Auditing Final

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

Unasserted Claim

The opinion expressed by the auditors when they conclude that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework (e.g., GAAP).

Unmodified Opinion

A company whose securities are not registered under requirements of the Securities and Exchange Commission; ordinarily, a "nonissuer" is a nonpublic company. This is in contrast to an issuer, a company whose securities are registered under the requirements of the Securities and Exchange Commission.

Nonissuer

A company other than one whose securities are traded on a public market or one that makes a filing with a regulatory agency in preparation for the sale of securities on a public market.

Nonpublic Company

A document that authorizes the production of a specific quantity of a product.

Production Order

Specific misstatements identified by the auditors during the course of the audit.

Known Misstatements

A transfer of goods from the owner to another person who acts as the sales agent of the owner.

Consignment

Misstatements may be categorized as:

- Factual Misstatements - Judgmental Misstatements - Projected Misstatements

An opinion that the financial statements do not fairly present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. This situation occurs when the auditors believe that departures from GAAP are both material and pervasive.

Adverse Opinion

An attestation engagement in which the CPAs agree to perform specific procedures for a specified party or parties and issue a report that expresses the CPA's findings. The report is restricted to use by the specified party or paties.

Agreed-Upon Procedures

Evaluations of financial information made by a study of plausible relationships between financial and nonfinancial information.

Analytical Procedures

A paragraph added to a report with a modified opinion (qualified, adverse, or disclaimer) that provides a description of the matter giving rise to the modification. The paragraph should be placed immediately before the opinion paragraph in the auditors' report and use the heading "Basis for Qualified Opinion," "Basis for Averse Opinion," or "Basis for Disclaimer of Opinion," as appropriate.

Basis-for-Modification Paragraph

A document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement.

Bill of Lading

A letter issued by the independent auditors to the underwriters of securities registered with the SEC under the Securities Act of 1933. Comfort letters deal with such matters as the auditors' independence and the compliance of unaudited data with requirements of the SEC.

Comfort Letter

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

Commitment

A complete set of financial statements for one or more prior periods included for comparison with the financial statements of the current period.

Comparative Financial Statements

An accounting service with the objective of assisting management in presenting financial information in the form of financial statements without obtaining or providing any assurance on those statements.

Compilation

An entity or business activity for which group or component management prepare financial information that is required by the applicable financial reporting framework to be included in group financial statements.

Component (of a Financial Statement)

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

Conservatism

A form of report in which the auditors state that they do not express an opinion on the financial statements.

Disclaimer of Opinion

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.

Disclosure Checklist

A system in which data are exchanged electronically between the computers of different companies. In an EDI system, source documents are replaced with electronic transactions created in a standard format.

Electronic Data Interchange (EDI)

A paragraph inserted in an auditor report issued under PCAOB standards to describe certain circumstances that the auditors believe should be emphasized (e.g., uncertainties, unusually important subsequent events, a major catastrophe, a division of responsibility for the total audit). See also explanatory paragraph.

Emphasis of a Matter Paragraph

The PCAOB form that requires (1) the name of the engagement partner, (2) the names, locations, and extend of participation of other accounting firms that took part of the audit if their work constituted 5% or more of the total audit hours; and (3) the number and aggregate extent of participation of other accounting firms that took part in the audit.

Form AP

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.

General Risk Contingency

A financial reporting framework designed to meet the common financial information needs of a wide range of users (e.g., GAAP, International Financial Reporting Standards).

General-Purpose Financial Reporting Framework

Financial reporting frameworks designed to meet the common financial information needs of a wide range of users. Examples of general-purpose financial reporting frameworks are accounting principles generally accepted in the United States of America and International Financial Reporting Standards issued by the International Accounting Standards Board.

General-Purpose Financial Reporting Framework

The audit of the financial statements of a company composed of more than one component.

Group Audit

Auditors that are responsible for issuing the audit report on a group of companies (e.g., a parent and its subsidiaries). In the PCAOB standards, group auditors are referred to as the principal auditors.

Group Auditors

Misstatements found by the auditors during their audit. May or may not be corrected by management.

Identified Misstatements

A document designed to accumulate the labor and machine time devoted to a particular production order.

Job Time Tickets

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.

Judgmental Misstatements

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.

Letter of Inquiry of the Client's Lawyer

The level of assurance provided by CPAs who review historical financial statements.

Limited Assurance (Negative Assurance)

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.

Loss Contingency

A schedule that is used to plan overall production for a period of time. The schedule illustrates the gross production of each of the company's products.

Master Production Schedule

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.

Other-Matter Paragraph

A method of accounting in which inventories are determined solely by means of a physical inventory at the end of the accounting period.

Periodic Inventory System

The term previously used by the AICPA to describe the group auditors. This term is still used in PCAOB standards.

Principal Auditors

An approach to making materiality judgments that quantifies the total likely misstatement 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.

Rollover Approach

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.

S-1 Review

A contractual obligation to sell goods at fixed prices, entered into well in advance of scheduled delivery dates.

Sales Commitment

T/F Bill and Hold transactions are not necessarily illegal, but may overstate revenues and net income they do not meet specific requirements for recognition.

True

T/F Factual misstatements are misstatements for which there is no doubt.

True

T/F The audit of inventories presents the auditors with special risks because they often represent a very substantial portion of current assets.

True

Under AICPA standards, auditors who perform work on the financial information of a component that will be used as audit evidence for the group audit. The term "other auditors" is used in the PCAOB standards.

Component Auditors

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.

Bill and Hold Transactions

Changes in accounting principles and reporting entities result in an emphasis-of-matter paragraph being added to the auditors' report.

Change in Accounting Principle

A five-member board established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles. Companies having significant supply contracts with certain U.S. government agencies are subject to the cost accounting standards established by the board.

Cost Accounting Standards Board

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

Minutes

T/F The auditors should immediately investigate evidence encountered after the issuance of its audit report indicating that the client's financial statements were materially misstated or lacked required disclosures.

True

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).

Emphasis-of-Matter Paragraph

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

Contingent Liability

As included in the PCAOB auditing standards, a matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subject, or complex auditor judgment.

Critical Audit Matter (CAM)

A paragraph inserted in an auditors' report to explain a matter or to describe the reasons for giving an opinion that is other than unmodified. This term is still used in PCAOB standards, but has been replaced in AICPA standards by an emphasis-of-matter paragraph and an other-matter paragraph.

Explanatory Paragraph

Misstatements about which there is no doubt; for example, failure to record a purchase during the period. Previously, the auditing literature referred to this as known misstatements.

Factual Misstatements

T/F A subsequent event is an event that occurs after the date of the auditors' report, but before the date of the release of the financial statements to the public.

False

T/F Matters related to fraud, illegal acts, reportable conditions, and certain other matters should be communicated orally or in writing to the CEO or the CFO.

False

T/F The primary objective of a CPA's observation of a client's physical inventory count is to discover whether a client has counted a particular inventory item or group of items.

False

A set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements. Financial reporting frameworks may be general-purpose financial reporting frameworks or special-purpose financial reporting frameworks.

Financial Reporting Framework

A term used by the PCAOB for an audit firm that performs work on a component of a company that will be used as audit evidence by the principal auditor (e.g., a subsidiary, while the principal auditor audit other subsidiaries and he parent). The term "component auditors" is used the the AICPA standards.

Other Auditors

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.

Other Information

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 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.

Other-Matter Paragraph

A method of accounting for inventories in which controlling accounts and subsidiary ledgers are maintained to record receipts and issuances of goods, both in quantities and in dollar amounts. The accuracy of perpetual inventory records is tested periodically by physical inventories.

Perpetual Inventory System

A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditors' judgment:-Are not confined to specific elements, accounts, or items of the financial statements.-If confined, represent or could represent a substantial proportion of the financial statements.-In relation to disclosures, are fundamental to users' understanding of the financial statements.

Pervasive

An accounting service that involves a CPA preparing (assembling) financial statements from client records. No assurance is provided and, ordinarily, no accountant's report is issued.

Preparation of Financial Statements

The date the auditors grant the client permission to use the audit report in connection with the financial statements. This is sometimes referred to as the date of issuance of the audit report.

Report Release Date

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.

Representation Letter

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.

Required Supplementary Information

A form of attestation based on inquiry and analytical procedures applied for the purpose of expressing limited assurance that historical financial statements are presented in accordance with generally accepted accounting principles or some other appropriate basis.

Review of Financial Statements

A restriction that prevents the auditors from being able to apply all of the audit procedures that they consider necessary in the circumstances. Scope limitations may be client imposed or may be imposed by other circumstances.

Scope Limitation

An auditors' report in which the principal auditors decide to share responsibility with other auditors who have audited some segment of the client's business. The sharing of responsibility is done by making reference to the other auditors. Making reference is not, in itself, a qualification of the auditors' report.

Shared Responsibility Opinion

Financial reporting frameworks other than GAAP, which are one of the following bases of accounting: cash basis, tax basis, regulatory basis, and contractual basis. Common special-purpose financial reporting frameworks include:-Cash basis. The cash receipts and disbursements basis of accounting, and modifications of the cash basis having substantial support, such as recording depreciation on fixed assets or accruing income taxes.-Tax basis. The basis of accounting that the entity uses or expects to use to file its income tax return for the period covered by the financial statements.-Regulatory basis. A basis of accounting in accordance with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject. An example is a basis of accounting that insurance companies use pursuant to the rules of a state insurance commission.-Contractual basis. A basis of accounting in accordance with an agreement between the entity and one or more third parties other than the auditors.

Special-Purpose Financial Reporting Frameworks

A person possessing special skill or knowledge in a field other than accounting or auditing, such as a real estate appraiser.

Specialist

An audit report with (1) an unmodified (unqualified) opinion and (2) no additional matters emphasized (e.g., a change in according principles) beyond the information required in all audit reports. Note that while this term is frequently used in practice, the AICPA no longer formally uses it in its standards.

Standard Report

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

Subsequent Event

When relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued).

Substantial Doubt

Historical financial information that is derived from the financial statements but contains less detail, while still providing a structured representation consistent with the financial statements.

Summary Financial Statements (Condensed Financial Statements)

T/F The receiving department is least likely to be responsible for the preparation of a shipping document.

True

T/F The rollover approach focuses on the balance sheet and the iron curtain approach considers the balance sheet effect of correcting a total misstatement existing at yearend.

True

T/F Effective internal control over inventories requires appropriate controls over purchasing, receiving, and issue supplies and materials; producing and shipping products; and cost accounting.

True *check*

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

Uncorrected Misstatements

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

Date of the Financial Statements

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 auditor's 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.)

Emphasis-of-Mater Paragraph

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.

Iron Curtain Approach

As included in the IAS, matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period. Are selected from matters communicated to those chaired with governance.

Key Audit Matter (KAM)

Being of substantial importance. Significant enough to affect evaluations or decisions by users of financial statements. Information that should be disclosed in order for the financial statements to constitute a fair presentation. Determining what is material involves both quantitative and qualitative criteria.

Material

A qualified opinion, an adverse opinion, or a disclaimer of opinion.

Modified Opinion

An assertion by CPAs that after applying limited investigative techniques to certain information, they are not aware of the need to modify the presentation of the information. Negative assurance is equivalent to limited assurance.

Negative Assurance

The auditors' evidence-gathering technique of viewing a client activity to obtain physical evidence of performance. periodic

Observation

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. Sometime referred to as known likely misstatements.

Projected Misstatements

A company whose stock is traded on a public market or a company in the process of registering its stock for public sale.

Public Company (issuer)

A contractual obligation to purchase goods at fixed prices, entered into well in advance of scheduled delivery dates.

Purchase Commitment

A modification of the auditors' standard report, employing a clause such as except for to limit the auditors' opinion on the financial statements. A qualified opinion indicates that, except for the effects of some limitation on the scope of the audit or some departure from generally accepted accounting principles, the financial statements are fairly presented.

Qualified Opinion

The period of time required by the applicable financial reporting framework or, if no requirement exists, within one year after the date of the financial statements are issued (or available to be issued).

Reasonable Period of Time

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.

Supplementary Information