Dictionary of Audit Terms For PDF

Basic Auditing & Assurance terms
Volume 1
By Ammar Mushtaq Khan
Volume 1
This booklet is issued only with the single purpose is that to help the student in making clear understanding about audit & assurance terms. Any decision took on the basis of this booklet will not create any responsibility or liability on the author. The user of this booklet is ethically & legally bound to take permission from author before copying, issuing, & reprinting it, wholly or partly. Some students & fellow will find that there are some terms are missing. So if such case happens to you please mail me that term so I include it in the next volume. Thanks for your cooperation
Ammar Mushtaq Khan Ammar.acca@gmail.com 0336-5586866
A
Acceptance sampling is sampling to determine whether internal control compliance is greater than or less than the tolerable deviation rate. Accounting and review services are governed by official pronouncements covering compilation and review engagements. Compilation is presenting in the form of financial statements information that is the representation of management (owners) without expressing assurance. Review is inquiry and analytical procedures to provide the accountant a basis for expressing limited assurance that there are no material modifications that should be made to the statements for them to be in conformity with U.S. generally accepted accounting principles. Accounting data includes journals, ledgers and other records, such as spreadsheets, that support financial statements. It may be in computer readable form or on paper. Accounting estimate means an approximation of a monetary amount in the absence of a precise means of measurement. This term is used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts that require estimation. Where accounting estimates involving measurement at
Volume 1 fair value, the term fair value accounting estimates is used Or An approximation of a financial statement element. Estimates are included in historical financial statements because some amounts are uncertain pending outcome of future events and relevant data about events that have occurred cannot be accumulated on a timely, cost-effective basis. Accounting principles are alternative ways of reporting and disclosing information in financial statements and related footnotes. Accounts receivable Debts due from customers from sales of products and services reported as a current asset. Accounting records are the records of initial accounting entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers; journal entries and other adjustments to the financial statements that are not reflected in journal entries; and records, such as work sheets and spreadsheets, supporting cost allocations, computations, reconciliations, and disclosures. Accounting research bulletins (ARBs) were issued years ago to set generally accepted accounting principles. Some have not been superseded by pronouncements of the Financial Accounting Standards Board. Those old pronouncements still qualify as generally accepted accounting principles.
Basic Auditing & Assurance terms Activity means an action or actions associated with a function or program, including administrative and internal control functions, that are integral to the operations of a business unit or an entity. The economy, efficiency or effectiveness of the activity is the subject matter of a performance engagement. Adjusting entries are accounting entries made at the end of an accounting period to allocate items between accounting periods. Adverse An audit opinion that the financial statements as a whole are not in conformity with GAAP or standards. Advisory services are a consulting service in which the auditors develops the findings, conclusions, and recommendations presented for client decision-making. This differs from attestation, where the auditor expresses a conclusion about a written assertion of another. Aggregate (aggregated) Constituting the whole. Aggregate expenses include expenses of all divisions combined for the entire year. Agreed-upon procedures means an engagement in which an auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. The recipients of the report form their own conclusions from the report by the auditor. The report is restricted to those parties that have
Volume 1 agreed to the procedures to be performed since others, unaware of the reasons for the procedures may misinterpret the results Or An engagement where the client specifies procedures and the accountant agrees to perform those procedures. An accountant may accept an engagement to apply agreed-upon procedures to financial statement elements, where the scope of the engagement is not sufficient to express an opinion, if the users assume responsibility for sufficiency of the procedures, and use of the report is restricted to specified users. AICPA American Institute of Certified Public Accountants. The professional organization of CPAs in the U.S. It is a private organization of CPAs, not an arm of the government. Each state issues CPA certificates, not the AICPA. Since each state makes its own laws, each state could prepare and grade their own CPA examination. However, each state uses the uniform CPA exam prepared and graded by the AICPA. Allocation Distribution according to a plan. Depreciation, amortization, and depletion are methods to allocate costs to periods benefited. Allowance for doubtful accounts A contra asset account with a credit balance used to reduce the carrying amount of accounts receivable to net realizable value. The allowance balance is the estimated total of uncollectible accounts included in accounts receivable.
Basic Auditing & Assurance terms Allowance for sampling risk The difference between a sample estimate and the projected population characteristic at a specified sampling risk. This allowance is also the difference between the expected error rate and the tolerable deviation rate. Analytical procedure means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. Or A comparison of financial statement amounts with an auditor's expectation. An example is to compare actual interest expense for the year (a financial statement amount) with an estimate of what that interest expense should be. The estimate can be found by multiplying a reasonable interest rate times the average balance of interest bearing debt outstanding during the year (the auditor's expectation). If actual interest expense differs significantly from the expectation, the auditor explains the difference in audit documentation. Analyze Identify and classify items for further study. Anticipated Expected.
Volume 1 Annual report means a document issued by an entity, ordinarily on an annual basis, which includes its financial report together with the auditors report thereon. Anomaly means a misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population. APB opinions The Accounting Principles Board existed before the Financial Accounting Standards Board. It issued opinions, some of which are still part of generally accepted accounting principles. Applicable framework financial reporting
means the financial reporting framework adopted by management and, where appropriate, those charged with governance in the preparation of the financial report that is acceptable in view of the nature of the entity and the objective of the financial report, or that is required by law or regulation or is the financial reporting framework adopted in the preparation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation. Fair presentation framework means a financial reporting framework that requires compliance with the requirements of the framework and:
Basic Auditing & Assurance terms application control (a) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial report, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or (b) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial report. Such departures are expected to be necessary only in extremely rare circumstances. The term compliance framework means a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (a) or (b) above. (see Fair presentation framework) Applicable financial reporting framework means a financial reporting framework that is designed to achieve fair presentation. Applied criteria means the criteria applied by management in the preparation of the summary financial statements Appropriateness (of audit evidence) means the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditors opinion is based.
Volume 1 Programmed procedure in application software designed to ensure completeness and accuracy of information. Appropriate Audit evidence is relevant (pertains to the proposition supported) and reliable (trustworthy). Approve To authorize. A manager authorizes a cash payment by signing a voucher providing approval for the disbursement. Arms length transactions are transactions between people who have no relationship other than that of buyer and seller. The price is the true fair market value of the goods or services sold. If you buy or sell something to a close relative, you might give better terms than to an unrelated party, so the price might not represent the true market value of the goods or services. Ascertain An audit procedure to determine or to discover with certainty. For example, to ascertain the date on which an investment was purchased by examining source documents. Assertion Management asserts financial statements are correct with regard to existence or occurrence of assets, liabilities or transactions, completeness of information in the financial statements, rights and obligations at a point in time, appropriate valuation or allocation, presentation, and disclosure.
Volume 1
Assertion-based engagement means a compliance engagement where an entity asserts compliance with requirements as measured by the suitable criteria, and the assurance practitioner evaluates and expresses a conclusion to enhance the intended users confidence in the entitys assertion. Assertion-based engagement means a performance engagement where the assurance practitioner reports on assertions prepared by the responsible party regarding the economy, efficiency or effectiveness of the activity. Assess means analyse identified risks to conclude on their significance. Assess, by convention, is used only in relation to risk. (also see Evaluate) Or To determine the value, significance, or extent of. Assessed Determined. The level of control risk determined by the auditor, based on tests of controls, is the assessed level of control risk. Assurance The level of confidence one has. Assurance engagement is an engagement in which an accountant issues a report designed to enhance the degree of confidence of third parties and management about the outcome of an evaluation or measurement of financial statements (subject matter) against an applicable financial reporting framework (criteria).
Assurance engagement risk means the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated. Assurance practitioner means a person or an organisation, whether in public practice, industry, commerce or the public sector, providing assurance services. Attest (attestation) report In an attest engagement, a practitioner issues a written conclusion about the reliability of a written assertion that is the responsibility of another. Attestation risk is the risk the CPA may unknowingly fail to modify the report on managements assertion. It is composed of inherent risk, control risk, and detection risk. Attorneys letter is signed by the client's lawyer and addressed to the auditor. It is the auditor's primary means to corroborate information furnished by management about litigation, claims, and assessments. Attribute sampling The characteristic tested is a property that has only two possible values (an error exists or it does not). Audit adjustment is a correction of a financial information misstatement identified by the auditor, whether recorded or not.
Audit committee A committee of the board of directors responsible for oversight of the financial reporting process, selection of the independent auditor, and receipt of audit results. Audit documentation (working papers) are records kept by the auditor of procedures applied, tests performed, information obtained, and pertinent conclusions reached in the engagement. The documentation provides the principal support for the auditor's report. Audit evidence is information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Audit Expert Systems Expert or decision support systems that can be used to assist IS Auditors in the decision-making process by automating the knowledge of experts in the field. This technique includes automated risk analysis, system software, and control objectives software packages. Audit file means one or more folders or other storage media, in physical or electronic form, containing the records that comprise the audit documentation for a specific engagement Audit sampling (sampling) means the application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in
Volume 1 order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population. Audited financial report means a financial report or a complete set of financial statements audited by the auditor in accordance with Australian Auditing Standards, and from which the summary financial statements are derived. Audit objective In obtaining evidence in support of financial statement assertions, the auditor develops specific audit objectives in light of those assertions. For example, an objective related to the completeness assertion for inventory balances is that inventory quantities include all products, materials, and supplies on hand. Audit planning Is developing an overall strategy for the audit. The nature, extent, and timing of planning varies with size and complexity of the entity, experience with the entity, and knowledge of the entity's business. Audit Program A series of steps to achieve an audit objective Audit risk A combination of the risk that material errors will occur in the accounting process and the risk the errors will not be discovered by audit tests. Audit risk includes uncertainties due to sampling (sampling risk) and to other factors (non sampling risk).
Basic Auditing & Assurance terms Auditor means the person or persons conducting the audit, usually the engagement partner or other members of the engagement team, or, as applicable, the firm. Where an Auditing Standard expressly intends that a requirement or responsibility be fulfilled by the engagement partner, the term engagement partner rather than auditor is used. Engagement partner and firm are to be read as referring to their public sector equivalents where relevant. Auditors expert means an individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditors expert may be either an auditors internal expert (who is a partner or staff, including temporary staff, of the auditors firm or a network firm), or an auditors external expert. Partner and firm should be read as referring to their public sector equivalents where relevant.
Volume 1 Authorize (authorization) To give permission for. A manager authorizes a transaction by signing a voucher authorizing the disbursement.
Auditors point estimate or auditors range means the amount, or range of amounts, respectively, derived from audit evidence for use in evaluating managements point estimate. Auditing standards board Statements on Auditing Standards are issued by the auditing standards board, the body of the AICPA designated to issue auditing pronouncements. By Ammar Mushtaq Khan 9
B
Backup A copy of a computer program or data stored separately from the original. Batch A set of computer data or jobs to be processed in a single program run. Benfords law is a mathematical law that applies to any population of numbers derived from other numbers (such as the dollar amount of a sale, found by multiplying the quantity sold times the unit price). It holds that 30% of the time the first non-zero digit of this derived number will be one, and it will be a nine only 4.6% of the time. Ben fords law is used by auditors to identify fictitious populations of numbers. Bill of lading A document issued by a carrier to a shipper, listing and acknowledging receipt of goods for transport and specifying terms of delivery. Black Hole Often used in several contexts, however most commonly for a large client that you work at for an extended period of time. Blind trust A financial arrangement in which a person avoids possible conflict of interest by transferring financial affairs to a fiduciary who has sole
Volume 1 asset management discretion. The person establishing the trust also gives up the right to information regarding the assets. Blowing a Budget To exceed the number of hours you are budgeted to complete a task by a considerable amount. Bottlenecking When a large amount of the work required on an audit is shifted closer toward the deadline instead of completed in a steady fashion throughout the time allotted toward the audit. Business risks a risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entitys ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies. Or Risks that could adversely affect an entity's ability to achieve its objectives and execute its strategies or from the setting of inappropriate objectives and strategies.
10
Basic Auditing & Assurance terms Check digit
Volume 1 A redundant digit added to a code to check accuracy of other characters in the code. Check register A listing of checks issued in numeric sequence and in order by date issued. Classification Arrangement or grouping. Assets and liabilities are normally classified as current or non current. COBIT Control Objectives for Information and related Technology, the international set of IT control objectives published by ISACF, 1998, 1996. COCO Criteria Of Control, published by the Canadian Institute of Chartered Accountants in 1995 Collateralize To pledge property as security (collateral) for a debt. Collusion A secret agreement between two or more parties for fraud or deceit. Comfort letter A letter written by the auditor to an underwriter of securities, which expresses an opinion about whether the audited financial statements and schedules in the registration statement comply as to form with applicable accounting requirements of the SEC and related rules and regulations adopted by the SEC. Procedures performed are specified by the underwriter. Comparability
C
CAATs -(Computer Assisted Audit Techniques) any automated audit techniques, such as generalized audit software, utility software, test data, application software tracing and mapping, and audit expert systems. Cadbury The Committee on the Financial Aspects of Corporate Governance, set up in May 1991 by the UK Financial Reporting Council, the London Stock Exchange and the UK accountancy profession, was chaired by Sir. Adrian Cadbury and produced a report on the subject commonly known, in the UK, as the Cadbury Report Cancel supporting documents To mark supporting documents as having been used to support a transaction so the same documents can't be used to support another transaction. An example is stamping vouchers "paid. Capitalized Recorded as an asset. A capitalized lease is in substance a purchase to the lessee. An asset is recorded equal to the present value of the lease payments, which is also recorded as a liability. Payments, partly interest and partly principal, are made on the lease liability. The leased asset is depreciated by the lessee as though it were legally owned by the lessee. Caveat A warning or caution.
11
Basic Auditing & Assurance terms Users evaluate accounting information by comparison. Similar companies account for similar transactions in similar ways. Another goal is comparison of one company's information from one period to the next (consistency). Operating trends should not be disguised by changing accounting methods. Comparative Financial statements of a prior period shown with those of the current period to aid in comparisons between periods. Comparative financial report means comparative information where amounts and other disclosures for the prior period are included for comparison with the financial report of the current period but, if audited, are referred to in the auditors opinion. The level of information included in that comparative financial report is comparable with that of the financial report of the current period. Comparative information means the amounts and disclosures included in the financial report in respect of one or more prior periods in accordance with the applicable financial reporting framework. Compare (comparison) An audit procedure. The auditor observes similarities and differences between items such as an account from one year to the next. Compensating balance
Volume 1 balance increases the effective interest rate to the bank since the net amount loaned is reduced but the interest paid is unchanged. Competence of an internal audit staff is a function of qualifications, including education, certification, and supervision. Compilation engagement means an engagement in which accounting expertise, as opposed to auditing expertise, is used to collect, classify and summarise financial information Compile (compilation) A compilation is presenting in the form of financial statements information that is the representation of management without expressing assurance. Compilation of a financial projection is assembling prospective statements based on assumptions of a responsible party, considering appropriateness of presentation, and issuing a compilation report. No assurance is provided on the statements or underlying assumptions. The accountant need not be independent. Complementary user entity controls means controls that the service organisation assumes, in the design of its service, will be implemented by user entities, and which, if necessary to achieve control objectives, are identified in the description of its system. Complete set of financial statements
An offsetting balance. A requirement by some banks that a borrower means financial statements and maintain a minimum balance in a related notes as determined by the checking or savings account as a requirements of the applicable condition of a loan. The offsetting financial reporting framework. For By Ammar Mushtaq Khan 12
Basic Auditing & Assurance terms example, a complete set of financial statements as described in Accounting Standard AASB 101 Presentation of Financial Statements1 includes: (a) a statement of financial position as at the end of the period; (b) a statement of comprehensive income for the period; (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; and (e) notes, comprising a summary of significant accounting policies and other explanatory information Completeness Assertions about completeness deal with whether all transactions and accounts that should be in the financial statements are included. For example, management asserts that all purchases of goods and services are included in the financial statements. Similarly, management asserts that notes payable in the balance sheet include all such obligations of the entity. Compliance means adherence by the entity to the requirements as measured by the suitable criteria. Or Following applicable internal control procedures, rules, or laws. Compliance engagement means an assurance engagement in which an assurance practitioner expresses a conclusion, after evaluating an entitys compliance with the requirements as measured by the suitable criteria.
Volume 1 Compliance engagement risk means the risk that the assurance practitioner expresses an inappropriate conclusion when the entity is materially non compliant with the requirements as measured by the suitable criteria. Compliance frameworkrelating to financial reporting (see Applicable financial reporting framework and General purpose framework) Compliance framework means a framework used by the entity, which is designed to ensure that the entity achieves compliance, and includes governance structures, programs, processes, systems, controls and procedures Component means an entity or business activity for which group or component management prepares financial information that should be included in the group financial report. Component auditor means an auditor who, at the request of the group engagement team, performs work on financial information related to a component for the group audit.
Component management means management, or those charged with governance, responsible for the preparation of the financial information of a component. Component materiality means the materiality level for a component determined by the group engagement team
13
Basic Auditing & Assurance terms Comprehensive basis accounting
of
Volume 1 services, transaction services, and staff and support services. Contingency is an existing condition involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) that will be resolved by future events. Estimates, such as the useful life of an asset, are not contingencies. Eventual expiration of the asset's utility is not uncertain. Continuing auditor is the auditor of the current year who also audited the financial statements of the client for the previous year. Continuing significance accounting
A complete set of rules other than GAAP applied to all items in a set of financial statements. Examples include a basis of accounting required by a regulatory agency, a basis of accounting the entity uses for its income tax return and the cash receipts and disbursements basis. Computer controls Internal controls performed by computer (software controls) as opposed to manual controls. Also means general and application controls over the computer processing of data. Condensed financial statements are presented in considerably less detail than complete financial statements. Confirm (confirmation) Communication with outside parties to authenticate internal evidence. Consignment Transfer of possession but not title to goods. Title stays with the consignor, while the consignee has possession. Consistency To achieve comparability of information over time, the same accounting methods must be followed. If accounting methods are changed from period to period, the effects must be disclosed. Consulted Sought advice or information. Consulting services performed by CPAs include consultations, advisory services, implementation services, product
means matters normally included in the permanent audit documentation, such as the analysis of balance sheet accounts, and those relating to contingencies. Such information from a prior year is used by the auditor in the current year's audit and is updated each year. Control A policy or procedure that is part of internal control. Control accounts are general ledger accounts that report totals of details included in subsidiary ledger accounts. For example, Accounts Receivable is a general ledger account with a balance equal to the total of the individual receivables included in the subsidiary accounts receivable ledger. Control activities means those policies and procedures that help ensure that management directives are carried out. Control activities are a component of internal control. 14
Basic Auditing & Assurance terms Control deficiencies exist when the design or operation of a control does not allow employees, in their assigned functions, to prevent or detect misstatements on a timely basis. Control environment is the attitude, awareness, and actions of the board, management, owners, and others about the importance of control. This includes integrity and ethical rules, commitment to competence, board or audit committee participation, organizational structure, assignment of authority and responsibility, and human resource policies and practices. Control policies and procedures Control activities are the policies and procedures that help ensure management directives are carried out. Those pertinent to an audit include performance reviews, information processing, physical controls and segregation of duties. Control risk The risk that material error in a balance or transaction class will not be prevented or detected on a timely basis by internal controls. (See Risk of material misstatement) Controller An officer who supervises financial affairs of an entity. In internal control the controller is often the person with record keeping (general ledger) responsibilities, as contrasted with asset custody, management decision-making, and internal audit functions.
Volume 1 Corporate governance The system by which organizations are directed and controlled. Boards of directors are responsible for the governance of their organization. Corresponding figures means comparative information where amounts and other disclosures for the prior period are included as an integral part of the current period financial report, and are intended to be read only in relation to the amounts and other disclosures relating to the current period (referred to as current period figures). The level of detail presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the current period figures. Corroborate (corroborating) (corroboration) (corroborative) To strengthen with other evidence, to make more certain. COSO The Committee of Sponsoring Organizations of the Tread way Commission produced the "Internal Control - Integrated Framework" report in 1992, commonly known as the COSO Report. Criteria means reasonable and acceptable standards of performance against which the extent of economy, efficiency or effectiveness of an activity may be assessed. Suitable criteria have the following characteristics: (a) relevance: relevant criteria contribute to conclusions that assist 15
Basic Auditing & Assurance terms decision-making by the intended users; (b) completeness: criteria are sufficiently complete when relevant factors that could affect the conclusions in the context of the performance engagement circumstances are not omitted. Complete criteria include, where relevant, benchmarks for presentation and disclosure; (c) reliability: reliable criteria allow reasonably consistent evaluation or measurement of the activity, including when used in similar circumstances by similarly qualified assurance practitioners; (d) neutrality: neutral criteria contribute to conclusions that are free from bias; and (e) understandability: understandable criteria contribute to conclusions that are clear, comprehensive, and not subject to significantly different interpretations.
Volume 1 bank, which is custodian of the company's securities. Custody Possession. Cutoff Designating a point of termination. An auditor uses tests of cutoff to obtain evidence that transactions for each year are included in the financial statements of the appropriate year.
Count Enumerate some characteristic such as the number of items in inventory. Cumulative effect of changing to a new accounting principle is the effect on retained earnings at the beginning of the current period. Current ratio Total current assets divided by total current liabilities. Custodian One who has possession or is in charge of something. Some entities entrust investment securities to a By Ammar Mushtaq Khan
16
D
Date of approval of the financial report means the date on which all the statements that comprise the financial report, including the related notes, have been prepared and those with the recognised authority have asserted that they have taken responsibility for that financial report Date of report means the date the assurance practitioner signs the report. Date of the auditors report means the date the auditor dates the report on the financial report in accordance with standards. Date of the financial report means the date of the end of the latest period covered by the financial report. Date the financial report is issued means the date that the auditors report and audited financial report are made available to third parties Defalcation To misuse or embezzle funds. Deficiency An internal control shortcoming or opportunity to strengthen internal controls. Deficiency in internal control means:
Volume 1 detect and correct, misstatements in the financial report on a timely basis; or (b) A control necessary to prevent, or detect and correct, misstatements in the financial report on a timely basis is missing. Detection risk means 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. Or The risk audit procedures will lead to a conclusion that material error does not exist when in fact such error does exist. Detective control A control designed to discover an unintended event or result. Deviation Departure from prescribed internal control. Often expressed as a rate at which the departure occurs. Direct reporting engagement means a compliance engagement where the assurance practitioner directly evaluates an entitys compliance with requirements as measured by the suitable criteria and expresses a conclusion to the intended users in a compliance report. Direct reporting engagement means performance engagements where the assurance practitioner directly undertakes the evaluation or measurement of the activity to report on the economy, efficiency or effectiveness of the activity. 17
(a) A control is designed, implemented or operated in such a way that it is unable to prevent, or By Ammar Mushtaq Khan
Basic Auditing & Assurance terms Economy means the acquisition of the appropriate quality and quantity of resources at the appropriate times and at the lowest cost. Efficiency means the use of resources such that output is optimised for any given set of resource inputs, or input is minimised for any given quantity and quality of output. Effectiveness means the achievement of the objectives or other intended effects of activities at a program or entity level. Disclaimer (disclaim) A statement that the auditor is unable to express an opinion as to the presentation of financial statements in conformity with U.S. GAAP. Disclosure Revealing information. Financial statement footnotes are one way of providing necessary disclosures. Discovery sampling Acceptance sampling (sampling to determine whether internal control compliance is greater than or less than the tolerable deviation rate) when the expected attribute occurrence rate is zero. Document (documentation) (documentary)
Volume 1 Dollar unit sampling (also known as probability proportional to size sampling) A sampling plan that bases the likelihood of selecting a particular account on the relative size of that account, so larger accounts have a greater probability of being selected for the sample than smaller accounts. Dual date If a major event comes to the auditor's attention between the report date and issuance of the report, the financial statements may include the event as an adjustment or disclosure. The auditor dual dates the audit report (as of the end of work paper review, except footnote XX, which is dated later). Dual-purpose test Audit procedures are classified as substantive tests or tests of controls. If a procedure provides both types of evidence it is a dual-purpose test. Due Care Diligence which a person would exercise under a given set of circumstances. Due professional care Diligence which a person, who possesses a special skill, would exercise under a given set of circumstances
Written or printed paper that bears information that can be used to furnish decisive evidence. Could also be a recording, computer readable information, or a photograph.
18
Volume 1 Effectiveness Producing a desired outcome. An audit procedure is effective if the evidence supports a correct conclusion. Efficiency The ratio of the audit evidence produced to audit resources used. Element Element of a financial statement means an element, account or item of a financial statement Embedded audit modules are included in the clients data processing systems to facilitate the acquisition of data needed by auditors. Embedded control performance deals with unexpected changes to data. Embezzlement To take assets in violation of trust. Emphasis of Matter paragraph means a paragraph included in the auditors report that refers to a matter appropriately presented or disclosed in the financial report that, in the auditors judgement, is of such importance that it is fundamental to users understanding of the financial report Encryption is scrambling data so it is meaningless to anyone but the intended recipient, who has the key to unscramble the data. Engagement documentation means the record of work performed, relevant evidence obtained, and conclusions the assurance 19
E
EDI Electronic Data Interchange is the use of communication between an entity and customers or suppliers to transact business electronically. Purchases, shipping, billing, cash receipts, and cash disbursements can be completed entirely by exchanging electronic messages. Edit checks Reasonableness, validity, limit, and completeness tests that are programmed routines designed to check input data and processing results for completeness, accuracy and reasonableness. EDP Electronic Data Processing. Processing of information by computer as opposed to handwritten records. Effective income tax rate The income tax provision (expense) shown on an income statement divided by pretax income. This differs from the statutory rate because of deductions, credits, and exclusions. Effective internal control Reasonable assurance that operational objectives are achieved, that published financial statements are reliably prepared, and that the entity complies with applicable laws and regulations.
Basic Auditing & Assurance terms practitioner reached (terms such as working papers or work papers are sometimes used). Engagement letter means the written terms of an engagement in the form of a letter. Engagement letter A letter that represents the understanding about the engagement between the client and the CPA / auditor. The letter identifies the financial statements and describes the nature of procedures to be performed. It includes the objectives of the procedures, an explanation that the financial information is the responsibility of the company's management, and a description of the form of report. Engagement partner means the partner or other person in the firm who is responsible for the audit engagement and its performance, and for the auditors report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body. Engagement partner should be read as referring to a public sector equivalent where relevant. Engagement partner (in the context of QC) means the partner or other person in the firm who is responsible for the assurance engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body. Engagement partner should be read as referring to a public sector equivalent where relevant.
Volume 1 Engagement quality control review means a process designed to provide an objective evaluation, on or before the date of the auditors report, of the significant judgements the engagement team made and the conclusions it reached in formulating the auditors report. The engagement quality control review process is for audits of financial reports of listed entities and those other audit engagements, if any, for which the firm has determined an engagement quality control review is required. Engagement quality control review (in the context of ASQC 1) means a process designed to provide an objective evaluation, on or before the date of the report, of the significant judgements the engagement team made and the conclusions it reached in formulating the report. The engagement quality control review process is for audits of financial reports of listed entities and those other engagements, if any, for which the firm has determined an engagement quality control review is required. Engagement quality control reviewer means a partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, none of whom is part of the engagement team, with sufficient and appropriate experience and authority to objectively evaluate the significant judgements the engagement team made and the conclusions it reached in formulating the auditors report.
20
Basic Auditing & Assurance terms Engagement team means all partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform audit procedures on the engagement. This excludes an auditors external expert engaged by the firm or a network firm. (also see Auditors expert) Engagement team (in the context of QC ) means all partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform procedures on the engagement. This excludes external experts engaged by the firm or a network firm. Enterprise (ERM) risk management
Volume 1 competence, board or audit committee participation, organization structure, assignment of authority and responsibility, and human resource policies and practices. Error Error means an unintentional misstatement in a financial report, including the omission of an amount or a disclosure Or Unintentional misstatements or omissions in financial statements. Errors may involve mistakes in gathering or processing accounting data, incorrect estimates from oversight or misinterpretation of facts, and mistakes in application of principles relating to amount, classification, presentation or disclosure. Estimation sampling is sampling to estimate the actual value of a population characteristic within a range of tolerable misstatement. Estimation uncertainty means the susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement Evaluate means identify and analyse the relevant issues, including performing further procedures as necessary, to come to a specific conclusion on a matter. Evaluation, by convention, is used only in relation to a range of matters, including evidence, the results of procedures and the effectiveness of managements response to a risk. (also see Assess)
identifies risks and opportunities, assesses them for likelihood and magnitude, determines responses strategy, and monitors progress. ERM integrates strategic planning, operations management, and internal control. Monitoring ERM is part of internal control activities. Entitys risk assessment process means a component of internal control that is the entitys process for identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks, and the results thereof. Environment The control environment is the attitude, awareness, and actions of the board, management, owners, and others about importance of control. It includes integrity and ethical rules, commitment to
21
Basic Auditing & Assurance terms Evidence (evidential matter) includes written and electronic information (such as checks, records of electronic fund transfers, invoices, contracts, and other information) that permits the auditor to reach conclusions through reasoning. Examination is evaluating the preparation of prospective statements, support underlying assumptions, and presentation. The accountant reports whether, in his or her opinion, the statements conform to AICPA guidelines and assumptions provide a reasonable basis for the responsible party's forecast. The accountant should be independent, proficient, plan the engagement, supervise assistants, and obtain sufficient evidence to provide a reasonable basis for the report. Examine (examining) As an audit procedure to examine something is to look at it critically. Exception means a response that indicates a difference between information requested to be confirmed, or contained in the entitys records, and information provided by the confirming party. Except for A qualified opinion. An auditor can qualify the audit opinion for both departures from U.S. GAAP in the financial statements and restrictions on the scope of the audit. The opinion paragraph of the qualified report is worded "In our opinion, except for..."
Volume 1 Execute (execution) To carry out an internal control procedure, such as to sign and mail a check after inspecting supporting documents. Existence Assertions about existence deal with whether assets or liabilities exist at a given date. For example, management asserts that finished goods inventories in the balance sheet are available for sale. Expenditure Cash paid or liability incurred. Experienced auditor means an individual (whether internal or external to the firm) who has practical audit experience, and a reasonable understanding of: (a) Audit processes; (b) Standards and applicable legal and regulatory requirements; (c) The business environment in which the entity operates; and (d) Auditing and financial reporting issues relevant to the entitys industry. Expert (Expertise) means skills, knowledge and experience in a particular field. Explanatory A paragraph added to an audit report to explain something, such as the reason for a qualified or adverse opinion. Explicitly Fully and clearly expressed, leaving nothing implied.
22
Basic Auditing & Assurance terms Extend means to multiply one number by another (to test extensions is to test the accuracy of multiplication done by the client). To extend audit procedures is to apply additional audit procedures to obtain more evidence. Extent of an audit test is the sample size. A small number of transactions provides less assurance than a large sample. There is more risk your conclusion will be incorrect if you use a smaller sample size. External confirmation means audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium
Volume 1
23
F
Field work The performance of audit procedures outside the CPA's office. Much field work, but not all, is done in the client's offices after the balance sheet date. FIFO First In First Out inventory cost flow. Financial forecasts are prospective financial statements that present expected future financial position, results of operations, and cash flows based on expected conditions. A financial forecast is of the most likely future scenario. Financial institution confirmation request A confirmation sent to the client's bank or other financial institution asking the bank to confirm directly to the auditor information about balances at a particular date. Financial projections are prospective financial statements that present, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and changes in financial position. A financial projection includes several alternative scenarios while a forecast is the single most likely scenario.
Volume 1 notes, and an assertion statement by those responsible for the financial report. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The requirements of the applicable financial reporting framework determine the form and content of the financial report. Financial statement means a structured representation of historical financial information, intended to communicate an entitys economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. What constitutes a financial statement is determined by the requirements of the applicable financial reporting framework. Financial reporting framework is a set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements. financial statements are a structured representation of historical financial information, including related notes, intended to communicate an entity's economic resources and obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. Firm means a sole practitioner, partnership or corporation or other entity of assurance practitioners. Firm should be read as referring to a public sector equivalent where relevant.
Financial report means, a complete set of financial statements, including the related By Ammar Mushtaq Khan
24
Basic Auditing & Assurance terms Flowchart A schematic representation of a sequence of operations in an accounting system or computer program. Also called a flow diagram or flow sheet. Foot a column is to add a column of numbers. To test footing is to add the column again to check accuracy. Forecast means prospective financial information prepared on the basis of assumptions as to future events which management expects to take place and the actions management expects to take as of the date the information is prepared (bestestimate assumptions). Fraud A deliberate deception to secure unfair or unlawful gain. False representation intended to deceive relied on by another to that person's injury. Fraud includes fraudulent financial reporting undertaken to render financial statements misleading, sometimes called management fraud, and misappropriation of assets, sometimes called defalcations. Fraud risk factors means events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Fraudulent financial reporting means financial reporting involving intentional misstatements, including omissions of amounts or disclosures in a financial report, to deceive financial report users By Ammar Mushtaq Khan
Volume 1
25
Volume 1 receipts, cash disbursements, and other common transactions. General ledger A record to which monetary transactions are posted (in the form of debits and credits) from a journal. It is the final record from which financial statements are prepared. General ledger accounts are often control accounts that report totals of details included in subsidiary ledgers. General purpose financial report means a financial report prepared in accordance with a general purpose framework. General purpose framework means a financial reporting framework designed to meet the common financial information needs of a wide range of users. The financial reporting framework may be a fair presentation framework or a compliance framework. Generalized audit software Packaged computer programs used on a variety of computers during audit field work to read computer files, select information, perform calculations, create data files, and print reports in a format specified by the auditor. Going concern assumption assumes the company will continue in operation long enough to realize its investment in assets through operations (as opposed to sale). Presenting assets at historical cost is justified by assuming productive assets will be used rather than sold. This makes market values irrelevant and supports accounting methods that match the actual cost of an asset to periods benefited. 26
G
GAAP Generally Principles. GAAS Generally Accepted Auditing Standards. The ten auditing standards adopted by the membership of the AICPA. Auditing standards differ from audit procedures in that "procedures" relate to acts to be performed, whereas "standards" deal with quality of the performance of those acts and objectives of the procedures. GASB Government Accounting Standards Board. A nongovernment private organization that sets GAAP in the United States for nonfederal governmental entities. General controls Policies and procedures to assure proper operation of computer systems, including controls over network operations, software acquisition and maintenance, and access security. General journal A book of original entry in a doubleentry system. The journal lists transactions and indicates accounts to which they are posted. The general journal includes all transactions not included in specialized journals used for cash Accepted Accounting
Basic Auditing & Assurance terms Governance means the role of person(s) or organisation(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity Government auditing standards A book issued by the comptroller general of the United States, sometimes called the "yellow book." Government Auditing Standards contains standards for audits of government organizations, programs, activities, and functions and of government assistance received by organizations. The audit is designed to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a direct and material effect on determination of financial statement amounts, are followed when required by law, regulation, agreement, contract, or policy. Gross margin percentage The gross margin from an income statement divided by net sales revenue. Group means all the components whose financial information is included in the group financial report. A group always has more than one component. Group audit means the audit of a group financial report. Group audit opinion means the audit opinion on the group financial report. Group engagement partner
Volume 1 means the partner or other person in the firm who is responsible for the group audit engagement and its performance, and for the auditors report on the group financial report that is issued on behalf of the firm. Where joint auditors conduct the group audit, the joint engagement partners and their engagement teams collectively constitute the group engagement partner and the group engagement team. Group engagement team means partners, including the group engagement partner, and staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial report. Group financial report means a financial report that includes the financial information of more than one component. The term group financial report also refers to combined financial reports aggregating the financial information prepared by components that have no parent but are under common control. Group management means management, or those charged with governance, responsible for the preparation of the group financial report. Group-wide controls means controls designed, implemented and maintained by group management over group financial reporting.
27
H
Hard copy A printed copy of information as opposed to information stored in computer readable form. Hardware A computer and associated physical equipment involved in data processing or communications functions as opposed to software (the computer programs that provide instructions the computer follows). Hardware control Computer controls built into physical equipment by the manufacturer. Hash total A control total that has no meaning in itself except for control, e.g., total social security numbers of employees paid. Hedges protect an entity against the risk of adverse price or interest-rate movements on its assets, liabilities, or anticipated transactions. A hedge reduces risk by counterbalancing losses with gains on separate positions. Historical financial information means information expressed in financial terms in relation to a particular entity, derived primarily from that entitys accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time in the past.
Volume 1 Historical financial information, other than a financial (a) Specific components, elements, accounts or items of a financial report, such as: (i) A single financial statement, for example, an income statement or balance sheet. (ii) Accounts receivable. (iii) Impairment of asset accounts. (iv) Inventory. (v) The liability for accrued benefits of a defined benefits plan. (vi) The recorded value of identified intangible assets. (vii) Pro-forma historical financial information and adjustments. (viii) The liability for incurred but not reported claims in an insurance portfolio, including related explanatory notes. (b) Other information derived from financial records, such as: (i) A schedule of externally managed assets and income of a private pension plan, including related explanatory notes. (ii) A schedule of net tangible assets, including related explanatory notes. (iii) A schedule of disbursements in relation to a leased property, including related explanatory notes. (iv) A schedule of profit participation or employee bonuses, including related explanatory notes. (c) Financial statements prepared in accordance with a financial reporting framework that is not designed to achieve fair presentation, such as condensed financial statements and an entitys internal management accounts.
28
I
Image-processing systems scan documents into electronic images for storage. Reference and source documents may not be retained after conversion. Immaterial Of no importance. Something in financial statements that will not change decisions of investors. Implementation of internal control means the auditor determines that the relevant controls exist and that the entity is using them. Implicitly Implied or understood even though not directly expressed. Implied control performance deals with expected changes to data. Incompatible duties Internal control systems rely on separation of duties to reduce the chance of errors or fraud. Duties are incompatible if they should be separated for control. For example, one person should not be in a position to both embezzle funds and to hide the embezzlement by changing the recorded accountability. Inconsistency
Volume 1 previously obtained and, possibly, about the basis for the auditors opinion on the financial report. Incorrect acceptance The risk of incorrect acceptance is the risk the sample supports the conclusion that the recorded balance is not materially misstated when it is materially misstated. Incorrect rejection The risk of incorrect rejection is the risk the sample supports the conclusion that the recorded balance is materially misstated when it is not materially misstated. Independent In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditors. This means freedom from bias, which is possible even when auditing one's own business (independence in fact). However, it is important that the auditor be independent in appearance (that others believe the auditor is independent). Inference control is a control used in the output of databases to stop a person who has access to only summary information from being able to determine (infer) a particular value for a particular record. Information systems consist of infrastructure (physical and hardware components), software, people, procedures (manual and automated), and data.
Information system relevant to means other information that financial reporting contradicts information contained in means a component of internal the audited financial report. A control that includes the financial material inconsistency may raise reporting system, and consists of the doubt about the audit conclusions procedures and records established drawn from audit evidence By Ammar Mushtaq Khan 29
Basic Auditing & Assurance terms to initiate, record, process and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities and equity. Inherent limitation The potential effectiveness of an entity's internal control is subject to inherent limitations. Human fallibility, collusion, and management override are examples. Inherent risk The susceptibility of a balance or transaction class to error that could be material, when aggregated with other errors, assuming no related internal controls. Initial audit engagement means an engagement in which either: (a) The financial report for the prior period was not audited; or (b) The financial report for the prior period was audited by a predecessor auditor. Input controls Computer controls designed to provide reasonable assurance that transactions are properly authorized before processed by the computer, accurately converted to machine readable form and recorded in the computer, that data files and transactions are not lost, added, duplicated or improperly changed, and that incorrect transactions are rejected, corrected and, if necessary, resubmitted on a timely basis. Inquire (inquiry) Ask questions of client personnel. Inspection
Volume 1 (as an audit procedure) means examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset. Inspection (in the context of QC) means in relation to completed engagements, procedures designed to provide evidence of compliance by engagement teams with the firms quality control policies and procedures Integrated test facility (integrated test data) A "dummy" unit (e.g., a department or employee) is established. Test (fictitious) transactions are posted to the dummy unit during the normal processing cycle. If test transactions are processed correctly that provides evidence that transactions of other units are processed correctly as well. Integrity Consistent adherence to an ethical code. If client management lacks integrity the auditor must be more skeptical than usual. Intended users means the person, persons or class of persons for whom the assurance practitioner prepares the compliance report. The responsible party may be one of the intended users, but not the sole user. Interim audit procedures are done during the year under audit, before year-end. Interim financial information means financial statements of a time period less than a full year. Interim financial report 30
Basic Auditing & Assurance terms means a financial report that is prepared in accordance with an applicable financial reporting framework for a period that is shorter than the entitys financial year Internal audit function means an appraisal activity established or provided as a service to the entity. Its functions include, amongst other things, examining, evaluating and monitoring the adequacy and effectiveness of internal control Internal auditors are employees of the client responsible for providing analyses, evaluations, assurances, recommendations, and other information to the entity's management and board. An important responsibility of internal auditors is to monitor performance of controls. Internal control Policies and procedures designed to provide reasonable assurance that specific entity objectives will be achieved. It consists of the control environment, risk assessment, control activities, information and communications, and monitoring. Internal control questionnaire A list of questions about the existing internal control system to be answered (with answers such as yes, no, or not applicable) during audit fieldwork. The questionnaire is a part of the documentation of the auditor's understanding of the client's internal controls. Internal control weakness A defect in the design or operation of internal controls. Introductory paragraph
Volume 1 The first paragraph of the auditor's standard report which identifies the financial statements audited and states the financial statements are the responsibility of management and that the auditor's responsibility is to express an opinion on the financial statements based on the audit. Inventory tag A tag attached to inventory items that identifies the inventory items to aid in counting the physical inventory. Inverse The opposite or reverse. An inverse relationship between two variables means that when one increases the other decreases. Investee The company in which an investment is held. Often used to describe an equity method investment, in which the investor reports a share of the investee's net income. Investigate means to enquire into matters arising from other procedures to resolve them. Invoice An itemized list of goods shipped or services rendered with costs. ISB Independence Standards Board. Issuer is a company that must file reports with the SEC. This includes companies with securities traded on a stock exchange and larger companies traded over-the-counter.
31
Volume 1
J
Journal A book of original entry in a doubleentry system. The journal lists all transactions and the accounts to which they are posted. Just-in-time An inventory system that attempts to minimize inventory costs that do not add value for the customer. It arranges for suppliers to deliver small quantities of raw materials just before those units are needed in production. Storing, insuring, and handling raw materials are costs that add no value to the product, and are minimized in a just in time system.
L
Lapping A scheme to cover an embezzlement by using payments made by one customer to reduce the receivables balance of another customer. Lead schedule The schedule at the beginning of audit documentation that summarizes the detailed schedules. Lead Sheets These are the trial balance broken out by sections such as Fixed Assets, Receivables, Cash, etc. It lists all the groupings of accounts which relate to that testing area LIFO Last In First Out inventory cost flow. Limited assurance engagement means an assurance engagement where the assurance practitioners objective is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the assurance engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative form of expression of the assurance practitioners conclusion. A limited assurance engagement is commonly referred to as a review. Limit test (limit check). A computer program step that compares data with predetermined limits as a reasonableness test). By Ammar Mushtaq Khan 32
K
Kiting Drawing a check on insufficient funds to take advantage of the time required for collection
Basic Auditing & Assurance terms Liquidity The availability of cash or ability to obtain it quickly. Debt paying ability. Listed entity means an entity whose shares, stock or debt are quoted or listed on a recognised stock exchange, or are marketed under the regulations of a recognised stock exchange or other equivalent body. Lockbox (Bank lockbox) speeds the availability of funds from cash collections by reducing the time from the customer mailing the check until the funds are available to spend. Remittances are sent to a bank near the customer and the bank deposits funds speedily to the payee's account.
Volume 1
M
Management is the person(s) with executive responsibility for the conduct of the entity's operations. Or means the person(s) with executive responsibility for the conduct of the entitys operations. For some entities in some jurisdictions, management includes some or all of those charged with governance, for example, executive members of a governance board, or an ownermanager Management bias means a lack of neutrality by management in the preparation of information. Management controls are controls performed by one or more managers. Managements expert means an individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial report. Managements point estimate means the amount selected by management for recognition or disclosure in the financial report as an accounting estimate
33
Basic Auditing & Assurance terms Management representation letter A letter addressed to the auditor, signed by the client's chief executive officer and chief financial officer. During an audit, management makes many representations to the auditor. Written representations from management in the letter confirm oral representations given to the auditor, document the continuing appropriateness of such representations, and reduce the possibility of misunderstanding. Managements specialist is an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements Manual controls are controls performed manually, not by computer. Material (materiality) Information important enough to change an investor's decision. Insignificant information has no effect on decisions, so there is no need to report it. Materiality includes the absolute value and relationship of an amount to other information. Materiality means, in relation to information, that if information is omitted, misstated or not disclosed, that information has the potential to affect the economic decisions of users of the financial report or the discharge of accountability by management or those charged with governance Material weakness
Volume 1 is a deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entitys financial statements will not be prevented, or detected and corrected on a timely basis. Memos Written records supporting journal entries. Credit memos support credits, while debit memos support debit entries. Misappropriate To embezzle or appropriate dishonestly for one's own use. Misappropriation of assets means the theft of an entitys assets and is often perpetrated by employees in relatively small and immaterial amounts. However, it can also involve management who are usually more capable of disguising or concealing misappropriations in ways that are difficult to detect. Misstatement is a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Or
means a difference between the amount, classification, presentation, or disclosure of a reported financial report item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud. By Ammar Mushtaq Khan 34
Basic Auditing & Assurance terms Where the auditor expresses an opinion on whether the financial report is presented fairly, in all material respects, or gives a true and fair view, misstatements also include those adjustments of amounts, classifications, presentation, or disclosures that, in the auditors judgement, are necessary for the financial report to be presented fairly, in all material respects, or to give a true and fair view. Misstatement of fact means other information that is unrelated to matters appearing in the audited financial report that is incorrectly stated or presented. A material misstatement of fact may undermine the credibility of the document containing the audited financial report. Mitigating Reducing in force or intensity. Modified opinion means a qualified opinion, an adverse opinion or a disclaimer of opinion. Monitoring Evaluation of the firms system of quality control to provide reasonable assurance that it is designed appropriately and operating effectively. Or means a process comprising an ongoing consideration and evaluation of the firms system of quality control, including a periodic inspection of a selection of completed engagements, designed to provide the firm with reasonable
Volume 1 assurance that its system of quality control is operating effectively. Monitoring of controls means a process to assess the effectiveness of internal control performance over time. It includes assessing the design and operation of controls on a timely basis and taking necessary corrective actions modified for changes in conditions. Monitoring of controls is a component of internal control.
35
N
Narrative A written description of an internal control system. Nature of audit testing means the type of testing, such as tests of internal controls, tests of transactions, or tests of balances in balance sheet accounts. Negative assurance A statement of what the auditor does not know as opposed to what the auditor believes (positive assurance). A statement that the auditor was "not aware of material modifications that should be made to financial statements for them to conform with generally accepted accounting principles" is negative assurance used in review reports. Negative confirmation request means a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request. Or The negative form of accounts receivable confirmation asks the client's customer to respond only if the customer disagrees with the balance determined by the client. The positive form asks the customer to respond whether the customer agrees or disagrees with the client's receivable balance. The negative form is used when controls over receivables are strong and accounts receivable consists of many accounts with small balances. The
Volume 1 positive form is used when controls are weak or there are fewer, but larger, accounts. Network means a larger structure: (a) That is aimed at cooperation, and (b) That is clearly aimed at profit or cost-sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources. Network firm means a firm or entity that belongs to a network. Non-compliance means acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations. Such acts include transactions entered into by, or in the name of, the entity, or on its behalf, by those charged with governance, management or employees. Noncompliance does not include personal misconduct (unrelated to the business activities of the entity) by those charged with governance, management or employees of the entity. Non issuer means all entities except for those that register their securities with the SEC. Non-response means a failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered 36
Basic Auditing & Assurance terms Non sampling risk is audit risk not due to sampling. An auditor may apply a procedure to all transactions or balances and fail to detect a material misstatement. Non sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve a specific objective. For example, confirming recorded receivables cannot reveal unrecorded receivables. Non sampling risk can be reduced to a negligible level through adequate planning and supervision.
Volume 1
37
Basic Auditing & Assurance terms Occurrence
Volume 1 Assertions about occurrence deal with whether recorded transactions have occurred during a given period. For example, management asserts that sales in the income statement represent the exchange of goods or services with customers for cash or other consideration. Online Access to a computer for immediate processing without having to wait for a batch of transactions to be processed at a later time. Opening balances means those account balances that exist at the beginning of the period. Opening balances are based upon the closing balances of the prior period and reflect the effects of transactions and events of prior periods and accounting policies applied in the prior period. Opening balances also include matters requiring disclosure that existed at the beginning of the period, such as contingencies and commitments. Operating effectiveness How an internal control was applied, the consistency with which it was applied, and by whom. Operating income from continuing operations is reported on an income statement. Opinion A auditor's conclusion held with confidence but not substantiated by positive knowledge or proof. Opinion paragraph The paragraph in the audit report that expresses the auditor's conclusions. The wording of the standard, unqualified opinion 38
O
Objective A goal. Objectivity The internal auditors' objectivity depends on the organizational status of the internal audit function, whether the internal auditor has direct access and reports regularly to the board, the audit committee, or ownermanager, and who oversees internal auditor employment decisions. Obligations Assertions about obligations deal with whether liabilities are obligations of the entity at a given date. For example, management asserts that amounts capitalized for leases in the balance sheet represent the cost of the entity's rights to leased property and that the corresponding lease liability represents an obligation of the entity. Obliterate To do away with something so as to leave no trace. Observe (observation) means looking at a process or procedure being performed by others, for example, the auditors observation of inventory counting by the entitys personnel, or of the performance of control activities or Watch and test a client action (such as taking inventory).
Basic Auditing & Assurance terms paragraph is: "In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company at December 31, year A, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles." Order is a listing of goods or services requested from a supplier with specifications and desired delivery method. A company starts the purchase process internally with a requisition, which results in an order being transmitted to a supplier. When the supplier ships the goods or provides the service, an invoice is sent to the customer telling the customer the specifications, delivery method, and price of those goods or services. Other comprehensive accounting basis of
Volume 1 financial report and the auditors report thereon. Other Matter paragraph means a paragraph included in the auditors report that refers to a matter other than those presented or disclosed in the financial report that, in the auditors judgement, is relevant to users understanding of the audit, the auditors responsibilities or the auditors report. Outcome of an accounting estimate means the actual monetary amount which results from the resolution of the underlying transaction(s), event(s) or condition(s) addressed by the accounting estimate Overall audit strategy means the strategy that sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan Overall review The objective of the overall review stage of the audit is to assess conclusions reached, and evaluate the overall financial statement presentation. The overall review includes reading the financial statements and notes and considering adequacy of evidence gathered in response to unusual or unexpected balances. Results of an overall review may indicate the need for additional evidence.
(OCBOA) means a definite set of criteria, other than accounting principles generally accepted in the United States of America or International Financial Reporting Standards (IFRSs), having substantial support underlying the preparation of financial statements prepared pursuant to that basis. Other financial information means historical financial information and information other than historical financial information (for example prospective financial information)
Other information means financial and non-financial information (other than the financial report and the auditors report thereon) which is included, either by law, regulation, or custom, in a document containing an audited By Ammar Mushtaq Khan
39
Basic Auditing & Assurance terms Password
Volume 1 A sequence of characters required to gain access to a computer system. Passwords are used to restrict computer system access to only authorized persons. Payroll Department that determines amounts of wage or salary due to each employee. Peer review A practice monitoring program in which the audit documentation of one accountant firm is periodically reviewed by independent partners of other firms to determine that it conforms to the standards of the profession. Pending Legal proceedings not yet decided. Per Diem An allowance for daily expenses. Often used to reimburse employees for estimated expenses as opposed to accounting for each small component of the expenses. Performance audit engagement means a performance engagement where the assurance practitioner provides reasonable assurance Performance engagement means a performance audit or a performance review of all or a part of the activities of an entity (or entities) to assess economy, efficiency or effectiveness. It includes a performance audit engagement or a performance review engagement directed to assess:
P
Parallel processing is the simultaneous performance of multiple operations, usually in reference to computer systems. Parallel simulation testing is the simultaneous performance of multiple operations. It provides evidence of the validity of processing if the second processing system yields the same results as the first. Auditors use their own generalized audit software to process the same data as was processed by the clients software. If the output of the audit software is the same as the output of the clients software that is evidence that the clients software is performing properly. Parity bit A redundant bit added to a string of bits to increase the accuracy of data transmission. Partner (in the context of quality control) means any individual with authority to bind the firm with respect to the performance of an audit, review or other assurance engagement. Partner should be read as referring to a public sector equivalent where relevant. Partner means any individual with authority to bind the firm with respect to the performance of an audit of a financial report or historical financial information. Partner should be read as referring to a public sector equivalent where relevant.
40
Basic Auditing & Assurance terms (a) the adequacy of an internal control structure or specific internal controls, in particular those intended to safeguard assets and to ensure due regard for economy, efficiency or effectiveness; (b) the extent to which resources have been managed economically or efficiently; and (c) the extent to which activities have been effective. The terms performance audit and performance review are predominantly applied in the public sector. In the private sector these audits and reviews are commonly referred to as operational audits and operational reviews. Performance engagement risk means the risk that the assurance practitioner expresses an inappropriate conclusion when the performance of an activity is not materially economic, efficient or effective. This would arise where the assurance practitioner draws conclusions based on evidence that is not soundly based or that is improper or incomplete as a result of inadequacies in the evidence gathering process, misrepresentation or fraud.
Volume 1 Performance review engagement means a performance engagement where the assurance practitioner provides limited assurance. Permanent audit documentation includes items of continuing accounting significance, such as the analysis of balance sheet accounts and contingencies. Such information from a prior year is used in the current audit and updated each year. Sometimes called the continuing file. Perpetrate Carry out an action such as a crime. Perpetual An inventory accounting system updated for each addition to inventory and each issuance from inventory, so the records indicate the exact quantity on hand at any moment. The alternative is a periodic inventory system where actual inventory on hand is determined only once a year. PBC (Prepared By Client) This is anything that was originally created by the client. Sometimes you will need to send a PBC list, which contains all of your first requests for everything you will need from the client to complete the audit. These items are often labeled PBC in your audit file as well.
Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial report as a whole to reduce to an appropriately low level the probability that the aggregate of Personal financial statements uncorrected and undetected misstatements exceeds materiality of individuals present assets and for the financial report as a whole. If liabilities at estimated current value applicable, performance materiality on an individual's balance sheet also refers to the amount or amounts (statement of financial condition). A set by the auditor at less than the statement of changes in net worth materiality level or levels for presents major changes in net worth particular classes of transactions, during a period. The accrual basis is account balances or disclosures used for assets and liabilities, which By Ammar Mushtaq Khan 41
Basic Auditing & Assurance terms are presented in order of liquidity and maturity, without classification as to current and non current. The cash value of life insurance less the amount of loans against it is an asset. Deferred income tax on the difference between the income tax basis and estimated current values is presented between liabilities and equity. Personnel The department that maintains records of each individual's employment. Personnel (in the context of firm) means partners and staff. Persuasive Having the power to influence. Most audit evidence is persuasive, but not conclusive. Perturbation control is a restriction control to limit the access a particular user has to details in a database. It introduces noise into the output (perturbs, or changes it) to shield the specifics of one record from the person who has only access to summary information. Pervasive means a term used, in the context of misstatements, to describe the effects on the financial report of misstatements or the possible effects on the financial report of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial report are those that, in the auditors judgement:
Volume 1 (a) Are not confined to specific elements, accounts or items of the financial report; (b) If so confined, represent or could represent a substantial proportion of the financial report; or (c) In relation to disclosures, are fundamental to users understanding of the financial report. Or Having the ability to permeate. An error is pervasive if it is material to more than one of the primary financial statements. Piecemeal opinion Expression of an opinion on an item in financial statements is not permitted as part of a disclaimer or adverse opinion on the financial statements as a whole because it would tend to overshadow or contradict a disclaimer of opinion or an adverse opinion. Plan Audit planning is developing an overall strategy for conduct and scope of the audit. The nature, extent, and timing of planning vary with size and complexity of the entity, experience with the entity, and knowledge of the business. In planning the audit, the auditor considers the entity's business and its industry, its accounting policies and procedures, methods used to process accounting information, the planned assessed level of control risk, and the auditor's preliminary judgment about audit materiality. Pledge Something given as security guarantee payment of a debt. to
42
Basic Auditing & Assurance terms Population means the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions Population size The number of items in the population from which a sample is drawn. Positive assurance A statement as to what the auditors believes. An example is an opinion that the financial statements are presented fairly in conformity with GAAP. The opposite is negative assurance, a statement about what the auditor does not know. A statement that the auditor was "not aware of material modifications that should be made to financial statements for them to conform with generally accepted accounting principles" is negative assurance used in review reports. Positive request) confirmation (positive
Volume 1 Preconditions for an audit means the use by management of an acceptable financial reporting framework in the preparation of the financial report and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted Predecessor auditor means the auditor from a different audit firm, who audited the financial report of an entity in the prior period and who has been replaced by the current auditor. Or The auditor of a client for a prior year who no longer audits that client. Premise, relating to the responsibilities of management and, where appropriate, those charged with governance, on which an audit is conducted means that management and, where appropriate, those charged with governance have acknowledged and understand that they have the following responsibilities that are fundamental to the conduct of an audit in accordance with Australian Auditing Standards. That is, responsibility: (a) For the preparation of the financial report in accordance with the applicable financial reporting framework; including where relevant their fair presentation; (b) For such internal control as management and, where appropriate, those charged with governance determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error, and 43
The positive form of receivables confirmation asks the customer to respond whether the customer agrees or disagrees with the client's reported receivable balance. The negative form of accounts receivable confirmation asks the client's customer to respond only if the customer disagrees with the balance determined by the client. The negative form is used when controls over receivables are strong and accounts receivable consists of many accounts with small balances. The positive form is used when controls are weak or there are fewer, but larger, accounts.
Basic Auditing & Assurance terms (c) To provide the auditor with: (i) Access to all information of which management and, where appropriate, those charged with governance are aware that is relevant to the preparation of the financial report such as record, documentation and other matters; (ii) Additional information that the auditor may request from management and, where appropriate, those charged with governance, for the purposes of the audit; and (iii) Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence. In the case of a fair presentation framework, (a) above may be restated as for the preparation and fair presentation of the financial report in accordance with the financial reporting framework, or for the preparation of the financial report that gives a true and fair view in accordance with the financial reporting framework. The premise, relating to the responsibilities of management and, where appropriate, those charged with governance, on which an audit is conducted may also be referred to as the premise. Presentation Assertions about presentation deal with whether particular financial statement components are properly classified and described. For example, management asserts that long-term liabilities in the balance sheet will not mature in one year. Similarly, management asserts that extraordinary items in the income
Volume 1 statement are properly classified and described. Presumptively mandatory quality control requirements apply unless, in rare circumstances, the firm documents the justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the objectives of the requirement. The word should indicates a presumptively mandatory requirement. Preventative control A control designed to avoid an unintended event. Principal auditor The auditor responsible for the greater portion of financial statements. The principal auditor may assume responsibility for the work of the other auditor or divide responsibility with the other auditor. Probability proportional to size (PPS) (also known as dollar unit) sampling A sampling plan that bases the likelihood of selecting a particular account on the relative size of that account, so larger accounts have a greater probability of being selected for the sample than smaller accounts. Probable A contingent loss is probable if it is uncertain but likely to happen. Procedure An action, such as a step performed as part of an audit program or as part of the client's internal controls.
44
Basic Auditing & Assurance terms Processing control is an internal control included in computer software designed to assure that all transactions are handled as authorized and none omitted or added. Production cycle The portion of an entity that acquires resources and converts them to the product or service for customers. Production order A document that initiates manufacturing process. Pro-forma The objective of pro forma financial information is to show effects on historical financial information as if a proposed event had occurred earlier. Professional Competence Proven level of ability, often linked to qualifications issued by relevant professional bodies and compliance with their codes of practice and standards Professional judgement means 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 skepticism means an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence. the
Volume 1 Proficiency as an auditor includes the auditor's formal education and subsequent experience. The independent auditor must undergo training adequate in technical scope, including commensurate general education. The assistant entering an auditing career must obtain experience with proper supervision and review of his or her work by a more experienced auditor. Program An audit program is a listing of audit procedures to be performed in completing the audit. A computer program (software) is a listing of steps to be performed in processing the data. Programmed controls are built into computer software and include reasonableness tests, control totals, and sequence checks. Projection means prospective financial information prepared on the basis of: (a) Hypothetical assumptions about future events and management actions which are not necessarily expected to take place, such as when some entities are in a start-up phase or are considering a major change in the nature of operations; or (b) A mixture of best-estimate and hypothetical assumptions Pronouncements of the GAAP , IAASB and international standards are rules that determine the principles for external financial reporting and disclosure. Proof of cash 45
Basic Auditing & Assurance terms is a reconciliation of the general ledger cash balance at both the beginning and end of a period, combined with a reconciliation of cash deposited for the period with the cash receipts journal, and a reconciliation of checks for the period with the cash disbursements journal. Prospective financial statements are either financial forecasts or financial projections. Prospective financial statements may cover a period that has partially expired. Statements for periods that have completely expired are not prospective financial statements. Prospective financial information means financial information based on assumptions about events that may occur in the future and possible actions by an entity. It is highly subjective in nature and its preparation requires the exercise of considerable judgement. Prospective financial information can be in the form of a forecast, a projection or a combination of both for example a one year forecast plus a five year projection. (see Forecast and Projection) Prospectus
Volume 1 offerees but it must be clearly marked as preliminary. Proxy A power of attorney granting a third party the right to a stockholder's vote. When management or others solicit proxies from stockholders a copy of the proxy statement must be filed with the SEC ten days before mailing the solicitation. The proxy statement must include all information relevant to the matter voted on. Public company (also called an issuer) is a company that must file reports with the SEC. This includes companies with securities traded on a stock exchange and larger companies traded over-the-counter Purchase order A document from a buyer to a seller placing an order and listing quantities and specifications. Purport Intending to present.
A registration statement filed with the SEC includes audited financial statements (balance sheet, income statement, and statement of cash flows) for the previous three years. A prospectus contains the same information and must be supplied to all parties to whom offers are made. There is a twenty-day waiting period between the filing of the registration statement and the first sale of securities. During this period, preliminary ads and a "red herring" prospectus can be provided to By Ammar Mushtaq Khan
46
Volume 1 assets less inventories and prepaid expenses.
Q
Qualified (qualify) An audit opinion that the financial statements as a whole are presented in conformity with GAAP & standards, with the exceptions noted. Qualitative Relating to the quality of a trait, as opposed to quantitative, which means expressed as a number. Quality control systems provide a accountant or auditors firm with reasonable assurance that personnel comply with professional standards and the firm's standards of quality, independence, integrity, and objectivity. It covers personnel management, acceptance and continuance of clients, engagement performance, and monitoring. Quantitative (quantitatively) Expressed as a number, as opposed to qualitative measurement. Questionnaire An internal control questionnaire is a list of questions about the internal control system to be answered (with answers such as yes, no, or not applicable) during audit fieldwork. The questionnaire is part of the documentation of the auditor's understanding of the client's internal controls. Quick ratio Quick assets divided by current liabilities. Quick assets are current By Ammar Mushtaq Khan
47
R
Random sample (random-number sampling) Identical probability of each population item being selected for a sample. Also, the use of random numbers to select a random sample from a population. Ratio The relation between two quantities expressed as the quotient of one divided by the other. The ratio of 8 to 2 is written 8/2 and equals four. Financial statement ratios are used as analytical procedures in audits. Ratio estimation In audit sampling a ratio of the proportion of errors in the sample applied to the population value to estimate total error. Reasonable assurance means, a high, but not absolute, level of assurance Reasonable assurance (in audit report) An auditor works within economic limits. The audit opinion, to be economically useful, must be formed in a reasonable time and at reasonable cost. The auditor must decide, exercising professional judgment, whether evidence available within limits of time and cost is sufficient to justify an opinion.
Volume 1 Reasonable assurance (in internal control) An internal control, no matter how well designed and operated, cannot guarantee that an entitys objectives will be met because of inherent limitations in all internal control systems. Reasonable assurance engagement means an assurance engagement where the assurance practitioners objective is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the assurance engagement as the basis for a positive form of expression of the assurance practitioners conclusion. A reasonable assurance engagement is commonly referred to as an audit Re audit When an auditor is asked to audit and report on financial statements that have been previously audited and reported on. Recalculate means checking the mathematical accuracy of documents or records. Or Perform procedures again compare to original results. Receiving report A document completed in the receiving department, which identifies the purchase order that initiated the purchase, and the date, quantity, and condition of goods received. Re computation Perform procedures again compare to original results. and and
48
Basic Auditing & Assurance terms Reconcile (reconciliation) A schedule establishing agreement between separate sources of information, such as accounting records reconciled with the financial statements. Registration statement A statement submitted to officially provide the SEC with information about an offering of securities. A registration statement includes audited financial statements (balance sheet, income statement, and statement of cash flows) for the previous years. Regression analysis A statistical method for finding the relationship between two or more variables. Also called least squares or linear regression. Related parties Related party means a person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity; (ii) Another entity over which the reporting entity has control or significant influence, directly or indirectly through one or more intermediaries; or (iii) Another entity that is under common control with the reporting entity through having: a. Common controlling ownership; b. Owners who are close family members; or c. Common key management. However, entities that are under common control by a state (that is, a national, regional or local government) are not considered
Volume 1 related unless they engage in significant transactions or share resources to a significant extent with one another. Or are those with whom the client has a relationship that might destroy the self-interest of one of the parties (accounting is based on measurement of arm's length transactions). Related parties include affiliates of the client, principle owners, management (decision makers who control business policy) and members of their immediate families. Related services means agreed-upon procedures and compilations Relevant Audit Evidence Audit evidence is relevant if it pertains to the audit objectives and has a logical relationship to the findings and conclusions it is used to support Relevant ethical requirements means ethical requirements that apply to the auditor, assurance practitioner, engagement quality control reviewer and firm Relevant assertion is a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated. Reliable (reliability)
Different audit evidence provides different degrees of assurance to the auditor. When evidence can be obtained from independent sources outside an entity it provides greater assurance of reliability for an independent audit than that secured By Ammar Mushtaq Khan 49
Basic Auditing & Assurance terms solely in the entity. More effective internal controls provide assurance about reliability of the accounting data and financial statements. The independent auditor's direct personal knowledge, from physical examination, observation, computation, and inspection, is more persuasive than information obtained indirectly. Reliable Audit Evidence Audit evidence is reliable if, in the IS Auditor's opinion, it is valid, factual, objective and supportable Remittance Sending money to someone. A remittance advice is a record of the amount sent, purpose of the payment, and associated account identification. Remote A contingency with only a slight chance of occurring. In computer processing of information, a distant computer. Re performance means the auditors independent execution of procedures or controls that were originally performed as part of the entitys internal control or The repeating by the auditor of a computation made by the client to check its accuracy. Report on the description and design of controls at a service organisation means a report that comprises: (a) A description, prepared by management of the service organisation, of the service organisations system, control
Volume 1 objectives and related controls that have been designed and implemented as at a specified date; and (b) A report by the service auditor with the objective of conveying reasonable assurance that includes the service auditors opinion on the description of the service organisations system, control objectives and related controls and the suitability of the design of the controls to achieve the specified control objectives. Report on the description, design, and operating effectiveness of controls at a service organisation means a report that comprises: (a) A description, prepared by management of the service organisation, of the service organisations system, control objectives and related controls, their design and implementation as at a specified date or throughout a specified period and, in some cases, their operating effectiveness throughout a specified period; and (b) A report by the service auditor with the objective of conveying reasonable assurance that includes: (i) The service auditors opinion on the description of the service organisations system, control objectives and related controls, the suitability of the design of the controls to achieve the specified control objectives, and the operating effectiveness of the controls; and (ii) A description of the service auditors tests of the controls and the results thereof. Representation 50
Basic Auditing & Assurance terms A letter from management to the auditor representing that the financial statements are fairly presented. The letter is addressed to the independent auditor, and dated at the date of the auditor's report. It is signed by members of management whom the auditor believes are responsible for, and knowledgeable about, matters covered (chief executive officer and chief financial officer).
Volume 1 The portion of a company that fills customer orders, accounts for receivables, and collects those receivables. Review To examine again. The overall review of audit documentation is completed after field work. A peer review is a practice monitoring program in which audit documentation of one CPA firm is periodically reviewed by independent partners of other firms to determine that they conform to professional standards. An analytical review is a type of substantive audit procedure. A review of financial statements of a nonpublic company is an engagement that results in the expression of less assurance than an audit, but more than in a compilation. A review of interim financial statements of a public company consists of analytical procedures and inquiries. Review engagement (see Limited assurance engagement) Review procedures means the procedures deemed necessary to meet the objective of a review engagement, primarily enquiries of entity personnel and analytical procedures applied to financial data. Review evidence is information used by the accountant to provide a reasonable basis for the obtaining of limited assurance. RFID
Responsible party means the person (or persons) who: (a) In a direct reporting engagement, is responsible for the subject matter; or (b) In an assertion-based engagement, is responsible for the subject matter information (the assertion). The responsible party may or may not be the party who engages the practitioner (the engaging party). Requisition A formal written request for something needed. A purchase by a company is initiated internally by a requisition, resulting in the issuance of a purchase order to the outside supplier. Restriction control is one type of inference control over output from a database. To prevent a user who has access only to summary information from inferring details of a particular record the user can see the results from only five or more records combined, not fewer than five records. Revenue cycle
radio frequency identification tag is attached to and identifies a thing such as an item in inventory, a case of items, a pallet of cases, a car By Ammar Mushtaq Khan 51
Basic Auditing & Assurance terms passing through a reader on a toll way, or a person passing through a doorway. It is like a UPC (universal product code) on items in a store, but can be scanned from a longer distance. A transceiver sends an activating signal and receives identification information. An active RFID tag has an internal battery and has a longer range than a passive tag which is powered by the radio signal it receives. Rights Assertions about rights deal with whether the entity has rights to the asset at a given date. For example, management asserts that amounts capitalized for leases in the balance sheet represent the cost of the entity's rights to leased property. Risk analysis An analysis of the possibility of suffering loss. Risk assessment procedures are the audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels. Or means the audit procedures performed to obtain an understanding of the entity and its environment, including the entitys internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial report and assertion levels. Risk of material misstatement
Volume 1 means the risk that the financial report is materially misstated prior to audit. This consists of two components, described as follows at the assertion level: (a) Inherent risk means 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. (b) Control risk means the risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entitys internal control.
52
S
Sample size The number of population items selected when a sample is drawn from a population. Sampling error Unless the auditor examines 100% of the population, there is some chance the sample results will mislead the auditor. This risk is sampling error. The larger the sample, the less chance of sampling error and the greater the reliability of the results. Sampling risk means the risk that the auditors conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. Sampling risk can lead to two types of erroneous conclusions: (a) In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a material misstatement does not exist when in fact it does. The auditor is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.
Volume 1 it would usually lead to additional work to establish that initial conclusions were incorrect. or The possibility that conclusions drawn from the sample may not represent correct conclusions for the entire population. Sampling unit means the individual items constituting a population Sarbanes Oxley act established the Public Company Accounting Oversight Board and added requirements for publicly traded companies, their officers, boards and auditors. It increased penalties for corporate financial fraud. SAS "Statements on Auditing Standards" are interpretations of U.S. generally accepted auditing standards issued by the AICPAs auditing standards board. Scope The type of engagement. The scope of an engagement might be a review, an audit, or a compilation. A scope limitation is a restriction on the evidence the auditor can gather. Scope paragraph
The paragraph in the audit report that explains the scope of the engagement. The wording of the standard scope paragraph is: "We conducted our audit in accordance (b) In the case of a test of controls, with generally accepted auditing that controls are less effective than standards/ international standards. they actually are, or in the case of a Those standards require that we test of details, that a material plan and perform the audit to obtain misstatement exists when in fact it reasonable assurance about whether does not. This type of erroneous the financial statements are free of conclusion affects audit efficiency as material misstatement. An audit By Ammar Mushtaq Khan 53
Basic Auditing & Assurance terms includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion." SEC The Securities and Exchange Commission is an agency that administers securities laws which require disclosure of information about publicly traded securities. The SEC investigates securities fraud and regulates securities exchanges and brokers. Second request When an auditor confirms receivables, some customers of the client fail to respond to the first confirmation request. Another request sent to the same customers is the second request. Secured transaction Right to repossess goods security for payment of a debt. Segregation of duties means assigning different people the responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets. Segregation of duties reduces the opportunities for one person to both perpetrate and conceal errors or fraud. Self-checking digit An extra digit is added to a number. The extra digit is computed from the other digits in the number. The computer program can then check input by re computing and comparing as
Volume 1 the check digit. This is a useful control over the input of account numbers. Service auditor means an auditor who, at the request of the service organisation, provides an assurance report on the controls of a service organisation. Or The auditor of an organization that provides services such as data processing or pension trust administration to other organizations (the users). Auditors of the users (user auditors) rely on a report from the service auditor about controls in the service organization that apply to financial statements of the user organization they are auditing. Service organisation means a third-party organisation (or segment of a third-party organisation) that provides services to user entities that are part of those entities information systems relevant to financial reporting. Service organisations system means the policies and procedures designed, implemented and maintained by the service organisation to provide user entities with the services covered by the service auditors report. Shipping document A document prepared when goods are shipped. It lists the date shipped, the customer, method of shipment, and quantities and specifications of goods shipped.
Significance means the relative importance of a matter, taken in context. The significance of a matter is judged by the practitioner in the context in By Ammar Mushtaq Khan 54
Basic Auditing & Assurance terms which it is being considered. This might include, for example, the reasonable prospect of its changing or influencing the decisions of intended users of the practitioners report; or, as another example, where the context is a judgement about whether to report a matter to those charged with governance, whether the matter would be regarded as important by them in relation to their duties. Significance can be considered in the context of quantitative and qualitative factors, such as relative magnitude, the nature and effect on the subject matter and the expressed interests of intended users or recipients. Significant component means a component identified by the group engagement team (i) that is of individual financial significance to the group, or (ii) that, due to its specific nature or circumstances, is likely to include significant risks of material misstatement of the group financial report Significant deficiency is a deficiency in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Significant deficiency in internal control means a deficiency or combination of deficiencies in internal control that, in the auditors professional judgement, is of sufficient importance to merit the attention of those charged with governance Significant risk is an identified and assessed risk of material misstatement that, in the
Volume 1 auditor's judgment, requires special audit consideration. Simulation Representation of the operation or features of one process or system through the use of another. Computer simulation of waiting lines can determine the number of employees needed to serve customers at a particular time. Single financial statement or specific element of a financial statement includes the related notes. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information relevant to the financial statement or to the element. Smaller entity means an entity which typically possesses qualitative characteristics such as: (a) Concentration of ownership and management in a small number of individuals (often a single individual either a natural person or another enterprise that owns the entity provided the owner exhibits the relevant qualitative characteristics); and (b) One or more of the following: (i) Straightforward or uncomplicated transactions; (ii) Simple record-keeping; (iii) Few lines of business and few products within business lines; (iv) Few internal controls; (v) Few levels of management with responsibility for a broad range of controls; or (vi) Few personnel, many having a wide range of duties. 55
Basic Auditing & Assurance terms These qualitative characteristics are not exhaustive, they are not exclusive to smaller entities, and smaller entities do not necessarily display all of these characteristics. Software Programs and languages that control computer hardware. Specialist An expert at activities not usually done by auditors (such as an appraiser for valuation). Special purpose financial report means a complete set of financial statements, including the related notes, and an assertion statement by those responsible for the financial report, prepared in accordance with a special purpose framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The requirements of the applicable financial reporting framework determine the format and content of a financial report prepared in accordance with a special purpose framework. Special purpose framework means a financial reporting framework designed to meet the financial information needs of specific users. The financial reporting framework may be a fair presentation framework or a compliance framework. (see Applicable financial reporting framework) SQCS Statement Standards.
Volume 1 SSARS Statements on Standards for Accounting and Review Services (SSARS) are pronouncements concerning unaudited financial information of a nonpublic entity issued by the AICPA Accounting and Review Services Committee. Staff means professionals, other than partners, including any experts the firm employs. Standard deviation A statistic used to measure dispersion equal to the square root of the arithmetic mean of the squares of the deviations from the arithmetic mean. Standards on assurance engagements means standards made by the AUASB which establish requirements and provide explanatory guidance for undertaking and reporting on assurance engagements other than audits or reviews of historical financial information covered by Australian Auditing Standards or Standards on Review Engagements. Standards on review engagements means standards made by the AUASB which establish requirements and provide explanatory guidance on the responsibilities of an auditor, or assurance practitioner, when engaged to undertake a review engagement and on the form and content of the auditors, or assurance practitioners, review report.
on
Quality
Control
56
Basic Auditing & Assurance terms Subject to Statistical Making inferences in uncertain situations using applied mathematics. Measurements from a small group, the sample, are used to infer the behavior of a larger group, the population. Probability theory determines how well the sample represents the population. Statistical sampling means an approach to sampling that has the following characteristics: (a) Random selection of the sample items; and (b) The use of probability theory to evaluate sample results, including measurement of sampling risk. A sampling approach that does not have characteristics (a) and (b) is considered non-statistical sampling. Stop-or-go sampling Taking a sample from a population and checking after each sample item is drawn whether the sample supports a desired conclusion. Sampling ceases as soon as that conclusion is supported. Stratify means the process of dividing a population into sub-populations, each of which is a group of sampling units which have similar characteristics (often monetary value). Or To arrange a population or a sample in distinct layers. Stratified sampling is used in auditing to select a greater percentage of accounts with high balances than of accounts with low balances.
Volume 1 Years ago there was a type of qualified audit opinion that was worded "In our opinion, subject to....." Auditors are no longer permitted to issue such opinions. Subject matter information means the outcome of the evaluation or measurement of a subject matter. It is the subject matter information about which the practitioner gathers sufficient appropriate evidence to provide a reasonable basis for expressing a conclusion in an assurance report. Sub service organization means a service organisation used by another service organisation to perform some of the services provided to user entities that are part of those user entities information systems relevant to financial reporting. Subsequent events means events occurring between the date of the financial report and the date of the auditors report, and facts that become known to the auditor after the date of the auditors report. Or affect the client and occur between the balance sheet date and issuance of the financial statements. Some such events provide additional evidence about conditions that existed at the balance sheet date, such as the bankruptcy of a customer with a history of financial difficulty. The financial statements are adjusted to reflect this evidence. Conditions that did not exist at the balance sheet date, such as fire that destroyed the client's plant after the balance sheet date, may be so significant as to require disclosure. 57
Basic Auditing & Assurance terms Substantive procedure Means an audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise: (a) Tests of details (of classes of transactions, account balances, and disclosures); and (b)Substantive analytical procedures. Subsidiary ledger The detailed information that totals to the balance in the general ledger account. The total of all customer accounts receivable included in the subsidiary ledger of accounts receivable is the balance in the general ledger accounts receivable account. Substantiated Supported with proof or evidence. Substantive audit procedure is a direct test of a financial statement balance designed to detect material misstatements at the assertion level. Substantive procedures comprise tests of details (classes of transactions, account balances, and disclosures), and substantive analytical procedures. Successor auditor The auditor of a client for the current year when that client had another auditor in prior years. The auditor who no longer audits that client is the predecessor auditor. Sufficiency (sufficient) means the measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditors assessment of the risks of material misstatement and also by the quality of such audit evidence. Or
Volume 1 A measure of the quantity of audit evidence. The independent auditor's objective is to obtain sufficient appropriate evidence to provide a reasonable basis for an opinion. Suitably qualified external person (in the context of QC) means an individual outside the firm with the competence and capabilities to act as an engagement partner, for example a partner of another firm, or an employee (with appropriate experience) of either a professional accountancy body whose members may perform audits and reviews of financial reports, or audits and reviews of other financial information, or other assurance engagements, or of an organisation that provides relevant quality control services Suitably qualified external person means an individual outside the firm with the competence and capabilities to act as an engagement partner, for example a partner of another firm, or an employee (with appropriate experience) of a professional accountancy body whose members may perform audits of financial reports or audits of other historical financial information, or of an organisation that provides relevant quality control services. Summary financial statements means historical financial information that is derived from a financial report, but that contains less detail than the financial report, while still providing a structured representation consistent with that provided by the financial report, of the entitys economic resources or obligations at a point in time or the changes therein for a period of time. Summary financial statements may include an assertion by those responsible for the 58
Basic Auditing & Assurance terms summary financial statements. Different jurisdictions may use different terminology to describe such historical financial information.
Volume 1
Supplementary information means information that is presented together with the financial report that is not required by the applicable financial reporting framework used to prepare the financial report, normally presented in either supplementary schedules or as additional notes. Supervise Supervision is directing efforts of assistants in the audit and determining whether objectives were accomplished. Elements of supervision include instructing assistants, keeping informed of problems, reviewing work performed, and dealing with differences of opinion among firm personnel. The appropriate extent of supervision depends on the complexity of subject matter and qualifications of persons performing the work. Suppliers provide goods or services to an audited entity. Sometimes called vendors. Sys trust engagements A CPA / auditor tests a business system for its ability to operate without material error and reports on its reliability.
59
T
Test A sample from a population to estimate characteristics of the population. Test count As part of inventory audit procedures auditors normally observe the client's employees counting physical inventory. A test count is inventory counted by the auditors to check the client's count. Test data is run through a computer program to test the software. Test data can be used to test compliance with controls in the software. Test of controls (tests of the operating effectiveness of internal controls) means an audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level Or Auditors evaluate the design of controls, then determine if the controls are in operation. In order to rely on the controls they must also obtain evidence as to whether the controls are operating effectively. Test of detail
Volume 1 performed as tests of controls as well as substantive tests they are "dual-purpose" tests. Third parties are all persons, including those charged with governance, except for members of management. Those charged with governance means the person(s) or organisation(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. For some entities in some jurisdictions, those charged with governance may include management personnel, for example, executive members of a governance board of a private or public sector entity, or an ownermanager Or are the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. Tick marks in audit work papers are footnotes represented by a symbol instead of by a number. They indicate procedures that have been carried out on specific items in the work papers. Tie Out To reference numbers to their source documents to ensure they are correct Times interest earned Income before interest and taxes divided by interest expense.
Direct tests of financial statement balances (substantive audit procedures) that are not analytical procedures. If tests of details are By Ammar Mushtaq Khan
60
Basic Auditing & Assurance terms Trace Timing of audit testing means when the procedure is performed. If you perform a test of balances procedure before year end there is a risk that internal controls are inadequate to provide assurance up through the balance sheet date. There is less risk if you do the procedure as of the balance sheet date. Tolerable deviation rate is the maximum rate of deviation from an internal control that will allow the auditor to place the planned reliance on that control. Or Tolerable rate of deviation means a rate of deviation from prescribed internal control procedures set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population Tolerable misstatement When planning a sample for a substantive test of details, the auditor considers how much monetary misstatement may exist without causing the financial statements to be materially misstated. This maximum misstatement is the tolerable misstatement for the sample. Or Tolerable misstatement means a monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population.
Volume 1 Follow a transaction through the steps of the system. Treasurer The officer who controls the entity's funds. The treasurer normally signs checks and is responsible for cash management. Treasury stock is stock of the corporation that has been issued and later reacquired. It is not an asset. It is a reduction of stockholders' equity. Treasury stock can be recorded at either its cost or its par value. Trend analysis An analysis of the change in something over time. Analytical procedures, which compare financial statement ratios of different years, are an example of trend analysis. Trial balance A statement of open debit and credit accounts in a ledger to test their equality. Turnover Inventory turnover is a measure of the time from receipt of inventory to its sale. It is found by dividing cost of sales by average inventory. Receivables turnover is a measure of the time it takes to collect receivables. It is found by dividing net credit sales by average net receivables. Employee turnover is the rate at which new employees replace old employees.
61
U
Uncertainty means a matter whose outcome depends on future actions or events not under the direct control of the entity but that may affect the financial report. Unconditional requirements Apply in all cases. Quality control standards use the words must or is required for an unconditional requirement. Uncorrected misstatements means misstatements that the auditor has accumulated during the audit and that have not been corrected . Or Are misstatements that the auditor has accumulated during the audit and that have not been corrected. Unmodified opinion means the opinion expressed by the auditor when the auditor concludes that the financial report is prepared, in all material respects, in accordance with the applicable financial reporting framework. Unqualified An audit opinion that the financial statements are in conformity with U.S. GAAP. Update (updated)
Volume 1 statements are changed, the updated report says they have been restated and expresses the appropriate opinion. If an updated opinion differs from the previous opinion, an explanatory paragraph preceding the opinion paragraph explains that the report has been updated and discloses the date and type of opinion previously expressed, and events that caused the revision. User auditor A service auditor is the auditor of an organization that provides services such as data processing or pension trust administration to other organizations (the users). Auditors of the users (user auditors) rely on a report from the service auditor about controls in the service organization that apply to financial statements of the user organization they are auditing. User entity means an entity that uses a service organisation and whose financial report is being audited. Useful Audit Evidence Audit evidence is useful if it assists the IS Auditors in meeting their audit objectives. Utility Software computer programs provided by a computer hardware manufacturer or software vendor and used in running the system. This technique can be used to examine processing activity, test programs and system activities and operational procedures, evaluate data file activity, and analyze job accounting data.
If an auditor notices events that affect financial statements on which an audit report has been issued, they are considered when updating the report on those statements. If those By Ammar Mushtaq Khan
62
Basic Auditing & Assurance terms Vendors
Volume 1 Provide goods or services to an entity. Also called suppliers. Verify (verification) Prove accuracy of existence of assets. Vouch Prove accuracy of accounting entries by tracing to supporting documents. Voucher A document in expenditure. The appropriate official authorization for issue a check. support of an signature of an on the voucher is the treasurer to numbers or
V
Validity check Software control over input of data to a computer system. Data is compared with the type of data properly included in each input field, e.g., only letters in a name field. Valuation An assertion made by management that each asset and liability is recorded at an appropriate carrying value. Value-added network A telecommunications network providing communication facilities, which enhance basic telecommunications services. They add value by passing, storing and converting messages. Also known as service providers and EDI service providers. Operated by a clearing house, an organization that provides message/file collection, routing and distribution service on behalf of other organizations. Variable sampling The characteristic tested has many possible values (such as dollar value of inventory). Variance A statistical measure of dispersion in a population. The variance is the square of the standard deviation. The standard deviation equals the square root of the arithmetic mean of the squares of deviations from the arithmetic mean.
63
Volume 1 Write-up In dollar terms a write-up is an intentional increase in the carrying value of an asset. In narrative terms a write-up is a description of something or some event.
W
Walk-through test means tracing a selected number of transactions through the financial reporting system. Web trust engagements A accountant issues an opinion on a web site when the business and information privacy practices, transaction integrity, and protection of customer information meet certain standards. Working papers (Written audit documentation) Records kept by the auditor of procedures applied, tests performed, information obtained, and pertinent conclusions in the engagement. Written representation means a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations in this context do not include the financial report, the assertions therein, or supporting books and records. Write-off Cancellation of part or all of a balance. Costs incurred that have no future utility are charged (written-off) to an expense or loss account, not carried forward as an asset.
64

Dictionary of Audit Terms For PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Dictionary of Audit Terms For PDF

Uploaded by

Copyright:

Available Formats

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms Check digit

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms Comprehensive basis accounting

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms Occurrence

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms Password

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

Volume 1 assets less inventories and prepaid expenses.

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

Basic Auditing & Assurance terms

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan

By Ammar Mushtaq Khan