ACC 204 - Audit Exam 4

Cash Basis

A basis of accounting that an organization uses to record cash receipts and disbursements and modifications of this having substantial support.

Contractual Basis

A basis of accounting that entity uses to comply with agreement between the entity and one or more third parties other than auditor.

Regulatory Basis

A basis of accounting that entity uses to comply with requirements of financial reporting provision of regulatory agency whose jurisdiction the entity is subject.

Tax Basis

A basis of accounting that entity uses to file ints income tax return for period covered by financial statements.

Factual Misstatement

A misstatement that has been specifically identified; also known as known misstatement.

Compilation Engagement

An engagement in which the accountant uses accounting expertise, as opposed to auditing expertise, to collect, classify, and summarize financial information.

Interest Rate Swap

An instrument that allows an organization to hedge against future changes in interest rates by either trading financial instruments, usually a fixed-term investment for a variable one, or vice-versa.

Unmodified Opinion

An unqualified opinion.

Review Analytical Procedures

Assist auditor in forming overall conclusion about whether financial statements are consistent with auditor's understanding of client.

Other Comprehensive Basis of Accounting

Bases of accounting that include cash, tax, regulatory, and contractual.

Zero Coupon Bonds

Bonds with no periodic interest payments that are sold at a deep discount from face value. Holder of this receives gradual appreciation in carrying value, which is redeemed at face value at maturity.

Junk Bonds

High-yielding bonds issued by a borrower with a lower-than-investment-grade credit rating. Many of these were issued in connection with leveraged buyouts.

Specified Users

Individuals who will receive practitioner's agree-upon procedures report.

Attestation Standards

Professional standards that provide guidance about gathering evidence regarding specific assertions and communicating an opinion on fairness of presentation to a third party.

Triple Bottom Line Reporting

Reporting on financial, environmental, and social performance.

Qualified Audit Report

Situations in which the auditor would issue this type of report are: -Material unjustified departure from GAAP that is not pervasive -Inadequate disclosure that is not pervasive -Scope limitation such that possible effects on financial statements of undetected misstatements, if any, could be material but not pervasive

Adverse Audit Report

Situations in which the auditor would issue this type of report are: -Pervasive and material unjustified departure from GAAP -Lack of important disclosures that is pervasive -Significant number of items in financial violate GAAP

Disclaimer of Opinion Report

Situations in which the auditor would issue this type of report are: -Scope limitation exists -Substantial doubt about going-concern -Lack of independence

Group Audit

The audit of group financial statements.

Group Audit Opinion

The audit opinion on the group financial statement.

Nonfinancial Reporting

The practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance toward goal of sustainable development.

Fair Value Estimate

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Assurance Engagement Risk

The risk that the practitioner expresses an inappropriate conclusion when subject matter information is materially misstated.

Financial Instruments

A broad class of instruments--usually debt securities, but also equity or hedges--that represents financial agreements between a party (issuer) and a counterparty (investor) based on either underlying assets or agreements to incur financial obligations or make payments; these range in complexity from a simple bond to complicated agreements containing puts or options.

Operating Segment

A component of an organization that is a profit center, that has discrete financial information, and whose results are reviewed regularly for purposes of performance assessment and resource allocation.

Floating Rate Note

A debt instrument with a variable interest rate. Interest rate adjustments are made periodically, often every 6 mos., and are tied to a money market index such as T-Bill or LIBOR.

Collateralized Mortgage Obligation

A debt obligation issued as a special-purpose instrument that is collateralized by a pool of mortgages. This is handled as a purchase of a group of mortgages using proceeds of an offering of bonds collateralized by the mortgages.

Collateralized Debt Obligation

A financial instrument that is essentially a bet on whether an underlying obligation, most often underlying mortgages on homes, will fail or not fail.

Special Purpose Framework

A financial reporting framework other than GAAP that is one of the following bases of accounting: cash, tax, regulatory, or contractual.

Internal Audit Charter

A formal, written document that defines the purpose, authority, and responsibilities of internal audit function within organization.

Management Letter

A letter from the auditor to the client identifying any problems and suggested solutions that may help management improve its effectiveness or efficiency.

Letter of Audit Inquiry

A letter that the auditor asks the client to send to its legal counsel to gather corroborative evidence concerning litigation, claims, and assessments.

Management Representation Letter

A letter to the auditors that the client's CEO and CFO are required to sign that specifies management's responsibility for financial statements and confirms oral responses given to auditor during audit.

Iron Curtain Method

A method of misstatement correction that focuses on assuring that year-end balance sheet is correct; this method does not consider impact of prior-year uncorrected misstatements reversing in later years.

Rollover Method

A method of misstatement correction that focuses on materiality of current-year misstatements and reversing effect of prior-year misstatements on income statement, thereby allowing misstatements to accumulate on balance sheet.

Dual Approach

A method of misstatement correction that requires use of both the iron curtain and rollover methods to determine whether a misstatement is material.

Judgmental Misstatement

A misstatement that arises from differences in judgments of management concerning accounting estimates that the auditor considers unreasonable, or selection or application of accounting policies that auditor considers inappropriate.

Known Misstatement

A misstatement that has been specifically identified, also referred to as a factual misstatement.

Projected Misstatement

A misstatement that is the auditor's best estimate of the misstatement in a given population, and that's a projection of the misstatement identified in an audit sample to entire population form which sample was drawn.

Reasonable Period of Time

A period of time, relating to going-concern, not to exceed one year beyond the date of financial statements being audited.

Modified Opinion

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

Engagement Quality Review

A review at the end of each audit conducted by experienced auditor, usually a partner, who was not a part of the audit team, but has appropriate competence, independence, integrity, and objectivity. Purpose is to help make sure audit and documentation are complete and support of audit opinion on financial statements.

Subsequent Events Review

A review of events occurring in the period between the balance sheet date and the audit report date to determine their possible effect on the financial statement.

Altman Z Score

A series of ratios that have predictive power in indicating the likelihood of bankruptcy. This is named for person that first introduced concept and associated measurement.

Forensic Accounting

A service that audit firms provide that involves detailed investigation of situations where fraud has already been identified or is highly suspected.

Compilation Engagement

A service, the objective of which is to assist management in presenting financial information in form of financial statements without undertaking to obtain or provide any assurance that there's no material modifications that should be made to statements in order for them to be in conformity with applicable framework.

Summary of Unadjusted Audit Differences

A summary of audit differences that is communicated to audit committee, described in management representation letter, and is evaluated individually and in aggregate for determining whether financial statements are materially correct.

Pervasive

A term used in context of misstatements to describe effects or possible effects on financial statements of misstatements that are undetected due to inability to obtain sufficient appropriate audit evidence.

Sustainability

Actions taken at corporate level to ensure economic, environmental, and social responsibility.

Internal Auditing

Activities of this function include: -Provide assurance on financial statement related items -Evaluate effectiveness of operations and related controls -Investigate concerns of fraud -Evaluate effectiveness of internal control processes -Perform operational audits -Evaluate organization's compliance with laws, regs, and organization policies -Perform info systems and security audits

Consulting Activity

Activity of Internal Audit including advisory or partnering activity that adds value and improve an organization's operations, in which the nature and scope of services are agreed upon with the client. Examples include counsel, advice, facilitation, process design, and training.

Omitted Procedures

After the audit report has been issued, the auditor may discover that an important audit procedure was not performed.

Other Postemployment Benefits

All postretirement benefits, other than pensions. Must be identified and measured by organization. Accounting treatment is conceptually same as pensions.

Group

All the components whose financial information is included in group financial statements. A group always has more than one component.

Five Ratio Altman-Z

Altman-Z for publicly owned manufacturing companies.

Four Ratio Altman-Z

Altman-Z for publicly/privately owned manufacturing & service companies.

Assembling

An activity that involves the manual or computer processing of mathematical or clerical functions to achieve presentation of prospective financial statements.

Agreed Upon Procedures Engagement

An agreement in which a practitioner is engaged by client to issue a report of findings based on specific procedures performed on subject matter.

Component Auditor

An auditor who performs work on the financial information of a component that will be used as audit evidence for group audit. A component auditor may be part of group engagement partner's firm, a network of group engagement partner's firm, or another firm.

Assurance Engagement

An engagement in which a practitioner expresses a conclusion designed to enhance degree of confidence of intended users other than responsible party about outcome of evaluation or measurement of subject matter against criteria.

Attestation Engagement

An engagement in which a practitioner is engaged to issue or does issue an examination, a review, or agreed-upon procedures report on subject matter, or an assertion about subject matter that is the responsibility of another party.

Review Engagement

An engagement that enables a practitioner to state whether, on basis of procedures which do not provide all evidence that would be required in an audit, anything has come to practitioner's attention that causes them to believe financial statements are not prepared, in all material respects, in accordance with applicable framework.

Reasonable Assurance Engagement

An engagement whose objective is reduction in assurance engagement risk to an acceptably low level in circumstances of engagement as basis for a positive form of expression on practitioner's conclusion.

Limited Assurance Engagement

An engagement whose objective is reduction in assurance engagement risk to level that is acceptable in circumstances of engagement, but where risk is greater than that for a reasonable assurance engagement, as basis for a negative form of expression of practitioner's conclusion.

Component

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

Positive Assurance

An explicit statement as to whether financial statements are presented fairly.

Hedge

An instrument that allows an organization to do this against a change in some underlying economic event that may effect the organization: -Foreign Currency -Fuel -Commodity

Internal Auditing

Defined as an independent, objective assurance and consulting activity designed to add value and improve organization's operations. It helps an organization accomplish objectives by brining a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes.

Subsequent Events

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

Type II Subsequent Events

Events that did not exist at the balance sheet date, but that may require disclosure.

Type I Subsequent Events

Events that existed at the balance sheet date.

Subject Matter

Example include: 1. Statement of greenhouse gas emissions 2. Privacy of personal information 3. Schedule of investment returns 4. Effectiveness of controls over security of a system 5. Capacity of a facility 6. Compliance with human resources

Group Financial Statements

Financial Statements that include the financial information of more than one component. The term also refers to combined financial statements aggregating the financial information prepared by components that have no parent but are under common control.

Prospective Financial Information

Financial forecasts or financial projection including the summaries of significant assumptions and accounting policies.

Special Purpose Financial Statements

Financial statements that are prepared in accordance with a special-purpose framework.

Reporting Unit

For accounting purposes, it is acquired segment or operating segment to which goodwill from acquisition is assigned. Tests for goodwill impairment are performed at this level.

Indicators of Going-Concern Problems

Indicators include: 1. Negative Trends 2. Internal Matters 3. External Matters 4. Significant Changes in Competitive Market or Competitiveness of Client's Products 5. Altman-Z Scores - Four/Five Ratio Model

Pro Forma Financial Information

Information that shows what the significant effects on historical financial information might've been had a consummated or proposed transaction (event) occurred at an earlier date.

Assurance Activity

Internal Audit activity of objective professional services that improve quality of information about processes; effectiveness of controls; reliability of information; or compliance with organization's regulatory or governmental procedures; and effectiveness and efficiency with which organization carries out its operations.

Securities Sold with a Put Option

Marketable Securities can be sold by investor together with a put option that entitles purchaser to sell securities back to investors who sold securities at a fixed price in the future.

Critical Audit Matters

Matters addressed during audit that: 1) Involved our most difficult, subjective, or complex judgments 2) Posed the most difficulty to us in obtaining sufficient appropriate evidence 3)Posed most difficulty to us in forming our opinion on financial statements PCAOB and IAASB do not view critical audit matters and key audit matters fundamentally differently.

Anti-Bribery Provision

No company may make a payment to a foreign official for obtaining or retaining business.

Call Option

Option that is a financial contract between two parties, the buyer and seller, in which buyer has right to buy agreed quantity of particular commodity or financial instrument from seller at a certain time for a certain price.

Put Option

Option that is a financial contract between two parties, the buyer and seller, in which buyer has right to sell agreed quantity of particular commodity or financial instrument to the seller at a certain time for a certain price.

Concurring Partner Review

Partner that was not part of the audit team performs an engagement quality review.

Grease Payments

Payments made to officials to expedite performance of their duties.

Corporate Social Responsibility Reporting

The continuing Commitment by business to behave ethically and contribute to economic development while improving quality of life of workforce, their families, the community, and society at large.

Report Release Date

The date the auditor grants the entity permission to use the auditor's report in connection with the financial statements.

Goodwill Impairment

The decrease in value of this. Measured by comparing fair value of reporting entity with carrying vale of entity. IF fair value is less than carrying value (including goodwill), then this is the presumption. It should be written down to an amount that would cause fair value to be no more than carrying value.

Goodwill

The excess of the purchase price over the FMV of the acquired organization's tangible assets, identifiable intangible assets, and liabilities.

Unqualified Opinion

The opinion expressed by auditor when auditor concludes that financial statements are presented fairly, in all material respects, in accordance with applicable financial reporting framework.`

Group Engagement Partner

The partner/other person in firm who's responsible for group audit engagement and performance, and for auditor's report on group financial statements that is issued on behalf of firm.

Securitized Receivables

These have been converted into a form that can be sold to investors. Issuer of this uses cash flows of the receivables to fund debt service on the securities.

Event-Risk Protected Debt

This debt covenant is associated with bonds and is intended to protect the bondholder in case of a credit downgrading of the bond, such as might happen in case of a leveraged buyout.

Financial Forecast

This includes prospective financial statements that present to best of responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows.

Financial Projection

This includes prospective financial statements that present, to best of responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows.

Noncompliance

This involves acts of omission or commission by entity, either intentional or unintentional, which are contrary to be the prevailing laws or regulations.

Impairment

This occurs when events or changed circumstances cause the estimated future cash flows (benefits) of an asset to fall below asset's book value.

Key Audit Matters

Those matters that, in the auditor's professional judgment, were of most significance in audit of financial statements during current period. These are selected from those matters communicated with those charged with governance.

Explanatory Language

Unqualified Audit Reports with this is used to explain: 1. Justified Departure from GAAP 2. Inconsistent Application of GAAP 3. Substantial Going-Concern Doubt 4. Emphasis of Some Matter (e.g. event, risks) 5. Reference to Other Auditors

Direct Assistance

Use of internal auditors to perform audit procedures under direction, supervision, and review of external auditors.

Sustainability Reporting

Voluntary corporate disclosures about sustainability initiatives, plans, and associated outcomes.