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CHAPTER 5 ∙ Professional Auditing Standards and the Audit Opinion

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Formulation Process
Accounting cycle
Recording and processing transactions that affect a group of related
accounts. The cycle begins when a transaction occurs and ends when it
is recorded in the financial statements.
Audit documentation
The record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached (terms such as working
papers or workpapers are also sometimes used).
Audit engagement letter
A document that specifies the responsibilities of both the client and the
auditor.
Audit evidence
Information used by the auditor in arriving at the conclusions on which
the auditor’s opinion is based.
Appropriate audit evidence
The measure of the quality of audit evidence (that is, its relevance and
reliability in providing support for the conclusions on which the
auditor’s opinion is based).
Audit procedures
Procedures designed to obtain audit evidence to support the audit
opinion(s). Three categories of procedures include risk assessment
procedures, tests of controls, and substantive procedures (including
substantive analytical procedures and tests of details).
Audit program
An audit document that lists the audit procedures to be followed in
gathering audit evidence and helps those in charge of the audit to
monitor the progress and supervise the work.
Control risk
The risk that a misstatement due to error or fraud that could occur in
an assertion and that could be material, individually or in combination
with other misstatements, will not be prevented or detected on a
timely basis by the organization’s internal control. Control risk is a

individually or in combination with other misstatements. Substantive procedure An audit procedure designed to detect material misstatements at the assertion level. Test of controls . but are used for purposes of planning the audit. Risk assessment procedure A procedure performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements whether due to error or fraud. Inherent risk The susceptibility of an assertion to a misstatement. Substantive audit An audit that includes substantive procedures and does not include tests of controls. Sufficient audit evidence The measure of the quantity of audit evidence.CHAPTER 5 ∙ Professional Auditing Standards and the Audit Opinion 13 Formulation Process function of the effectiveness of the design and operation of internal control. Controls reliance audit An audit that includes tests of controls and substantive procedures. that could be material. before consideration of any related controls. due to error or fraud. for example a substantive test of sales transactions performed concurrently with a test of controls over those transactions. Substantive procedures comprise tests of details and substantive analytical procedures. Risk assessment procedures by themselves do not provide sufficient appropriate evidence on which to base an audit opinion. Dual-purpose test A substantive test and a related test of a relevant control that are performed concurrently.

.CHAPTER 5 ∙ Professional Auditing Standards and the Audit Opinion 14 Formulation Process An audit procedure designed to evaluate the operating effectiveness of controls in preventing. typically at the assertion level. or detecting and correcting. material misstatements.