Chapter 16: definition of terms Flashcards
Evaluations of financial information made by a study of plausible
relationships between financial and nonfinancial information.
Analytical procedures
A contractual obligation to carry out a transaction at specified terms in the future.
Material commitments should be disclosed in the financial statements.
Commitment
An accounting doctrine for asset valuation in which the lower of two alternative
acceptable asset valuations is chosen
Conservatism
A possible liability, stemming from past events, that will be resolved as to
existence and amount by some future event.
Contingent liability
The date of the end of the latest period covered by the financial
statements (e.g., date of the balance sheet).
Date of the financial statements
A list of specific disclosures required by the FASB, the GASB, the FASAC,
and the SEC that is used to evaluate the adequacy of the disclosures in a set of financial statements
Disclosure checklist
A section (paragraph) included in the nonpublic
company auditors’ report that is required by GAAS or is included at the auditors’ discretion, and that
refers to a matter appropriately presented or disclosed in the financial statements that, in the auditors’
judgment, is of such importance that it is fundamental to users’ understanding of the financial
statements (e.g., a lack of consistent application of GAAP). For public companies, as discussed in detail
in Chapter 17, the terms explanatory paragraph and emphasis of a matter paragraph are used.
Emphasis-of-matter section (paragraph)
Misstatements about which there is no doubt; for example, failure to
record a purchase during the period. Previously, the auditing literature referred to factual misstatements
as known misstatements. Misstatements may be categorized as factual misstatements, judgmental
misstatements, and projected misstatements—see the definitions of each.
Factual misstatements
An element of the business environment that involves some risk of
a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe.
General risk contingencies should not be disclosed in financial statements.
General risk contingency
Misstatements found by the auditors during their audit. These
misstatements may or may not be corrected by management. Misstatements may be categorized as factual
misstatements, judgmental misstatements, and projected misstatements—see the definitions of each.
Identified misstatements
An approach to making materiality judgments that quantifies the
total likely misstatement as of the current year-end based on the effects of reflecting all misstatements
(including projecting misstatements where appropriate) existing in the balance sheet at the end of the
current year, irrespective of whether the misstatements occurred in the current year or previous years. For
example, if expenses were understated by $20,000 in the previous year and $45,000 during the current
year, the iron curtain method would quantify the misstatement as $65,000. Also see rollover approach.
Iron curtain approach
Differences arising 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. For example, a difference related to the
appropriate amount in the allowance for doubtful accounts. Misstatements may be categorized as factu
Judgmental misstatements
The auditing literature now refers to these as factual misstatements (see
that term). Misstatements may be categorized as factual misstatements, judgmental misstatements, and
projected misstatements—see the definitions of each.
Known misstatements
A letter sent by auditors to a client’s legal counsel
requesting a description and evaluation of pending or threatened litigation, unasserted claims, and other
loss contingencies. The returned letter from the lawyer is referred to as the lawyer’s letter.
Letter of inquiry (of the client’s lawyer)
A possible loss, stemming from past events, that will be resolved as to existence
and amount by some future event. Loss contingencies should be disclosed in notes to the financial
statements if there is a reasonable possibility that a loss has been incurred. When loss contingencies are
considered probable and can be reasonably estimated, they should be accrued in the accounts.
Loss contingency
Reviews conducted by management of estimates and other
kinds of financial information for reasonableness. They often involve the use of significant judgment,
knowledge, and experience in comparing recorded amounts with expectations of the reviewers. They
often are considered monitoring controls but may relate to any of the other COSO components that
have the common characteristic of management review of information to identify misstatements or
breakdowns in other controls.
Management review controls
A formal record of the issues discussed and actions taken in meetings of stockholders
and the board of directors.
Minutes
Differences between the amount, classification, presentation, or disclosure
of reported financial statement items and the amount, classification, presentation, or disclosure that
is required for the items to be presented fairly in accordance with the applicable financial reporting
framework. Misstatements can arise from fraud or error. Misstatements may be categorized as factual
misstatements, judgmental misstatements, and projected misstatements—see the definitions of each.
Misstatements
Financial and nonfinancial information (other than the financial statements
and the auditors’ report thereon) included in an entity’s annual report.
Other information
The auditors’ best estimate of the misstatement in populations
involving the projection of misstatements identified in audit samples to entire populations from which
the samples were drawn; for example, a difference in the total accounts receivable based on a projection
of sample results to the entire population of accounts receivable. Projected misstatements are sometimes
referred to as known likely misstatements. Misstatements may be categorized as factual misstatements,
judgmental misstatements, and projected misstatements—see the definitions of each.
Projected misstatements
The date the auditors grant the client permission to use the audit report in
connection with the financial statements. This is sometimes referred to as the date of issuance of the
audit report.
Report release date
A single letter or separate letters prepared by officers of the client
company at the auditors’ request setting forth certain representations about the company’s financial
position or operations.
Representation letter
Information that a designated accounting standards
setter requires to accompany an entity’s basic financial statements. Required supplementary information
differs from other types of information outside the basic financial statements because a designated
accounting standards setter considers the information an essential part of the financial reporting
of certain entities and because authoritative guidelines for the measurement and presentation of the
information have been established.
Required supplementary information
An approach to making materiality judgments that quantifies the total likely
misstatement as of the current year-end based on the effects of reflecting misstatements (including
projecting misstatements where appropriate) only during the current year. For example, if expenses were
understated by $20,000 in the previous year, and $45,000 during the current year, the rollover method
would quantify the misstatement as $45,000, ignoring the previous year misstatement. Also see iron
curtain approach.
Rollover approach
Procedures carried out by auditors at the client company’s facilities on or as close as
practicable to the effective date of a registration statement filed under the Securities Act of 1933.
S-1 review
An event occurring between the date of the financial statements and the date
of the auditor’s report.
Subsequent event
Information presented outside the basic financial statements,
excluding required supplementary information, that is not considered necessary for the financial
statements to be fairly presented in accordance with the applicable financial reporting framework. Such
information may be presented in a document containing the audited financial statements or separate
from the financial statements.
Supplementary information
A possible legal claim of which no potential claimant has exhibited an awareness
Unasserted claim
Misstatements that have not been reflected in the financial
statements. Ordinarily these are misstatements the auditors have identified and for which proposed
adjusting entries have not been recorded.
Uncorrected misstatements
