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