Chapter 3: Auditing and Attestation - Performing Audit Procedures and Evaluating Evidence Flashcards
a set of audit procedures that examine the relationships between financial and nonfinancial data
Analytical Procedures
declarations or a set of declarations about whether subject matter is based on or conforms to selected criteria (AT 101.08)
Assertions
a series of specific and specialized steps or actions auditors take to meet audit objectives
Audit Procedure
the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
Audit Risk
the classification of accounts receivable by various age categories. The balance of accounts receivable in each class (e.g., current, 30, 45, 60, 90, and over 90 days past due) is multiplied by the percentage probability of collection based on past collection history and management judgment (e.g., there may be a 90% likelihood that an account 30 days past due will be collected, while the probability drops to 25% when the account is over 90 days past due)
Aging of Accounts Receivable
a concept of the attest function. It is the practitioner’s satisfaction about the reliability of an assertion being made by one party for use by other parties
Assurance
he application of an audit procedure to fewer than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class
Audit Sampling
an accounting process for reducing an asset or liability by periodic payments or writedowns that are distributed across the time the organization gains a value from or has obligation for the item
Amortization
a method of short-term financing, similar to pledging, in which a business uses its accounts receivable as collateral for a loan under a more formal process than pledging
Assigning of Accounts Receivable
Another name for the goal of the audit procedures used to obtain evidence about the dollar amounts and disclosures presented in the financial statements
Audit Objective
an activity ratio that measures efficiency of credit and collection policies with respect to trade accounts
Accounts Receivable Turnover
ratios that measure the efficiency with which the firm uses its resources
Activity Ratio
the measure of the quality of audit evidence, that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based
Appropriate
a formula or plan that disperses an amount and is considered an accounting process
Allocation
A basic assumption of accounting is that measurements are made and reports prepared for a specific time period,
Accounting Period
an attempt to quantify the effects of future events that cannot be known with certainty, based on assumptions and projections
Accounting Estimate
to issue a written communication expressing a conclusion (opinion) on subject matter, or an assertion about the subject matter that is the responsibility of another party
Attest Engagement
an individual who performs auditing procedures to determine the validity and fair presentation of financial information or to provide assurance to management on the effectiveness of the organization’s governance, risk management, and/or control processes
Auditor
designed to ensure that all transactions have management approval before they are executed and recorded.
Authorization
a written outline of work to be done during an audit
Audit Program
information that correctly and precisely represents a recorded event
Accuracy
the transactions and data relating to each computer-based application system and are, therefore, specific to each such application
Application Controls
the path left by a transaction when it is processed
Audit Trail
provides auditors with the ability to quickly extract data from computer files
Audit Software
entered in the accounting records by an adjusting journal entry
Accrued
measures how rapidly the firm’s credit sales are being collected (the lower the ratio, the more efficient the collection)
Average Collection Period
a measure of how effectively a business unit uses its assets. It can be illustrated as Total sales/Total average assets.
Asset Turnover
the principal laws and regulations used by management and those charged with governance in the preparation of the financial statements of an entity
Applicable Financial Reporting Framework (AFRF)
a dollar amount appearing on financial statements
Account Balance
a body formed by a company’s board of directors to oversee audit operations and circumstances
Audit Committee
the number of shares of stock that the issuing corporation may legally issue as specified in the corporate charter or as amended by a vote of shareholders.
Authorized
auditing standards, internal controls are subdivided into two types: accounting and administrative controls
Accounting Controls
an “overall” audit opinion which states that the financial statements do not present fairly the financial position or the results of operations or cash flows in conformity with an applicable financial reporting framework (AU-C 705.09)
Adverse Opinion
a legal document in accordance with applicable state law that outlines the organization of a corporation and is filed with the Secretary of State as an application for a certificate of incorporation
Articles of Incorporation
a person (or firm) possessing knowledge in a particular field other than accounting or auditing
Auditor’s Specialist
a receivable that is considered to be uncollectible
Bad Debt
the condition of being judged insolvent by the court and having property distributed to creditors when a debtor is unable to meet debts
Bankruptcy
he contra asset account used to bring accounts receivable to net realizable value
Bad Debt Allowance
the uncertainty of the return related to the special problems of a particular company or industry
Business Risk
a plan of action expressed in dollars
Budget
a summary of assets, liabilities, and owner’s equity for a company as of a specific date
Balance Sheet
a form of confirmation that asks the recipient to fill in the balance or furnish other information
Blank Confirmation
a policy-setting committee, elected by and accountable to the shareholders in a business.
Board of Directors
the formal written statement specifying the conditions (terms) under which a bond is issued, including any restrictions or covenants
Bond Indenture
the tendency of a measure to fall more to one side than the other of what it represents, instead of being equally likely to fall on either side
Bias
financial statements presented together for one or more prior periods as well as the current period
Comparative Financial Statements
a management assertion that all transactions and events that should be presented in the financial statements are included
Completeness Assertion
sets the tone of an organization, influencing the control consciousness of its people
Control Environment
the policies and procedures that help ensure that management directives are carried out
Control Activities
the risk that a material misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure will not be prevented or detected and corrected on a timely basis by the entity’s internal control.
Control Risk
evidence, other than the books of original entry (i.e., the accounting records), which allows the auditor to reach conclusions
Corroborating Evidence
direct communication with external independent parties to prove that balances (e.g., cash balances, accounts receivable, accounts payable, notes payable) are correc
Confirmation
designed to ensure that all transactions are recorded in the correct account, charged or credited to the correct customer (or vendor), applied to the correct product line, or classified as an intercompany sale (i.e., a review of a fixed asset listing to confirm that no maintenance and repair expenditures have been capitalized).
designed to ensure that all transactions are recorded in the correct account, charged or credited to the correct customer (or vendor), applied to the correct product line, or classified as an intercompany sale (i.e., a review of a fixed asset listing to confirm that no maintenance and repair expenditures have been capitalized).
the last day of the accounting period
Cutoff Date
someone who has been lawfully appointed to take custody of something
Custodian (of a Minor)
a service, the objective of which is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework.
Compilation
may be direct, as in the case of handling cash or maintaining an inventory storeroom, or indirect, as in the case of receiving customer checks in the mail or writing checks on the organization’s bank account
Custody of Assets
the cost of holding inventory over time (e.g., rent and utilities on storage facilities, salaries for custodial personnel, insurance, write-off of obsolete inventory, lost interest on the funds tied up in inventory)
Carrying Cost
The process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions
Confirmation Process
the instructions or statements of a computer program, a system of symbols to convert alphanumeric data into a transmittable form, or a set of rules for the manner in which data must be represented
Code
all costs that were included in the value of the units of finished product sold during the period
Cost of Goods Sold
ownership interest that is subordinate to all other classes of stock (and to all creditors) of the issuing corporation in participation rights and in dividend and liquidation preferences (i.e., holders of common stock are paid after debt and preferred stock obligations have been met)
Common Stock
the property that a person can give and in which another can take a security interest or property subject to a security interest.
Collateral
a cash balance left on account with the bank in exchange for a loan
Compensating Balance
a draft drawn on a bank (drawee) by the writer (drawer or depositor) and payable on demand (to the payee).
Checks
the process of recording a cost as an asset and deferring its recognition as an expense to future periods.
Capitalization
a provision in a debt agreement that defines activities or obligations of the parties
Covenants
add across several columns of numbers to compute a total.
Crossfoot
an ownership interest in an incorporated business enterprise, represented by stock certificates that may be bought and sold or otherwise transferred
Capital Stock
a joint initiative of the five private-sector organizations listed below and is dedicated to providing thought leadership through the development of frameworks and guidance on enterprise risk management, internal control, and fraud deterrence.
COSO
the absence of evidence to the contrary, the entity is assumed to have an indefinite (“ongoing”) life—a life that is sufficiently indefinite and long for the entity to accomplish its objectives and fulfill its legal obligations and that provides the basis for the current/noncurrent balance sheet classification.
Continuity
right to receive payment or to sue; it can be used in bankruptcy to identify and categorize creditors.
Claim
ets an auditor extract (retrieve) data from the client’s computer and then analyze the data.
Data Extraction Software (DES)
a system for assembling, recording, classifying, storing, analyzing, and reporting data
Data Processing System
The use of two dates on the auditor’s report to indicate to the user that the auditor’s responsibility for events occurring subsequent to the original report date (the first date) is limited to the specific event referred to by the second date.
Dual Dating
the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements
Detection Risk
reported in the financial statements or the notes to the financial statements.
Disclosure
the excess of face value over the proceeds (cash paid) for a bond (i.e., the borrower receives proceeds less than the face value), which is contrasted to a Premium
Discount
a negative response to a confirmation request, such as when a customer disagrees with the account balance as shown on the confirmation request.
Deviation
the process of systematic, rational allocation of the cost of operational assets to the accounting periods benefited. Depreciation is not a process of valuation (FASB ASC 360-10-35-4), does not represent a reserve to replace the asset, and does not mean that cash will be available to replace the asset.
Depreciation
a system for assembling, recording, classifying, storing, analyzing, and reporting data.
Data Processing System
a special type of attribute sampling used when the occurrence rate (of a deviation) is extremely low.
Discovery Sampling
a liquidity ratio that measures a firm’s ability to discharge currently maturing obligations from existing current assets that are expected to be converted into cash within the maturing period of the claims
Current Ratio
a leverage ratio that measures the relationships between total debt (current and long-term liabilities) to total equity
Debt-to-Equity Ratio
n activity ratio that measures on-hand inventory and the sales activity needed for a number of days
Days’ Supply in Inventory
are the distributions of cash, other corporate assets or property, or the corporation’s own stock to stockholders in proportion to the number of outstanding shares held. Accounting for dividends represents a debit to retained earnings and the establishment of a liability at the date of declaration.
Dividends
an obligation to pay money, goods, or services due in the future to another entity (creditor)
Debt
an expression of no opinion
Disclaimer of Opinion
management assertion that assets and liabilities are real and exist at a specific date
Existence
the requirement of the auditor to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion on financial statements
Evidence
the degree to which objectives are achieved; producing the desired effect or result
Effectiveness
the amount of audit work performed when the procedures are executed (i.e., the size of the sample)
Extent
a special accounting treatment for investments in equity securities used only when the investor:
can exert significant influence or control over the investee (usually with majority—greater than 50%—ownership) and
does not consolidate the financial statements of the subsidiary.
Equity Method
any security that represents ownership interest or shares in an enterprise (e.g., common, preferred, and other capital stock) or the right to acquire (e.g., warrants, rights, and call options) or dispose of (put options) ownership interest in an enterprise at fixed and determinable prices
Equity Securities
the outflow or other using up of assets or incurring of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations
Expense
an unintentional misstatement or omission of amounts or disclosures in financial statements.
Error
an integral part of an application system that is designed to identify and report actual transactions and other information that meet criteria having audit significance
Embedded Audit Module
characters processed in computer systems and stored in computer files
Data
the quantity of inventory that should be ordered at one time in order to minimize the associated costs of carrying and ordering inventory, such as purchase-order processing, transportation, and insurance.
Economic Order Quantity (EOQ)
a situation wherein the practitioner renders professional services
Engagement
the auditor’s estimate of the ratio of actual deviations to population size
Expected Rate of Deviation
the allocation of a pro rata share of income to each share of common stock
Earnings per Share (EPS)
the date on which the grantee takes advantage of the option to purchase shares under a stock option or stock rights plan
Exercise Date
a letter written by the CPA to the client that represents the contractual understanding between the CPA and the client of the work to be performed, signed by both the CPA and the client
Engagement Letter
consists of documents or representations (e.g., confirmations) obtained by the auditor directly from independent parties external to the client entity (e.g., banks, customers, vendors, lenders, lessors, trustees, registrars). External evidence is evidence that has not been processed (“tainted”) by the entit
External Evidence
a decrease in (use of) the financial resources of the entity
Expenditure
the principal means of communicating financial information to those users external to the entity.
Financial Statements
the amount that the asset could reasonably expect to receive for it in a current sale between a willing buyer and a willing seller, that is, other than in a forced or liquidation sale
Fair Market Value (FMV)
the intentional misrepresentation or failure to disclose a material fact or facts that results in injury or loss to someone relying on it.
Fraud
a graphic depiction, using uniform symbols to show the control flow, primary actions, and interrelationships of a task or a set of tasks
Flowchart
he prediction of outcomes, trends, or expected behavior for the economy, an industry, a particular business, or an item such as sales or market prices using statistical methods.
Forecast
are tangible (i.e., having physical substance), long-lived (more than one accounting period) assets held for and used in the operations of the enterprise which provide measurable future benefits
Fixed Asset
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Fair Value
an explanatory note or comment at the end of a financial statement.
Footnote
audit standards that must be followed for audits of federal organizations, programs, activities, functions, and funds received by contractors, nonprofit organizations, and other external organizations. These standards are recommended for use in audits of state and local government organizations, programs, activities, and functions
Government Auditing Standards
used to estimate inventory cost when a physical inventory count is not possible
Gross Profit Method
the Statements on Auditing Standards issued by the Auditing Standards Board (ASB), the senior committee of the AICPA designated to issue pronouncements on auditing matter for nonissuers
Generally Accepted Auditing Standards (GAAS)
the sales minus cost of goods sold, the “first stage” profit from the manufacture of goods for sale, and profit before selling and administrative expenses
Gross Margin
a business entity that is expected to continue in operation indefinitely
Going Concern
a nonsense total
Hash Totals
the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls
Inherent Risk
a process, effected by an entity’s board of directors, management and other personnel, which is designed to provide reasonable assurance regarding the achievement of objectives in one or more categories:
Effectiveness and efficiency of operations
Reliability of financial information
Compliance with applicable laws and regulations
Internal Control
the seeking of appropriate information from knowledgeable persons inside (both management and staff) or outside the entity (e.g., bankers, attorneys, vendors, customers, predecessor auditor) with the approval of management
Inquiry
a time period or date before the cut-off (year-end) date (e.g., a monthly or quarterly period-end).
Interim Period
nonphysical and nonfinancial assets (lacking physical substance) whose value derives from the rights that their ownership confers (e.g., goodwill).
Intangible Asset
financial information prepared and presented in accordance with an applicable financial reporting framework that comprises either a complete or condensed set of financial statements covering a period or periods less than one full year or covering a 12-month period ending on a date other than the entity’s fiscal year-end.
Interim Financial Information
examination of records, documents, and tangible assets
Inspection
a financial statement that shows an organization’s revenues and expenses for a defined period of time
Income Statement
he charge for the use of money over time. It is the time value of money
Interest
an audit of internal control over financial reporting being integrated with the audit of financial statements
Integrated Audit
series of questions about specific internal controls
Internal Control Questionnaire (ICQ)
an activity ratio that measures the liquidity of inventory; it is the measurement of the effectiveness with which a firm manages its inventory
Inventory Turnover
the number of shares of authorized capital stock that have initially been released to individuals or entities outside the issuing corporation
Issued Shares
an entity who issues or proposes to issue any security, with some noted exceptions
Issuer
test data is developed and integrated into the live processing of actual data resulting from business transactions
Integrated Test Facility
audit work performed prior to year-end
Interim Audit Work
the price, stated as a percentage over time (usually per year), that is charged for the use of money
Interest Rate
be free from conflicts of interest and bias, self-governing, impartial, not subject to control by others, not requiring or relying on something else, not contingent, and acting with integrity and objectivity (i.e., with judgment that is unimpaired and without bias or prejudice).
Independence
The established scope must be sufficient to achieve the objectives of the engagement.
Internal Audit Scope
the item prepared to enter a transaction or event in the accounting records with equal amounts of debits and credits
Journal Entry
he accounting record where transactions and events are first recorded in chronological order
Journal
the practice of writing checks against uncleared deposits (playing the float)
Kiting
are equity and debt securities of another enterprise held by the entity that are not intended to be converted into cash within one year or one operating cycle, whichever is longer
ong-Term Investment
a letter from an auditor to an outside party seeking corroboration of information furnished by management.
Letter of Inquiry
a cost principle necessitated when the benefit to be derived from the asset has declined below cost (i.e., disposal value of the asset) in the ordinary course of business. It is applied primarily to inventory
Lower of Cost or Market
probable future sacrifices of economic benefits arising from present obligations of the entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
Liabilities
used to edit data during input or processing to validate data
Limit Test
The comfort letter provides “negative assurance” to the underwriters that “nothing came to our attention which would indicate that the information does not meet the specified standard.”
Letter for Underwriters
a suit that is contested in court. It is a legal action
Litigation
a creditor’s legal right to have a debtor’s specified property as security for a debt and to take possession of the property, following prescribed legal procedures if the debt is not paid
Lien
provide relevant and reliable evidence for the auditor, especially with respect to official actions of the board of directors and stockholders
Minutes of Meetings
written representation from management which affirms (AU-C 580):
the fair presentation of the financial statements and management’s responsibility for them,
the completeness of all information provided to the auditor and in the financial statements,
representations relating to recognition, measurement, and disclosure (including the absence of knowledge of fraud or suspected fraud), and
information concerning subsequent events.
Management Representation Letter
an untrue statement that misrepresents the facts and which, by its magnitude or nature, influences the decision making of the user.
Materially Misstated
an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity’s financial report.
Materiality
a reported amount that is over (overstated) or under (understated) the actual amount.
Misstatement
a deficiency, or a 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
Material Weakness
the average among a group of numbers
Mean
used to estimate the value of a population by multiplying the number of units in a population by the sample mean of the population
Mean-per-Unit Variables Sampling
the process of associating realized revenues with the expenses and expired costs that were necessary to generate the revenues (i.e., that were incurred in the earning process).
Matching
costs incurred to keep an asset in good working condition consistent with the original expectation (e.g., costs of labor, parts, and supplies for lubrication, cleaning, calibration, and painting)
Maintenance
used in electronic data processing and contains relatively permanent information used for reference and updated periodically
Master File
are basic accounting principles and standards and specific conventions, rules, and regulations that define accepted accounting practice at a particular time by incorporation of consensus and substantial authoritative support.
Generally Accepted Accounting Principles (GAAP)
one of the attributes used to measure assets and liabilities
Net Realizable Value
the type of audit procedure to be used, whether a class of transactions is tested by analytical procedures, tests of controls or substantive testing through confirmation, recalculation, examination of documents (tracing and vouching), reperformance, etc. It is related to the appropriateness of the audit evidence.
Nature
all entities except for those defined as issuers
Nonissuer
is all aspects of audit risk that are not due to sampling
Nonsampling Risk
gross sales less returns, less allowances, and less sales discounts.
Net Sales
a contractual right to receive a sum certain of money on fixed or determinable dates at a fixed rate of interest.
Notes Receivable
a confirmation letter that requests a reply only if the account balance is considered incorrect.
Negative Confirmations
looking at a process or procedures being performed by others
Observation
the increase in owner’s equity in a business from its normal or principal operations.
Operating Income
a specified price at which a stock option may be exercised
Option Price
the number of shares of capital stock that have been issued and are currently owned by stockholders
Outstanding
the rate used to charge overhead costs to work in process.
Overhead Rate
processed with other computers or networks immediately through the Internet
Online Transaction
include the following:
Occurrence and rights and obligations—Disclosed events, transactions, and other matters have occurred and pertain to the entity.
Completeness—All disclosures that should have been included in the financial statements have been included.
Classification and understandability—Financial information is appropriately presented and described, and disclosures are clearly expressed.
Accuracy and valuation—Financial and other information are disclosed fairly and at appropriate amounts.
Presentation
a method of short-term financing in which a business uses its accounts receivable as collateral for a loan
Pledging
the professional conduct or skill expected of one rendering professional services.
Professional Competence
the physical count of inventory taken by the client at year-end (i.e., on the last day of the fiscal year) to obtain evidence regarding existence and completeness.
Physical Inventory
“the application of relevant training, knowledge, and experience, within the context provided by auditing, accounting, and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.”
AU-C 200.14
Professional Judgment
a method of measuring the physical quantities in inventory under which the units received (manufactured) and issued (sold) are recorded continuously during the accounting period.
Perpetual Inventory
he excess of proceeds (cash paid) on a bond over the face value of the bond
Premium
was established by Congress to oversee public company audits
Public Company Accounting Oversight Board (PCAOB)
indicates how closely we can reproduce from a sample the results that we would obtain if we were to take a complete count of the population using the same measurement methods.
Precision
a misstatement rate in the population, projected from the known deviation or misstatement rate of the sample.
Projected Misstatement
a basic management function involving formulation of one or more detailed plans to achieve optimum balance of needs or demands with the available resources.
Planning
the auditor runs duplicate processing of the same information, and compares results obtained from the duplicate program with the actual data processed by the client system.
Parallel Simulation
all of the members or elements of a group, universe, or field that constitutes the account balance or class of transactions of interest from which the sample will be drawn and about which the auditor wishes to generalize results
Population
a string of characters (alpha, numeric, or special) that allows an individual to access a computer or a multiuser computer system
Passwords
to bring forth, yield, or cause to exist as a result of labor, machining, thought, or knowledge. It is the conversion of inputs into outputs.
Production
one in which the debtor is requested to respond whether or not he is in agreement with the information given
Positive Confirmations
an auditor who was previously the auditor of an entity and who has resigned or been replaced by another auditor
Predecessor Auditor
it is recorded in the period in which it occurred
Proper Period
the amount of cash, or cash equivalent, borrowed (loaned) and the amount subject to interest that equals the face value in an interest-bearing note
Principal
an accounting period that ended before the current period.
Prior Period
the auditor responsible for the greater portion of financial statements.
Principal Auditor
a liquidity ratio that measures the firm’s ability to discharge currently maturing obligations from most liquid (quick) current assets, cash, marketable equity securities (MES), and accounts receivable (AR)
Quick Ratio
states that except for the effects of the matter to which the qualification relates, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flow in accordance with accounting standards generally accepted in the United States or an applicable financial reporting framework.
Qulified Opinion
are management assertions that all recorded assets are owned by (i.e., are rights of) the entity and that all liabilities are obligations of (i.e., are owed by) the entity at the given date. (AU-C 315.A114)
Rights and Obligations
he combination of inherent risk (IR) and control risk (CR) for an entity
Risk of Material Misstatement (RMM)
an edit check of logical correctness of the relationships among the values in an input data set, or the value of an input item with the values of a related data item in a master file.
Reasonableness Check
a belief that motivates a person to act.c
Reliance
are inflows or other enhancements of the assets of an entity or settlements of its liabilities, or both, during the period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations
Revenues
n engagement undertaken to achieve, through the performance of inquiry and analytical procedures, limited assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with GAAP or, if applicable, with a comprehensive basis of accounting other than generally accepted accounting principles
Review
an estimating technique that uses the relationship (i.e., ratio) of audit to book values to estimate the population value.
Ratio Estimation
an aspect of sampling risk when performing substantive tests of details. It is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when, in fact, it is materially misstated.
Risk of Incorrect Acceptance
an aspect of sampling risk when performing substantive tests of details. It is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when, in fact, it is not materially misstated.
Risk of Incorrect Rejection
a mathematical equation used to fit the best line possible to the observed data
Regression
the study of proportional relationships between recorded amounts. It is the comparison of ratios to expectations.
Ratio Analysis
attempts to measure the likelihood of the variability of future returns from the proposed investment
Risk Analysis
he risk that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control.
Risk of Assessing Control Risk Too High
an action to bring two related balances into agreement, to identify differences between two related balances (as, for example, the cash balance per the accounting records and the balance per the bank statement), and to detect errors or items that were included in the preparation of one balance omitted from the other.
Reconciliation
a systematic process of evaluating the potential risks that are involved in an audit or attestation engagement
Risk Assessment
is an aspect of sampling risk related to tests of controls. It is the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control
Risk of Assessing Control Risk Too Low
goods to be consumed directly or indirectly in the production process and include major basic materials, parts and subcomponents, and basic supplies (lubrication oils, cleaning materials, nails, glue, etc.).
Raw Material
management, owners, family members of owners or management, affiliates, or any party which “can significantly influence the management or operating policies” such that the entity might be “prevented from fully pursuing its separate interests.”
Related Parties (Financial Statements)
the degree of assurance to convince a “reasonable man” within the cost-benefit constraint.
Reasonable Assurance
provides information about the entity’s assets, liabilities, and equity and their relationships to one another at a particular point in time
Statement of Financial Position
an extra digit, precisely computed, that is added to a basic identification number (e.g., employee ID number) to detect transpositions or other clerical errors.
Self-Checking Digit
tests of transaction details and account balances and analytical procedures performed to detect material misstatements in the account balances, transaction class, and disclosure components of the financial statements. These tests are used to test financial statement assertions.
Substantive Procedures
a federal government agency charged with the responsibility of writing rules consistent with federal security laws, investigation of violations, maintenance of financial disclosure documentation, and initiation of action against violators of federal securities acts.
Securities and Exchange Commission (SEC)
as 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.
Significant Deficiency
a document that initiates a transaction
Source Document
a separate ledger summarized in a single controlling account in the general ledger. It is a special ledger that provides more detailed information about an account.
Subsidiary Ledger
the directing and reviewing the efforts of assistants
Supervision
To achieve adequate internal control in a business enterprise, the primary functions of the business should be identified. The duties of these functions should be outlined and control procedures designed to achieve adequate internal control. In designing control procedures, the duties involved in accomplishing these functions should be separated as much as possible to attain control
Segregation (or Separation) of Duties
the ratio of number of deviations in the sample to the sample size
Sample Deviation Rate
an identified and assessed risk of material misstatement that, in the auditor’s professional judgment, requires special audit consideration.
Significant Risk
the amount and kind of audit evidence required by an auditor to form an opinion (i.e., Is there enough evidence?)
Sufficient
a sampling plan in which the laws of probability are used for selecting and evaluating a sample from a population for the purpose of reaching a conclusion about the population
Statistical Sampling
dividing the population into relatively homogeneous groups (layers)
Stratified Sampling
arises from the possibility that, when a test of controls or a substantive test is restricted to a sample, the auditor’s conclusions may be different from the conclusions that would have been reached if the tests have been applied in the same way to all of the items in the account balance or class of transactions (i.e., a particular sample may contain proportionately more or less deviation from prescribed internal controls or monetary misstatement than exists in the balance or class as a whole).
Sampling Risk
obligations whose liquidation is reasonably expected to require either the use of existing resources properly classified as current assets or the creation of other current liabilities (FASB ASC 210-10-45-6)
Short-Term Obligation
a right to purchase shares of stock in accordance with an agreement, on payment of a specified amount.
Stock Option
total residual ownership interest in the corporation: net assets and total assets in excess of total liabilities
Stockholders’ Equity
a predetermined quantity or cost of inputs (direct material, direct labor, and manufacturing overhead) that should be required to produce one unit of output
Standard Cost
a computer language, such as COBOL or FORTRAN, that is an input to a translation process
Source Code
the member or element of the population which is selected, such as each credit sales invoice, each customer account, cash receipt, invoice, canceled check, etc.
A
an event occurring after the balance sheet date but prior to the issuance of the auditor’s report, which has a material effect on the financial statements and therefore requires adjustment or disclosure in the statements
Subsequent Event
within the near future or usually within the next fiscal year or operating cycle, whichever is longer
Short Term
provides information about the entity’s assets, liabilities, and equity and their relationships to one another at a particular point in time.
Statement of Financial Position
an agreement which creates or provides for a security interest
Security Agreement
provides evidence on a sample basis about the presence or absence of a control condition
Test of Controls
the management assertion that all assets, liabilities, revenues, and expenses have been included in the financial statements at the proper amount
Valuation
follow the course of development of some object
Trace
the maximum monetary misstatement that may exist in an account balance or class of transactions, when combined with misstatements in other accounts, without causing the financial statements to be misstated
Tolerable Misstatement
he maximum population rate of deviations from the prescribed internal control that the auditor is willing to accept without altering the planned assessed level of control risk.
Tolerable Rate
the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity
Those Charged with Governance
remove an amount from the accounting records, usually by a corresponding entry to an expense or allowance account, as to write off a specific account receivable with a credit to accounts receivable and a debit to the allowance for uncollectible accounts.
Write-Off
an activity ratio that measures the effectiveness with which the firm uses total assets to generate sales. It indicates the extent to which total assets are used—a low turnover indicates under-utilization and sales should be increased or assets should be disposed of, or both.
Total Assets Turnover
the time frame during which the audit procedure is performed (e.g., interim or at year-end), which is related to the appropriateness of the audit evidence.
Timing of Audit Procedure
a particular kind of external event, namely, an external event involving transfer of something of value between two or more entities.
Transaction
the comparison of similar ratios for the same firm at different points in time, the comparison of prior-year and current-year ratios for a firm, and the analysis of changes within the firm over time.
Trend Analysis
data specifically designed and developed to test the accuracy and completeness of a computer program.
Test Data
designed to ensure that all recorded transactions are those which should have been recorded (i.e., that the transactions are real and actually occurred and are properly documented).
Validity
states that the financial statements present fairly, in all material respects, the entity’s financial position, results of operations, and cash flows in accordance with accounting principles generally accepted in the United States of Ameri
Standard Auditor’s Report
document the work done and conclusions reached by the auditor, showing procedures applied, tests performed, information obtained, and pertinent conclusions reached
Workpapers
shares of the issuing corporation’s own stock (common or preferred) that were issued and were later reacquired in the open market by the issuing corporation and are still held by the issuing corporation
Treasury Stock
a listing of all account balances as of a particular date
Trial Balance
states that the financial statements are presented fairly in accordance with accounting principles generally accepted in the United States of America or an applicable financial reporting framework—the basic premise being that the auditor has tested the financials and they give an accurate representation of the company’s condition.
Unmodified Opinion
