ACCT 450 - Chapter 16

Minutes

A formal record of the issues discussed and actions taken in meetings of stockholders or the board of directors.

Letter of inquiry (of the client's lawyer)

A letter sent by auditors to a client's legal counsel requesting a description and evaluation of pending or threatened litigation, unasserted claims, and other loss contingencies. The returned letter from the lawyer is referred to as the lawyer's letter.

Unasserted claim

A possible legal claim of which no potential claimant has exhibited an awareness.

Iron curtain approach

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years. For example, if expenses were understated by $20,000 in the previous year and $45,000 during the current year, the iron curtain method would quantify the misstatement as $65,000. Also see rollover approach.

Subsequent event

An event occurring between the date of the financial statements and the date of the auditor's report.

General risk contingency

An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.

Other information

Financial and nonfinancial information (other than the financial statements and the auditors' report thereon) that is included in a document containing audited financial statements and the auditors' report thereon but is not required by a designated accounting standards setter

supplementary information

Information presented outside the basic financial statements, excluding required supplementary information, that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework. Such information may be presented in a document containing the audited financial statements or separate from the financial statements.

Required Supplementary Information

Information that a designated accounting standards setter requires to accompany an entity's basic financial statements. Required supplementary information differs from other types of information outside the basic financial statements because a designated accounting standards setter considers the information an essential part of the financial reporting of certain entities and because authoritative guidelines for the measurement and presentation of the information have been established.

Report release date

The date the auditor grants the entity permission to use the auditor's report in connection with the financial statements. This is sometimes referred to as the date of issuance of the audit report

Rollover approach

an approach to making materiality judgments that quantifies the total likely misstatements as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year. For example, if expenses were understated by $20,000 in the previous year and $45,000 during the current year, the rollover method would quantify the misstatement as $45,000, ignoring the previous year misstatement. Also see iron curtain approach.

Conservatism

an accounting doctrine for asset valuation in which the lower of two alternative acceptable asset valuations is chosen.

Commitment

a contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.

Disclosure checklist

A list of specific disclosures required by the FASB, the GASB, the FASAC, and the SEC that is used to evaluate the adequacy of the disclosures in a set of financial statements.

emphasis of matter paragraph

A paragraph included in the auditors' report that is required by GAAS or is included at the auditors' discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditors' judgment, is of such importance that it is fundamental to users' understanding of the financial statements (e.g., a lack of consistent application of GAAP, substantial doubt about an entity's ability to continue as a going concern).

other-matter paragraph

A paragraph included in the auditors' report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors' judgment, is relevant to users' understanding of the audit, the auditors' responsibilities, or the auditors' report.

Contingent Liability

A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.

Loss Contingency

A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event. Loss contingencies should be disclosed in notes to the financial statements if there is a reasonable possibility that a loss has been incurred. When loss contingencies are considered probable and can be reasonably estimated, they should be accrued in the accounts.

Representation letter

A single letter or separate letters prepared by officers of the client company at the auditors' request setting forth certain representations about the company's financial position or operations.

uncorrected misstatements

Misstatements that have not been reflected in the financial statements. Ordinarily these are misstatements the auditors have identified and for which proposed adjusting entries that have not been recorded.

S-1 review

Procedures carried out by auditors at the client company's facilities on or as close as practicable to the effective date of a registration statement filed under the Securities Act of 1933.

Judgmental Misstatements

differences arising from the judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate. For example, a difference related to the appropriate amount in the allowance for doubtful accounts. Misstatements may be categorized as factual, judgmental, and projected - see the definitions of each.

Misstatements

differences between the amount, classification, presentation or disclosure of reported financial statement items and the amount, classification, presentation or disclosure that is required for the items to be presented fairly in accordance with the applicable financial reporting framework. Misstatements can arise from fraud or error. Misstatements may be categorized as factual, judgmental, and projected - see the definitions of each.

Analytical procedures

evaluations of financial information made by a study of plausible relationships between financial and nonfinancial data

Factual Misstatements

misstatements about which there is no doubt; for example, failure to record a purchase during the period. Previously, the auditing literature referred to factual misstatements as known misstatements. Misstatements may be categorized as factual misstatements, judgmental misstatements, and projected misstatements - see the definitions of each

Identified misstatements

misstatements found by the auditors during their audit. These misstatements may or may not be corrected by management. Misstatements may be categorized as factual misstatements, judgmental misstatements, and projected misstatements - see the definition of each

Known misstatements

the auditing literature now refers to these as factual misstatements (see that term). Misstatements may be categorized as factual, judgmental, or projected - see the definition of each.

Projected Misstatement

the auditors' best estimate of the misstatement in populations involving the projection of misstatements identified in audit samples to entire populations from which the samples were drawn; for example, a difference in the total accounts receivable based on a projection of sample results to the entire population of accounts receivable. Projected misstatements are sometimes referred to as known likely misstatements. Misstatements may be categorized as factual, judgmental, and projected - see the definitions of each.

date of the financial statements

the date of the end of the latest period covered by the financial statements (e.g. date of the balance sheet)