WERABE UNIVERSITY

COLLAGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FAINANCE

Course Title: Investment Decisions and Portfolio management

Group-6 Assignment on article review

STUDENT NAME:-……………………………..ID NO

1. Sefa seid ………………………..……….…..………MScAc/021/13

SUBMITED TO: - Dr. Nag. ……………….(PHD)

Ethiopia
Accounting—the recording, classifying, regulations set by some higher authority;
and summarizing of economic events in a (2) an audit performed to determine
logical manner for the purpose of pro - whether an entity that receives financial
viding financial information for decision assistance from the federal government
making has complied with specific laws and
Assurance service—an independent pro - regulations
fessional service that improves the quality Evidence—any information used by the
of information for decision makers auditor to determine whether the infor -
Attestation service—a type of assurance mation being audited is stated in accord -
service in which the CPA firm issues a ance with established criteria
report about the reliability of an assertion Financial statement audit—an audit
that is the responsibility of another party con ducted to determine whether the
Audit of historical financial statements— overall financial statements of an entity
a form of attestation service in which the are stated in accordance with specified
auditor issues a written report stating criteria (usually U.S. or international
whether the financial statements are in accounting standards)
material conformity with accounting Government accountability office audi -
standards tor—an auditor working for the U.S.
Audit report—the communication of Government Accountability Office (GAO);
audit findings to users the GAO reports to and is responsible
Auditing—the accumulation and evalu - solely to Congress
ation of evidence about information to Independent auditors—certified public
determine and report on the degree of accountants or accounting firms that
correspondence between the information perform audits of commercial and non -
and established criteria commercial financial entities
Certified public accountant—a person Information risk—the risk that informa -
who has met state regulatory requirements, tion upon which a business decision is
including passing the Uniform CPA made is inaccurate
Examination, and has thus been certified; Internal auditors—auditors employed by
a CPA may have as his or her primary a company to audit for the company’s
responsibility the performance of the board of directors and management
audit function on published historical Internal control over financial reporting—
financial statements of commercial and an engagement in which the auditor reports
noncommercial financial entities on the effectiveness of internal control
Compliance audit—(1) a review of an over financial reporting; such reports are
organization’s financial records performed required for accelerated filer public
to determine whether the organization is following specific companies under Section 404 of the
procedures, rules, or Sarbanes–Oxley Act provides less assurance than an audit as
Internal revenue agents—auditors who to whether the financial statements are
work for the Internal Revenue Service in material conformity with accounting
(IRS) and conduct examinations of tax - standards
payers’ returns Sarbanes–Oxley Act—a federal securities
Operational audit—a review of any part law passed in 2002 that provides for
of an organization’s operating procedures additional regulation of public companies
and methods for the purpose of evalu - and their auditors; the Act established the
ating efficiency and effectiveness Public Company Accounting Oversight
Review of historical financial state - Board and also requires auditors to audit
ments—a form of attestation in which a the effective ness of internal control over
CPA firm issues a written report that financial reporting
Adverse opinion—a report issued when Acceptable audit risk—a measure of how
the auditor believes the financial state - willing the auditor is to accept that the
ments are so materially misstated or financial statements may be materially
misleading as a whole that they do not misstated after the audit is completed and
present fairly the entity’s financial posi - an unqualified opinion has been issued
tion or the results of its operations and Audit strategy—overall approach to the
cash flows in conformity with GAAP audit that considers the nature of the
Combined report on financial statements client, risk of significant misstatements,
and internal control over financial and other factors such as the number of
reporting—audit report on the financial client locations and past effectiveness of
statements and the effectiveness of internal client controls
control over financial reporting required Budgets—written records of the client’s
for larger public companies under Section expectations for the period; a comparison
404 of the Sarbanes–Oxley Act of budgets with actual results may indicate
Disclaimer of opinion—a report issued whether or not misstatements are likely
when the auditor is not able to become Client business risk—the risk that the
satisfied that the overall financial state - client will fail to achieve its objectives
ments are fairly presented or the auditor related to (1) reliability of financial
is not independent reporting, (2) effectiveness and efficiency
Material misstatement—a misstatement of operations, and (3) compliance with
in the financial statements, knowledge of laws and regulations
which would affect a decision of a reason - Corporate minutes—the official record
able user of the statements of the meetings of a corporation’s board
Qualified opinion—a report issued when of directors and stockholders, in which
the auditor believes that the overall financial corof dividends and the approval of con -
statements are fairly stated but that either tracts, are documented
the scope of the audit was limited or the Engagement letter—an agreement between
financial data indicated a failure to follow the CPA firm and the client as to the
GAAP terms of the engagement for the conduct
Separate report on internal control over of the audit and related services
financial reporting—audit report on the Inherent risk—a measure of the auditor’s
effectiveness of internal control over assessment of the likelihood that there are
financial reporting required for public material misstatements in a segment before
companies under Section 404 of the considering the effectiveness of internal
Sarbanes–Oxley Act that cross-references control
the separate audit report on the financial Initial audit planning—involves deciding
statements whether to accept or continue doing the
Standard unqualified audit report—the audit for the client, identifying the client’s
report a CPA issues when all auditing reasons for the audit, obtaining an engage -
conditions have been met, no significant ment letter, and developing an audit strategy
misstatements have been discovered and Related party—affiliated company, prin -
left uncorrected, and it is the auditor’s cipal owner of the client company, or any
opinion that the financial statements are other party with which the client deals,
fairly stated in accordance with GAAP where one of the parties can influence the
Unqualified audit report with explanatory management or operating policies of the
paragraph or modified wording—an other
unquali fied report in which the financial Related party transaction—any transac -
statements are fairly presented, but the tion between the client and a related partyporate issues, such
auditor believes it is important, or is as the declaration
required, to provide additional infor -
mation
Acceptable audit risk—a measure of how Direct projection estimate of misstate -
willing the auditor is to accept that the ment—estimate of likely misstatement
financial statements may be materially in a population based on a sample, ex -
misstated after the audit is completed and cluding sampling risk, and calculated as
an unqualified audit opinion has been net misstatements in the sample, divided
issued; see also audit assurance by the total sampled, multiplied by the
Allocation of the preliminary judgment total recorded population value
about materiality—the process of assign - Engagement risk—the risk that the auditor
ing to each balance sheet account the mis - or audit firm will suffer harm because of
statement amount considered to be material a client relationship, even though the audit
for that account based on the auditor’s report rendered for the client was correct
preliminary judgment Inherent risk—a measure of the auditor’s
Audit assurance—a complement to assessment of the likelihood that there
acceptable audit risk; an acceptable audit are material misstatements in a segment
risk of 2 percent is the same as audit before considering the effectiveness of
assurance of 98 percent; also called overall internal control
assurance and level of assurance Known misstatements—specific misstate -
Audit risk model—a formal model re - ments in a class of transactions or account
flecting the relationships between accept - balance identified during the audit
able audit risk (AAR), inherent risk (IR), Likely misstatements—misstatements that
control risk (CR), and planned detection arise from either differences between
risk (PDR); PDR = AAR/(IR × CR) management’s and the auditor’s judgment
Control risk—a measure of the auditor’s about estimates of account balances or
assessment of the likelihood that mis - from projections of misstatements based
statements exceeding a tolerable amount on the auditor’s test of a sample from a
in a segment will not be prevented or population
detected by the client’s internal controls Revised judgment about materiality—
Materiality—the magnitude of an omis - a change in the auditor’s preliminary
sion or misstatement of accounting infor - judgment made when the auditor deter -
mation that, in the light of surrounding mines that the preliminary judgment was
circumstances, makes it probable that the too large or too small
judgment of a reasonable person relying Risk—the acceptance by auditors that
on the information would have been there is some level of uncertainty in per -
changed or influenced by the omission or forming the audit function
misstatement Risk of material misstatement—the com -
Planned detection risk—a measure of the bination of inherent risk and control risk
risk that audit evidence for a segment will (IR × CR)
fail to detect misstatements exceeding a Sampling error—results because the
tolerable amount, should such misstate - auditor has sampled only a portion of the
ments exist; PDR = AAR/ (IR × CR) population
Preliminary judgment about materiality— Tolerable misstatement—the materiality
the maximum amount by which the allocated to any given account balance;
auditor believes that the statements used in audit planning
could be misstated and still not affect the REVIEW
decisions of reasonable users; used in
audit planning