audit that the preliminary judgment was too Likely misstatements-misstatements large or too small that arise either from differences between Risk assessment proceduresaudit management's and the auditor's judgment procedures performed to obtain an under- about estimates of account balances or from standing of the entity and its environment, projections of misstatements based on the including the entity's internal control, to auditor's test of a sample from a population identify and assess the risks of material Materiality-the magnitude of an omis- misstatement sion or misstatement of accounting infor- Risk of material misstatement-the risk mation that, in the light of surrounding that the financial statements are materially circumstances, makes it probable that the misstated prior to the audit judgment of a reasonable person rely- Sampling risk-results because the audi- ing on the information would have been tor has sample only a portion of the pop- changed or influenced by the omission or ulation misstatement Tolerable misstatement the application Performance materiality--the material- of performance materiality to a sampling ity amount(s) for segments of the audit, set procedure (AICPA standards) or the materi- by the auditor at less than materiality for ality allocated to any given account balance the financial statements as a whole (PCAOB standards) Acceptable audit risk-a measure of audit report rendered for the client was how willing the auditor is to accept that correct the financial statements may be materi- Inherent risk-a measure of the audi- ally misstated after the audit is completed and an unmodified audit opinion has been tor's assessment of the susceptibility of an assertion to material misstatement before issued; see also audit assurance considering the effectiveness of internal Audit assurance complement to control acceptable audit risk; an acceptable audit risk of two percent is the same as audit Nonroutine transaction-a transaction that is unusual, either due to size or nature, assurance of 98 percent; also called overall assurance and level of assurance and that is infrequent in occurrence Audit risk model-a formal model Planned detection risk-a measure of reflecting the relationships between the risk that audit evidence for a segment acceptable audit risk (AAR), inherent risk will fail to detect misstatements that could (IR), control risk (CR), and planned detec be material, should such misstatements tion risk (PDR); PDR = AAR(IR CR) exist, PDR = AAR/(IRCR) Control risk-a measure of the auditor's Risk-the acceptance by auditors that assessment of the risk that a material mis- there is some level of uncertainty in per- statement could occur in an assertion and forming the audit function not be prevented or detected on a timely Significant risk-an identified and as- basis by the client's internal controls sessed risk of material misstatement that, Engagement risk-the risk that the audi- in the auditor's professional judgment, tor or audit firm will suffer harm because requires special audit consideration of a client relationship, even though the Assessment inquiry-inquiry to corrobo- Informational inquiryinquiry to ob- rate or contradict prior information obtained tain information about facts and details the Earnings management-deliberate ac- auditor does not have tions taken by management to meet earn- Interrogative inquiry-inquiry used ings objectives to determine if the interviewee is being Fraud risk factors-entity factors that in- deceptive or purposefully omitting disclo- crease the risk of fraud sure of key knowledge of facts, events, or Fraud triangle represents the three con- circumstances ditions of fraud: incentives/pressures, op- Premature revenue recognition-rec- portunities, and attitudes/rationalization ognition of revenue before accounting Horizontal analysis analysis of per- standards requirements for recording rev- enue have been met centage changes in financial statement numbers compared to the previous period Vertical analysis-analysis in which Income smoothing form of earn- financial statement numbers are converted ings management in which revenues and to percentages of a base; also called com- mon-size financial statements expenses are shifted between periods to reduce fluctuations in earnings principles must be functioning for con- Internal controla process designed to trols to be effective provide reasonable assurance regarding Cybersecurity-the information tech- the achievement of management's objec- nology and internal control processes tives in the following categories: (1) reli- an organization has in place to protect ability of reporting. (2) effectiveness and computers, networks, programs, and data efficiency of operations, and (3) compli- from unauthorized access ance with applicable laws and regulations Database management systems Local area networks (LANs) networks hardware and software systems that allow that connect computer equipment, data clients to establish and maintain databases files, software, and peripheral equipment shared by multiple applications within a local area, such as a single building Digital signatures-electronic certificates or a small cluster of buildings, for intracom- that are used to authenticate the validity pany use of individuals and companies conducting Manual controls-application controls business electronically done by people Encryption techniques-computer pro- Monitoring-management's ongoing grams that change a standard message or and periodic assessment of the quality of data file into one that is coded, then de- internal control performance to determine coded using a decryption program that controls are operating as intended and Enterprise resource planning (ERP) are modified when needed systems-systems that integrate numer- Output controls controls designed to Ons aspects of an organization's activities ensure that computer-generated data are into one accounting information system valid, accurate, complete, and distributed Entity-level controls-controls that only to authorized people have a pervasive effect on the entity's sys- Parallel testing a company's computer tem of internal control; also referred to as testing approach that involves operating company-level controls the old and new systems simultaneously Firewall-a system of hardware and soft- Pilot testing a company's computer ware that monitors and controls the flow testing approach that involves implement- of e-commerce communications by chan- ing a new system in just one part of the neling all network connections through a organization while maintaining the old control gateway system at other locations General authorization companywide Processing controls controls designed to policies for the approval of all transactions ensure that data input into the system are within stated limits accurately and completely processed General controls-controls that relate to Risk assessment-management's identi- all parts of the IT function and affect many fication and analysis of risks relevant to different software applications the preparation of financial statements in Hardware controls controls built into accordance with an applicable accounting the computer equipment by the manufac- framework turer to detect and report equipment failure Separation of duties-separation of the Independent checks-internal control following activities in an organization: activities designed for the continuous in- (1) custody of assets from accounting, ternal verification of other controls (2) authorization from custody of assets, Information and communication (3) operational responsibility from record the set of manual and/or computerized pro- keeping, and (4) IT duties from outside cedures that initiate, record, process, and users of IT report an entity's transactions and maintain Service center an organization that accountability for the related assets provides IT services for companies on an Input controls-controls designed by an outsourcing basis organization to ensure that the informa- Specific authorization-case-by-case tion to be processed by the computer is approval of transactions not covered by authorized, accurate, and complete companywide policies Internal control questionnaire-a series of questions about the controls in each audit area used as a means of indi- cating to the auditor aspects of internal control that may be inadequate Key controls-controls that are expected to have the greatest effect on meeting audit objectives Management letter-an optional letter written by the auditor to a client's man- agement containing the auditor's recom- mendations for improving any aspect of the client's business Material weakness a significant defi- ciency in internal control that, by itself or in combination with other significant deficiencies, results in a reasonable pos- sibility that a material misstatement of the financial statements will not be prevented or detected Narrative a written description of a client's internal controls, including the origin, processing, and disposition of documents and records, and the relevant control procedures Parallel simulation testing an audit testing approach that involves the auditor's use of audit software, either purchased or programmed by the auditor, to replicate some part of a client's application system Procedures to obtain an understand- ing procedures used by the auditor to gather evidence about the design and implementation of specific controls Significant deficiency-a control deficiency, or a combination of con- trol deficiencies, that is less severe than a material weakness, but impor- tant enough to merit attention by those responsible for oversight of the compa- ny's financial reporting Test data approach a method of audit- ing an IT system that uses the auditor's test data to determine whether the client's computer program correctly processes valid and invalid transactions Tests of controls-audit procedures to test the operating effectiveness of con- trols in support of reduced assessed con- trol risk Walkthrough the tracing of selected transactions through the accounting system to determine that controls are in place Analytical procedures-evaluations of Substantive analytical procedure financial information through analysis of an analytical procedure in which the audi- plausible relationships among financial tor develops an expectation of recorded and nonfinancial data amounts or ratios to provide evidence sup- Evidence mix-the combination of the porting an account balance types of tests to obtain sufficient appro- Substantive tests-audit procedures de priate evidence for a cycle; there are likely signed to test for dollar (monetary) misstate- to be variations in the mix from cycle to ments of financial statement balances cycle depending on the circumstances of Substantive tests of transactions, the audit audit procedures testing for monetary Further audit procedures combina- misstatements to determine whether tion of tests of controls, substantive tests the six transaction-related audit objec- of transactions, substantive analytical pro- tives have been satisfied for each class of cedures, and tests of details of balances transactions performed in response to risks of material Tests of controls-audit procedures to misstatement identified by the auditor's test the effectiveness of controls in support risk assessment procedures of a reduced assessed control risk Phases of the audit process the four Tests of details of balances-audit proce- aspects of a complete audit: (1) plan and dures testing for monetary misstatements design an audit approach, (2) perform tests to determine whether the eight balance- of controls and substantive tests of trans- related audit objectives have been satisfied actions, (3) perform substantive analytical for each significant account balance procedures and tests of details of balances, Types of tests the five categories of au- and (4) complete the audit and issue an dit tests auditors use to determine whether audit report financial statements are fairly stated: risk Procedures to obtain an understanding assessment procedures, tests of controls, of internal control procedures used by substantive tests of transactions, substantive the auditor to gather evidence about the de- analytical procedures, and tests of details of sign and implementation of specific controls balances