Audit Definitions

Question 1

Assurance services

Answer 1

Independent professional services that improve the quality of information, or its context, for decision makers. Encompasses attest services and financial statement audits.

Question 2

Attest services

Answer 2

Services provided by a practitioner engaged to issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. Encompasses financial statement audits.

Question 3

Audit evidence

Answer 3

All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements, as well as other information.

Question 4

Audit risk

Answer 4

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Question 5

Auditing

Answer 5

A systematic process of

1. Objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria, and
2. Communicating the results to interested users.

Question 6

Financial statement

assertions

Answer 6

Expressed or implied representations by management that are reflected in the financial statement components.

Question 7

Information asymmetry

Answer 7

The concept that the manager generally has more information about the true financial position and results of operations of the entity than the absentee owner does.

Question 8

Materiality

Answer 8

The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users.

Question 9

Misstatement

Answer 9

An instance where a financial statement assertion is not in accordance with the criteria against which it is audited (e.g., GAAP). Misstatements may be classified as fraud (intentional), other illegal acts such as noncompliance with laws and regulations (intentional or unintentional), and errors (unintentional).

Question 10

Reasonable assurance

Answer 10

The concept that an audit done in accordance with auditing standards may fail to detect a material misstatement in a client’s financial statements. In an auditing context this term has been defined to mean a high but not absolute level of assurance.

Question 11

Reporting

Answer 11

The end product of the auditor’s work, indicating the auditing standards followed and expressing an opinion as to whether an entity’s financial statements are fairly presented in accordance with agreed-upon criteria (e.g., GAAP).

Question 12

Risk of material

misstatement

Answer 12

The pre-audit risk that the entity’s financial statements contain a material misstatement whether caused by error or fraud.

Question 13

Unqualified/unmodified

audit report

Answer 13

A “clean” audit report, indicating the auditor’s opinion that a client’s financial statements are fairly presented in accordance with agreed-upon criteria (e.g., GAAP).

Question 14

Audit committee

Answer 14

A committee consisting of members of the board of directors, charged with overseeing the entity’s system of internal control over financial reporting, internal and external auditors, and the financial reporting process. Members typically must be independent of management.

Question 15

Board of directors

Answer 15

Persons elected by the stockholders of a corporation to oversee management and to direct the affairs of the corporation.

Question 16

Business processes

Answer 16

Processes implemented by management to achieve entity objectives. Business processes are typically organized into the following categories: financing processes, purchasing, human resource management, inventory management, and revenue.

Question 17

Code of Professional Conduct

Answer 17

A set of principles, rules, and interpretations that establish guidance for acceptable behavior for accountants and auditors.

Question 18

Corporate governance

Answer 18

The oversight mechanisms in place to help ensure the proper stewardship over an entity’s assets. Management and the board of directors play primary roles, and the independent auditor plays a key facilitating role.

Question 19

Ethics

Answer 19

A system or code of conduct based on moral duties and obligations that indicates how an individual should behave.

Question 20

Generally accepted accounting principles (GAAP)

Answer 20

Accounting principles that are generally accepted for the preparation of financial statements in the United States. GAAP standards are currently issued primarily by the FASB, with oversight and influence by the SEC. International Financial Reporting Standards (IFRS) are set by the International Accounting Standards Board.

Question 21

Generally accepted auditing standards

GAAS

Answer 21

Ten broad statements guiding the conduct of financial statement auditing. The 10 GAAS are still found in PCAOB standards but they have been replaced in the ASB standards by the “Principles Underlying an Audit Conducted in Accordance with Generally Accepted Auditing Standards.”

Question 22

Illegal acts

Answer 22

Violations of laws or government regulations. Independence. A state of objectivity in fact and in appearance, including the absence of any significant conflicts of interest.

Question 23

Integrated audit

Answer 23

An audit of both financial statements and internal control over financial reporting, provided by the external auditor. Required for public companies.

Question 24

International Standards 
on Auditing (ISA)

Answer 24

Statements issued by IFAC’s International Auditing and Assurance Standards Board.

Question 25

Management | advisory services

Answer 25

Consulting services that may provide advice and assistance concerning an entity’s organization, personnel, finances, operations, systems, or other activities.

Question 26

Principles Underlying | an Audit Performed in Accordance with GAAS

Answer 26

The ASB replaced the 10 Generally Accepted Auditing Standards with these Principles, organized into four parts: 1. Purpose of an Audit and Premise upon which an Audit is Conducted 2. Auditor Responsibilities 3. Audit Performance 4. Audit Reporting.

Question 27

Public accounting | firm

Answer 27

An organization created to provide professional accounting-related services, including auditing. Usually formed as a proprietorship or as a form of partnership.

Question 28

Standards (AS) of the PCAOB

Answer 28

Standards regarding the conduct of financial statement audits for public companies. Currently consist of a mix of standards and statements established by the ASB, as these statements and standards were adopted by the PCAOB in 2003 on an interim basis, together with Auditing Standards (AS) issued by the PCAOB since 2003

Question 29

Statements on Auditing Standards (SAS)

Answer 29

Standards (AS) of the PCAOB Standards regarding the conduct of financial statement audits for public companies. Currently consist of a mix of standards and statements established by the ASB, as these statements and standards were adopted by the PCAOB in 2003 on an interim basis, together with Auditing Standards (AS) issued by the PCAOB since 2003

Question 30

PCAOB

Answer 30

- Public Company Accounting Oversight Board - Provides oversight for auditors of public companies, establishes auditing and quality control standards for public company audits and performs inspections of the quality controls at audit firms performing those audits. - Overseen by SEC

Question 31

AICPA

Answer 31

- American Institute of Certified Public Accountants • Sets professional requirements (ethics) • Conducts research • Publishes materials related services performed • Empowered to set standards (guidelines) and rules • CPA Exam - Responsible for auditing standards of all companies other than public companies

Question 32

Analytical procedures

Answer 32

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.

Question 33

Audit procedures

Answer 33

Specific acts performed as the auditor gathers evidence to determine if specific audit objectives are being met.

Question 34

Audit strategy

Answer 34

The auditor’s plan for the expected conduct, organization, and staffing of the audit.

Question 35

Auditor specialist

Answer 35

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor’s specialist may be either an auditor’s internal specialist (who is a partner or staff, including temporary staff, of the auditor’s firm or a network firm) or an auditor’s external specialist.

Question 36

Dual-purpose test

Answer 36

Tests of transactions that both evaluate the effectiveness of controls and detect monetary errors.

Question 37

Engagement letter

Answer 37

A letter that formalizes the contract between the auditor and the entity and outlines the responsibilities of both parties.

Question 38

Internal audit function

Answer 38

An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Question 39

Overall materiality | Planning materiality

Answer 39

The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users.

Question 40

Substantive | procedures

Answer 40

Audit procedures performed to test material misstatements in an account balance or disclosure component of the financial statements.

Question 41

Substantive tests of transactions

Answer 41

Tests to detect errors or fraud in individual transactions.

Question 42

Tests of controls

Answer 42

Audit procedures performed to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the relevant assertion level.

Question 43

Tests of details

Answer 43

Substantive tests that concentrate on the details of items contained in the account balance and disclosure.

Question 44

Tolerable misstatement (Performance materiality)

Answer 44

 The amount of the overall materiality that is used to establish a scope for the audit procedures for the individual account balance or disclosures.

Question 45

Business risks

Answer 45

Risks resulting from significant conditions, events, circumstances, and actions or inactions that could adversely affect management’s ability to execute its strategies and to achieve its objectives, or through the setting of inappropriate objectives or strategies.

Question 46

Control risk

Answer 46

The risk that a misstatement that could occur in an assertion about an account or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

Question 47

Detection risk

Answer 47

The risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

Question 48

Engagement risk

Answer 48

The risk that the auditor is exposed to financial loss or damage to his or her professional reputation from litigation, adverse publicity, or other events arising in connection with financial statements audited and reported on.

Question 49

Errors

Answer 49

Unintentional misstatements or omissions of amounts or disclosures.

Question 50

Factual | misstatements

Answer 50

These are misstatements about which there is no doubt. For example, an auditor may test a sales invoice and determine that the prices applied to the products ordered are incorrect. Once the products are correctly priced, the amount of misstatement is known. In such cases, the auditor knows the exact amount of the misstatement.

Question 51

Fraud

Answer 51

An intentional act by one or more among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements.

Question 52

Inherent risk

Answer 52

The susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

Question 53

Judgmental | misstatements

Answer 53

 These are misstatements that arise from the judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate.

Question 54

Non-sampling risk

Answer 54

The risk that auditors will make judgment errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation.

Question 55

Projected | misstatements

Answer 55

These are the auditor’s best estimate of misstatements in populations, involving the projection of misstatements identified in an audit sample to the entire population from which the sample was drawn.

Question 56

Risk assessment

Answer 56

The identification, analysis, and management of risks relevant to the preparation of financial statements that are fairly presented in conformity with GAAP.

Question 57

Risk of material | misstatement

Answer 57

The risk that the financial statements are materially misstated prior to the audit. It represents the combination of inherent risk and control risk.

Question 58

Scope of the audit

Answer 58

Refers to the nature, timing, and extent of audit procedures, where nature refers to the type of evidence; timing refers to when the evidence will be gathered; and extent refers to how much of the type of evidence will be evaluated.

Question 59

Accounting records

Answer 59

The records of initial entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries, and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations, and disclosures.

Question 60

Assertions

Answer 60

 Expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in the financial statements and related disclosures.

Question 61

``` Audit documentation (working papers) ```

Answer 61

The auditor’s principal record of the work performed and the basis for the conclusions in the auditor’s report. It also facilitates the planning, performance, and supervision of the engagement and provides the basis for the review of the quality of the work by providing the reviewer with written documentation of the evidence supporting the auditor’s significant conclusions.

Question 62

Confirmation

Answer 62

A confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party) in paper form or by electronic or other media.

Question 63

Inquiry

Answer 63

Seeking information of knowledgeable persons, both financial and nonfinancial, within the entity or outside the entity.

Question 64

Inspection of records and documents

Answer 64

Examination of internal or external records or documents that are in paper form, electronic form, or other media.

Question 65

Inspection of | tangible assets

Answer 65

Physical examination of the tangible assets.

Question 66

Observation

Answer 66

Watching a process or procedure being performed by others.

Question 67

Other information

Answer 67

Audit evidence that includes minutes of meetings; confirmations from third parties; industry analysts’ reports; comparable data about competitors (benchmarking); controls manuals; information obtained by the auditor from such audit procedures as inquiry, observation, and inspection; and other information developed by, or available to, the auditor that permits the auditor to reach conclusions through valid reasoning.

Question 68

Recalculation

Answer 68

The auditor’s checking the mathematical accuracy of documents or records either manually or electronically.

Question 69

Relevance of | evidence

Answer 69

The relevance of audit evidence refers to its relationship to the assertion or to the objective of the control being tested.

Question 70

Reliability of | evidence

Answer 70

The diagnosticity of evidence—that is, whether the type of evidence can be relied on to signal the true state of the assertion.

Question 71

Re-performance

Answer 71

The auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control, either manually or through the use of computer-assisted audit techniques.

Question 72

Scanning

Answer 72

The auditor’s exercise of professional judgment to review accounting data to identify significant or unusual items to test.

Question 73

Application controls

Answer 73

Controls that apply to the processing of specific computer applications and are part of the computer programs used in the accounting system.

Question 74

Computer-assisted audit techniques (CAATs)

Answer 74

Computer programs that allow auditors to test computer files and databases.

Question 75

Control activities

Answer 75

The policies and procedures that help ensure that management’s directives are carried out.

Question 76

Control deficiency

Answer 76

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis.

Question 77

Control environment

Answer 77

The tone of an organization, which reflects the overall attitude, awareness, and actions of the board of directors, management, and owners influencing the control consciousness of its people.

Question 78

Control risk

Answer 78

The risk that a misstatement that could occur in an assertion about an account or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

Question 79

Electronic (Internet) | commerce

Answer 79

Business transactions between individuals and organizations that occur without paper documents, using computers and telecommunication networks.

Question 80

Electronic data | interchange

Answer 80

The transmission of business transactions over telecommunications networks.

Question 81

General controls

Answer 81

Controls that relate to the overall information processing environment and have a pervasive effect on the entity’s computer operations.

Question 82

Internal control

Answer 82

The method by which an entity’s board of directors, management, and other personnel provide reasonable assurance about the achievement of objectives in the following categories: (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.

Question 83

Monitoring of controls

Answer 83

A process that assesses the quality of internal control performance over time.

Question 84

Material weakness

Answer 84

A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis.

Question 85

Reliance strategy

Answer 85

The auditor’s decision to rely on the entity’s controls, test those controls, and reduce the direct tests of the financial statement accounts.

Question 86

Significant deficiency

Answer 86

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.

Question 87

Substantive strategy

Answer 87

The auditor’s decision not to rely on the entity’s controls and to audit the related financial statement accounts by relying more on substantive procedures.

Question 88

Walkthrough

Answer 88

A transaction being traced by an auditor from origination through the entity’s information system until it is reflected in the entity’s financial reports. It encompasses the entire process of initiating, authorizing, recording, processing, and reporting individual transactions and controls for each of the significant processes identified.

Question 89

Entity-level controls

Answer 89

Controls that have a pervasive effect on the entity’s system of internal control such as controls related to the control environment; controls over management override; the entity’s risk assessment process; centralized processing and controls, including shared service environments; controls to monitor results of operations; controls to monitor other controls, including activities of the internal audit function, the audit committee, and self-assessment programs; controls over the period-end financial reporting process; and policies that address significant business control and risk management practices.

Question 90

Internal control | over financial reporting

Answer 90

A process designed by, or under the supervision of, the entity’s principal executive and principal financial officers, or persons performing similar functions, and effected by the entity’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Question 91

Relevant assertion

Answer 91

A financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated.

Question 92

Remediation

Answer 92

The process of correcting a material weakness as part of management’s assessment of the effectiveness of ICFR.

Question 93

Safeguarding of assets

Answer 93

Those policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.

Question 94

Significant account | or disclosure

Answer 94

An account or disclosure is significant if there is a reasonable possibility that the account or disclosure could contain a misstatement that, individually or when aggregated with others, has a material effect on the financial statements, considering the risks of both overstatement and understatement.

Question 95

Significant deficiency

Answer 95

A deficiency, or a combination of deficiencies, in ICFR that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the entity’s financial reporting.

Question 96

Walkthrough

Answer 96

A transaction being traced by an auditor from origination through the entity’s information system until it is reflected in the entity’s financial reports. It encompasses the entire process of initiating, authorizing, recording, processing, and reporting individual transactions and controls for each of the significant processes identified.