auditing dictionary of terms

3/16/2015 AuditingDictionaryofTerms

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AuditingDictionaryofTermsThewordsdefinedbelowallhaveappearedonCPAexamquestions,sotheyareworthknowingifyouarestudyingfortheauditingexam.WewrotethisoverseveralyearstoincludeinourAuditingselfstudybooktohelppeopleunderstandtheterminologytestedontheexam.OurBEC,REG,andFARselfstudybookshavesimilarglossaries.

acceptancesamplingissamplingtodeterminewhetherinternalcontrolcomplianceisgreaterthanorlessthanthetolerabledeviationrate.accounting and review services are governed by official pronouncements coveringcompilation and review engagements. Compilation is presenting in the form of financialstatements informationthat is therepresentationofmanagement(owners)withoutexpressingassurance.Review is inquiryandanalyticalprocedures toprovide theaccountantabasis forexpressing limitedassurance that therearenomaterialmodifications thatshouldbemade tothestatementsforthemtobeinconformitywithU.S.generallyacceptedaccountingprinciples.accounting data includes journals, ledgers and other records, such as spreadsheets, thatsupportfinancialstatements.Itmaybeincomputerreadableformoronpaper.accounting estimate An approximation of a financial statement element. Estimates areincluded in historical financial statements because some amounts are uncertain pendingoutcome of future events and relevant data about events that have occurred cannot beaccumulatedonatimely,costeffectivebasis.accountingprinciplesarealternativewaysofreportinganddisclosinginformationinfinancialstatementsandrelatedfootnotes.accountsreceivableDebtsduefromcustomersfromsalesofproductsandservicesreportedasacurrentasset.accountingrecordsaretherecordsofinitialaccountingentriesandsupportingrecords,suchas checks and records of electronic fund transfers invoices contracts the general andsubsidiaryledgersjournalentriesandotheradjustmentstothefinancialstatementsthatarenotreflected in journal entries and records, such aswork sheets and spreadsheets, supportingcostallocations,computations,reconciliations,anddisclosures.accounting research bulletins (ARBs) were issued years ago to set generally acceptedaccounting principles.Somehavenot been supersededby pronouncements of theFinancialAccounting Standards Board. Those old pronouncements still qualify as generally acceptedaccountingprinciples.adjustingentriesareaccountingentriesmadeattheendofanaccountingperiodtoallocateitemsbetweenaccountingperiods.

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adverseAnauditopinion that the financial statementsasawholearenot inconformitywithU.S.GAAP.advisory services are a consulting service in which the CPA develops the findings,conclusions, and recommendations presented for client decisionmaking. This differs fromattestation,wheretheCPAexpressesaconclusionaboutawrittenassertionofanother.aggregate(aggregated)Constitutingthewhole.Aggregateexpenses includeexpensesofalldivisionscombinedfortheentireyear.agreedupon procedures An engagement where the client specifies procedures and theaccountantagreestoperformthoseprocedures.Anaccountantmayacceptanengagementtoapply agreedupon procedures to financial statement elements, where the scope of theengagement is not sufficient to express an opinion, if the users assume responsibility forsufficiencyoftheprocedures,anduseofthereportisrestrictedtospecifiedusers.aicpa American Institute of Certified Public Accountants. The professional organization ofCPAsintheU.S.ItisaprivateorganizationofCPAs,notanarmofthegovernment.EachstateissuesCPAcertificates,nottheAICPA.Sinceeachstatemakesitsownlaws,eachstatecouldprepare and grade their ownCPA examination. However, each state uses the uniformCPAexampreparedandgradedbytheAICPA.allocation Distribution according to a plan. Depreciation, amortization, and depletion aremethodstoallocatecoststoperiodsbenefited.allowancefordoubtfulaccountsAcontraassetaccountwithacreditbalanceusedtoreducethecarryingamountofaccounts receivable tonet realizablevalue.Theallowancebalance istheestimatedtotalofuncollectibleaccountsincludedinaccountsreceivable.allowance for sampling risk The difference between a sample estimate and the projectedpopulation characteristic at a specified sampling risk. This allowance is also the differencebetweentheexpectederrorrateandthetolerabledeviationrate.analytical procedure A comparison of financial statement amounts with an auditor'sexpectation. An example is to compare actual interest expense for the year (a financialstatementamount)withanestimateofwhatthatinterestexpenseshouldbe.Theestimatecanbefoundbymultiplyingareasonableinterestratetimestheaveragebalanceofinterestbearingdebtoutstandingduring theyear (theauditor'sexpectation). Ifactual interestexpensedifferssignificantlyfromtheexpectation,theauditorexplainsthedifferenceinauditdocumentation.analyzeIdentifyandclassifyitemsforfurtherstudy.anticipatedExpected.apb opinions The Accounting Principles Board existed before the Financial AccountingStandards Board. It issued opinions, some of which are still part of generally acceptedaccountingprinciples.applicablefinancialreportingframeworkisthefinancialreportingframeworkadoptedinthepreparationofthefinancialstatementsthatisacceptableinviewofthenatureoftheentityandtheobjectiveofthefinancialstatements,orthatisrequiredbylaworregulation.application control Programmed procedure in application software designed to ensurecompletenessandaccuracyofinformation.appropriate audit evidence is relevant (pertains to the proposition supported) and reliable(trustworthy).approveToauthorize.Amanagerauthorizesacashpaymentbysigningavoucherproviding



approvalforthedisbursement.arm's length transactions are transactionsbetweenpeoplewhohaveno relationshipotherthanthatofbuyerandseller.Thepriceisthetruefairmarketvalueofthegoodsorservicessold. Ifyoubuyorsellsomething toacloserelative,youmightgivebetter terms than toanunrelatedparty,sothepricemightnotrepresentthetruemarketvalueofthegoodsorservices.ascertain An audit procedure to determine or to discover with certainty. For example, toascertainthedateonwhichaninvestmentwaspurchasedbyexaminingsourcedocuments.assertion Management asserts financial statements are correct with regard to existence oroccurrence of assets, liabilities or transactions, completeness of information in the financialstatements, rights and obligations at a point in time, appropriate valuation or allocation,presentation,anddisclosure.assessTodeterminethevalue,significance,orextentof.assessedDetermined.The levelofcontrol riskdeterminedby theauditor,basedon testsofcontrols,istheassessedlevelofcontrolrisk.assuranceThelevelofconfidenceonehas.assuranceengagementisanengagementinwhichanaccountantissuesareportdesignedtoenhancethedegreeofconfidenceof thirdpartiesandmanagementabout theoutcomeofanevaluation or measurement of financial statements (subject matter) against an applicablefinancialreportingframework(criteria).attest(attestation)reportInanattestengagement,apractitionerissuesawrittenconclusionaboutthereliabilityofawrittenassertionthatistheresponsibilityofanother.attestationriskistherisktheCPAmayunknowinglyfailtomodifythereportonmanagementsassertion.Itiscomposedofinherentrisk,controlrisk,anddetectionrisk.attorney'sletterissignedbytheclient'slawyerandaddressedtotheauditor.Itistheauditor'sprimarymeans to corroborate information furnished bymanagement about litigation, claims,andassessments.attributesamplingThecharacteristictestedisapropertythathasonlytwopossiblevalues(anerrorexistsoritdoesnot).audit adjustment is a correction of a financial information misstatement identified by theauditor,whetherrecordedornot.auditcommitteeAcommitteeoftheboardofdirectorsresponsibleforoversightofthefinancialreportingprocess,selectionoftheindependentauditor,andreceiptofauditresults.auditdocumentation(workingpapers)arerecordskeptbytheauditorofproceduresapplied,testsperformed, informationobtained,andpertinentconclusionsreached in theengagement.Thedocumentationprovidestheprincipalsupportfortheauditor'sreport.auditevidence is informationusedby theauditor inarrivingat theconclusionsonwhich theauditor'sopinionisbased.auditobjective Inobtainingevidenceinsupportof financialstatementassertions,theauditordevelopsspecificauditobjectivesinlightofthoseassertions.Forexample,anobjectiverelatedto the completeness assertion for inventory balances is that inventory quantities include allproducts,materials,andsuppliesonhand.auditplanningisdevelopinganoverallstrategyfortheaudit.Thenature,extent,andtimingofplanning varies with size and complexity of the entity, experience with the entity, and



knowledgeoftheentity'sbusiness.auditriskAcombinationoftheriskthatmaterialerrorswilloccurintheaccountingprocessandtherisktheerrorswillnotbediscoveredbyaudittests.Auditriskincludesuncertaintiesduetosampling(samplingrisk)andtootherfactors(nonsamplingrisk).auditing standards board Statements on Auditing Standards are issued by the auditingstandardsboard,thebodyoftheAICPAdesignatedtoissueauditingpronouncements.authorize (authorization) To give permission for. A manager authorizes a transaction bysigningavoucherauthorizingthedisbursement.backupAcopyofacomputerprogramordatastoredseparatelyfromtheoriginal.batchAsetofcomputerdataorjobstobeprocessedinasingleprogramrun.benford'slaw isamathematical law thatapplies toanypopulationofnumbersderived fromothernumbers(suchasthedollaramountofasale,foundbymultiplyingthequantitysoldtimestheunitprice).Itholdsthat30%ofthetimethefirstnonzerodigitofthisderivednumberwillbeone,and itwillbeanineonly4.6%of the time.Benford's law isusedbyauditors to identifyfictitiouspopulationsofnumbers.billofladingAdocumentissuedbyacarriertoashipper,listingandacknowledgingreceiptofgoodsfortransportandspecifyingtermsofdelivery.blind trust A financial arrangement inwhich a person avoids possible conflict of interest bytransferring financial affairs to a fiduciary who has sole asset management discretion. Thepersonestablishingthetrustalsogivesuptherighttoinformationregardingtheassets.businessrisksarerisksthatcouldadverselyaffectanentity'sabilitytoachieveitsobjectivesandexecuteitsstrategiesorfromthesettingofinappropriateobjectivesandstrategies.cancel supporting documents To mark supporting documents as having been used tosupportatransactionsothesamedocumentscan'tbeusedtosupportanothertransaction.Anexampleisstampingvouchers"paid.capitalizedRecorded as an asset. A capitalized lease is in substance a purchase to thelessee.Anasset is recordedequal to thepresentvalueof the leasepayments,which isalsorecorded as a liability. Payments, partly interest and partly principal, aremade on the leaseliability.Theleasedassetisdepreciatedbythelesseeasthoughitwerelegallyownedbythelessee.caveatAwarningorcaution.checkdigitA redundantdigit added toa code to checkaccuracyof other characters in thecode.checkregisterAlistingofchecksissuedinnumericsequenceandinorderbydateissued.classificationArrangementorgrouping.Assetsandliabilitiesarenormallyclassifiedascurrentornoncurrent.collateralizeTopledgepropertyassecurity(collateral)foradebt.collusionAsecretagreementbetweentwoormorepartiesforfraudordeceit.comfortletterAletterwrittenbytheauditortoanunderwriterofsecurities,whichexpressesanopinion about whether the audited financial statements and schedules in the registrationstatementcomplyastoformwithapplicableaccountingrequirementsoftheSECActof1933andrelatedrulesandregulationsadoptedbytheSEC.Proceduresperformedarespecifiedby



theunderwriter.comparability Users evaluate accounting information by comparison. Similar companiesaccountforsimilartransactionsinsimilarways.Anothergoaliscomparisonofonecompany'sinformationfromoneperiodtothenext(consistency).Operatingtrendsshouldnotbedisguisedbychangingaccountingmethods.comparativeFinancialstatementsofapriorperiodshownwith thoseof thecurrentperiod toaidincomparisonsbetweenperiods.compare(comparison)Anauditprocedure.Theauditorobservessimilaritiesanddifferencesbetweenitemssuchasanaccountfromoneyeartothenext.compensatingbalanceAnoffsettingbalance.Arequirementbysomebanksthataborrowermaintainaminimumbalance inacheckingorsavingsaccountasaconditionofa loan.Theoffsettingbalanceincreasestheeffectiveinterestratetothebanksincethenetamountloanedisreducedbuttheinterestpaidisunchanged.competence of an internal audit staff is a function of qualifications, including education,certification,andsupervision.compile (compilation) A compilation is presenting in the form of financial statementsinformation that is the representation of management without expressing assurance.Compilation of a financial projection is assembling prospective statements based onassumptionsofaresponsibleparty,consideringappropriatenessofpresentation,andissuingacompilationreport.Noassuranceisprovidedonthestatementsorunderlyingassumptions.Theaccountantneednotbeindependent.completenessAssertionsaboutcompletenessdealwithwhetheralltransactionsandaccountsthatshouldbeinthefinancialstatementsareincluded.Forexample,managementassertsthatall purchases of goods and services are included in the financial statements. Similarly,managementassertsthatnotespayableinthebalancesheetincludeallsuchobligationsoftheentity.complianceFollowingapplicableinternalcontrolprocedures,rules,orlaws.comprehensivebasisofaccountingAcompletesetofrulesotherthanU.S.GAAPappliedtoallitemsinasetoffinancialstatements.Examplesincludeabasisofaccountingrequiredbyaregulatoryagency,abasisofaccountingtheentityusesforitsincometaxreturnandthecashreceiptsanddisbursementsbasis.computercontrolsInternalcontrolsperformedbycomputer(softwarecontrols)asopposedtomanualcontrols.Alsomeansgeneralandapplicationcontrolsoverthecomputerprocessingofdata.condensed financial statements are presented in considerably less detail than completefinancialstatements.confirm(confirmation)Communicationwithoutsidepartiestoauthenticateinternalevidence.consignmentTransferofpossessionbutnottitletogoods.Titlestayswiththeconsignor,whiletheconsigneehaspossession.consistencyToachievecomparabilityofinformationovertime,thesameaccountingmethodsmustbefollowed.Ifaccountingmethodsarechangedfromperiodtoperiod,theeffectsmustbedisclosed.consultedSoughtadviceorinformation.



consulting services performed by CPAs include consultations, advisory services,implementationservices,productservices,transactionservices,andstaffandsupportservices.contingency is an existing condition involving uncertainty as to possible gain (gaincontingency)orloss(losscontingency)thatwillberesolvedbyfutureevents.Estimates,suchastheusefullifeofanasset,arenotcontingencies.Eventualexpirationoftheasset'sutilityisnotuncertain.continuingauditoristheauditorofthecurrentyearwhoalsoauditedthefinancialstatementsoftheclientforthepreviousyear.continuingaccountingsignificancemeansmattersnormallyincludedinthepermanentauditdocumentation, such as the analysis of balance sheet accounts, and those relating tocontingencies.Such information fromaprioryear isusedby theauditor in thecurrentyear'sauditandisupdatedeachyear.controlApolicyorprocedurethatispartofinternalcontrol.control accounts are general ledger accounts that report totals of details included insubsidiary ledger accounts. For example, AccountsReceivable is a general ledger accountwith a balance equal to the total of the individual receivables included in the subsidiaryaccountsreceivableledger.controldeficienciesexistwhenthedesignoroperationofacontroldoesnotallowemployees,intheirassignedfunctions,topreventordetectmisstatementsonatimelybasis.control environment is the attitude, awareness, and actions of the board, management,owners,andothersabout the importanceof control.This includes integrityandethical rules,commitment to competence, board or audit committee participation, organizational structure,assignmentofauthorityandresponsibility,andhumanresourcepoliciesandpractices.controlpoliciesandproceduresControlactivitiesarethepoliciesandproceduresthathelpensuremanagementdirectivesarecarriedout.Thosepertinenttoanauditincludeperformancereviews,informationprocessing,physicalcontrolsandsegregationofduties.controlriskTheriskthatmaterialerrorinabalanceortransactionclasswillnotbepreventedordetectedonatimelybasisbyinternalcontrols.controller An officer who supervises financial affairs of an entity. In internal control thecontrollerisoftenthepersonwithrecordkeeping(generalledger)responsibilities,ascontrastedwithassetcustody,managementdecisionmaking,andinternalauditfunctions.corroborate (corroborating) (corroboration) (corroborative) To strengthen with otherevidence,tomakemorecertain.countEnumeratesomecharacteristicsuchasthenumberofitemsininventory.cumulativeeffectofchangingtoanewaccountingprincipleistheeffectonretainedearningsatthebeginningofthecurrentperiod.currentratioTotalcurrentassetsdividedbytotalcurrentliabilities.custodian One who has possession or is in charge of something. Some entities entrustinvestmentsecuritiestoabank,whichiscustodianofthecompany'ssecurities.custodyPossession.cutoffDesignatingapointoftermination.Anauditorusestestsofcutofftoobtainevidencethattransactionsforeachyearareincludedinthefinancialstatementsoftheappropriateyear.



defalcationTomisuseorembezzlefunds.deficiencyAninternalcontrolshortcomingoropportunitytostrengtheninternalcontrols.detectionriskTheriskauditprocedureswill leadtoaconclusionthatmaterialerrordoesnotexistwheninfactsucherrordoesexist.detectivecontrolAcontroldesignedtodiscoveranunintendedeventorresult.deviationDeparture fromprescribed internalcontrol.Oftenexpressedasa rateatwhich thedepartureoccurs.disclaimer(disclaim)Astatement that theauditor isunable toexpressanopinionas to thepresentationoffinancialstatementsinconformitywithU.S.GAAP.disclosure Revealing information. Financial statement footnotes are one way of providingnecessarydisclosures.discovery sampling Acceptance sampling (sampling to determine whether internal controlcomplianceisgreaterthanorlessthanthetolerabledeviationrate)whentheexpectedattributeoccurrencerateiszero.document (documentary) (documentation)Written or printed paper that bears informationthatcanbeused to furnishdecisiveevidence.Couldalsobea recording,computer readableinformation,oraphotograph.dollar unit sampling (also known as probability proportional to size sampling) Asamplingplanthatbasesthelikelihoodofselectingaparticularaccountontherelativesizeofthat account, so larger accounts have a greater probability of being selected for the samplethansmalleraccounts.dual date If a major event comes to the auditor's attention between the report date andissuance of the report, the financial statements may include the event as an adjustment ordisclosure.Theauditordualdatestheauditreport(asoftheendofworkpaperreview,exceptfootnoteXX,whichisdatedlater).dualpurposetestAuditproceduresareclassifiedassubstantivetestsortestsofcontrols.Ifaprocedureprovidesbothtypesofevidenceitisadualpurposetest.edi Electronic Data Interchange is the use of communication between an entity andcustomers or suppliers to transact business electronically. Purchases, shipping, billing, cashreceipts, and cash disbursements can be completed entirely by exchanging electronicmessages.edit checks Reasonableness, validity, limit, and completeness tests that are programmedroutinesdesignedtocheckinputdataandprocessingresultsforcompleteness,accuracyandreasonableness.edp Electronic Data Processing. Processing of information by computer as opposed tohandwrittenrecords.effectiveincometaxrateTheincometaxprovision(expense)shownonanincomestatementdividedbypretax income.Thisdiffers from thestatutory ratebecauseofdeductions, credits,andexclusions.effectiveinternalcontrolReasonableassurancethatoperationalobjectivesareachieved,thatpublished financial statements are reliably prepared, and that the entity complies withapplicablelawsandregulations.effectiveness Producing a desired outcome. An audit procedure is effective if the evidence



supportsacorrectconclusion.efficiencyTheratiooftheauditevidenceproducedtoauditresourcesused.embeddedauditmodulesareincludedintheclientsdataprocessingsystemstofacilitatetheacquisitionofdataneededbyauditors.embeddedcontrolperformancedealswithunexpectedchangestodata.embezzlementTotakeassetsinviolationoftrust.encryption isscramblingdatasoit ismeaninglesstoanyonebuttheintendedrecipient,whohasthekeytounscramblethedata.engagementletterAletterthatrepresentstheunderstandingabouttheengagementbetweentheclientandtheCPA.Theletteridentifiesthefinancialstatementsanddescribesthenatureofprocedures tobeperformed. It includes theobjectivesof theprocedures,anexplanation thatthefinancialinformationistheresponsibilityofthecompany'smanagement,andadescriptionoftheformofreport.enterprise risk management (ERM) identifies risks and opportunities, assesses them for likelihood and magnitude,determines responses strategy, and monitors progress. ERM integrates strategic planning, operations management, andinternalcontrol.MonitoringERMispartofinternalcontrolactivities.

environment The control environment is the attitude, awareness, and actions of the board,management,owners,andothersabout importanceofcontrol. It includesintegrityandethicalrules, commitment to competence, board or audit committee participation, organizationstructure, assignment of authority and responsibility, and human resource policies andpractices.error Unintentional misstatements or omissions in financial statements. Errors may involvemistakes in gathering or processing accounting data, incorrect estimates from oversight ormisinterpretation of facts, and mistakes in application of principles relating to amount,classification,presentationordisclosure.estimation sampling is sampling to estimate the actual value of a population characteristicwithinarangeoftolerablemisstatement.evidence (evidential matter) includes written and electronic information (such as checks,recordsofelectronicfundtransfers,invoices,contracts,andotherinformation)thatpermitstheauditortoreachconclusionsthroughreasoning.examination is evaluating the preparation of prospective statements, support underlyingassumptions, and presentation. The accountant reports whether, in his or her opinion, thestatementsconformtoAICPAguidelinesandassumptionsprovideareasonablebasisfor theresponsible party's forecast. The accountant should be independent, proficient, plan theengagement,superviseassistants,andobtainsufficientevidencetoprovideareasonablebasisforthereport.examine(examining)Asanauditproceduretoexaminesomethingistolookatitcritically.exceptforAqualifiedopinion.AnauditorcanqualifytheauditopinionforbothdeparturesfromU.S.GAAPinthefinancialstatementsandrestrictionsonthescopeof theaudit.Theopinionparagraphofthequalifiedreportisworded"Inouropinion,exceptfor..."execute (execution) To carry out an internal control procedure, such as to sign andmail acheckafterinspectingsupportingdocuments.existence Assertions about existence deal withwhether assets or liabilities exist at a givendate.Forexample,managementasserts that finishedgoods inventories in thebalancesheet



areavailableforsale.expenditureCashpaidorliabilityincurred.explanatoryAparagraphaddedtoanauditreporttoexplainsomething,suchasthereasonforaqualifiedoradverseopinion.explicitlyFullyandclearlyexpressed,leavingnothingimplied.extendmeanstomultiplyonenumberbyanother(totestextensionsistotesttheaccuracyofmultiplication done by the client). To extend audit procedures is to apply additional auditprocedurestoobtainmoreevidence.extent of an audit test is the sample size. A small number of transactions provides lessassurancethanalargesample.Thereismoreriskyourconclusionwillbeincorrectifyouuseasmallersamplesize.fasab FederalAccountingStandardsAdvisoryBoard.AnorganizationthatsetsGAAPin theU.S.forfederalgovernmententities.fasb FinancialAccountingStandardsBoard.A nongovernment private organization that setsGAAPintheU.S.forprofitmakingentitiesandnotforprofitnongovernmentalorganizations.fieldworkTheperformanceofauditproceduresoutsidetheCPA'soffice.Muchfieldwork,butnotall,isdoneintheclient'sofficesafterthebalancesheetdate.fifoFirstInFirstOutinventorycostflow.financialforecastsareprospectivefinancialstatementsthatpresentexpectedfuturefinancialposition, results of operations, and cash flows based on expected conditions. A financialforecastisofthemostlikelyfuturescenario.financial institutionconfirmation requestA confirmation sent to the client's bank or otherfinancialinstitutionaskingthebanktoconfirmdirectlytotheauditorinformationaboutbalancesataparticulardate.financial projections are prospective financial statements that present, given one or morehypothetical assumptions, an entity's expected financial position, results of operations, andchangesinfinancialposition.Afinancialprojectionincludesseveralalternativescenarioswhileaforecastisthesinglemostlikelyscenario.financialreportingframeworkisasetofcriteriausedtodeterminemeasurement,recognition,presentation,anddisclosureofallmaterialitemsappearinginthefinancialstatements.financialstatementsareastructuredrepresentationofhistoricalfinancialinformation,includingrelated notes, intended to communicate an entity's economic resources and obligations at apointintimeorthechangesthereinforaperiodoftimeinaccordancewithafinancialreportingframework.flowchartAschematicrepresentationofasequenceofoperationsinanaccountingsystemorcomputerprogram.Alsocalledaflowdiagramorflowsheet.footacolumn is toaddacolumnofnumbers. To test footing is toadd thecolumnagain tocheckaccuracy.fraudAdeliberatedeceptiontosecureunfairorunlawfulgain.Falserepresentationintendedtodeceive relied on by another to that person's injury. Fraud includes fraudulent financialreportingundertakentorenderfinancialstatementsmisleading,sometimescalledmanagementfraud,andmisappropriationofassets,sometimescalleddefalcations.



gaapGenerallyAcceptedAccountingPrinciples.AccordingtoRule203oftheAICPACodeofProfessionalConduct,GAAPfornongovernmententitiesinclude(inaconflictthesourceearlierin the list prevails): 1. FASB Standards and Interpretations, APBOpinions, ARBs. 2. FASBTechnicalBulletins,AICPAGuidesandAICPAStatementsofPosition.3.PositionsoftheFASBEmerging Issues Task Force and AICPA Practice Bulletins. 4. AICPA accountinginterpretations, FASB staff "Qs and As", and widely recognized industry practices. 5. FASBConceptsStatements,textbooks,articles.gaas Generally Accepted Auditing Standards. The ten auditing standards adopted by themembershipoftheAICPA.Auditingstandardsdifferfromauditproceduresinthat"procedures"relate to acts to be performed, whereas "standards" deal with quality of the performance ofthoseactsandobjectivesoftheprocedures.gasb Government Accounting Standards Board. A nongovernment private organization thatsetsGAAPintheUnitedStatesfornonfederalgovernmentalentities.generalcontrols Policies and procedures to assure proper operation of computer systems,includingcontrolsovernetworkoperations,softwareacquisitionandmaintenance,andaccesssecurity.generaljournalAbookoforiginalentryinadoubleentrysystem.Thejournalliststransactionsandindicatesaccountstowhichtheyareposted.Thegeneraljournalincludesalltransactionsnot included in specialized journals used for cash receipts, cash disbursements, and othercommontransactions.generalledgerArecordtowhichmonetarytransactionsareposted(intheformofdebitsandcredits) 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 insubsidiaryledgers.generalstandardInthetenU.S.generallyacceptedauditingstandardstherearethreegeneralstandards: 1. The examination is to be performed by a person or persons having adequatetechnicaltrainingandproficiencyasanauditor.2.Inallmattersrelatingtotheassignment,anindependenceinmentalattitudeistobemaintainedbytheauditor.3.Dueprofessionalcareistobeexercisedinperformingtheexaminationandpreparationofthereport.generalized audit softwarePackaged computer programs used on a variety of computersduringaudit fieldwork to readcomputer files,select information,performcalculations,createdatafiles,andprintreportsinaformatspecifiedbytheauditor.goingconcernassumptionassumesthecompanywillcontinue inoperation longenoughtorealizeits investment inassetsthroughoperations(asopposedtosale).Presentingassetsathistorical cost is justified by assuming productive assets will be used rather than sold. Thismakesmarketvaluesirrelevantandsupportsaccountingmethodsthatmatchtheactualcostofanassettoperiodsbenefited.government auditing standards A book issued by the comptroller general of the UnitedStates, sometimes called the "yellow book." Government Auditing Standards containsstandards for audits of government organizations, programs, activities, and functions and ofgovernmentassistancereceivedbyorganizations.Theauditisdesignedtoprovidereasonableassuranceofdetectingmaterialmisstatementsresultingfromnoncompliancewithprovisionsofcontracts or grant agreements that have a direct and material effect on determination offinancial statement amounts, are followed when required by law, regulation, agreement,contract,orpolicy.grossmarginpercentageThegrossmargin froman incomestatementdividedbynetsales



revenue.hardcopyAprintedcopyofinformationasopposedtoinformationstoredincomputerreadableform.hardware A computer and associated physical equipment involved in data processing orcommunications functions as opposed to software (the computer programs that provideinstructionsthecomputerfollows).hardwarecontrolComputercontrolsbuiltintophysicalequipmentbythemanufacturer.hash totalA control total that has no meaning in itself except for control, e.g., total socialsecuritynumbersofemployeespaid.hedges protect an entity against the risk of adverse price or interestratemovements on itsassets,liabilities,oranticipatedtransactions.Ahedgereducesriskbycounterbalancinglosseswithgainsonseparatepositions.Imageprocessing systems scan documents into electronic images for storage. Referenceandsourcedocumentsmaynotberetainedafterconversion.immaterialOfnoimportance.Somethinginfinancialstatementsthatwillnotchangedecisionsofinvestors.implementationof internalcontrolmeans theauditordetermines that the relevantcontrolsexistandthattheentityisusingthem.implicitlyImpliedorunderstoodeventhoughnotdirectlyexpressed.impliedcontrolperformancedealswithexpectedchangestodata.incompatibledutiesInternalcontrolsystemsrelyonseparationofdutiestoreducethechanceoferrorsorfraud.Dutiesareincompatibleiftheyshouldbeseparatedforcontrol.Forexample,onepersonshouldnotbeinapositiontobothembezzlefundsandtohidetheembezzlementbychangingtherecordedaccountability.incorrect acceptanceThe risk of incorrect acceptance is the risk the sample supports theconclusionthattherecordedbalanceisnotmateriallymisstatedwhenitismateriallymisstated.incorrectrejectionTheriskofincorrectrejectionistheriskthesamplesupportstheconclusionthattherecordedbalanceismateriallymisstatedwhenitisnotmateriallymisstated.independentInallmattersrelatingtotheassignment,anindependenceinmentalattitudeistobemaintainedby theauditors.Thismeans freedom frombias,which is possible evenwhenauditingone'sownbusiness(independenceinfact).However,itisimportantthattheauditorbeindependentinappearance(thatothersbelievetheauditorisindependent).inferencecontrolisacontrolusedintheoutputofdatabasestostopapersonwhohasaccessto only summary information from being able to determine (infer) a particular value for aparticularrecord.informationsystemsconsistofinfrastructure(physicalandhardwarecomponents),software,people,procedures(manualandautomated),anddata.inherent limitation The potential effectiveness of an entity's internal control is subject toinherentlimitations.Humanfallibility,collusion,andmanagementoverrideareexamples.inherentriskThesusceptibilityofabalanceortransactionclasstoerrorthatcouldbematerial,whenaggregatedwithothererrors,assumingnorelatedinternalcontrols.inputcontrolsComputercontrolsdesignedtoprovidereasonableassurancethattransactions



are properly authorizedbefore processedby the computer, accurately converted tomachinereadable 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,correctedand,ifnecessary,resubmittedonatimelybasis.inquire(inquiry)Askquestionsofclientpersonnel.inspect(inspection)Asanauditprocedure,toscrutinizeorcriticallyexamineadocument.Aspart of a CPA firm's quality control system, a procedure tomonitor the effectiveness of thesystem.integrated test facility (integrated test data) A "dummy" unit (e.g., a department oremployee)isestablished.Test(fictitious)transactionsarepostedtothedummyunitduringthenormalprocessingcycle.Iftesttransactionsareprocessedcorrectlythatprovidesevidencethattransactionsofotherunitsareprocessedcorrectlyaswell.integrity Consistent adherence to an ethical code. If client management lacks integrity theauditormustbemoreskepticalthanusual.interimauditproceduresaredoneduringtheyearunderaudit,beforeyearend.interimfinancialinformationmeansfinancialstatementsofatimeperiodlessthanafullyear.internalauditorsareemployeesoftheclientresponsibleforprovidinganalyses,evaluations,assurances, recommendations, andother information to theentity'smanagement andboard.Animportantresponsibilityofinternalauditorsistomonitorperformanceofcontrols.internal control Policies and procedures designed to provide reasonable assurance thatspecific entity objectives will be achieved. It consists of the control environment, riskassessment,controlactivities,informationandcommunications,andmonitoring.internalcontrolquestionnaireAlistofquestionsabouttheexistinginternalcontrolsystemtobe answered (with answers such as yes, no, or not applicable) during audit fieldwork. Thequestionnaire is a part of the documentation of the auditor's understanding of the client'sinternalcontrols.internalcontrolweaknessAdefectinthedesignoroperationofinternalcontrols.introductoryparagraphThe first paragraph of the auditor's standard reportwhich identifiesthe financial statements audited and states the financial statements are the responsibility ofmanagement and that the auditor's responsibility is to express an opinion on the financialstatementsbasedontheaudit.inventory tagA tag attached to inventory items that identifies the inventory items to aid incountingthephysicalinventory.inverse The opposite or reverse. An inverse relationship between two variablesmeans thatwhenoneincreasestheotherdecreases.investee The company in which an investment is held. Often used to describe an equitymethodinvestment,inwhichtheinvestorreportsashareoftheinvestee'snetincome.invoiceAnitemizedlistofgoodsshippedorservicesrenderedwithcosts.isbIndependenceStandardsBoard.issuer is a company that must file reports with the SEC. This includes companies withsecurities traded on a stock exchange and larger companies traded overthecounter (morethan500investorswithassetsover$10million).



journalAbookoforiginalentryinadoubleentrysystem.Thejournallistsalltransactionsandtheaccountstowhichtheyareposted.justintimeAn inventory system that attempts to minimize inventory costs that do not addvalueforthecustomer.Itarrangesforsupplierstodeliversmallquantitiesofrawmaterialsjustbeforethoseunitsareneededinproduction.Storing,insuring,andhandlingrawmaterialsarecoststhataddnovaluetotheproduct,andareminimizedinajustintimesystem.kiting Drawing a check on insufficient funds to take advantage of the time required forcollection.lappingAscheme tocoveranembezzlementbyusingpaymentsmadebyonecustomer toreducethereceivablesbalanceofanothercustomer.lead schedule The schedule at the beginning of audit documentation that summarizes thedetailedschedules.lifoLastInFirstOutinventorycostflow.limittest(limitcheck).Acomputerprogramstepthatcomparesdatawithpredeterminedlimitsasareasonablenesstest(hoursworkedover60perweek).liquidityTheavailabilityofcashorabilitytoobtainitquickly.Debtpayingability.lockbox(banklockbox)speedstheavailabilityoffundsfromcashcollectionsbyreducingthetimefromthecustomermailingthecheckuntil thefundsareavailable tospend.Remittancesare sent to a bank near the customer and the bank deposits funds speedily to the payee'saccount.management is the person(s) with executive responsibility for the conduct of the entity'soperations.managementcontrolsarecontrolsperformedbyoneormoremanagers.management representation letterA letter addressed to the auditor, signed by the client'schief executive officer and chief financial officer.Duringanaudit,managementmakesmanyrepresentations to theauditor.Written representations frommanagement in the letterconfirmoral representations given to the auditor, document the continuing appropriateness of suchrepresentations,andreducethepossibilityofmisunderstanding.management'sspecialistisanindividualororganizationpossessingexpertiseinafieldotherthanaccountingorauditing,whoseworkinthatfieldisusedbytheentitytoassisttheentityinpreparingthefinancialstatementsmanualcontrolsarecontrolsperformedmanually,notbycomputer.material (materiality) Information important enough to change an investor's decision.Insignificantinformationhasnoeffectondecisions,sothereisnoneedtoreportit.Materialityincludestheabsolutevalueandrelationshipofanamounttootherinformation.materialweaknessisadeficiencyininternalcontrolsuchthatthereisareasonablepossibilitythat a material misstatement of the entitys financial statements will not be prevented, ordetectedandcorrectedonatimelybasis.memosWritten recordssupporting journalentries.Creditmemossupportcredits,whiledebitmemossupportdebitentries.misappropriateToembezzleorappropriatedishonestlyforone'sownuse.misstatementisadifferencebetweentheamount,classification,presentation,ordisclosureof



areported financialstatement itemand theamount,classification,presentation,ordisclosurethat is required for the item to be in accordance with the applicable financial reportingframework.mitigatingReducinginforceorintensity.monitoring Evaluationof the firmssystemofqualitycontrol toprovide reasonableassurance that it isdesignedappropriatelyandoperatingeffectively.

narrativeAwrittendescriptionofaninternalcontrolsystem.natureofaudit testingmeans the typeof testing,suchas testsof internalcontrols, testsoftransactions,ortestsofbalancesinbalancesheetaccounts.negativeassuranceAstatementofwhattheCPAdoesnotknowasopposedtowhattheCPAbelieves (positive assurance). A statement that the CPA was "not aware of materialmodifications that should be made to financial statements for them to conform with U.S.generallyacceptedaccountingprinciples"isnegativeassuranceusedinreviewreports.negativeconfirmation requestThenegative formof accounts receivable confirmation askstheclient'scustomertorespondonlyifthecustomerdisagreeswiththebalancedeterminedbythe client. The positive form asks the customer to respondwhether the customer agrees ordisagreeswith theclient's receivablebalance.Thenegative form isusedwhencontrolsoverreceivablesarestrongandaccountsreceivableconsistsofmanyaccountswithsmallbalances.Thepositiveformisusedwhencontrolsareweakortherearefewer,butlarger,accounts.nonissuermeansallentitiesexceptforthosethatregistertheirsecuritieswiththeSEC.nonsamplingrisk isaudit risknotdue tosampling.Anauditormayapplyaprocedure toalltransactionsorbalancesandfailtodetectamaterialmisstatement.Nonsamplingriskincludesthe possibility of selecting audit procedures that are not appropriate to achieve a specificobjective.Forexample,confirmingrecordedreceivablescannotrevealunrecordedreceivables.Nonsampling risk can be reduced to a negligible level through adequate planning andsupervision.objectiveAgoal.objectivityTheinternalauditors'objectivitydependsontheorganizationalstatusoftheinternalauditfunction,whethertheinternalauditorhasdirectaccessandreportsregularlytotheboard,the audit committee, or ownermanager, and who oversees internal auditor employmentdecisions.obligations Assertions about obligations deal with whether liabilities are obligations of theentityatagivendate.Forexample,managementassertsthatamountscapitalizedforleasesinthe balance sheet represent the cost of the entity's rights to leased property and that thecorrespondingleaseliabilityrepresentsanobligationoftheentity.obliterateTodoawaywithsomethingsoastoleavenotrace.observe(observation)Watchandtestaclientaction(suchastakinginventory).occurrence Assertions about occurrence deal with whether recorded transactions haveoccurred during a given period. For example,management asserts that sales in the incomestatement represent the exchange of goods or services with customers for cash or otherconsideration.onlineAccess toa computer for immediateprocessingwithout having towait for a batchoftransactionstobeprocessedatalatertime.operating effectivenessHow an internal control was applied, the consistencywithwhich it



wasapplied,andbywhom.operatingincomefromcontinuingoperationsisreportedonanincomestatement.opinionACPA'sconclusionheldwithconfidencebutnotsubstantiatedbypositiveknowledgeorproof.opinionparagraphTheparagraphintheauditreportthatexpressestheauditor'sconclusions.The wording of the standard, unqualified opinion paragraph is: "In our opinion, the financialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionofXYZCompanyatDecember31,yearA,andtheresultsof itsoperationsanditscashflowsfortheyearthenendedinconformitywithU.S.generallyacceptedaccountingprinciples."orderisalistingofgoodsorservicesrequestedfromasupplierwithspecificationsanddesireddeliverymethod. Acompanystarts thepurchaseprocess internallywitha requisition,whichresults in an order being transmitted to a supplier. When the supplier ships the goods orprovidestheservice,aninvoiceissenttothecustomertellingthecustomerthespecifications,deliverymethod,andpriceofthosegoodsorservices.othercomprehensivebasisofaccounting (OCBOA)meansadefinitesetof criteria,otherthanaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericaorInternationalFinancialReportingStandards (IFRSs),havingsubstantialsupportunderlying thepreparationoffinancialstatementspreparedpursuanttothatbasis.otherinformationFinancialandnonfinancial information (other than the financialstatementsandtheauditor'sreport)includedinadocumentcontainingauditedfinancialstatementsandtheauditor'sreportthereon,excludingrequiredsupplementaryinformation.overallreviewTheobjectiveof theoverallreviewstageof theaudit is toassessconclusionsreached,andevaluatetheoverallfinancialstatementpresentation.Theoverallreviewincludesreadingthefinancialstatementsandnotesandconsideringadequacyofevidencegatheredinresponse to unusual or unexpected balances.Results of an overall reviewmay indicate theneedforadditionalevidence.parallel processing is the simultaneous performance of multiple operations, usually inreferencetocomputersystems.parallelsimulationtestingisthesimultaneousperformanceofmultipleoperations.Itprovidesevidenceofthevalidityofprocessingifthesecondprocessingsystemyieldsthesameresultsasthefirst.Auditorsusetheirowngeneralizedauditsoftwaretoprocessthesamedataaswasprocessedbytheclientssoftware.Iftheoutputoftheauditsoftwareisthesameastheoutputoftheclientssoftwarethatisevidencethattheclientssoftwareisperformingproperly.parity bit A redundant bit added to a string of bits to increase the accuracy of datatransmission.passwordAsequenceofcharactersrequiredtogainaccesstoacomputersystem.Passwordsareusedtorestrictcomputersystemaccesstoonlyauthorizedpersons.payrollDepartmentthatdeterminesamountsofwageorsalaryduetoeachemployee.peerreviewApracticemonitoringprograminwhichtheauditdocumentationofoneCPAfirmisperiodicallyreviewedbyindependentpartnersofotherfirmstodeterminethatitconformstothestandardsoftheprofession.pendingLegalproceedingsnotyetdecided.perdiemAnallowancefordailyexpenses.Oftenusedtoreimburseemployeesforestimatedexpensesasopposedtoaccountingforeachsmallcomponentoftheexpenses.



performancemateriality means the amounts set by the auditor at less than materiality toreduce to an appropriately low level the probability that the aggregate of uncorrected andundetectedmisstatementsexceedsmaterialityforthefinancialstatementsasawhole.permanentauditdocumentation includes itemsof continuingaccounting significance, suchas the analysis of balance sheet accounts and contingencies. Such information from a prioryearisusedinthecurrentauditandupdatedeachyear.Sometimescalledthecontinuingfile.perpetrateCarryoutanactionsuchasacrime.perpetual An inventory accounting system updated for each addition to inventory and eachissuance from inventory, so the records indicate theexact quantity onhandat anymoment.Thealternative is a periodic inventory systemwhereactual inventory onhand is determinedonlyonceayear.personalfinancialstatementsofindividualspresentassetsandliabilitiesatestimatedcurrentvalue on an individual's balance sheet (statement of financial condition). A statement ofchangesinnetworthpresentsmajorchangesinnetworthduringaperiod.Theaccrualbasisisused for assets and liabilities,which are presented in order of liquidity andmaturity,withoutclassificationastocurrentandnoncurrent.Thecashvalueoflifeinsurancelesstheamountofloans against it is an asset. Deferred income tax on the difference between the income taxbasisandestimatedcurrentvaluesispresentedbetweenliabilitiesandequity.personnelThedepartmentthatmaintainsrecordsofeachindividual'semployment.persuasive Having the power to influence. Most audit evidence is persuasive, but notconclusive.perturbationcontrolisarestrictioncontroltolimittheaccessaparticularuserhastodetailsinadatabase.Itintroducesnoiseintotheoutput(perturbs,orchangesit)toshieldthespecificsofonerecordfromthepersonwhohasonlyaccesstosummaryinformation.pervasiveHavingtheabilitytopermeate.Anerrorispervasiveifitismaterialtomorethanoneoftheprimaryfinancialstatements.piecemealopinionExpressionofanopiniononaniteminfinancialstatementsisnotpermittedaspartofadisclaimeroradverseopinionon the financialstatementsasawholebecause itwouldtendtoovershadoworcontradictadisclaimerofopinionoranadverseopinion.planAuditplanning isdevelopinganoverallstrategyforconductandscopeof theaudit.Thenature,extent,and timingofplanningvarywithsizeandcomplexityof theentity,experiencewiththeentity,andknowledgeofthebusiness.Inplanningtheaudit,theauditorconsiderstheentity's business and its industry, its accounting policies and procedures, methods used toprocessaccounting information, theplannedassessed level of control risk, and theauditor'spreliminaryjudgmentaboutauditmateriality.pledgeSomethinggivenassecuritytoguaranteepaymentofadebt.populationsizeThenumberofitemsinthepopulationfromwhichasampleisdrawn.positiveassuranceAstatementastowhattheCPAbelieves.Anexampleisanopinionthatthe financial statements are presented fairly in conformity with U.S. GAAP. The opposite isnegativeassurance,astatementaboutwhattheCPAdoesnotknow.AstatementthattheCPAwas"notawareofmaterialmodificationsthatshouldbemadetofinancialstatementsforthemtoconformwithU.S.generallyacceptedaccountingprinciples" isnegativeassuranceused inreviewreports.positiveconfirmation(positiverequest)Thepositive formof receivablesconfirmationasks



thecustomer to respondwhether thecustomeragreesordisagreeswith theclient's reportedreceivable balance. The negative form of accounts receivable confirmation asks the client'scustomertorespondonlyifthecustomerdisagreeswiththebalancedeterminedbytheclient.Thenegativeformisusedwhencontrolsoverreceivablesarestrongandaccountsreceivableconsistsofmanyaccountswithsmallbalances.Thepositive form isusedwhencontrolsareweakortherearefewer,butlarger,accounts.predecessorauditorTheauditorofaclientforaprioryearwhonolongerauditsthatclient.presentationAssertions about presentation deal with whether particular financial statementcomponents are properly classified and described. For example, management asserts thatlongterm liabilities in the balance sheet will notmature in one year. Similarly,managementassertsthatextraordinaryitemsintheincomestatementareproperlyclassifiedanddescribed.presumptivelymandatoryqualitycontrolrequirementsapplyunless,inrarecircumstances,the firm documents the justification for the departure and how the alternative proceduresperformed in thecircumstancesweresufficient toachieve theobjectivesof the requirement.Thewordshouldindicatesapresumptivelymandatoryrequirement.preventativecontrolAcontroldesignedtoavoidanunintendedevent.principalauditorTheauditor responsible for thegreaterportionof financialstatements.Theprincipal auditor may assume responsibility for the work of the other auditor or divideresponsibilitywiththeotherauditor.pro forma The objective of pro forma financial information is to show effects on historicalfinancialinformationasifaproposedeventhadoccurredearlier.probability proportional to size (pps) (also known as dollar unit) samplingA samplingplan that bases the likelihood of selecting a particular account on the relative size of thataccount, so largeraccountshaveagreaterprobabilityofbeingselected for thesample thansmalleraccounts.probableAcontingentlossisprobableifitisuncertainbutlikelytohappen.procedureAnaction,suchasastepperformedaspartofanauditprogramoraspartoftheclient'sinternalcontrols.processingcontrol is an internal control included in computer software designed to assurethatalltransactionsarehandledasauthorizedandnoneomittedoradded.productioncycleTheportionofanentity thatacquires resourcesandconverts them to theproductorserviceforcustomers.productionorderAdocumentthatinitiatesthemanufacturingprocess.proficiencyasanauditorincludestheauditor'sformaleducationandsubsequentexperience.The independent auditor must undergo training adequate in technical scope, includingcommensurate general education. The assistant entering an auditing career must obtainexperience with proper supervision and review of his or her work by a more experiencedauditor.programAnauditprogram isa listingofauditprocedures tobeperformed incompleting theaudit.A computer program (software) is a listing of steps to beperformed in processing thedata.programmed controls are built into computer software and include reasonableness tests,controltotals,andsequencechecks.



pronouncementsof theFASBandGASBarerulesthatdeterminetheprinciplesforexternalfinancialreportinganddisclosure.proofofcashisareconciliationofthegeneralledgercashbalanceatboththebeginningandendofaperiod,combinedwithareconciliationofcashdepositedfortheperiodwiththecashreceipts journal, and a reconciliation of checks for the period with the cash disbursementsjournal.prospective financial statements are either financial forecasts or financial projections.Prospectivefinancialstatementsmaycoveraperiodthathaspartiallyexpired.Statementsforperiodsthathavecompletelyexpiredarenotprospectivefinancialstatements.prospectusA registrationstatement filedwith theSEC includesaudited financialstatements(balancesheet,incomestatement,andstatementofcashflows)forthepreviousthreeyears.Aprospectuscontains thesame informationandmustbesupplied toallparties towhomoffersaremade.Thereisatwentydaywaitingperiodbetweenthefilingoftheregistrationstatementand the first sale of securities. During this period, preliminary ads and a "red herring"prospectuscanbeprovidedtooffereesbutitmustbeclearlymarkedaspreliminary.proxy A power of attorney granting a third party the right to a stockholder's vote. WhenmanagementorotherssolicitproxiesfromstockholdersacopyoftheproxystatementmustbefiledwiththeSECtendaysbeforemailingthesolicitation.Theproxystatementmustincludeallinformationrelevanttothemattervotedon.publiccompany(alsocalledanissuer)isacompanythatmustfilereportswiththeSEC.Thisincludescompanieswithsecurities tradedonastockexchangeand largercompanies tradedoverthecounter(morethan500investorswithassetsover$10million).purchaseorderAdocumentfromabuyertoasellerplacinganorderandlistingquantitiesandspecifications.purportIntendingtopresent.qualified(qualify)Anauditopinionthat thefinancialstatementsasawholearepresented inconformitywithU.S.GAAP,withtheexceptionsnoted.qualitativeRelatingtothequalityofatrait,asopposedtoquantitative,whichmeansexpressedasanumber.qualitycontrolsystemsprovideaCPAfirmwithreasonableassurancethatpersonnelcomplywith professional standards and the firm's standards of quality, independence, integrity, andobjectivity. It covers personnel management, acceptance and continuance of clients,engagementperformance,andmonitoring.quantitative(quantitatively)Expressedasanumber,asopposedtoqualitativemeasurement.questionnaireAninternalcontrolquestionnaireisalistofquestionsabouttheinternalcontrolsystemtobeanswered(withanswerssuchasyes,no,ornotapplicable)duringauditfieldwork.The questionnaire is part of the documentation of the auditor's understanding of the client'sinternalcontrols.quick ratioQuick assets divided by current liabilities. Quick assets are current assets lessinventoriesandprepaidexpenses.random sample (randomnumber sampling) Identical probability of each population itembeingselectedforasample.Also,theuseofrandomnumberstoselectarandomsamplefromapopulation.ratioTherelationbetweentwoquantitiesexpressedasthequotientofonedividedbytheother.



The ratio of 8 to 2 is written 8/2 and equals four. Financial statement ratios are used asanalyticalproceduresinaudits.ratioestimation Inauditsamplingaratioof theproportionoferrors in thesampleappliedtothepopulationvaluetoestimatetotalerror.reasonableassurance (inaudit report)Anauditorworkswithin economic limits. Theauditopinion, to be economically useful,must be formed in a reasonable time and at reasonablecost. Theauditormust decide, exercising professional judgment,whether evidenceavailablewithinlimitsoftimeandcostissufficienttojustifyanopinion.reasonableassurance(ininternalcontrol)Aninternalcontrol,nomatterhowwelldesignedand operated, cannot guarantee that an entitys objectives will be met because of inherentlimitationsinallinternalcontrolsystems.reauditWhenanauditor isasked toauditandreporton financialstatements thathavebeenpreviouslyauditedandreportedon.recalculatePerformproceduresagainandcomparetooriginalresults.receiving report A document completed in the receiving department, which identifies thepurchase order that initiated the purchase, and the date, quantity, and condition of goodsreceived.recomputationPerformproceduresagainandcomparetooriginalresults.reconcile (reconciliation) A schedule establishing agreement between separate sources ofinformation,suchasaccountingrecordsreconciledwiththefinancialstatements.registration statementA statement submitted to officially provide the SECwith informationaboutanofferingof securities.A registrationstatement includesaudited financial statements(balancesheet,incomestatement,andstatementofcashflows)forthepreviousthreeyears.regression analysis A statistical method for finding the relationship between two or morevariables.Alsocalledleastsquaresorlinearregression.regulationsxisaregulationoftheSECthatexplainstheformatofinformationtobesubmittedto the SEC. It is entitled "Form andContent of andRequirements for Financial Statements,SecuritiesActof1933,SecuritiesExchangeActof1934,PublicUtilityHoldingCompanyActof1935,InvestmentCompanyActof1940,andEnergyPolicyandConservationActof1975."relatedpartiesare thosewithwhomtheclienthasa relationship thatmightdestroy theselfinterest of one of the parties (accounting is based on measurement of arm's lengthtransactions). Related parties include affiliates of the client, principle owners, management(decisionmakerswhocontrolbusinesspolicy)andmembersoftheirimmediatefamilies.relevant assertion is a financial statement assertion that has a reasonable possibility ofcontainingamisstatement ormisstatements thatwould cause the financial statements to bemateriallymisstated.reliable (reliability)Different audit evidence provides different degrees of assurance to theauditor.Whenevidencecanbeobtainedfromindependentsourcesoutsideanentityitprovidesgreaterassuranceofreliability foran independentaudit thanthatsecuredsolely in theentity.Moreeffective internalcontrolsprovideassuranceaboutreliabilityof theaccountingdataandfinancial statements. The independent auditor's direct personal knowledge, from physicalexamination, observation, computation, and inspection, is more persuasive than informationobtainedindirectly.remittanceSendingmoneytosomeone.Aremittanceadvice isarecordof theamountsent,



purposeofthepayment,andassociatedaccountidentification.remote A contingency with only a slight chance of occurring. In computer processing ofinformation,adistantcomputer.reperformanceTherepeatingbytheauditorofacomputationmadebytheclienttocheckitsaccuracy.representation A letter from management to the auditor representing that the financialstatementsarefairlypresented.Theletterisaddressedtotheindependentauditor,anddatedat thedateof theauditor'sreport. It issignedbymembersofmanagementwhomtheauditorbelievesareresponsiblefor,andknowledgeableabout,matterscovered(chiefexecutiveofficerandchieffinancialofficer).requisition A formal written request for something needed. A purchase by a company isinitiatedinternallybyarequisition,resultingintheissuanceofapurchaseordertotheoutsidesupplier.restrictioncontrolisonetypeofinferencecontroloveroutputfromadatabase.Topreventauserwhohasaccessonlytosummary informationfrominferringdetailsofaparticularrecordthe user can see the results from only five or more records combined, not fewer than fiverecords.revenuecycleTheportionofacompanythat fillscustomerorders,accounts forreceivables,andcollectsthosereceivables.reviewToexamineagain.Theoverall reviewofauditdocumentation iscompletedafter fieldwork.ApeerreviewisapracticemonitoringprograminwhichauditdocumentationofoneCPAfirm is periodically reviewed by independent partners of other firms to determine that theyconform to professional standards. An analytical review is a type of substantive auditprocedure. A review of financial statements of a nonpublic company is an engagement thatresults in theexpressionof lessassurance thananaudit, butmore than ina compilation.Areviewofinterimfinancialstatementsofapubliccompanyconsistsofanalyticalproceduresandinquiries.reviewevidence is informationusedbytheaccountant toprovideareasonablebasis for theobtainingoflimitedassurance.rfidradiofrequencyidentificationtagisattachedtoandidentifiesathingsuchasanitemininventory,acaseofitems,apalletofcases,acarpassingthroughareaderonatollway,orapersonpassing througha doorway. It is like aUPC (universal product code) on items in astore,butcanbescannedfromalongerdistance.Atransceiversendsanactivatingsignalandreceivesidentificationinformation.AnactiveRFIDtaghasaninternalbatteryandhasalongerrangethanapassivetagwhichispoweredbytheradiosignalitreceives.rightsAssertionsabout rightsdealwithwhether theentityhas rights to theassetatagivendate. For example, management asserts that amounts capitalized for leases in the balancesheetrepresentthecostoftheentity'srightstoleasedproperty.riskanalysisAnanalysisofthepossibilityofsufferingloss.riskassessmentproceduresaretheauditproceduresperformedtoobtainanunderstandingof theentityand itsenvironment, including theentity's internalcontrol, to identifyandassesstherisksofmaterialmisstatement,whetherduetofraudorerror,atthefinancialstatementandrelevantassertionlevels. sample size The number of population items selected when a sample is drawn from apopulation.



samplingerrorUnlesstheauditorexamines100%ofthepopulation,thereissomechancethesampleresultswillmisleadtheauditor.Thisriskissamplingerror.Thelargerthesample,thelesschanceofsamplingerrorandthegreaterthereliabilityoftheresults.sampling risk The possibility that conclusions drawn from the sample may not representcorrectconclusionsfortheentirepopulation.sarbanesoxleyactestablishedthePublicCompanyAccountingOversightBoardandaddedrequirements for publicly traded companies, their officers, boards and auditors. It increasedpenaltiesforcorporatefinancialfraud.sas"StatementsonAuditingStandards"areinterpretationsofU.S.generallyacceptedauditingstandardsissuedbytheAICPAsauditingstandardsboard.scopeThetypeofengagement.Thescopeofanengagementmightbeareview,anaudit,oracompilation.Ascopelimitationisarestrictionontheevidencetheauditorcangather.scope paragraph The paragraph in the audit report that explains the scope of theengagement. The wording of the standard scope paragraph is: "We conducted our audit inaccordancewithU.S.generallyacceptedauditingstandards.Thosestandardsrequirethatweplan and perform the audit to obtain reasonable assurance about whether the financialstatements are free ofmaterialmisstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believethatourauditprovidesareasonablebasisforouropinion."secTheSecuritiesandExchangeCommissionisanagencythatadministersFederalsecuritieslaws which require disclosure of information about publicly traded securities. The SECinvestigatessecuritiesfraudandregulatessecuritiesexchangesandbrokers.second requestWhen an auditor confirms receivables, some customers of the client fail torespond to the first confirmation request.Another requestsent to thesamecustomers is thesecondrequest.securedtransactionRighttorepossessgoodsassecurityforpaymentofadebt.segregation of dutiesmeans assigning different people the responsibilities of authorizingtransactions,recordingtransactions,andmaintainingcustodyofassets.Segregationofdutiesreducestheopportunitiesforonepersontobothperpetrateandconcealerrorsorfraud.selfcheckingdigitAnextradigitisaddedtoanumber.Theextradigitiscomputedfromtheotherdigits in thenumber.Thecomputerprogramcan thencheck inputby recomputingandcomparingthecheckdigit.Thisisausefulcontrolovertheinputofaccountnumbers.serviceauditorTheauditorofanorganizationthatprovidesservicessuchasdataprocessingorpension trustadministration tootherorganizations (theusers).Auditorsof theusers (userauditors)relyonareportfromtheserviceauditoraboutcontrolsintheserviceorganizationthatapplytofinancialstatementsoftheuserorganizationtheyareauditing.shippingdocumentAdocumentpreparedwhengoodsareshipped.Itliststhedateshipped,thecustomer,methodofshipment,andquantitiesandspecificationsofgoodsshipped.significantdeficiency is a deficiency in internal control that is less severe than a materialweakness,yetimportantenoughtomeritattentionbythosechargedwithgovernance.significantriskisanidentifiedandassessedriskofmaterialmisstatementthat,intheauditor'sjudgment,requiresspecialauditconsideration.



simulationRepresentationoftheoperationorfeaturesofoneprocessorsystemthroughtheuseofanother.Computersimulationofwaitinglinescandeterminethenumberofemployeesneededtoservecustomersataparticulartime.single audit act This federal legislation requires state and local governments that receivefederalaidof$500,000ormoreinafiscalyeartohaveanauditundertheact.Agovernmentthat receives less than $500,000 can have an audit under the act or with specific laws andregulations of programs in which the government participates. Auditors report whether theauditedentityhasfollowedlawsandregulationsthatmayhaveamaterialeffectoneachmajorfederalaidprogram.softwareProgramsandlanguagesthatcontrolcomputerhardware.specialist An expert at activities not usually done by auditors (such as an appraiser forvaluation).sqcsStatementonQualityControlStandards.

ssars Statements on Standards for Accounting and Review Services (SSARS) arepronouncementsconcerningunauditedfinancialinformationofanonpublicentityissuedbytheAICPAAccountingandReviewServicesCommittee.standard deviationA statistic used to measure dispersion equal to the square root of thearithmeticmeanofthesquaresofthedeviationsfromthearithmeticmean.statisticalMakinginferencesinuncertainsituationsusingappliedmathematics.Measurementsfromasmallgroup,thesample,areusedtoinferthebehaviorofalargergroup,thepopulation.Probabilitytheorydetermineshowwellthesamplerepresentsthepopulation.stoporgosamplingTakingasamplefromapopulationandcheckingaftereachsampleitemisdrawnwhetherthesamplesupportsadesiredconclusion.Samplingceasesassoonasthatconclusionissupported.stratifyToarrangeapopulationorasample indistinct layers.Stratifiedsampling isused inauditing toselectagreaterpercentageofaccountswithhighbalances thanofaccountswithlowbalances.subject toYears ago there was a type of qualified audit opinion that was worded "In ouropinion,subjectto....."Auditorsarenolongerpermittedtoissuesuchopinions.subsequenteventsaffecttheclientandoccurbetweenthebalancesheetdateandissuanceofthefinancialstatements.Somesucheventsprovideadditionalevidenceaboutconditionsthatexisted at the balance sheet date, such as the bankruptcy of a customer with a history offinancialdifficulty.Thefinancialstatementsareadjustedtoreflectthisevidence.Conditionsthatdidnotexistat thebalancesheetdate,suchas fire thatdestroyed theclient'splantafter thebalancesheetdate,maybesosignificantastorequiredisclosure.subsidiary ledger The detailed information that totals to the balance in the general ledgeraccount. The total of all customer accounts receivable included in the subsidiary ledger ofaccountsreceivableisthebalanceinthegeneralledgeraccountsreceivableaccount.substantiatedSupportedwithprooforevidence.substantive audit procedure is a direct test of a financial statement balance designed todetectmaterialmisstatementsattheassertionlevel.Substantiveprocedurescomprisetestsofdetails(classesoftransactions,accountbalances,anddisclosures),andsubstantiveanalyticalprocedures.



successorauditorThe auditor of a client for the current yearwhen that client had anotherauditorinprioryears.Theauditorwhonolongerauditsthatclientisthepredecessorauditor.sufficiency(sufficient)Ameasureofthequantityofauditevidence.Theindependentauditor'sobjective is to obtain sufficient appropriate evidence to provide a reasonable basis for anopinion.superviseSupervision is directingefforts of assistants in theaudit anddeterminingwhetherobjectiveswereaccomplished.Elementsofsupervisionincludeinstructingassistants,keepinginformedofproblems,reviewingworkperformed,anddealingwithdifferencesofopinionamongfirm personnel. The appropriate extent of supervision depends on the complexity of subjectmatterandqualificationsofpersonsperformingthework.suppliersprovidegoodsorservicestoanauditedentity.Sometimescalledvendors.systrust engagements A CPA tests a business system for its ability to operate withoutmaterialerrorandreportsonitsreliability.testAsamplefromapopulationtoestimatecharacteristicsofthepopulation.test count As part of inventory audit procedures auditors normally observe the client'semployees counting physical inventory. A test count is inventory counted by the auditors tochecktheclient'scount.testdataisrunthroughacomputerprogramtotestthesoftware.Testdatacanbeusedtotestcompliancewithcontrolsinthesoftware.testofcontrols(testsoftheoperatingeffectivenessofinternalcontrols)Auditorsevaluatethedesignofcontrols, thendetermine if thecontrolsare inoperation. Inorder to relyon thecontrolstheymustalsoobtainevidenceastowhetherthecontrolsareoperatingeffectively.testofdetailDirect testsof financial statementbalances (substantiveauditprocedures) thatarenotanalyticalprocedures. If testsofdetailsareperformedas testsofcontrolsaswellassubstantiveteststheyare"dualpurpose"tests.thirdpartiesareallpersons,includingthosechargedwithgovernance,exceptformembersofmanagement.those charged with governance are the person(s) with responsibility for overseeing thestrategicdirectionoftheentityandobligationsrelatedtotheaccountabilityoftheentity.tickmarksinauditworkpapersarefootnotesrepresentedbyasymbolinsteadofbyanumber.Theyindicateproceduresthathavebeencarriedoutonspecificitemsintheworkpapers.timesinterestearnedIncomebeforeinterestandtaxesdividedbyinterestexpense.timing of audit testing means when the procedure is performed. If you perform a test ofbalances procedure before year end there is a risk that internal controls are inadequate toprovide assurance up through the balance sheet date. There is less risk if you do theprocedureasofthebalancesheetdate.tolerabledeviationrateisthemaximumrateofdeviationfromaninternalcontrolthatwillallowtheauditortoplacetheplannedrelianceonthatcontrol.tolerablemisstatementWhenplanningasampleforasubstantivetestofdetails,theauditorconsidershowmuchmonetarymisstatementmayexistwithoutcausingthefinancialstatementstobemateriallymisstated.Thismaximummisstatement is the tolerablemisstatement for thesample.traceFollowatransactionthroughthestepsofthesystem.



treasurerTheofficerwhocontrolstheentity'sfunds.Thetreasurernormallysignschecksandisresponsibleforcashmanagement.treasurystockisstockofthecorporationthathasbeenissuedandlaterreacquired.It isnotanasset.It isareductionofstockholders'equity.Treasurystockcanberecordedateitheritscostoritsparvalue.trendanalysisAnanalysisofthechangeinsomethingovertime.Analyticalprocedures,whichcomparefinancialstatementratiosofdifferentyears,areanexampleoftrendanalysis.trialbalanceAstatementofopendebitandcreditaccountsinaledgertotesttheirequality.turnoverInventoryturnoverisameasureofthetimefromreceiptofinventorytoitssale.It isfoundbydividingcostofsalesbyaverageinventory.Receivablesturnoverisameasureofthetime it takes to collect receivables. It is found by dividing net credit sales by average netreceivables.Employeeturnoveristherateatwhichnewemployeesreplaceoldemployees.unconditional requirements apply in all cases. Quality control standards use the wordsmustorisrequiredforanunconditionalrequirement.uncorrectedmisstatementsaremisstatements that theauditorhasaccumulatedduring theauditandthathavenotbeencorrected.unqualifiedAnauditopinionthatthefinancialstatementsareinconformitywithU.S.GAAP.update(updated)Ifanauditornoticeseventsthataffectfinancialstatementsonwhichanauditreporthasbeenissued,theyareconsideredwhenupdatingthereportonthosestatements.Ifthosestatementsarechanged,theupdatedreportsaystheyhavebeenrestatedandexpressestheappropriateopinion.Ifanupdatedopiniondiffersfromthepreviousopinion,anexplanatoryparagraph preceding the opinion paragraph explains that the report has been updated anddiscloses the date and type of opinion previously expressed, and events that caused therevision.userauditorAserviceauditoristheauditorofanorganizationthatprovidesservicessuchasdataprocessingorpension trustadministration tootherorganizations(theusers).Auditorsoftheusers(userauditors)relyonareportfromtheserviceauditoraboutcontrolsintheserviceorganizationthatapplytofinancialstatementsoftheuserorganizationtheyareauditing.validitycheck Software control over input of data to a computer system.Data is comparedwiththetypeofdataproperlyincludedineachinputfield,e.g.,onlylettersinanamefield.valuationAnassertionmadebymanagement thateachassetand liability is recordedatanappropriatecarryingvalue.valueaddednetworkAtelecommunicationsnetworkprovidingcommunicationfacilities,whichenhance basic telecommunications services. They add value by passing, storing andconvertingmessages.AlsoknownasserviceprovidersandEDIserviceproviders.Operatedbyaclearinghouse,anorganizationthatprovidesmessage/filecollection,routinganddistributionserviceonbehalfofotherorganizations.variablesamplingThecharacteristictestedhasmanypossiblevalues(suchasdollarvalueofinventory).varianceAstatisticalmeasureofdispersioninapopulation.Thevarianceisthesquareofthestandarddeviation.Thestandarddeviationequalsthesquarerootofthearithmeticmeanofthesquaresofdeviationsfromthearithmeticmean.vendorsprovidegoodsorservicestoanentity.Alsocalledsuppliers.



verify(verification)Proveaccuracyofnumbersorexistenceofassets.vouchProveaccuracyofaccountingentriesbytracingtosupportingdocuments.voucherAdocumentinsupportofanexpenditure.Thesignatureofanappropriateofficialonthevoucherisauthorizationforthetreasurertoissueacheck.webtrust engagements A CPA issues an opinion on a web site when the business andinformationprivacypractices,transactionintegrity,andprotectionofcustomerinformationmeetcertainstandards.working papers (written audit documentation) Records kept by the auditor of proceduresapplied,testsperformed,informationobtained,andpertinentconclusionsintheengagement.writeoffCancellationofpartorallofabalance.Costsincurredthathavenofutureutilityarecharged(writtenoff)toanexpenseorlossaccount,notcarriedforwardasanasset.writeupIndollartermsawriteupisanintentionalincreaseinthecarryingvalueofanasset.Innarrativetermsawriteupisadescriptionofsomethingorsomeevent.

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