Chapter 4: Auditing and Attestation - Evaluating Audit Findings, Communications, and Reporting Flashcards
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. An account balance is a control account composed of many constituent items (e.g., accounts receivable control account represents the sum of all individual accounts receivable, sales represents the sum of hundreds of sales invoices)
Account Balance
the methods or procedures implemented by an entity to help ensure the validity and accuracy of its financial statements
Accounting Controls
an attempt to quantify the effects of future events that cannot be known with certainty, based on assumptions and projections
Accounting Estimate
a set of prescribed guidelines for recording and reporting the economic effects (substance) of financial events and transactions. It exists on three levels: basic and pervasive concepts; broad operating standards and practices; and specific conventions, rules, and regulations that define accepted accounting practice at a particular time by incorporation of consensus and substantial authoritative support (and the methods of applying them)
Accounting Principle
The information system relevant to financial reporting objectives, which includes the accounting system, consists of the procedures and records designed and established to:
initiate, authorize, record, process, and report entity transactions (as well as events and conditions) and maintain accountability for the related assets, liabilities, and equity;
resolve incorrect processing of transactions…;
process and account for system overrides or bypasses to controls;
transfer information from transaction processing systems to the general ledger;
capture information relevant to financial reporting for events and conditions other than transactions, such as the depreciation and amortization of assets and changes in the recoverability of accounts receivables; and
ensure information required to be disclosed by the applicable financial reporting framework is accumulated, recorded, processed, summarized, and appropriately reported in the financial statements.
Accounting System
amounts the entity is entitled to receive that arise in the normal course of business (e.g., from the credit sales of goods or services)
Accounts Receivable
a journal entry that is recorded at the end of an accounting period to achieve accrual basis values in all the ledger accounts
Adjusting Entry
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
An accountant may accept an engagement that is less than the scope of an audit but may apply limited procedures to specified elements, accounts, or items of a financial statement.
Agreed-Upon Procedures
required to correctly summarize the financial operations for a designated period and to report on the financial position at the end of a period
Adjusting Journal Entry (AJE)
a set of audit procedures that examine the relationships between financial and nonfinancial data
Analytical Procedures
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
declarations or a set of declarations about whether subject matter is based on or conforms to selected criteria (AT 101.08)
Assertions
when an auditor is associated with financial information when the auditor has applied procedures sufficient to permit the auditor to report in accordance with GAAS (generally accepted auditing standards)
Association with Financial Statements
the practitioner’s satisfaction about the reliability of an assertion being made by one party for use by other parties
Assurance
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 (AT 101.01)
Attest Engagement
a set of standards that provides guidance and a broad framework for a variety of attest services performed by a certified public accountant
Attestation Standards
a body formed by a company’s board of directors to oversee audit operations and circumstances
Audit Committee
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
a statement about the correspondence between assertions by others (usually quantifiable information) and established criteria
Audit Opinion
a series of specific and specialized steps or actions auditors take to meet audit objectives
Audit Procedure
a written outline of work to be done during an audit
Audit Program
the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
Audit Risk
the process of conducting formal, often periodic, examinations and checks of accounts of financial records to verify their correctness, which may also include the issuance of a final statement of account by the auditors
Auditing
a person (or firm) possessing knowledge in a particular field other than accounting or auditing
Auditor’s Specialist
a detailed record of all checks cleared and deposits made, plus the ending balance of an account with a bank
Bank Statement
the condition of being judged insolvent by the court and having property distributed to creditors when a debtor is unable to meet debts
Bankruptcy
the amount used by the taxpayer to compute the amount of depreciation, amortization, depletion, casualty losses, and the gain or loss upon sale, exchange, or other disposition of an asset
Basis
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
a person who acts as an intermediary between a buyer and a seller but does not take title to the goods in the transaction
Broker
he annual report of the governmental entity, and is composed of the following:
Introductory section
Financial section, including the following:
Auditor’s report
Management’s discussion and analysis (MD & A)
Basic Financial Statements and Notes to the statements
Required supplementary information other than MD & A
Combining financial statements and individual fund statements and schedules
Statistical section
Comprehensive Annual Financial Reports (CAFR)
an ownership interest in an incorporated business enterprise, represented by stock certificates that may be bought and sold or otherwise transferred
Capital Stock
the process of recording a cost as an asset and deferring its recognition as an expense to future periods
Capitalization
the adoption of a generally accepted accounting principle different from the one used previously
Change in Accounting Principle
the right to receive payment or to sue; it can be used in bankruptcy to identify and categorize creditors
Claim
the property that a person can give and in which another can take a security interest or property subject to a security interest
Collateral
the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items
Comparability
financial statements presented together for one or more prior periods as well as the current period
Comparative Financial Statements
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
a management assertion that all transactions and events that should be presented in the financial statements are included (AU-C 315.A114)
Completeness Assertion
required to fulfill the Single Audit Act, which requires the auditor of the entity to determine whether it has complied with laws and regulations that have a material effect on each major federal assistance program
Compliance Audit
A basis of accounting that the entity used to comply with the requirements or financial reporting provisions of a governmental regulatory agency to whose jurisdiction the entity is subject (e.g., pursuant to the rules of a state insurance commission)
A basis of accounting used to file income tax returns for the period covered by the financial statements
The cash receipts and disbursements basis of accounting, and modifications of the cash basis when such modifications are substantially supported, such as recording depreciation on fixed assets or accruing income taxes
A definite set of criteria having substantial support that is applied to all items appearing in financial statements, such as the price level basis of accounting
Comprehensive Basis of Accounting (Other Than Generally Accepted Accounting Principles)
direct communication with external independent parties to prove that balances (e.g., cash balances, accounts receivable, accounts payable, notes payable) are correct
Confirmation
the use of the same accounting principles over time
Consistency
a reporting procedure in which the financial statements of the parent and the subsidiary are combined
Consolidation
minimize the risk of being associated with a client whose management lacks integrity
Continuance of Client
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
sets the tone of an organization, influencing the control consciousness of its people.
Control Environment
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
all costs that were included in the value of the units of finished product sold during the period
Cost of Goods Sold
cash and other assets that can be expected to be used, sold, or converted to cash during the current business cycle, generally one year
Current Assets
a person or firm that regularly buys and sells property
Dealer
the process of systematic, rational allocation of the cost of operational assets to the accounting periods benefited
Depreciation
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
an expression of no opinion
Disclaimer of Opinion
stating additional facts or explanations in a financial statement or auditor’s report
Disclosure
indicating clearly in the audit report, in the introductory and opinion paragraphs, the portion of the audit covered by the other independent auditor(s)
Division of Responsibility
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
an additional paragraph(s) added to the standard auditor’s report to fulfill the need to add explanatory language to the report
Emphasis-of-Matter (Other-Matter) Paragraph
a situation wherein the practitioner renders professional services
Engagement
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
an unintentional misstatement or omission of amounts or disclosures in financial statements
Error
the requirement of the auditor to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion on financial statements
Evidence
a management assertion that assets and liabilities are real and exist at a specific date
Existence
he amount of audit work performed when the procedures are executed
Extent
it 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
an independent authoritative body, created in 1973 to replace the AICPA Accounting Principles Board, and authorized by the AICPA Code of Professional Conduct as a promulgator of generally accepted accounting principles (GAAP)
Financial Accounting Standards Board (FASB)
a cost flow assumption that matches the oldest costs to current sales revenues
First In, First Out (FIFO)
the principal means of communicating financial information to those users external to the entity
Financial Statements
a graphic depiction, using uniform symbols to show the control flow, primary actions, and interrelationships of a task or a set of tasks
Flowchart
an explanatory note or comment at the end of a financial statement
Footnote
the 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
the intentional misrepresentation or failure to disclose a material fact or facts that results in injury or loss to someone relying on it
Fraud
the financial statements include all the information relevant to the formation of business decisions by users external to the enterprise
Full Disclosure
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)
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)
a business entity that is expected to continue in operation indefinitely
Going Concern
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
Government Auditing Standards
external financial reporting which is intended to meet the common informational needs of various users who must rely on the information communicated by management
General Purpose Financial Statements (GPFS)
a series of questions about specific internal controls
Internal Control Questionnaire (ICQ)
a financial statement that shows an organization’s revenues and expenses for a defined period of time
Income Statement
to 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 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
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
examination of records, documents, and tangible assets
Inspection
an audit of internal control over financial reporting being integrated with the audit of financial statements
Integrated Audit
audit work performed prior to year-end.
Interim Audit Work
defines the area of activities covered and the depth of the audit testing procedures
Internal Audit Scope
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 first paragraph of the standard auditor’s report, in which the company and the financial statements audited are identified.
Introductory Paragraph
The aggregate of items of tangible personal property owned by the business (to which the firm has legal title) intended either for internal consumption in the production of goods for sale or for sale
Inventory
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
an entity who issues or proposes to issue any security, with some noted exceptions
Issuer
an agreement conveying the right to use property, plant, or equipment (i.e., land and/or depreciable property), usually for a stated period of time.
Lease
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 letter from an auditor to an outside party seeking corroboration of information furnished by management
Letter of Inquiry
a cost flow assumption that matches the latest (most recent) costs to current sales revenues
Last In, First Out (LIFO)
a statement 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
Limited Assurance
a suit that is contested in court
Litigation
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
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
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
an untrue statement that misrepresents the facts and which, by its magnitude or nature, influences the decision making of the user
Materially Misstated
a reported amount that is over (overstated) or under (understated) the actual amount
Misstatement
an opinion that has been changed in some way to limit or specify its meaning
Modified Opinion
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
a statement made by the auditor which says that, as a result of specified procedures, “nothing came to our attention which would indicate that specified matters do not meet a specified standard.”
Negative Assurance
a confirmation letter that requests a reply only if the account balance is considered incorrect
Negative Confirmations
describes violations of laws or governmental regulations perpetrated by the entity or by the management or employees acting on behalf of the entity
Noncompliance with Laws and Regulations by Client
an organization formed for charitable purposes—to serve the community versus to make a profit
Nonprofit
all aspects of audit risk that are not due to sampling
Nonsampling Risk
a sampling technique for which the auditor considers sampling risk in evaluating an audit sample without using statistical theory to measure that risk or statistical procedures to draw up the sample
Nonstatistical Sampling
looking at a process or procedures being performed by others
Observation
all transactions and other events that are not investing or financing activities
Operating Activities
he paragraph of the standard auditor’s report in which the auditor’s opinion is expressed
Opinion Paragraph
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
Other Supplementary Information
the rate used to charge overhead costs to work in process.
Overhead Rate
the investor company that owns over 50% of the outstanding voting stock of another (investee) company, the majority interest, or the controlling interest
Parent
stablished by Congress to oversee public company audits
Public Company Accounting Oversight Board (PCAOB)
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
a method of short-term financing in which a business uses its accounts receivable as collateral for a loan
Pledging
a method of accounting for business combinations in which the parent acquires substantially all (90% or more) of the voting stock of another entity by exchanging shares of its own stock for the shares of the subsidiary; the parent does not disburse resources
Pooling of Interests
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
an auditor’s statement to the effect that the tested items are in compliance with applicable laws or regulations or agreement with specified standards
Positive Assurance
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
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
an accounting period that ended before the current period. This need not be the period immediately preceding the current period
Prior Period
how what the significant effects on historical financial information might have been had a consummated or proposed transaction or event occurred at an earlier date
Pro Forma Financial Statements
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
Professional Judgment
the entity’s expected future position and results of operations based on hypothetical assumptions
Projection
official, authoritative statements or standards that must be complied with
Pronouncements
consists of financial estimates of future events that may be a forecast (the entity’s expected future position and results of operations based on expected conditions and expected courses of action) or a projection (based on hypothetical assumptions)
Prospective Financial Information
a business form prepared by the buyer describing the merchandise he or she wishes to purchase
Purchase Order
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
Qualified Opinion
the reasonable assurance that policies and procedures are in place during an audit engagement to be in compliance with GAAS (generally accepted auditing standards)
Quality Control
a CPA firm’s system of specified standards that are required to be developed to assure that firm is in compliance with professional standards for the services it provides
Quality Control Standards
a proportional relationship between two single amounts
Ratio
the study of proportional relationships between recorded amounts. It is the comparison of ratios to expectations
Ratio Analysis
to change the account used to record an item, or its category, on a financial statement
Reclassification
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
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)
a fundamental decision-specific quality of decision usefulness and the capacity of information to “make a difference.”
Relevance
a belief that motivates a person to act.
Reliance
Change from LIFO method of inventory pricing to another method
Change in the method of accounting for long-term construction contracts
Changes to or from the “full cost” method of accounting used in the extractive industries
Changes made at the time of an initial distribution of company stock
Restatement
an increase in net assets from results of operations, retained by the corporation for use in the enterprise.
an increase in net assets from results of operations, retained by the corporation for use in the enterprise.
an 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
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
Rights and Obligations
the combination of inherent risk (IR) and control risk (CR) for an entity
Risk of Material Misstatement (RMM)
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
a restriction on an audit that is caused by the client, issues beyond the control of the client, or other events that do not allow the auditor to complete all aspects of his or her audit procedures.
Scope Limitation
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)
provides that any person who acquired securities and was injured by false financial statements or misleading omissions from registration statements may sue any party associated with the statement, including the accountant. It relieves the plaintiff of burden of proof; it includes investors who are not clients of the accountant and who are not in privity with the accountant.
Section 11
an organization or segment of an organization that provides services to user entities that are relevant to those user entities’ internal control over financial reporting.
Service Organization
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
an identified and assessed risk of material misstatement that, in the auditor’s professional judgment, requires special audit consideration
Significant Risk
federal legislation that establishes uniform requirements for the audits of federal financial assistance provided to state and local governments
Single Audit Act Amendment of 2013
financial reports, such as offering statements, budgets, and reports filed with federal grantor agencies or senior levels of government, issued to satisfy the specific needs of specific users.
Special-Purpose Financial Statements
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 America
Standard Auditor’s Report
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
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. It allows the auditor to design an efficient sample, to measure the sufficiency of the audit evidence obtained, and to evaluate the sample results
Statistical Sampling
distributions of the corporation’s own stock (treasury or newly issued shares) to stockholders in proportion to the number of outstanding shares held
Stock Dividend
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
a term applied by an auditor to indicate his opinion, based upon sufficient appropriate audit evidence, that an entity may not be able to continue as a going concern beyond a year from the period being audited
Substantial Doubt
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
Substantive Procedures
an auditor who replaces the previous auditor
Successor Auditor
relates to the amount and kind of audit evidence required by an auditor to form an opinion
Sufficient
the directing and reviewing the efforts of assistants
Supervision
financial information outside of the basic financial statements
Supplemental Information
provides evidence on a sample basis about the presence or absence of a control condition
Test of Controls
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
the auditor’s shorthand for abbreviating comments about work performed
Tick Marks
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
follow the course of development of some object
Trace
a particular kind of external event, namely, an external event involving transfer of something of value between two or more entities
Transaction
carry significant authority because they are the Treasury Department’s official interpretation of tax statutes
Treasury Regulations
a listing of all account balances as of a particular date
Trial Balance
decision making without knowledge of which state of nature will occur
Uncertainty
one who distributes a new issue of securities or a large block of issued securities—that is, a secondary offering, commonly including an obligation to purchase the underwritten securities, regardless of whether they can be resold to others
Underwriter
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
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
designed to ensure that all recorded transactions are those which should have been recorded
Validity
document the work done and conclusions reached by the auditor, showing procedures applied, tests performed, information obtained, and pertinent conclusions reached
Workpapers
