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Audit Exam #1
Audit Exam #1 Chapters 1-6, Modules B & C
| Term | Definition |
|---|---|
| assurance | the lending of credibility to information |
| assurance services | independent professional services that improve the quality of information or its context for decision makers |
| attestation engagement | the provision of an opinion on subject matter or an assertion about the subject matter that is the responsibility of another party. |
| attestation | the lending of credibility to assertions made by a third-party |
| auditing | systematic process of objectively obtaining & evaluating evidence regarding assertions about economic actions & events to ascertain degree of correspondence between the assertions and established criteria and communicating the results to interested users |
| business risk | the risk that an entity will fail to meet its objectives. If the company fails to meet its objectives enough times, the company may ultimately fail |
| completeness | all of the transactions, events, assets, liabilities, equity interests, and other disclosures that should have been recorded in the financial statements have been recorded |
| cutoff | refers to accounting for revenue, expense and other transactions in the proper period. The date chosen usually refers to the audit client's year-end balance sheet date. |
| existence | all assets, liabilities, and equity interests do actually exist |
| financial reporting | process of providing statements of financial position, results of operations, changes in cash flows, and accompanying disclosure to outside decision makers who do not have access to management's internal sources of information. |
| information risk | the probability that the information circulated by a company will be false or misleading |
| internal auditing | an independent, objective assurance and consulting activity designed to add value and improve an organization's operations |
| occurrence | all of the transactions and events that have been recorded are valid, pertain to the entity, and have actually taken place |
| operational auditing | the study of business operations for the purpose of making recommendations about the efficient use of resources, effective achievement of business objectives, and compliance with company policy |
| presentation and disclosure | management assertion that all transactions and events have been presented correctly and that all relevant information has been disclose to financial statement users, usually in the footnotes to the financial statements |
| professional skepticism | defined in the professional auditing standards as having an attitude that "includes a questioning mind and a critical assessment of evidence," Essentially, its an auditor's tendency to not believe management's assertions without corroboration |
| rights and obligations | the entity is entitled to all rights of the assets, the liabilities are the legal responsibility of the entity, and all of the disclosed events and transactions pertain to the entity |
| substantial equivalency | the process through which CPAs licensed in one state can practice in another state |
| valuation or allocation | all assets, liabilities, & equity interests of the entity have been valued in accordance with the relevant financial reporting standards and are listed at the proper amount & resulting valuation adjustments are appropriately recorded in the financials |
| American Institute of Certified Public Accountants (AICPA) | as related to professional auditing standards, the body charged with establishing auditing standards for the audits of nonpublic entities through Statements of Auditing Standards (SASs) issued by the Auditing Standards Board. |
| interim auditing standards | those SASs that have not yet been amended or superseded by the PCAOB serve as... |
| appropriate (audit evidence) | characteristics related to the quality (relevance and reliability) or audit evidence |
| audit plan | a list of the audit procedures auditors need to perform to gather sufficient audit evidence on which to base their opinion on the financial statements |
| audit procedures | the specialized actions auditors take to obtain evidence in an engagement |
| auditing standards | the audit quality guides that apply to all audits |
| control risk | the probability that a material misstatement (error or fraud) will not be prevented or detected on a timely basis by the entity's internal controls |
| detection risk | the risk that the audit team's substantive procedures will fail to detect a material misstatement |
| analytical procedures | evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data. They investigate fluctuations/relationships inconsistent with relevant information or that differ greatly from expected values |
| due care | a level or performance that would be exercised by reasonable auditors in similar circumstances; auditors are expected to possess the skills and knowledge of others in their profession and are not expected to be infallible |
| engagement quality control review | an internal evaluation of the significant judgments made by the audit team and the conclusions reached in formulating its report on an engagement conducted by that firm |
| evidence | the information used by auditors in arriving at the conclusion on which the audit opinion is based, which includes the underlying accounting data and all available corroborating information |
| financial reporting framework | a set of criteria used to determine the measurement, recognition, presentation, and disclosure of material items in the financial statement |
| Generally Accepted Auditing Standards (GAAS) | standards that identify necessary qualifications and characteristics of auditors and guide the conduct of the audit examination. |
| independence in appearance | the extent to which others (particularly financial statement users) perceive auditors to be independent |
| independence in fact | an auditor's mental attitude and impartiality with respect to the client |
| inherent risk | the probability that a material misstatement (error or fraud) will occur in an account balance or class of transactions |
| inspection | an evaluation of an accounting firm's audit engagements and system of quality control conducted by the PCAOB and required for any firms providing auditing serves to public entities |
| internal control | the policies and procedures implemented by an entity to prevent or detect material accounting errors or frauds and provide for their correction on a timely basis |
| materiality | as it relates to financial reporting, the dollar amount that would influence the lending or investing decisions of financial statement users |
| professional judgement | the application of relevant training, knowledge, and experience in making informed decisions about appropriate courses of action during the audit engagement |
| Public Company Accounting Oversight Board (PCAOB) | as related to professional auditing standards, the body charged with establishing auditing standards for the audits of public entities through the issuance of Auditing Standards. Also responsible for inspecting firms that perform audits of public company |
| public entity | an entity that offers registered securities, such as stocks and bonds, for sale to the general public |
| reasonable assurance | concept that a GAAS audit may not detect all material misstatements and auditors are not "insurers" or "guarantors" regarding the fairness of the entity's financial statemenets |
| risk of material misstatement | the combined probability that a material misstatement (error or fraud) will occur and will not be prevented or detected on a timely basis by the entity's internal controls... inherent risk + control risk |
| substantive procedures | procedures used by auditors to obtain assurance as to the fairness of the entity's financial statements |
| sufficiency (audit evidence) | the measure of the quantity of audit evidence (the number of transactions or components evaluated) |
| sufficient and appropriate (must have enough of the right stuff) | audit evidence must be both... |
| system of quality control | the policies and procedures implemented by a firm to provide a reasonable assurance that the firm and its personnel (1) comply with professional standards and applicable regulatory and legal requirements and (2) issue reports that are appropriate |
| unmodified (or unqualified) opinion | an opinion which concludes that the financial statements present an entity's financial condition, results of operations, and cash flows in conformity with GAAP |
| analytical procedures | the reasonableness tests used to gain an understanding of financial statement accounts and relationships |
| audit documentation | the written basis for the auditor's conclusions that provides the necessary support for the auditor's assertions and representations made in the auditor's report |
| audit engagement partner | the person with the final responsibility for the audit, and usually an industry specialist |
| audit trail | the chain of evidence provided through coding, cross-references and documentation connecting account balances and other summary results with the original transaction source documents |
| continuing audit files (or permanent files) | the audit documentation containing information of continuing audit significance for current and past audits of the same client |
| engagement letter | the letter sets for the understanding with the client, including in particular (1) objectives of the engagement (2) management's responsibilities, (3) the auditors' responsibilities and (4) any limitations of the engagement. |
| form 8-k | the "special events report" filed with the SEC whenever certain significant corporate events such as changes in control, legal proceedings and changes in auditor occur |
| interim audit work | the procedures performed several weeks or months before the balance-sheet date |
| lead schedule | a summary of the accounts in or components of an account group |
| planning memorandum | the document summarizing the preliminary analytical procedures and the materiality assessment with specific directions about the effect on the audit |
| predecessor auditor | the public accounting firm that has been terminated or has voluntarily withdrawn from an audit engagement (whether or not the audit has been completed) |
| quality assurance partner | the second audit partner on the audit team as required for audits of financial statements filed with the SEC who reviews the audit team's work in critical audit areas (those areas with the highest potential audit risk) |
| specialists | the persons skilled in fields other than accounting and auditing - actuaries, appraisers, attorneys, engineers, and geologists - who are not members of the public accounting firm |
| substantive audit plan | document that contains a list of audit procedures for gathering evidence related to the relevant assertions identified for the significant financial statement accounts and disclosures on an audit client |
| termination letter | the documentation provided to former clients dealing with the subject of future services, in particular access to audit documentation by new auditors re-issuance of the auditors' report when required and fee arrangements for future services. |
| tracing | an audit procedure in which the auditor selects a basic source document and follows its processing path forward to find its final recording in a summary journal or ledger. |
| vouching | an audit procedure in which an auditor selects an item of financial information, usually from a journal or ledger, and follows its path back through the processing steps to its origin (i.e. the source documentation that supports the item selected) |
| year-end audit work | the procedures performed shortly before and after the balance sheet date |
| accounting estimates | the approximations of financial statement numbers often included in financial statements |
| audit committee | a subset of a company's board of directors composed of outside members (those not involved in the day-to-day operations of the company) who can provide a buffer between the audit firm and management |
| audit risk | the risk that the auditor will express an inappropriate audit opinion when the financial statements are materially misstated |
| audit strategy memorandum | the scope, timing, and direction for auditing each relevant assertion based on the results of the audit risk model |
| business risk | the risks that result from significant conditions/circumstances, actions/inactions that could adversely affect a company's ability to achieve its objectives/execute strategies |
| defalcation | another name for employee fraud or embezzlement |
| direct-effect noncompliance | the violations of laws or government regulations by the entity or its management or employees that produce direct and material effects on dollar amounts in financial statements |
| embezzlement | a type of fraud involving employees or nonemployees wrongfully taking money or property entrusted to their care, custody and control, often accompanied by false accounting entries and other forms of lying and cover-up |
| employee fraud | the use of fraudulent means to take money or other property from an employer. It consists of three phases (1) the fraudulent act (2) the conversion of the money or property to the fraudster's use and (3) the cover-up |
| enterprise risk management (ERM) | a process effected by an entity's board of directors, management & other personnel applied in strategy setting and across the enterprise that is designed to identify potential events that may affect the entity and to manage risks |
| errors | the unintentional misstatements or omissions of amounts or disclosures in financial statements |
| extended procedures | the audit procedures used in response to heightened fraud awareness as the result of the identification of significant risks |
| fraud | the act of knowingly making material misrepresentations of fact with the intent of inducing someone to believe the falsehood and act on it and, thus, suffer an economic loss |
| fraudulent financial reporting | the intentional or reckless conduct, whether by act or omission, that results in materially misstated financial statements |
| horizontal analysis | the comparative analysis of year-to-year changes in balance sheet and income statement accounts |
| indirect-effect noncompliance | the violation of laws and regulations that does not directly affect specific financial statement accounts or disclosures |
| larceny | the simple theft of an employer's property that is not entrusted to an employee's care, custody, or control |
| management fraud | the deliberate fraud committed by management that injures investors and creditors through materially misstated information |
| relevant assertions | a financial statement assertion that has a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated |
| related parties | those individuals or organizations that are closely tied to the audit client, possibly through family ties or investment relationships |
| significant account or disclosure | an account or disclosure that has a reasonable possibility of containing a material misstatement individually or when aggregated with others regardless of effects of controls |
| significant risk | a risk of material misstatement that requires special audit consideration. Fraud risk is always considered this... |
| vertical analysis | the common-size analysis of financial statement amounts created by expressing amounts as proportions of a common base such as sales or total assets |
| white-collar crime | fraud perpetrated by people who work in offices and steal with a pencil or from a computer terminal. |
| adverse opinion | the opinion issued when the company has a material weakness and not maintained in effective internal control over financial reporting |
| auditors' report on internal control over financial reporting | a report required by the SOX act that provides an opinion on the effectiveness of the entity's internal control over financial reporting |
| business risks | those factors, events and conditions that could prevent the organization from achieving its business objectives |
| control activities | the specific actions taken by a client's management and employee to help ensure that management directives are carried out |
| design effectiveness | a condition expressing whether controls would be expected to prevent or detect errors or fraud that could result in a material misstatement in the financial statements |
| detective controls | the activities that detect misstatements after they occur |
| disclaimer of opinion on internal control over financial reporting | the report issued when auditors cannot provide assurance on the effectiveness of internal control over financial reporting; issued when significant scope limitations exist |
| dual-purpose test | an audit procedures that can be used as both a test of controls and a substantive test |
| entity-level controls | the controls that are pervasive to the financial statements taken as a whole |
| flowchart | the audit documentation that provides a visual display of the accounting system and control activities in an entity's internal control system |
| information system | an entity's system, usually build on some type of technological platform that has been designed to produce the information necessary for the entity to operate and control its business operations |
| integrated audit process | the term used to describe an audit process that is designed to provide and opinion on both the financial statements and internal control system of an entity |
| internal control deficiency | a condition that exists when the design or operation of a control does not allow the entity's management or employees to detect or prevent misstatements in a timely fashion |
| internal control questionnaire | the audit documentation that uses a checklist of internal control-related questions to gain an document an understanding of the client's internal control |
| management's annual report on internal control over financial reporting | report required by SOX that states that mgmt is responsible for establishing and maintaining adequate internal control over reporting, identifies the framework mgmt uses to evaluate control effectiveness and provides mgmts assessment of effectiveness |
| material weakness | a deficiency or combination of deficiencies that results in a reasonable possibility that a material misstatement would not be prevented or detected on a timely basis |
| narrative description | the audit documentation that describes the environmental elements, the accounting system, and the control activities in an entity's internal control |
| operating effectiveness | description of a condition expressing whether a control is operating as designed and whether the person performing the control possesses the necessary authority and qualifications to perform the control effectively |
| preventive controls | the activities that prevent misstatements before they occur |
| significant deficiency | a deficiency or a combination of deficiencies in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance |
| transaction-level controls | the controls that relate to specific classes of transactions, account balances and disclosures |
| unqualified opinion on internal control over financial reporting | the report issued when no material weaknesses in internal control over financial reporting are identified and no scope limitations on the audit of internal control exist |
| walkthrough | the tracing of one or more transactions through the audit trail from initiation of the transaction to its inclusion in the financial statements |
| check kiting | the practice of building up balances in one or more bank accounts based on uncollected (floating)checks drawn against similar accounts in other banks |
| cutoff bank statement | a client bank statement (usually sent directly to the auditor) that includes all paid checks and deposits slips through a certain date, usually in the middle of the month |
| direct-effect illegal acts | the violations of laws or government regulations by a company or its management or employees that produce direct and material effects on dollar amounts in financial statments |
| fidelity bond | an insurance policy that covers most kinds of cash embezzlement losses |
| lapping | the theft of payment and the application of subsequent payments to cover the theft |
| lockbox | an arrangement in which a fiduciary (e.g. bank) receives the payments, lists the receipts, deposits the money, and sends the remittance advices (stubs showing the amount received from each customer) to the company. |
| motive | in the fraud context, some type of pressure experienced by a person that is believed to be unshareable with friends and confidants |
| proof of cash | a reconciliation in which the bank balance, the bank report of cash deposited, and the bank report of cash paid are all reconciled to the company's general ledger and cash receipts and disbursements journals |
| schedule of interbank transfers | a document prepared to use in analyzing whether transfers of cash from one bank to another were recorded properly (correct amount and date) |
| act-utilitarianism | the emphasis on an individual act as it is affected by the specific circumstances of the situtation |
| categorical imperative | Kant's specification of an unconditional obligation to act as thinks other should act regardless of circumstances |
| commission | a percentage fee charged for professional services in connection with executing a transaction or performing some other business activity |
| contingent fee | a type of compensation established for the performance of any service in an arrangement in which no amount will be changed unless a specific finding or result is attained or the fee otherwise depends on the result |
| covered member | any individual who might be in a position to compromise the integrity of an audit - those (1) on audit team (2) in a position of influence on team (3) a partner or manager of a nonaudit client service team or (4) a partner from the local office |
| generalization argument | a judicious combination of the imperative and utilitarian principles; to act as one thinks others should act in a similar circumstance |
| independence | a mental attitude and the appearance that the auditor is not influenced by others in judgments and decisions |
| referral fee | the (1) compensation that a CPA receives for recommending another CPA's services and (2) that a CPA pays to obtain a client |
| rule-utilitarianism | the emphasis on the centrality of rules for ethical behavior while still maintaining the criterion of the greatest universal good |
| self-regulation | the quality control reviews and disciplinary actions conducted by fellow CPAs-professional peers |
| virtue ethics | the focus on the role of one's character in the decision-making process |
| breach of contract | a claim that accounting or auditing services were not performed in the manner described in the contract |
| causation defense | an argument available to auditors who can show that a plaintiff's economic loss was caused by a factor other than the auditors' failure to exercise the appropriate level of professional care or breach of contract |
| class action | a situation in which a group of plaintiffs comes together in a legal action against another party |
| comfort letter | a letter issued by auditors to underwriters of securities that provides an opinion on the fairness of the issuers' financial statements |
| common law | the liability for injuries based on reasons other than violation of a written law or statute. Legal precedent is used in assessing the degree of responsibility/fault of the parties. auditors have common law liability to clients and 3rd parties |
| constructive fraud | a failure to provide any care in fulfilling a duty owed to another including a reckless disregard for the truth (similar to gross negligence) |
| contributory negligence | a legal defense theory in which the plaintiff's own failure to perform with the appropriate level of professional care bars recovery from auditors |
| "deep pockets" theory | the concept that lawsuits may be brought against auditors not because they are necessarily at fault but because they are the only party with resources against which recovery can be made |
| expectation gap | the difference between the actual work and assurance required by GAAS and the expectation of that work by the general public |
| Financial Reporting Releases (FRRs) | reports prepared by SEC staff that express new rules and policies about disclosure |
| foreseeable party | the individuals or organizations that could be reasonably expected to rely on auditors' work |
| form 10-K | the form to use for annual filing of financial statements and related disclosures by public companies with the SEC |
| form 10-Q | the form to use for quarterly filing of financial statements and related disclosures by public companies with the SEC |
| gross negligence | the breach of duty owed to another party because of a lack of minimal care (similar to constructive fraud) |
| initial public offering (IPO) | the initial issuance of securities by a registrant entity to the investing public through a market that is subject to the provisions of the Securities Act of 1933 |
| joint and several liability | the legal doctrine that when multiple defendants are named, the full amount of a damage award may be collected from any of the defendants named in the lawsuit even though they may be only partially at fault. |
| limited liability partnership | a form of organization adopted by most large accounting firms that combines the advantages of a traditional partnership with the liability protection afforded to corporations |
| ordinary negligence | the unintentional breach of duty owed to another as a result of a lack of reasonable care |
| plaintiff | the person or organization that initiates a lawsuit (client or 3rd party user of financial statements) |
| primary beneficiary | a person known by name to the auditor for whose primary benefit the audit or other accounting service is performed |
| privity of contract | a situation in which parties have a contractual relationship |
| proportionate liability | the legal doctrine that payment of a share of the court's damage award be based on the extent (proportion) of fault exhibited by a convicted defendant |
| prospectus | a legal document offering securities for sale; includes significant information about the issuing entity, including its historical financial statements and other necessary disclosures |
| registration statement | a set of documents, including a prospectus, that a company files with the SEC prior to an initial public offering. |
| regulation S-K | the SEC requirements relating to all business, analytical and supplementary financial disclosures other than financial statements themselves |
| regulation S-X | the SEC accounting requirements for annual and interim financial statements filed under both the Securities Act and the Securities Exchange Act |
| scienter | a mental state embracing the intent to deceive, manipulate, or defraud prior to committing those actions( for example, auditors' knowledge of misstatement and the intentional failure to disclose the misstatement in their report) |
| staff accounting bulletins (SABs) | the unofficial but important interpretations of regulation s-k and s-x by SEC staff |
| statutory law | the legal rules affecting liability based on violations of written laws or statutes. Auditors have statutory liability to 3rd party investors under the securities act |
| tort | a civil complaint charging that the action of one person caused injury (personal or financial) to another; such action against auditors is normally initiated by users of financial statements |
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