ACCT 3222 Exam 2 Key Terms

Significant deficiency

A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance

Material weakness

A deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis

Misstatement

A difference between the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework

Management letter

A document prepared by the audit team and provided to the client that discusses internal control weaknesses and other matters discovered during the course of the audit

Management bias

A lack of neutrality by management in the preparation and fair presentation of information

Audit program

A listing of details of the audit procedures to be used when testing controls, conducting detailed substantive audit procedures, and completing the audit

Monitoring

A process that assesses the quality of internal control performance over time; involves assessing the design and operation of controls on a timely basis and taking necessary corrective actions

Internal control

A process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the reliability of financial reporting, the effectiveness and efficiency of operations, and compliance with applicable laws and regulations

Attribute sampling

A sampling technique used to reach a conclusion about a population in terms of a rate of occurrence

Regression analysis

A statistical process that involves estimating a prediction equation that expresses an item of interest in terms of other data fields

Dual-purpose test

A substantive test of a transaction and a test of control relevant to that transaction that are performed concurrenty

Scanning

A type of analytical procedure in which auditors use their professional judgement to review accounting data to identify unusual or significant items to examine futher

Tracing

A type of inspection in which auditors select source document and work forward to follow the transaction through to recording in the journal and ledger

Vouching

A type of inspection in which auditors select transactions from a journal or ledger and work backward to examine the underlying source documents

Accounting estimate

An approximation of a monetary amount when a precise means of measurement is not available

Relevant assertion

An assertion that has a reasonable possibility of containing a material misstatement or misstatements that would cause the financial statements to be materially misstated and, therefore, has a meaningful impact on whether the account is fairly stated

Component auditor

An audit firm that performs work on the financial information of a component that will be used as audit evidence for the group audit

Group audit

An audit of group financial statements

External confirmation

An audit procedure in which the auditor corresponds directly with a third party, either in paper or electronic form, and the third party responds directly to the auditor on the matters included in the confirmation

Recalculation

An audit procedure that involves checking the mathematical accuracy of documents or records

Reperformance

An audit procedure that involves the independent execution of procedures or controls that were originally performed by client personnel

Benchmarking

An audit testing strategy that can be used to allow evidence obtained in prior audit periods to support a conclusion about IT application controls in the current audit period

Component

An entity or business activity whose financial information is required by an applicable financial reporting framework to be included in group financial statements

Inquiry

An evidence-gathering procedure that involves asking questions verbally or in written form to gain an understanding of various matters throughout the audit

Inspection

An evidence-gathering procedure that involves examining documents and physical assets

Observation

An evidence-gathering procedure that involves watching a process or procedure being carried out by client personnel or another party

Significant risk

An identified and assessed risk of material misstatement that, in the auditor's judgement, requires special audit consideration

Specialist

An individual or organization with expertise in a field other than accounting or auditing whose work in that field is used by the auditors to assist in obtaining sufficient appropriate evidence

Notable item

An item identified from the population being analyzed that has one or more characteristics that, for a relevant assertion, may do the following: be indicative or a risk of material misstatement or provide information useful in tailoring or designing procedures to address risks of material misstatement

Control exception (deviation)

An observed condition that provides evidence that the control being tested did not operate as intended

Relevant assertions

Assertions that have a reasonable probability of containing a material misstatement that would cause the financial statements to be materially misstated and, therefore, have a meaningful impact on whether the account is fairly stated

Substantive procedures

Audit procedures designed to detect material misstatements at the assertion level and to gather evidence to support management assertions

Accounting records

Client's records of the initial accounting entry and supporting documents

Current file

Contains audit information that is relevant for the duration of one audit

Permanent file

Contains client information that is relevant for more than one audit

Detective controls

Controls applied after transactions have been processed to identify whether fraud or errors have occurred, and to rectify the fraud or errors on a timely basis

Preventative controls

Controls applied to each transaction that stop fraud or errors from occurring

IT application controls

Controls designed to provide reasonable assurance that the recording, processing, and reporting of data by IT are properly performed for specific applications

IT-dependent manual controls

Controls that involve manual review of the completeness and accuracy of computer generated information

Bank confirmation

Correspondence between the auditors and their client's bank requesting information such as cash held in the bank and details of any loans with the bank and interest rates charged

Positive confirmation

Correspondence sent directly by an auditor to a third party, who is asked to respond to the auditor on the matters included in the letter in all circumstances, or whether they agree or disagree with the information included in the letter

Negative confirmation

Correspondence sent directly by an auditor to a third party, who is asked to respond to the auditor on the matters included in the letter only if the party disagrees with the information provided

Receivable confirmation

Correspondence sent directly by the auditors to their client's customers requesting information about amounts owed to the client by the customer

WCGW

Describes where material misstatements due to fraud or error could occur in a flow of transactions or source and preparation of information that affects a relevant financial statement assertion

Internal auditors

Employees of the client who perform assurance and consulting activities designed to evaluate and improve the effectiveness of the entity's governance, risk management, and internal control processes

Analytical procedures

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data

Analytical procedures

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data; includes investigation of fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount

Control deficiency

Exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis

Group financial statements

Financial statements that include the financial information or more than one entity

Information and communication systems

Includes accounting system, consists of methods and records established to identify, analyze, classify, record and report entity transactions and to maintain accountability for the related assets and liabilities

Audit evidence

Information gathered by the auditor that is used when forming an opinion on the fair presentation of a client's financial statements

False positives

Items incorrectly identified as notable items

Working papers

Paper or electronic documentation of the audit created by the audit team as evidence of the work completed

Group engagement team

Partners and staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate audit evidence to form an opinion on the group financial statements

Roll-forward procedures

Procedures performed at year-end on transactions occurring between an interim date and year-end to provide sufficient appropriate audit evidence on which to base conclusions and year-end when substantive procedures are performed at an interim date

Relevance

Refers to the logical connection with the assertion being tested

Appropriate

Refers to the quality of audit evidence gathered

Sufficient

Refers to the quantity of audit evidence gathered

Reliability

Refers to the source, form, or nature of the audit evidence

Assertion

Statement or representation, explicit or implicit, made by management regarding the recognition, measurement, presentation, and disclosure of items included in the financial statements and notes

Lead schedule

Summarizes the detail included in a specific account on the financial statements

Tests of controls

The audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level

Entity-level controls

The client's control environment, risk assessment process, information system, control activities, and monitoring of controls that exist at the organizational level

Group engagement partner

The partner who is responsible for the group audit engagement and its performance and for the auditor's report on the group financial statements that is issued on behalf of the firm

Cluster analysis

The process of discovering groups of similar items in a set of data; items in the same group are similar, while items in different groups are not similar

Matching information in key data fields

The process whereby the auditor uses audit data analytics to search for key characteristics that may exist in several different databases

Expected rate of deviation in the population

The rate at which the auditor expects controls not to function as planned

visualization

The representation of a data set, or key information, as a chart or other image

Estimation uncertainty

The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement

Confirmation bias

The tendency to seek or interpret evidence in ways that support pre-existing beliefs or expectations

Visualization

Using graphics to explain and communicate findings

Audit data analytics

Using software to discover and analyze patterns, identify anomalies, and extract other useful information in data underlying the subject matter of an audit through analysis, modeling and visualization for the purpose of planning or performing an audit

IT general controls

controls of program development, program changes, computer operations, and access to programs and data; designed to provide reasonable assurance that individual software applications operate consistently and effectively

Transaction-level controls

controls that affect a particular transaction or group of transactions

Walkthrough

following a transaction from origination through the company's processes until reflected in the financial records

Control environment

the attitudes, awareness, and actions of management and those charged with governance concerning the entity's internal control and its importance in the entity

Risk assessment process

the entity's process for identifying and responding to risks that an organization will not achieve its objectives

Tolerable deviation rate

the maximum rate of deviation from a prescribed control that an auditor is willing to accept and still use the planned assessed level of control risk