Chapter 16 Audit

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.

Subsequent event

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

Analytical procedures

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

Commitment

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

Emphasis-of-matter paragraph and 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 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.

Minutes

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

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.

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. 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.

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 (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.

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. "X" 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.

Likely misstatements

Misstatements identified by the auditors during the course of the audit that are due to either extrapolation from audit evidence or differences in accounting estimates.

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.

Known misstatements

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

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.

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.

Unasserted claim

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

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.

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.

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.