Chapter 5: Accounting and Review Services Engagements Flashcards
Under the cash method, income is included in the year it is either actually or constructively received and expense is recorded in the year it is paid. Under the accrual method, income and expense are included in the year when the right to the income or the liability for an expense becomes fixed, the amount can be determined with reasonable accuracy, and economic performance has occurred.
Accounting Method
a set of prescribed guidelines for recording and reporting the economic effects (substance) of financial events and transactions
Accounting Principle
are obligations to suppliers of merchandise or of services purchased on open account, with payment usually due in 30 to 60 days.
Accounts Payable
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
an attempt to quantify the effects of future events that cannot be known with certainty, based on assumptions and projections
Accounting Estimate
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)
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
was adopted to provide guidance and rules to all members in the operation of their professional responsibilities
AICPA Code of Professional Conduct
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
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
Attest Engagement
a periodic verification of assets, records, transactions, events, or conditions performed by a person independent of the custody or recordkeeping for the items verified
Audit
a body formed by a company’s board of directors to oversee audit operations and circumstances
Audit Committee
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
a plan of action expressed in dollars
Budget
a lease that has a noncancelable lease term and meets one or more of the following criteria for capitalization:
For both the lessee and the lessor:
the lease transfers ownership of the property to the lessee by the end of the lease term.
the lease contains a bargain purchase option.
the lease term is equal to 75% or more of the estimated economic life of the lease property.
the present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90% of the excess of the fair market value of the leased property at that time.
Capital Lease
the amount of net cash that was generated by an entity during an accounting period
Cash Flow
the adoption of a generally accepted accounting principle different from the one used previously
Change in Accounting Principle
the property that a person can give and in which another can take a security interest or property subject to a security interest
Collateral
financial statements presented together for one or more prior periods as well as the current period
Comparative Financial Statements
represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen
Competence
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
direct communication with external independent parties to prove that balances (e.g., cash balances, accounts receivable, accounts payable, notes payable) are correct
Confirmation
providing advisory services
Consulting Services
evidence, other than the books of original entry (i.e., the accounting records), which allows the auditor to reach conclusions
Corroborating Evidence
a form of accounting fraud, a misappropriation of assets, a mishandling of funds, or embezzlement
Defalcation
an expression of no opinion
Disclaimer of Opinion
reported in the financial statements or the notes to the financial statements. Management discussion and analysis, supplemental schedules, and written narratives outside of the financial statements and notes (i.e., unaudited) do not constitute disclosure in the strictest sense
Disclosure
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
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
an unintentional misstatement or omission of amounts or disclosures in financial statements
Error
a happening of consequence to the entity
Event
the principal means of communicating financial information to those users external to the entity
Financial Statements
the intentional misrepresentation or failure to disclose a material fact or facts that results in injury or loss to someone relying on it
Fraud
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
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
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 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 provides evidence of varying degrees of reliability depending on the nature, source, and effectiveness of controls over the processing of the records and documents
Inspection
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
a time period or date before the cut-off (year-end) date
Interim Period
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 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
the item prepared to enter a transaction or event in the accounting records with equal amounts of debits and credits
Journal Entry
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 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
changes that would make a difference in the decision-making process if made.
Material Modifications
an untrue statement that misrepresents the facts and which, by its magnitude or nature, influences the decision making of the user
Materially Misstated
notes taken to document discussions and decisions
Minutes of Meetings
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
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
a contractual right to pay a certain sum of money on fixed or determinable dates at a fixed rate of interest
Notes Payable
established by Congress to oversee public company audits. Congress formed the group to protect the interests of investors and further the public interest in the preparation of audit reports
Public Company Accounting Oversight Board (PCAOB)
an auditor who was previously the auditor of an entity and who has resigned or been replaced by another auditor
Predecessor Auditor
show 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
any notice, circular, advertisement, or communication that offers any security for sale; a selling circular
Prospectus
are 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
the degree of assurance to convince a “reasonable man” within the cost-benefit constraint
Reasonable Assurance
the end result of the registration process that contains the material financial and other information concerning securities offered for public sale
Registration Statement
issued subsequent to the date of the original report
Reissued Report
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 belief that motivates a person to act
Reliance
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
a systematic process of evaluating the potential risks that are involved in an audit or attestation engagement
Risk Assessment
the combination of inherent risk (IR) and control risk (CR) for an entity
Risk of Material Misstatement (RMM)
provide the detail and guidance needed to meet the 10 GAAS standards
Statements on Auditing Standards (SAS)
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)
a federal statute regulating the initial public offering (IPO) and private placement of securities.
Securities Act of 1933
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
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
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
standards concerning the accounting (compilation) and review services rendered in connection with unaudited financial statements or other unaudited financial information of an entity that is not required to file financial statements with a regulatory agency.
Statements on Standards for Accounting and Review Services (SSARS)
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
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
an auditor who replaces the previous auditor
Successor Auditor
the directing and reviewing the efforts of assistants. It is important in the general management of personnel
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 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 listing of all account balances as of a particular date
Trial Balance
decision making without knowledge of which state of nature will occur
Uncertainty
document the work done and conclusions reached by the auditor, showing procedures applied, tests performed, information obtained, and pertinent conclusions reached
Workpapers
