Audit Exam II

Cross-footing

Checking the agreement of the cross-addition of a number of columns of figures that sum to a grand total.

Audit Adjustment

Correction of a misstatement of financial statements that was or should have been proposed by the auditor, whether or not recorded by management, that could, either individually or when aggregated with other misstatements, have a material effect on the company's financial statements.

Recalculating Estimated Amounts

Recomputing an amount that the client has already estimated, such as recomputing the allowance for doubtful accounts based on a formula related to the aging of accounts receivable ending balances.

Tests of Extensions

Recomputing items involving multiplication.

Accounting Cycle

Recording and processing transactions that affect a group of related accounts. The cycle begins when a transaction occurs and ends when it is recorded in the financial statements.

Timing of risk Response

Refers to when audit procedures are conducted and whether those procedures are conducted at announced or predictable times.

Risk of Material Mistatement

Risk that exists at the overall financial statement level and at the assertion level, and within these levels risk can be categorized as involving inherent risk and control risk.

Simple random sampling

Selecting a random sample by matching random numbers generated by a computer or selected from a random-number table with, for example, document numbers such as an invoice or a purchase order.

Generalized audit softward (GAS)

Software programs designed specifically for auditors.

Audit Findings

Substantive matters that are important to the procedures performed, evidence obtained, or conclusions reached on an audit.

Significant Issues

Substantive matters that are important to the procedures performed, evidence obtained, or conclusions reached on an audit.

Substantive Procedure

Substantive procedure An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise tests of details and substantive analytical procedures.

Tracing

Taking a sample of original source documents and ensuring that the transactions related to the source documents have been recorded in the appropriate journal and general ledger.

Vouching

Taking a sample of recorded transactions and obtaining the original source documents supporting the recorded transaction.

Extent of risk response

The amount of evidence that is necessary given the client's assessed risks, materiality, and the level of acceptable audit risk.

Tolerable mistatement

The amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated.

Basic Precision

The amount of uncertainty associated with testing only a part of the population (sampling risk). Basic precision is calculated as the sampling interval multiplied by a confidence factor.

Attribute

A characteristic of the population of interest to the auditor.

Risk

A concept used to express uncertainty about events and/or their outcomes that could have a material effect on the organization.

Interim Date

A date at which audit evidence is collected earlier than the balance sheet date.

Brainstorming

A group discussion designed to encourage auditors to creatively assess client risks, particularly those relevant to the possible existence of fraud in the organization.

Population

A group of transactions or the items that make up an account balance for which the auditor wants to estimate some characteristic, such as the effectiveness of a control procedure or estimate the extent of misstatement in an account.

Appropriateness of Audit Evidence

A measure of the quality of audit evidence, and includes both the relevance and reliability of the evidence

Reliability of Audit Evidence

A measure of the quality of the underlying evidence. It is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence.

Tolerable misstatement

A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. In practical terms, a tolerable misstatement is the maximum amount of misstatement the auditor can accept in the population without requiring an audit adjustment or a qualified audit opinion.

Haphazard sampling

A nonstatistical sample selection method that attempts to approximate a random selection by selecting sampling units without any conscious bias, or special reason for including or omitting certain items from the sample.

Audit Risk Model

A numerical depiction of the relationship between inherent risk, control risk, detection risk, and audit risk.

Cutoff period

A period of time usually covering several days before and after the client's balance sheet date.

Risk Assessment Procedure

A procedure performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements whether due to error or fraud. Risk assessment procedures by themselves do not provide sufficient, appropriate evidence on which to base an audit opinion but are used for purposes of planning the audit.

Tolerable rate of deviation

A rate of deviation set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population. Also referred to as the tolerable failure rate.

Monetary Unit Sampling (MUS)

A sampling method based on attributes estimation sampling but involving dollar misstatements rather than failure rates. MUS is often referred to as probability proportional to size (PPS) sampling.

Probability proprtion to size (PPS) sampling

A sampling selection method in which each item in the population has a probability of being included in the sample proportionate to the dollar value of the item. Monetary unit sampling uses this method to select a sample and is considered a subset of PPS sampling.

Block Sampling

A sampling technique that involves selecting a sample that consists of contiguous population items, such as selecting transactions by day or week

Attributes Sampling

A statistical sampling method used to estimate the rate of control procedure failures based on selecting one sample and performing the appropriate audit procedure.

Dual-purpose test

A substantive test and a related test of a relevant control that are performed concurrently, for example, a substantive test of sales transactions performed concurrently with a test of controls over those transactions.

Scanning

A type of analytical procedure involving the auditor's review of accounting data to identify significant or unusual items to test.

Tick marks

Abbreviations and symbols used by auditors to document the work they have performed and any issues identified during their work.

Footing

Adding a column of figures to verify the correctness of the client's totals.

Side Agreement

An agreement made between the organization and its customer that includes agreements made outside of publicly known contracts.

Clearly Trivial

An amount that is clearly inconsequential, whether taken individually or in the aggregate and whether judged by any criteria of size, nature, or circumstances.

Trend analysis

An analytical technique that includes simple year-to-year comparisons of account balances, graphic presentations, and analysis of financial data, histograms of ratios, and projections of account balances based on the history of changes in the account.

Ratio Analysis

An analytical technique that is useful in identifying significant differences between the client results and a norm (such as industry ratios) or between auditor expectations and actual results; ratio analysis is also useful in identifying potential audit problems that may be found in ratio changes between years.

Expected population deviation rate

An anticipation of the deviation rate in the entire population. Also referred to as theexpected failure rate.

Directional Testing

An approach to testing account balances that considers the type of misstatement likely to occur in the account balance and the corresponding evidence provided by other accounts that have been tested. The auditor normally tests assets and expenses for overstatement, and liabilities and revenues for understatement, because (1) the major risks of misstatements on those accounts are in those directions or (2) tests of other accounts provide evidence of possible misstatements in the other direction.

Audit Program

An audit document that lists the audit procedures to be followed in gathering audit evidence and helps those in charge of the audit to monitor the progress and supervise the work.

Test of Controls

An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements, typically at the assertion level.

Substantive Audit

An audit that includes substantive procedures and does not include tests of controls.

Controls Reliance Audit

An audit that includes tests of controls and substantive procedures.

Misstatement

An error, either intentional or unintentional, that exists in a transaction or financial statement account balance.

Misstatement

An error, either intentional or unintentional, that exists in a transaction or financial statement account balance. For substantive sampling purposes, a misstatement involves differences between recorded values and audited values.

Significant Risk

An identified and assessed risk of material misstatement that, in the auditor's professional judgment, requires special consideration.

Incremental allowance for Sampling Risk

An increase in the total estimated misstatement caused by the statistical properties of misstatements detected in the lower stratum.

Auditor's Specialist

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor's specialist may be either an auditor's internal specialist (who is a partner or staff, including temporary staff, of the auditor's firm or a network firm) or an auditor's external specialist.

Management's specialist

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the client to assist management in preparing the financial statements.

Indirect Evidence

Audit evidence that requires a linkage of inferences to provide assurance about the assertion being tested, that is, one or more inferences are made. Examples include inferences made when using analytical procedures as audit evidence.

Direct Evidence

Audit evidence that requires only one inference to reach a conclusion about the assertion being tested. Usually that inference is that the sample taken is representative of the population as a whole.

Audit Procedures

Audit procedures Procedures designed to obtain audit evidence to support the audit opinion(s). Three categories of procedures include risk assessment procedures, tests of controls, and substantive procedures (including substantive analytical procedures and tests of details).

Disaggregation

Breaking data down into their component parts, such as different time periods, geographical locations, customer type, or product lines.

Quantification

Determining whether management's explanation for observed differences can, in fact, account for the observed difference.

Stratification

Dividing the population into two or more subgroups.

Analytical Procedures

Evaluations of financial information through analyzing plausible relationships among both financial and nonfinancial data.

Relevance of audit evidence

Evidence that provides insight on the validity of the assertion being tested; that is, the evidence bears directly on the assertion being tested.

Current File

File that includes schedules, documents, and analyses that are relevant to the current-year audit.

Permanent file

File that includes schedules, documents, and records that are relevant for the current and future audits.

Audit Evidence

Information used by the auditor in arriving at the conclusions on which the auditor's opinion is based.

Business Risk

Inherent risk at the financial statement level that affects the business operations and potential outcomes of organizational activities.

Lower Stratum

Items that are not in the top stratum.

Sufficiency of Evidence

Measure of the quantity of audit evidence.

Corroboration

Obtaining sufficient evidence that management's explanation is accurate.

Top stratum

Population items whose book values exceed the sampling interval and are therefore all included in the sample. The top stratum consists of all account balances exceeding a specific dollar amount.

Cutoff tests

Procedures applied to transactions selected from those recorded during the cutoff period to provide evidence as to whether the transactions have been recorded in the proper period.

Performance Materiality

The amount or amounts set by the auditor at less than the materiality level for the financial statements as a whole or for particular classes of transactions, account balances, or disclosures. The term is used with respect to assessing risks of material misstatement and determining the nature, timing, and extent of further audit procedures.

Audit Sampling

The application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.

Nonstatistical Sampling

The application of auditor judgment and experience in a sample application to assist the auditor in determining an appropriate sample size and in evaluating the sample results.

Statistical sampling

The application of probability theory and statistical inference, along with auditor judgment and experience, in a sample application to assist the auditor in determining an appropriate sample size and in evaluating the sample results.

Reperformance

The auditor's independent execution of controls that were originally performed as part of the entity's internal control.

Logical Unit

The balance or transaction that includes the selected dollar in a monetary unit sample.

Projected misstatement

The best estimate of the actual amount of dollar misstatements in the population based on projecting the sample results to the population. The projected misstatement is calculated as the sampling interval multiplied by the tainting percentage. Also see likely misstatement or most likely misstatement.

Reasonableness Test

The development of an expected value of an account by using data partly or wholly independent of the client's accounting information system.

Sampling Units

The individual items to be tested.

Expected Misstatement

The level of misstatement that the auditor expects to detect, and it is based on projected misstatements in prior-year audits, results of other substantive tests, professional judgment, and knowledge of changes in personnel and the accounting system.

Materiality

The magnitude of an omission or misstatement of accounting information that, in view of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

Appropriate Audit Evidence

The measure of the quality of audit evidence (i.e., its relevance and reliability in providing support for the conclusions on which the auditor's opinion is based).

Sufficient Audit Evidence

The measure of the quantity of audit evidence.

Tainting percentage

The percentage of misstatement present in a logical unit, such as the sample item's book value. The tainting percentage equals the amount of misstatement in the item divided by the item's recorded amount.

Roll-forward period

The period between the confirmation date and the balance sheet date.

Data Analytics

The process of examining large amounts of data to uncover underlying patterns, correlations, and complex relationships through statistical methods for data modeling, and techniques that enable visualization of data.

Audit Documentation

The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as working papers or workpapers are also sometimes used).

Accounting Records

The records of initial accounting entries and supporting records.

Control Risk

The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

Control Risk

The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the organization's internal control. Control risk is a function of the effectiveness of the design and operation of internal control.

Audit Risk

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Nonsampling risk

The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

Risk of incorrect rejection of book value

The risk that the auditor will conclude that the account balance contains a material misstatement when the account balance actually does not contain a material misstatement.

Risk of incorrect acceptance of book value

The risk that the auditor will conclude that the account balance does not contain a material misstatement when the account balance actually does contain a material misstatement.

Risk of incorrect acceptance of itnernal control reliability

The risk that the auditor will conclude that the state of internal controls is effective when internal controls are actually not effective (also referred to as the risk of assessing control risk too low).

Risk of incorrect rejection of internal control reliability

The risk that the auditor will conclude that the state of internal controls is not effective when internal controls are actually effective (also referred to as therisk of assessing control risk too high).

Sampling Risk

The risk that the auditor's conclusion based on a sample might be different from the conclusion he or she would reach if the test were applied in the same way to the entire population.

Detection Risk

The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

Inherent Risk

The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

Nature of risk repsonse

The types of audit procedures applied given the nature of the account balance and the most relevant assertions regarding that account balance

Audit Documentation

The written record that forms the basis for the auditor's conclusions.

Systematic Sampling

This sampling technique involves dividing the number of physical units in the population by the sample size to determine a uniform interval; a random starting point is selected in the first interval and one item is selected throughout the population at each of the uniform intervals after the starting point.

Systematic random sampling

This sampling technique involves systematic sampling in which the first item is selected randomly from the interval.

Related-party transactions

Transactions that a client has with other companies or people who may be related to either the client or client's senior management.