Audit exam chapter 14, 15, 16, 17

Component auditors

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.

Internal controls for debt

Use of an independent trustee Authorization by the board of directors

Scope limitation

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

Representation letter

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.

Voucher register

A journal used in a voucher system to record liabilities requiring cash payment in the near future. Every liability recorded in corresponds to a voucher authorizing future payment.

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.

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.

Stock certificate book

A book of serially numbered certificates with attached stubs. Each stub shows the corresponding certificate number and provides space for entering the number of shares represented by the certificate, the name of the shareholder, and the serial number of the certificate surrendered in exchange for the new one. Surrendered certificates are canceled and replaced in the certificate book. i

Comparative financial statements

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

Commitment

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

Voucher

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

General-purpose financial reporting framework

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). Also referred to in the professional standards as a general-purpose framework.

Disclaimer of opinion

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

Minutes

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

Vendor's statement

A monthly statement prepared by vendor (supplier) showing the beginning balance, charges during the month for goods or services, amounts collected, and ending balance. This externally created document should correspond (except for timing differences) with an account in the client's accounts payable subsidiary ledger.

Basis-for-modification paragraph

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 Adverse Opinion," "Basis for Disclaimer of Opinion," as appropriate.

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).

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 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 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.

Emphasis of a matter paragraph

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

Explanatory paragraph

A paragraph inserted in an auditors' report issued under PCAOB standards to describe a matter relating to the financial statements or to the audit. Also see emphasis of a matter paragraph. AICPA Auditing Standards Board (and international) standards use the terms "emphasis-of-matter paragraph" and "other-matter paragraph."

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. should be disclosed in notes to the financial statements if there is a reasonable possibility that a loss has been incurred. When considered probable and can be reasonably estimated, they should be accrued in the accounts.

Modified opinion

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

Stockholders ledger

A record showing the number of shares owned by each stockholder. This is the basic record used for preparing dividend payments and other communications with shareholders.

Direct registration system

A system that allows electronic registration of securities in an investor's name on the books of the transfer agent or the company itself ("the issuer"), and allows shares to be transferred between a transfer agent and a stockbroker electronically.

Other auditors

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 in the AICPA standards.

Pervasive

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.

Consignment

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

Conservatism

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

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.

Rollover 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 misstatements

Standard report

An audit report with (1) an unmodified (unqualified) opinion and (2) no additional matters emphasized (e.g., a change in accounting 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.

Shared responsibility opinion

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.

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. should not be disclosed in financial statements.

Component (of a financial statement)

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

Stock registrar

An institution charged with responsibility for avoiding overissuance of a corporation's stock. Every new certificate must be presented to the registrar for examination and registration before it is issued to a stockholder.

Stock transfer agent

An institution responsible for maintaining detailed records of shareholders and handling transfers of stock ownership.

Adverse opinion

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.

Debenture bond

An unsecured bond, dependent upon the general credit of the issuer.

Key audit matter (KAM)

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

Critical audit matter (CAM)

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.

Material

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.

Sinking fund

Cash or other assets set aside for the retirement of a debt.

Change in accounting principle

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

Foot note disclosures on debt

Classification of debt Interest rates

Substantive test for accounts payable

Confirm accounts payable Analytical procedures

Substantive tests of debt

Confirm interest bearing debt Analytical procedures

Substantive tests of equity

Confirm shares outstanding Analytical procedures

Trade accounts payable

Current liabilities arising from the purchase of goods and services from trade creditors, generally evidenced by invoices or statements received from the creditors.

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

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.

Confirmation

Direct communication with vendors or suppliers to determine the amount of an account payable. Represents high-quality evidence because it is a document created outside the client organization and transmitted directly to the auditors.

Footnote disclosure for owners equity

Dividend rate Par or stated value

Analytical procedures

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

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.

Group auditors

For nonpublic companies, the firm responsible for issuing the audit report on a group of companies (e.g., a parent and its subsidiaries). The term "principal auditors" is used in the PCAOB standards.

Required supplementary information

Information that a designated accounting standards setter requires to accompany an entity's basic financial statements.

Factual misstatements

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

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 definitions of each.

Footnote disclosure for accounts payable

Related party transactions Pledged assets secured by AP

Internal controls of accounts payable

Segregation of duties Approval of purchase orders

Internal controls of owners equity

Segregation of duties Maintenance of records

Treasury stock

Shares of its own stock acquired by a corporation for the purpose of being reissued at a later date.

Accrued liabilities (accrued expenses)

Short-term obligations for services of a continuing nature that accumulate over time. Examples include interest, taxes, rent, salaries, and pensions. They generally are not evidenced by invoices or statements.

Form AP

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

Group audit

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

Projected misstatements

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 totalaccounts receivable based on a projection of sample results to the entire population of accounts receivable. referred to as known likely misstatements.

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).

Report release date

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.

Trust indenture

The formal agreement between bondholders and the issuer as to the terms of the debt.

Unmodified opinion

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).

Reasonable period of time (relating to a client's going-concern status)

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

Principal auditors

The term used by the PCAOB for the audit firm that is responsible for issuing the audit report on the overall group of companies (e.g., the firm that has audited the parent and all but one of its subsidiaries). We use the term "group auditors" for public company audits (see footnote 13, page 725).

Subsequent period

The time extending from the balance sheet date to the date of the auditors' report.

Substantial doubt (about an entity's ability to continue as a going concern)

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).

Qualified opinion

except for to limit the auditors' A modification of the auditors' standard report, employing a clause such as 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.