Auditing key terms 9-11

voided check

A check that is not negotiable (null and void). A voided check usually results from an error in preparing the check. In contrast a canceled check is one that has been paid by the bank.

standard confirmation form

A confirmation form, agreed to by the AICPA, the American Bankers Association, and the Bank Administration Institute, that is designed to provide corroborating evidence about the client's account balances and outstanding loans.

deviation rate

A defined rate of departure from prescribed controls.

voucher

A document authorizing a cash disbursement. A voucher usually provides space for the initials of employees performing various approval functions. The term voucher may also be applied to the group of supporting documents used as a basis for recording liabilities or for making cash disbursements.

aged trial balance

A listing of individual customers' accounts classified by the number of days subsequent to billing, that is, by age. A preliminary step in estimating the collectibility of accounts receivable.

channel stuffing

A marketing practice that suppliers sometimes use to boost sales by inducing customers to buy substantially more inventory than they can promptly resell. Channel stuffing without appropriate provision for sales returns is an example of booking tomorrow's revenue today in order to window dress the financial statements.

Allowance for sampling risk

A measure of the difference between sample estimate (projection) and the tolerable rate of deviation or tolerable misstatement at a specified sampling risk. It is also referred to as precision

Brokers' advice

A notification sent by a stockbrokerage firm to a customer reporting the terms of a purchase or sale of securities.

lockbox

A post office box controlled by a company's bank at which cash remittances from customers are received. The bank picks up the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company.

dividend record book

A reference book published monthly by investment advisory services reporting detailed information concerning all listed and many unlisted securities; includes dividend dates and amounts, current prices of securities, and other condensed financial data.

confirmation request

A request sent to a confirming party requesting that the confirming party consider the accuracy of information included in that request. A confirmation request may take one of two forms: positive confirmation request and negative confirmation request.

Positive confirmation request

A request that the confirming party respond directly to the auditor by providing the requested information or indicating whether the confirming party agrees or disagrees with the information in the request.

Attributes sampling

A sampling plan enabling the auditors to estimate the rate of deviation (occurrence) in a population.

discovery sampling

A sampling plan for locating at least 1 deviation, providing that the deviation occurs in the population with a specified frequency.

Sequential (stop-or-go) sampling

A sampling plan in which the sample is selected in stages, with the need for each subsequent stage being conditional on the results of the previous stage.

difference estimation

A sampling plan that uses the average difference between the audited (correct) values book values of items in a sample to calculate the estimated total audited value of the population.

ratio estimation

A sampling plan that uses the ratio of the audited (correct) values of items to their book values, to calculate the estimated total audited value of the population. Ratio estimation is used in lieu of difference estimation when the differences are nearly proportional to book values.

voucher register

A special journal used to record the liabilities for payment originating in a voucher system. The debit entries are the cost distribution of the transaction, and the credits are Vouchers Payable. Every transaction recorded in a voucher register corresponds to a voucher authorizing future payment of cash.

dual-purpose test

A test designed to test a control and to substantiate the dollar amount of an account using the same sample.

window dressing

Action taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements.

what is deviation rate also referred as to

Also referred to as occurrence rate or exception rate.

Check Clearing for the 21st Century Act (Check 21)

An act of Congress that allows banks to use and transmit digital images of checks rather than transport paper checks for return. This allows for services like remote deposit of checks and facilitates bill-paying.

expected population deviation rate

An advance estimate of a deviation rate. This estimate is necessary for determining the required sample size in an attributes sampling plan.

proof of cash

An audit procedure that reconciles the bank's record of cash activity with the client's accounting records for a test period. The working paper used for the proof of cash is a four-column bank reconciliation.

tolerable misstatement

An estimate of materiality for the particular audit test.

External Confirmation

Audit evidence obtained by the auditors as a direct written response to the auditors from a third party (the confirming party) in paper form or by electronic or other medium (e.g., the auditors' direct access to information held by a third party).

define the difference between non-statistical sampling and statistical sampling

Non-statistical sampling is an audit sampling technique in which the risk of sampling error is estimated by the auditors using professional judgment rather than by the laws of probability. Statistical sampling involves the quantification of the risk of sampling error through the use of mathematics and laws of probability.

describe the difference between sampling risk and non-sampling risk

Sampling risk is the possibility that the auditors will make an erroneous decision based on a sample result. Non-sampling risk is the risk of erroneous conclusions by the auditors based on any factor other than sampling.

random selection

Selecting items from a population in a manner in which every item has an equal chance of being included in the sample.

sampling unit

The individual items constituting a population being sampled.

confirming party

The individual who responds to the confirmation request. Responses to confirmation requests provide more relevant and reliable audit evidence when the confirmation requests are sent to confirming parties who the auditors believe are knowledgeable about the information to be confirmed. For example, an individual in accounts payable may provide more relevant and reliable audit evidence with respect to a client's receivable balance than an individual who has no direct access to accounts payable records.

tolerable deviation rate

The maximum population rate of deviations from a prescribed control that the auditor will tolerate without modifying the planned assessment of control risk.

point estimated (of the audited value)

The most likely rate or amount in the population based on the extrapolation of the sample results.

physical representation of the population

The population from which the auditors sample. The physical representation of the population differs from the actual population when it does not include items that exist in the actual population (e.g., the auditors sample from a trial balance of receivables which may or may not include all actual receivables).

Risk of incorrect rejection

The risk that sample results will indicate that a population is materially misstated when, in fact, it is not.

Risk of incorrect acceptance

The risk that sample results will indicate that a population is not materially misstated when, in fact, it is materially misstated.

non-sampling risk

The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk. This risk normally related to "human" rather than "statistical" errors.

Audit sampling

The selection and evaluation of less than 100 percent of the population of audit relevance such that the auditor expects the items selected (sample) to be representative of the population and, thus, likely to provide a reasonable basis for conclusions about the population. These conclusions are subject to the limitations of sampling risk

systematic selection

The technique of selecting a sample by drawing every nth item in the population, following one or more random starting points.

risk of assessing control risk too low

This most important risk is the possibility that the assessed level of control risk based on the sample is less than the true operating effectiveness of the controls.

interim audit work

Those audit procedures that are performed before the balance sheet date. The purpose is to facilitate earlier issuance of the audit report and to spread the auditors' work more uniformly over the year.

pledging receivables

To assign to a bank, factor, finance company, or other lender an exclusive claim against accounts receivable as security for a debt.

Bill and hold transactions

Transactions in which sales of merchandise are billed to customers prior to delivery, with the goods being held by the seller. These transactions may overstate revenues and net income if they do not meet specific requirements for recognition as sales.

cutoff bank statement

a bank statement covering a specified number of business days (usually 9 to 10) after the client's balance sheet date.

mean per unit estimation

a classical variables sampling plan enabling the auditors to estimate the average dollar value of items in a population by determining the average value of items in a sample

electronic date interchange

a computer network between companies that allows interchange of data from one company's computer to the other's (allows purchases and sales between two firms to be processed electronically)

Electronic Funds Transfer (EFT)

a computer system that transmits and processes fund related cash disbursement and receipt transactions. Increasingly, companies are electronically transferring funds bank accounts rather than issuing checks.

fidelity bond

a form of insurance protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. Fidelity bonds usually insure a business for losses caused by the dishonest acts of its employees.

monetary unit sampling

a form of variables sampling based on attributed sampling theory that uses probability-proportional to size selection. Sometimes referred to as dollar unit sampling or probability proportional to size sampling

standard deviation

a measure of the variability or dispersion of items within a population

Negative confirmation request

a request that the confirming party respond directly yo the auditors indicating where the confirming party disagrees with the information in the request.

representative sample

a sample possessing essentially the same characteristics as the population from which it was drawn

what is reliability also referred as to

confidence level

stratification

dividing the population into two or more subgroups (strata), each of which is a group of sampling units that have similar characteristics.

derivates

financial instruments that derive their value from other financial instruments, underlying assets, or indexes. Examples are options, forward contracts and future contracts.

example of sample unit in classical variables

for accounts receivable, it may be either individual accounts receivable at year-end by customer or individual sales collectible as of year end.

side arrangements

formal or informal modifications of normal terms and conditions of sales transactions to entice customers to accept delivery of goods and services

confidence interval

in classical variables sampling, an interval that estimates the amount of misstatement in a population (or the estimated total audited value) at the given risk or incorrect acceptance and rejection

When is difference estimation used?

in lieu of ratio estimation when the differences are not nearly proportional to book values.

Example of when to use estimated total audited value

in mean per unit sampling, this is equal to the mean sample audited value multiplied by the number of items in the population

Estimated total audited value

in variables sampling, the most likely audited total in the population based on the extra population of the sample results.

kitting

manipulations causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. Kitting schemes are based on the float period - the time necessary for a check deposited in one bank to clear the bank on which it was drawn

what is confidence interval also referred as to

rejection

what is confidence level also referred as to

reliability

management review controls

reviews conducted by management of estimates and other kinds of financial information for reasonableness.

variables sampling

sampling plans designed to estimate a numerical measurement of population such as a dollar value

projected misstatement

the auditor's best estimate of misstatement in populations, involving the projection of misstatements identified in audit samples to the entire population from which the samples were drawn.

what is point estimated referred as to

the auditor's best estimate of the deviation rate attributes sampling) or the population estimated total audited value (variables sampling)

mean

the average item value, computed by dividing total value by the number of items composing total value.

reliability

the complement of the risk of incorrect acceptance.

confidence level

the complement of the risk of incorrect acceptance. The measure of probability associated with a sample interval.

sampling error

the difference between the actual rate or amount in the population and that of the sample. For example, if an actual (but unknown) deviation rate of 3 percent exists in the population, and the sample's deviation rate is 2 percent, the sampling error is 1 percent.

what does stratification increases

the efficiency of most sampling plans by reducing the variability of items in each stratum

risk of assessing control risk too high

the risk is the possibility that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control

example of sampling unit in attributes sampling

this may be individual cash disbursements during the period being audited.

what does auditors use cutoff bank statements for

to determine that checks issued on or before the balance sheet ate and paid during the cutoff period were listed as outstanding on the year end bank reconciliation. Also to determinate that reconciling items shown on the year end bank reconciliation have cleared the bank within a reasonable amount of time.

when may stratification be used

to focus audit procedures on risk areas or to reduce the variability in sampling populations (which may decrease the total required sample size)