CIA Glossary

Application Controls

"Application controls" refers to the transactions and data relating to each computer-based application system and are, therefore, specific to each such application. The objectives of application controls, which may be manual or programmed, are to ensure the completeness and accuracy of the records and the validity of the entries made therein. Application controls consist of input controls, processing controls, and output controls.

Bad Debt

A bad debt is a receivable that is considered to be uncollectible. The loss in the valuation of receivables should be recognized for financial accounting purposes when the original revenue is earned even if the specific uncollectible receivables cannot be identified. For tax purposes, the loss in valuation of receivables should be recognized when the specific receivable becomes worthless. For tax purposes, bad debts that a taxpayer incurs, and that did not arise in the course of operating a trade or business by the taxpayer, are nonbusiness bad debts. To be deductible, nonbusiness bad debts must be totally worthless; a partly worthless nonbusiness bad debt cannot be deducted. Nonbusiness bad debts are treated as short-term capital losses. (IRC Section 166) Business bad debts that become wholly worthless during the tax year are deductible. Business bad debts that are partially worthless may be partially deductible according to IRC Section 166.

Bank

A bank is an organization formed for the purpose of making a profit from the lending of funds at a higher interest rate than those paid to depositors. A bank's principal functions are to accept deposits, make loans, pay checks, and perform related services for the public. A bank acts as a "middleman" between suppliers and users of funds. A bank can also act as agent for its customers (e.g., initiating payment orders to third parties), purchase or sell securities for a trust account customer, and operate cash management services for corporate customers. A bank collects funds from three sources: demand deposits (checking accounts), savings, and time deposits; short-term borrowings from other banks; and equity capital. It earns money by reinvesting these funds in longer-term assets. A commercial bank invests its depositors' money principally in loans. An investment bank does much the same with its investment portfolio of securities managed on behalf of clients and for its own trading account. A bank assumes both interest rate risk and credit risk in making loans. In the United States, banks can be chartered by states and by the federal government. A bank may also be a governmentally organized institution whose primary role is to regulate private banks and to control the money supply by buying and selling the paper of private banks. All U.S. banks are required to insure depositors' funds with the Federal Deposit Insurance Corporation (FDIC), a federal agency.

Budget

A budget is a plan of action expressed in dollars. It is a formal quantitative expression of the plans of the enterprise—a plan for the coordination of revenues and expenditures or the amount of money that is available for, required for, or assigned to a particular purpose. A budget is a method of providing control and evaluating performance. It is an expression of policy and financial intent of a governmental entity. In governmental funds, the budget is formally integrated in the records using memorandum accounts called "budgetary accounts." GASB 1700 Budgets are also used as an internal planning tool in private not-for-profit and for-profit organizations, and are usually thought to be an expression of the organization's strategic plan in monetary terms. Such budgets are not integrated into the formal accounting records as is done in the governmental sector. A complete budget is called the master budget. A master budget is composed of smaller budgets, including: • operating budget (budgeted income statement),• sales budget (sales forecast),• production budget,• direct materials budget,• direct labor budget,• direct overhead budget,• cost of goods sold budget,• selling and administrative expense budget,• financial budget,• cash forecast (cash receipts and disbursements),• budgeted balance sheet,• special budgets,• performance budgets,• capital budgets,• pro forma financial statements,• pro forma statement of activities,• pro forma statement of financial position, and• pro forma statement of cash flows.

Byproduct

A byproduct is output of a joint production process (e.g., a process where two or more products result from a single input) which is not the main product but which has sales value and is often subject to additional processing beyond the splitoff point. Byproducts can be accounted for in one of two ways: 1. Assigning a value at production (net realizable value) 2. Assigning no value until sold

Accountability

Accountability is the obligation to explain one's actions or to justify what one does. Accountability is one of the primary objectives of financial reporting. It is information about how management discharged its stewardship responsibility to owners or to the citizenry regarding the use of resources entrusted to it. Accountability is the obligation to explain the custody and safekeeping of resources, their efficient and effective (profitable) use, and their protection from unfavorable economic factors (GASB Concept Statement 1, paragraph 56). In governmental accounting, financial accountability of one entity for another is a result of either: the other entity being fiscally dependent on the reporting government or the reporting government either: appointing the voting majority of the governing body orcreating and having the power to unilaterally abolish another entity that it also either:can impose its will upon orhas a financial benefit or burden relationship with.

Accounting Controls

Accounting controls are the procedures designed to maintain accuracy, reliability, and propriety of transactions and accounting records. They are designed to maintain quantitative control over information, e.g., subsidiary ledger of accounts receivable total agrees with the total of its control account, accounts receivable. Accounting controls are designed to assure that transactions are recorded according to management authorization and as a reliable basis for the resulting financial statements. Accounting controls include accountability for assets. Accounting controls are a subset of the overall system of internal controls. In the auditing standards, internal controls are subdivided into two types: accounting and administrative controls.

Accounts Payable

Accounts payable are amounts owed a creditor from buying goods or services on account in the normal course of business. Accounts payable are reported as a current liability in the balance sheet.

Accounts Receivable

Accounts receivable are amounts the entity is entitled to receive that arise in the normal course of business (e.g., from the credit sales of goods or services). Receivables are claims against others for money, goods, or services, usually on "open" accounts after credit approval is granted. There is no formal written agreement, and they are usually classified as current assets. Normally, accounts receivable are expected to be received within 30 to 90 days. Accounts receivable are contrasted with notes receivable, which are of a longer term (e.g., 3 to 24 months) and accrue interest at a stated rate. Nontrade receivables are those that arise outside of the normal course of business (e.g., loans to employees or receivables from affiliated entities) and may be recorded net or gross. They are reported at net realizable value (i.e., the amount expected to be collected) and are offset by a valuation allowance account (a contra asset account). Factors responsible for a net realizable value less than the amount billed are cash discounts, sales returns, and uncollectible amounts.

Accounts Receivable Turnover

Accounts receivable turnover (or receivables turnover) is an activity ratio that measures efficiency of credit and collection policies with respect to trade accounts. It confirms the fairness of the receivable balance and reflects the relationship between trade receivables outstanding and credit sales for the period. (Lenient credit policies and poor collection efforts will decrease this ratio.) Computation: Net credit sales ÷ Average AR

Activity-Based Costing (ABC Accounting)

Activity-based costing (ABC) is a refinement of traditional overhead cost allocation. Traditional cost systems accumulate indirect costs and allocate them directly to products in a single step using a single allocation base. They are unit-based costing systems. Activity-based costing systems use a two-step process. First, a separate pool accumulates the costs associated with each activity and some distinct measure is found for that activity. For example, machinery setups can be counted and setup costs can be accumulated so that more setups lead to a higher total of setup costs. Costs from each activity pool are allocated to product lines on the basis of the activity measure. In a second step, the costs accumulated by product line are then allocated to the individual units in the product line. Activity-based costing yields different results from traditional indirect cost allocation if products vary greatly in indirect support, such as machinery setups. The essence of activity-based costing is to attribute costs to products in a manner that reflects actual cost flows within the organization and to recognize that different products demand differing levels of indirect support. Activity-based costing shares some characteristics with traditional costing systems. Like unit-based costing, ABC divides the organization's resources into cost pools and uses some mechanism (a rate) to attribute those costs. Traditional costing attributes the costs to products, while ABC attributes costs first to product lines and then to the products (or any other object the organization is interested in costing).

Administrative Cost

Administrative Expenses General Administrative Expenses General Administrative Costs Administrative costs and expenses are those costs of overall management not considered part of the production cost of goods and services or the selling costs of those goods and services. Administrative expenses include executive salaries and fringe benefits, rent and other general office expenses, and the expense of business support services such as accounting, legal, and data processing. Administrative expenses are charged to the period (i.e., they are matched against revenue in the period in which they are incurred). The term has a separate meaning in proceedings under the Federal Bankruptcy Code. Section 503 defines administrative expenses as "the actual, necessary costs and expense of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case." The bankruptcy court has the final say as to what is considered an actual and necessary cost.

Administrative Actions

Administrative actions are the process by which the power of an agency is exercised to carry out the terms of the law creating the agency as well as to make regulations, conduct adjudicatory hearings, and issue orders.

Aging

Aging is a process wherein accounts receivable or accounts payable are scheduled, listed, or arranged based on elapsed time from date of service or transaction.

Accounting Principle

An accounting principle is a set of prescribed guidelines for recording and reporting the economic effects (substance) of financial events and transactions. It exists on three levels: basic and pervasive concepts; broad operating standards and practices; and specific conventions, rules, and regulations that define accepted accounting practice at a particular time by incorporation of consensus and substantial authoritative support (and the methods of applying them). Alternate methods of accounting for the same event or transaction may be generally accepted, e.g., inventory cost flows, such as LIFO and FIFO. For example, a principle is, "The cost of assets that benefit more than one period should be charged to expense each period (matched to revenues) in a systematic and rational way (i.e., depreciated); straight-line, double-declining balance, sum-of-years' digits, and machine hours are alternative methods of applying the same principle." However, methods are also considered to be principles.

Agent

An agent has general or specific authority, as determined by the principal, to bind the principal as regards third parties (i.e., an agent works for and under the control of another (the principal) and has the power to impose liability to third parties on the principal). However, a "general agent" is not an independent contractor, trustee, or employee (servant). Duties of an agent include acting with loyalty and good faith ("fiduciary" relationship); obedience; necessary skill, care, and diligence; not to make delegation or substitution; and duty to account. An agent is generally not personally liable to third parties unless the agent does any of the following: • Acts for a nonexistent, incompetent, or undisclosed principal• Signs a negotiable instrument in his own name• Misrepresents his authority• Personally guarantees certain acts Agents are liable for their own torts.

Attribute

An attribute is any characteristic that is either present or absent. In tests of controls, the presence or absence of evidence of the application of a specified control is sometimes referred to as an attribute (e.g., in a credit sale, credit approval before the sale is initiated is the attribute, or control condition, of the credit sale). Absence of, or rate of occurrence of deviation from, the attribute is measured in tests of controls and used to determine whether a control is reliable.

Audit Committee

An audit committee is a body formed of a company's board of directors to oversee audit operations and circumstances. It selects, oversees, and appraises the performance of the external auditing firm and selects or removes the chief audit executive (CAE) and sets his/her compensation. The audit committee also approves the internal audit charter, reviews and approves internal audit's work plan, reviews internal audit's work product, and oversees appropriate corrective action for deficiencies noted by internal audit. The most important function of the audit committee is to promote the independence of the internal and external auditors by protecting them from management's influence. In accordance with SEC regulation, the audit committee must be composed of outside directors and at least one member must be a financial expert.

Audit Procedure

An audit procedure is a series of specific and specialized steps or actions auditors take to meet audit objectives. Audit procedures may vary for different audit engagements, depending on the complexity of the activity under review, the type of company, and other factors unique to the engagement. Audit procedures are to be tailored to the engagement as compared to audit standards, which do not change. Audit procedures are used for tests of controls and substantive testing. The seven basic audit procedures are (1) inspection, (2) observation, (3) inquiry, (4) confirmation, (5) recalculation, (6) reperformance, and (7) analytical procedures.

Audit Program

An audit program is a written outline of work to be done during an audit. It may include a description of the scope, time to be allotted, personnel assignments, and procedures to be undertaken to serve as a guide for the auditor and the assistants. As the end result of the audit planning stage, this step-by-step plan is designed with the intent to help guide the auditors in gathering the evidence that underlies their conclusions and/or opinion.

Auditee

An auditee is the subsidiary, business unit, department, group, or other established subdivision of an organization that is the subject of an assurance engagement.

Auditor

An auditor is an individual who performs auditing procedures to determine the validity and fair presentation of financial information or to provide assurance to management on the effectiveness of the organization's governance, risk management, and/or control processes. The auditor may be either internal (an employee) or external to the entity (an independent certified public accountant).

Appropriateness

Appropriateness is the measure of the quality of audit evidence, that is, its relevance and its reliability in providing support for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related assertions.

Assertions

Assertions are declarations or a set of declarations about whether subject matter is based on or conforms to selected criteria (AT 101.08). Assertions are representations by management that are embodied in the account balance, transaction class, and disclosure components of the financial statements (AU 326.14-.19). Assertions about classes of transactions include the following: • Occurrence • Completeness • Accuracy • Cutoff • Classification Assertions about account balances at the period end include the following: • Existence • Rights and obligations • Completeness • Valuation and allocation Assertions about presentation and disclosure include the following: • Occurrence and rights and obligations • Completeness • Classification and understandability • Accuracy and valuation The independent auditor's work in forming an opinion on the financial statements consists primarily of obtaining and evaluating audit evidence concerning these assertions.

Assets

Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. They describe levels or amounts of resources at a moment in time. SFAC 6.25-.34 and .172-.191 Essential characteristics, all three of which must be present, are as follows: 1. Embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows2. A particular entity can obtain the benefit and control others' access to it.3. The transaction or other event giving rise to the entity's right to or control of the benefit has already occurred. Economic benefits derive from the ability of assets to be exchanged for cash or other goods or services, by being used to produce goods or services to increase the value of other assets, or by being used to settle liabilities. Services provided by other entities cannot be stored and are received and used simultaneously. Rights to receive services for specified or determinable future periods can be assets. Assets are changed by transactions, activities, and events that happen to the entity, both those directly controlled by the entity (receipt and transfer of cash and other assets or adding value to noncash assets through operations by using, combining, and transforming goods into other goods) and those beyond its control (changes in prices, interest rates, and technology; impositions of taxes and regulations; discovery; growth or accretion; shrinkage; vandalism; theft; expropriations; and natural disasters). "Valuation accounts" that increase or decrease the carrying value of assets are part of the related asset and are not assets, or liabilities, in their own right. These valuation accounts are either adjunct accounts (increase the related asset) or contra accounts (decrease the related asset). In governmental accounting: Assets are defined as resources with present service capacity that the government presently controls. (GASB Concepts Statement 4.8)

Assignment

Assigns An assignment is a transfer by one party (the transferor, obligee, or assignor) to a contract of some or all of the rights under a contract, or of property interest, to another person who is not a party to the contract (the assignee). The assignee can receive no greater rights than those possessed by the assignor. No consideration is required—the transfer may be part of another contract or gratuitous. (Also said of partnership rights; contrast to Delegation.) Rights are assignable unless: • personal service, credit, or trust is involved.• the assignment would materially vary the duty or risk agreed to by the obligor (the person obligated to perform under the contract).• the assignment is prohibited by the contract or by statute. The Uniform Commercial Code (U.C.C.) liberalizes the assignment of rights (especially the right to receive money) under contracts governed by the U.C.C.; however, under U.C.C. 2-210, 9-301, the assignee must file a financing statement ("perfect the assignment") to protect the interest in the assigned rights. Between assignees to the same right, the first to file will prevail. Assignment for the benefit of creditors is a way for the debtor to deal with financial failure other than declaring bankruptcy. The debtor voluntarily transfers specified property to a trustee who pays the creditors. Creditors do not have to consent and assignment does not legally discharge the debtor from his debt obligations. (Contrast to receivership and Bankruptcy

Audit Risk

Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the audit opinion on financial statements that are materially misstated (AU 312.02). In the context of internal auditing, it is the risk that the auditor may unknowingly fail to identify all significant risks during an audit engagement. Assessing audit risk involves the evaluation of the effectiveness of the entity's internal control system. An assessment of audit risk is the primary objective of obtaining an understanding of internal control and must be considered, along with materiality, in determining the nature, timing, and extent of auditing procedures and in evaluating the results of these procedures. Audit risk (AR) consists of three component risks. They are inherent risk (IR), control risk (CR), and detection risk (DR): AR = IR × CR × DR. (AU 312.21-.26)

Audit Software

Audit software or generalized audit software (GAS) provides auditors with the ability to quickly extract data from computer files. It provides additional abilities for the auditor in dealing with the data. The software can perform calculations and sorts to help auditors in the analysis of large amounts of data which they were not able to analyze in the past because of time and the complexity of the task. Specifically, the auditor can use special software in sampling (sample selection), analytical reviews (trend analysis), and exception reporting (items too high or too low) based upon a defined normal situation.

Authorization

Authorization is an audit internal control objective. Authorization controls are designed to ensure that all transactions have management approval before they are executed and recorded. Examples of an authorization control include credit approval for a sale on credit as well as checking to ensure that all purchase orders are supported by requisitions signed by the appropriate person and verification that they are included in approved budgets.

Bias

Bias is an ingredient of neutrality (SFAC 8.3, QC14). It is the tendency of a measure to fall more to one side than the other of what it represents, instead of being equally likely to fall on either side.

Accrued

If an item has been accrued, it has been entered in the accounting records by writing an adjusting journal entry. Accrual accounting requires that the effect of a future cash transaction be reflected in the current period's financial statements, not in the following period or periods when the cash transaction will occur if its occurrence is certain (contractual) or the result of the passage of time. From the income statement point of view, the adjusting journal entry is recorded because either the revenue is earned (e.g., interest earned but not received) and should be recognized in the current period—even if payment has not yet been received, or the expense (e.g., interest owed but not paid) should be matched against the current period's revenue—even if payment for the expense has not yet been made. From the balance sheet perspective, either an asset (e.g., interest receivable) or a liability (e.g., interest payable) should be reported on the balance sheet, but the item has not yet been recorded.

Audit Objective

In the context of external auditing, another name for the goal of the audit procedures used to obtain evidence about the dollar amounts and disclosures presented in the financial statements is the audit objective. The primary, overriding audit objective is to express an opinion on the fairness, in all material respects, with which the financial statements present the financial position, results of operations, and cash flows in conformity with GAAP. Practical or specific audit objectives relate to and are developed in light of the assertions of management embodied in the financial statements. These specific objectives are to obtain and evaluate sufficient appropriate audit evidence regarding the assertions. In the context of internal auditing, audit, or engagement, objectives are broad statements that define intended engagement accomplishments. Audit objectives are designed to address the risks associated with the activity under review. Internal auditors must consider the probability of significant errors, fraud, noncompliance, and other exposures when developing audit objectives.

Allowance of Accounts Receivable

The balance of accounts receivable in each class (e.g., current, 30, 45, 60, 90, and over 90 days past due) is multiplied by the percentage probability of collection based on past collection history and management judgment (e.g., there may be a 90% likelihood that an account 30 days past due will be collected, while the probability drops to 25% when the account is over 90 days past due). This represents a form of expected value—the expected value of the collectible accounts. The allowance is the difference between this estimated collectible amount and the total amount in accounts receivable.

Accounting System

The information system relevant to financial reporting objectives, which includes the accounting system, consists of the procedures and records designed and established to: -initiate, authorize, record, process, and report entity transactions (as well as events and conditions) and maintain accountability for the related assets, liabilities, and equity; -resolve incorrect processing of transactions; -ensure information required to be disclosed by the applicable financial reporting framework is accumulated, recorded, processed, summarized, and appropriately reported in the financial statements; -process and account for system overrides or bypasses to controls; -transfer information from transaction processing systems to the general ledger; -capture information relevant to financial reporting for events and conditions other than transactions, such as the depreciation and amortization of assets and changes in the recoverability of accounts receivables; and -ensure information required to be disclosed by the applicable financial reporting framework is accumulated, recorded, processed, summarized, and appropriately reported in the financial statements.

Bad Debt Allowance

also known as: Allowance for Uncollectible Accounts The bad debt allowance is the contra asset account used to bring accounts receivable to net realizable value. It is offset by an entry to bad debt expense in an attempt to match uncollectible accounts receivable with the revenue generated by the sales on account. The two methods for estimating a bad debt allowance are as follows: 1. Income statement estimation approach (as a percentage of sales)2. Balance sheet estimation approach based on the aging of accounts receivable (conceptually preferable) Both methods of estimating an allowance for bad debts are acceptable for reporting of results by publicly held companies. However, for tax accounting purposes, the reserve method may only be used for small banks. Nearly all accrual-basis taxpayers must use the specific charge-off method for receivables that become uncollectible. This difference in acceptable methodology results in book-to-tax differences for bad debt expense. It is sometimes also called Allowance for Uncollectible Accounts.

board

also known as: Audit Committee The highest level governing body (e.g., a board of directors, a supervisory board, or a board of governors or trustees) charged with the responsibility to direct and/or oversee the organization's activities and hold senior management accountable. Although governance arrangements vary among jurisdictions and sectors, typically the board includes members who are not part of management. If a board does not exist, the word "board" in the Standards refers to a group or person charged with governance of the organization. Furthermore, "board" in the Standards may refer to a committee or another body to which the governing body has delegated certain functions (e.g., an audit committee).

Batch Total

also known as: Batch Control TotalControl Total Batch total is an input control, the sum of the number of items or total amount. Input is compared to processing; a mismatch of the number of items or sum of the totals (e.g., sum of invoice totals) between input and processing indicates that an item was lost or processed twice.

Beta Coefficient

also known as: Beta The beta coefficient in the capital asset pricing model (CAPM) measures the market risk of a security relative to other securities. In the CAPM equation, ke = Rf + b(Km - Rf), the beta coefficient is the term "b". The other terms in the equation are: • ke: the required return on the security on the part of investors,• Km: the average return in the market on all securities, and• Rf: the risk-free rate of return, usually measured as the present return on Treasury bills. The beta coefficient is calculated by using a regression analysis of a firm's historical total return each year, regressed against the market's historical average return in the same years. A beta of 1.0 indicates that the security has the same (systematic or market) risk as the average security in the market. A beta greater than 1.0 indicates that the security fluctuates more than the average security over the business cycle, and is thus riskier. Investors will require a higher-than-average return on this security. A beta smaller than 1.0 indicates that the security fluctuates less than the average security over the business cycle, and thus investors will accept a lower rate of return on the security. Securities with high betas are typically those in firms producing luxury goods or services, where sales and profits expand and contract a great deal in response to the state of the economy over the business cycle. Securities with low betas are typically those from firms that sell necessities; thus, public utilities have betas less than 1.0. Some securities, such as stocks, usually fluctuate with changes in the business cycle. Other securities, like short-term government securities, do not fluctuate directly with the business cycle, and thus have a beta of "0." Large investment firms publish beta coefficient for commonly traded stocks. There are slightly different ways to calculate a beta, and some betas are adjusted for the additional risk posed by the firm's level of debt (leverage).

Bona Fide Purchaser

also known as: Bona Fide Purchaser for Value BFP4V Good Faith Purchaser A bona fide purchaser is a party who buys (gives value in the regular course of business and not for any antecedent debt) in good faith and without notice of any adverse claim (has no knowledge of a secured interest in the goods). The bona fide purchaser takes delivery with better rights than the transferor had, is an "innocent" purchaser, and is similar to a holder in due course. "To give value" means an act of extending credit, accepting delivery, taking in satisfaction for an existing debt, or entering a transaction that is supported by contractual consideration. Example A person takes a watch to the repair shop. The watch is inadvertently (unintentionally, accidentally) sold by the repair shop. The person who purchases the watch is a BFP4V (bona fide purchaser for value) and is entitled to keep the watch. The original owner of the watch is only entitled to receive the cash value of the watch from the repair shop. The BFP4V has better rights to the watch than the original owner. A BFP4V (for example, the purchaser of inventory from a merchant in the normal course of business) has rights greater than a secured creditor (whether perfected or not, and whether the purchaser knew of the secured interest or not). If a merchant defaults on a loan secured by his inventory, the creditor cannot take title from the BFP4V who bought the goods. The creditor's only recourse is to the merchant and the proceeds of the sale. (U.C.C. 9-307) A BFP4V who buys outside the normal course of business (e.g., buys a TV set from a neighbor) will also have greater rights and will win (keep title) against a creditor who holds a PMSI (purchase money security interest), but a BFP4V who buys outside the normal course of business (e.g., buys a TV set from a neighbor) will lose to the secured creditor who both files and perfects the PMSI (but as a practical matter, the creditor will usually not repossess from the BFP4V).

Accounting Profit

also known as: Business Profit Accounting Income Net Income Accounting profit is the difference between total revenues and measurable or estimable expenses paid to outsiders to acquire and use all necessary factors of production. Accounting profit does not include those implicit costs that are not measurable, such as opportunity costs and return to the owner for use of owner's capital and entrepreneurial skills (the normal profit). It is the profit in excess of actual costs of production. The residual accrues to the owners.

Audit

also known as: Examinations An audit is a periodic verification of assets, records, transactions, events, or conditions performed by a person independent of the custody or recordkeeping for the items verified. These independent examinations of accounts or operations may be performed to verify the accuracy of financial information (as performed by independent CPAs during a financial audit) or to provide assurance to management on the effectiveness of the organization's governance, risk management, and/or control processes (as performed by internal auditors).

Billings

also known as: Progress Billings Billings On Contracts A billing is a periodic interim invoicing for progress payments on long-term contracts. It is a contra asset (construction in process) account, netted against the construction in process asset account and recorded as either an asset (construction costs in excess of billings) or as a liability (billings in excess of construction costs).

Bankruptcy

also known as: ReorganizationLiquidationChapter 7Chapter 11 Bankruptcy is the condition of being judged insolvent by the court and having property distributed to creditors when a debtor is unable to meet debts. The uniform bankruptcy provisions are governed by the Bankruptcy Reform Act of 2005. The purpose of the Act is to provide relief to an insolvent debtor from his or her debts (to provide a "fresh start") and to give all creditors an equal chance to share in the assets of the debtor in a specified priority and according to their claims. A person can become bankrupt involuntarily or voluntarily. He or she can also undertake a reorganization or liquidation to pay his or her debts. Chapter 7 of the Bankruptcy Act concerns liquidation of the business or the assets of the individual. An interim trustee is appointed by the court with broad powers to make management changes, obtain financing, and operate the business. Chapter 11 concerns corporate reorganization, but may be used by individuals. Unless the court rules differently, the officers of the corporation continue to operate the business and propose plans to pay off the debts. However, the court must approve such plans. Bankruptcy proceedings involve many parties: the debtor, the bankruptcy court judge, the trustee, secured creditors, general creditors, the creditors committee, and supporting professionals (e.g., accountants and attorneys).

Audit Sampling

also known as: Sampling Test Basis Sample Basis Audit sampling is the application of an audit procedure to fewer 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. Audit sampling may be statistical or nonstatistical and requires professional judgment (AU 350). The design and size of the audit sample impacts the sufficiency and appropriateness of the audit evidence. Judgmental decisions involved in audit sampling include the following: • Population definition• Sample method• Selection technique• Error analysis• Sampling risk Aspects of sampling risk include the following: • When performing substantive tests of details:• The risk of incorrect acceptance• The risk of incorrect rejection • When performing tests of controls:• Risk of overreliance• Risk of underreliance The sample must be representative of the population (i.e., selected from the entire population in such a way that every element in the population has an equal chance of being selected).

Ad Hoc

also known as: Special PurposeNon-Standard Ad hoc refers to something that is done to meet a specific need. The term is often used to describe a report or analysis that is developed quickly to meet an immediate information need. Sometimes ad hoc reports are used as the basis for future standardized reports, etc.

Audit Trail

also known as: Transaction Trail The audit trail is the path left by a transaction when it is processed. The trail begins with the original source document or documents, proceeds through the transactions, entries, and posting of records, and is completed with the financial statements. Source document → Journal → Ledger → Financial statements The traditional audit trail is characterized by accessible records, observable activities, source documents, detailed chronological journals, and ledger summaries. For entities with highly complex information technology systems, the audit trail is partially or completely electronic. Information technology (IT) has impacted the audit trail in the following ways: • Source documents may no longer be produced—access to documents is more difficult .• Ledger summaries may be replaced by electronic master files. • Printed data may not be available. • Processing activities are difficult to observe—much of the processing is automated within the system.