AFM 201 Textbook Summary [Audit Only] File contains concise, easy-to-read summaries of assigned textbook readings. Readings arranged chronologically by when they were assigned for ease of use; organized by chapter for increased readability.

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University of Waterloo
Accounting & Financial Management
AFM 201
Clark Hampton

Chapter 1Audit Societies Societies in which there is extensive monitoring of economic and other politically important activities to help assure that capital markets are efficient Auditing A systematic process of objectively obtaining and evaluating evidence regarding the assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to interested users Information Risk Failure of the financial statements to appropriately reflect the economic substance of business activities including business risks and uncertainties In particular information risk from the auditors perspective is the risk probability that the financial statements of the company will be materially false and misleading Threeparty Accountability The relationship between the first party investor second party seller and the third party the auditor Underlying conditions that affect demand by users for accounting information o Complexity o Remoteness o Consequences The goal of GAAP is to yield financial statements that represent as faithfully as possible the economic conditions and performance of a company The lending of credibility is also known as providing assurance and external auditing of financial statements is described as an assurance engagement Purpose of the audit of financial statements is to express an opinion whether the financial statement present clearly in all material respects the financial position results of operation and cash flows in accordance with generally accepted accounting principals A materiality misstatement is one that would affect user decision making Following SOX selfregulating of the audit profession was no longer an option SOX basically brings more external monitoring and control of the profession Internal Control Statements Statements about the reliability of the system of process that creates the financial statements Chapter 4Six fundamental statements of accepted conduct o The member should act to maintain the professions reputation o The member should use due care and maintain his or her professional competence o The member should maintain independence and in the appearance as well as the fact of independent of his or her professional judgment o The member should preserve client confidentiality o The member should base his or her reputation on professional excellencein particular advertising should inform not solicit o The member should show professional courtesy to other members at all times Independence is the term given to objectivity in the special case of assurance engagements independence is a way of achieving objectivity Five threats to independence o Selfreview threat which occurs when a PA provides assurance on his or her own work o Selfinterest threat which occurs for example when a PA could benefit from a financial interest in a client o Advocacy threat which occurs when a PA promotes a clients position or opinion o Familiarity threat which occurs when a PA becomes too sympathetic to a clients position or opinion o Intimidation threat which occurs when a PA is deterred from acting objectively by actual or perceived threats from the client Auditors are permitted to carry home mortgages immaterial loans and secured loans to be made under the clients normal lending procedures terms and requirements if the client is a bank or other financial institution Independence is also not considered impaired by a member obtaining there kinds of personal loans from assurance service clients o Auto loans and leases collateralized by the automobile o Insurance policy loans based on policy and surrender value o Loans collateralized by cash deposits at the same financial institution o Credit card balances and cash advances equivalent to other customers of the client in the normal course of business Loans should be under the same terms as granted to other customers of the institution in the normal course of business Ordinarily independence is impaired if a PA serves on an organizations board of directors However members can be honorary directors of such organizations as charity hospitals fund drives symphony orchestra societies and other nonprofit organizations as long as
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