Chapter 17- definition of terms Flashcards
An opinion that the financial statements do not fairly present financial
position, results of operations, and cash flows in conformity with generally accepted accounting
principles. This situation occurs when the auditors believe that departures from GAAP are both
material and pervasive.
Adverse opinion
Changes in accounting principles and reporting entities
result in an emphasis-of-matter paragraph being added to the auditors’ report.
Change in accounting principle
A complete set of financial statements for one or more prior
periods included for comparison with the financial statements of the current period.
Comparative financial statements
An entity or business activity for which group or
component management prepare financial information that is required by the applicable financial
reporting framework to be included in group financial statements.
Component (of a financial statement)
Under AICPA standards, auditors who perform work on the financial
information of a component that will be used as audit evidence for the group audit. The term “other
auditors” is used in the PCAOB standards.
Component auditors
As included in the PCAOB auditing standards, a matter
arising from the audit of the financial statements that was communicated or required to be communicated
to the audit committee and that (1) relates to accounts or disclosures that are material to the financial
statements and (2) involved especially challenging, subject, or complex auditor judgment.
Critical audit matter (CAM)
A form of report in which the auditors state that they do not express an
opinion on the financial statements.
Disclaimer of opinion
A paragraph inserted in an audit report issued under PCAOB
standards to describe certain circumstances that the auditors believe should be emphasized (e.g.,
uncertainties, unusually important subsequent events, a major catastrophe, a division of responsibility
for the total audit). See also explanatory paragraph.
Emphasis of a matter paragraph
A 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 see Explanatory paragraph and Emphasis of
a matter paragraph.
Emphasis-of-matter paragraph
A paragraph inserted in an auditors’ report issued under PCAOB
standards to describe a matter relating to the financial statements or to the audit. Also see emphasis
of a matter paragraph. AICPA Auditing Standards Board (and international) standards use the terms
“emphasis-of-matter paragraph” and “other-matter paragraph.”
Explanatory paragraph
The PCAOB form that requires (1) the name of the engagement partner; (2) the
names, locations, and extent of participation of other accounting firms that took part in the audit if their
work constituted 5 percent or more of total audit hours; and (3) the number and aggregate extent of
participation of other accounting firms that took part in the audit.
Form AP
A financial reporting framework designed
to meet the common financial information needs of a wide range of users (e.g., GAAP, International
Financial Reporting Standards). Also referred to in the professional standards as a general-purpose
framework.
General-purpose financial reporting framework
The audit of the financial statements of a company composed of more than one
component.
Group audit
For nonpublic companies, the firm responsible for issuing the audit report on a
group of companies (e.g., a parent and its subsidiaries). See footnote 13, page 761. The term “principal
auditors” is used in the PCAOB standards.
Group auditors
As included in the AICPA and international auditing standards,
matters that, in the auditor’s professional judgment, were of most significance in the audit of the
financial statements of the current period. Key audit matters are selected from matters communicated to
those charged with governance.
Key audit matter (KAM)
Being of substantial importance. Significant enough to affect evaluations or decisions by
users of financial statements. Information that should be disclosed in order for the financial statements to
constitute a fair presentation. Determining what is material involves both quantitative and qualitative criteria.
Material
A qualified opinion, an adverse opinion, or a disclaimer of opinion.
Modified opinion
A term used by the PCAOB for an audit firm that performs work on a component
of a company that will be used as audit evidence by the principal auditor (e.g., a subsidiary, while the
principal auditor audit other subsidiaries and he parent). The term “component auditors” is used in the
AICPA standards.
Other auditors
Financial and nonfinancial information (other than the financial statements
and the auditors’ report thereon) included in an entity’s annual report.
Other information
This term is used in nonpublic auditing standards for a paragraph
(section) included in the auditors’ report that is required by GAAS, or is included at the auditor’s
discretion and that refers to a matter other than those presented or disclosed in the financial statements.
Public company auditing standards consider these paragraphs (sections) as one type of explanatory
paragraph.
Other-matter paragraph
A term used, in the context of misstatements, to describe the effects on the financial
statements of misstatements or the possible effects on the financial statements of misstatements, if any,
that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects
on the financial statements are those that, in the auditors’ judgment, * Are not confined to specific
elements, accounts, or items of the financial statements. * If confined, represent or could represent a
substantial proportion of the financial statements. * In relation to disclosures, are fundamental to users’
understanding of the financial statements.
Pervasive
The term used by the PCAOB for the audit firm that is responsible for
issuing the audit report on the overall group of companies (e.g., the firm that has audited the parent and all but one of its subsidiaries). We use the term “group auditors” for public company audits (see
footnote 13, page 761).
Principal auditors
A modification of the auditors’ opinion employing a clause such as except
for to limit the auditors’ opinion on the financial statements. A qualified opinion indicates that, except
for the effects of some limitation on the scope of the audit or some departure from generally accepted
accounting principles, the financial statements are fairly presented.
Qualified opinion
The period of time required by the applicable financial reporting
framework or, if no requirement exists, within one year after the date the financial statements are issued
(or available to be issued). (relating to a client’s going-concern status)
Reasonable period of time
A restriction that prevents the auditors from being able to apply all of the audit
procedures that they consider necessary in the circumstances. Scope limitations may be client imposed
or may be imposed by other circumstances.
Scope limitation
An auditors’ report in which the principal auditors decide to
share responsibility with other auditors who have audited some segment of the client’s business. The
sharing of responsibility is done by making reference to the other auditors. Making reference is not, in
itself, a qualification of the auditors’ report.
Shared responsibility opinion
Identified and assessed risks of material misstatement that, in the auditor’s
judgment, require special audit consideration
Significant Risks
An audit report with (1) an unmodified (unqualified) opinion and (2) no
additional matters emphasized (e.g., a change in accounting principles) beyond the information required
in audit reports. Note that while this term is frequently used in practice, neither the AICPA nor the
PCAOB currently uses it in its standards.
Standard report
When relevant conditions and events, considered in the aggregate, indicate
that it is probable that the entity will be unable to meet its obligations as they become due within one
year after the date that the financial statements are issued (or available to be issued). (about an entity’s
ability to continue as a going concern)
Substantial doubt
For nonpublic companies, the opinion expressed by the auditors when
they conclude that the financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework (e.g., GAAP).
Unmodified opinion
For public companies, the opinion expressed when they conclude that the
financial statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework (e.g., GAAP).
Unqualified opinion
