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is sampling to determine whether internal control compliance is greater than or less than the tolerable deviation rate.
Accounting and review services
- Governed by official pronouncements covering compilation and review engagements.
- Compilation is presenting in the form of financial statements information that is the representation of management (owners) without expressing assurance.
- Review is inquiry and analytical procedures to provide the accountant a basis for expressing limited assurance that there are no material modifications that should be made to the statements for them to be in conformity with U.S. generally accepted accounting principles.
- Includes journals, ledgers and other records, such as spreadsheets, that support financial statements.
- It may be in computer readable form or on paper.
- An approximation of a financial statement element.
- Estimates are included in historical financial statements because some amounts are uncertain pending outcome of future events and relevant data about events that have occurred cannot be accumulated on a timely, cost-effective basis.
Alternative ways of reporting and disclosing information in financial statements and related footnotes.
Debts due from customers from sales of products and services reported as a current asset.
- Records of initial accounting entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers; journal entries and other adjustments to the financial statements.
- These 'other adjustments' are not reflected in journal entries; and records, such as work sheets and spreadsheets, supporting cost allocations, computations, reconciliations, and disclosures.
Accounting Research Bulletins (ARBs)
- Issued years ago to set generally accepted accounting principles.
- Some have not been superseded by pronouncements of the Financial Accounting Standards Board. Those old pronouncements still qualify as generally accepted accounting principles.
Accounting entries made at the end of an accounting period to allocate items between accounting periods.
An audit opinion that the financial statements as a whole are not in conformity with U.S. GAAP.
- A consulting service in which the CPA develops the findings, conclusions, and recommendations presented for client decision-making.
- This differs from attestation, where the CPA expresses a conclusion about a written assertion of another.
- Constituting the whole.
- Aggregate expenses include expenses of all divisions combined for the entire year.
- An engagement where the client specifies procedures and the accountant agrees to perform those procedures.
- An accountant may accept an engagement to apply agreed-upon procedures to financial statement elements, where the scope of the engagement is not sufficient to express an opinion, if the users assume responsibility for sufficiency of the procedures, and use of the report is restricted to specified users.
- American Institute of Certified Public Accountants.
- The professional organization of CPAs in the U.S.
- It is a private organization of CPAs, not an arm of the government.
- Each state issues CPA certificates, not the AICPA.
- Since each state makes its own laws, each state could prepare and grade their own CPA examination.
- However, each state uses the uniform CPA exam prepared and graded by the AICPA.
- Distribution according to a plan.
- Depreciation, amortization, and depletion are methods to allocate costs to periods benefited.
Allowance for doubtful accounts
- A contra asset account with a credit balance used to reduce the carrying amount of accounts receivable to net realizable value.
- The allowance balance is the estimated total of uncollectible accounts included in accounts receivable.
Allowance for sampling risk
- The difference between a sample estimate and the projected population characteristic at a specified sampling risk.
- This allowance is also the difference between the expected error rate and the tolerable deviation rate.
- A comparison of financial statement amounts with an auditor's expectation.
- An example is to compare actual interest expense for the year (a financial statement amount) with an estimate of what that interest expense should be.
- The estimate can be found by multiplying a reasonable interest rate times the average balance of interest bearing debt outstanding during the year (the auditor's expectation).
- If actual interest expense differs significantly from the expectation, the auditor explains the difference in audit documentation.
Identify and classify items for further study.
- The Accounting Principles Board existed before the Financial Accounting Standards Board.
- It issued opinions, some of which are still part of generally accepted accounting principles.
Applicable financial reporting framework
Financial reporting framework adopted in the preparation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation.
Programmed procedure in application software designed to ensure completeness and accuracy of information.
Appropriate audit evidence
- Relevant (pertains to the proposition supported)
- and Reliable (trustworthy).
- To authorize.
- A manager authorizes a cash payment by signing a voucher providing approval for the disbursement.
Arm's length transactions
- Transactions between people who have no relationship other than that of buyer and seller.
- The price is the true fair market value of the goods or services sold.
- If you buy or sell something to a close relative, you might give better terms than to an unrelated party, so the price might not represent the true market value of the goods or services.
- An audit procedure to determine or to discover with certainty.
- For example, to ascertain the date on which an investment was purchased by examining source documents.
- Management asserts financial statements are correct with regard to
- existence or occurrence of assets,
- liabilities or transactions,
- completeness of information in the financial statements,
- rights and obligations at a point in time,
- appropriate valuation or allocation,
- and disclosure.
To determine the value, significance, or extent of.
- The level of control risk determined by the auditor, based on tests of controls, is the assessed level of control risk.
The level of confidence one has.
Engagement in which an accountant issues a report designed to enhance the degree of confidence of third parties and management about the outcome of an evaluation or measurement of financial statements (subject matter) against an applicable financial reporting framework (criteria).
Attest (Attestation) report
In an attest engagement, a practitioner issues a written conclusion about the reliability of a written assertion that is the responsibility of another.
- The risk the CPA may unknowingly fail to modify the report on management’s assertion.
- It is composed of inherent risk, control risk, and detection risk.
- is signed by the client's lawyer and addressed to the auditor.
- It is the auditor's primary means to corroborate information furnished by management about litigation, claims, and assessments.
The characteristic tested is a property that has only two possible values (an error exists or it does not).
A correction of a financial information misstatement identified by the auditor, whether recorded or not.
A committee of the board of directors responsible for oversight of the financial reporting process, selection of the independent auditor, and receipt of audit results.
- Records kept by the auditor of procedures applied, tests performed, information obtained, and pertinent conclusions reached in the engagement.
- The documentation provides the principal support for the auditor's report.
- Aka: working papers.
Information used by the auditor in arriving at the conclusions on which the auditor's opinion is based.
- In obtaining evidence in support of financial statement assertions, the auditor develops specific audit objectives in light of those assertions.
- For example, an objective related to the completeness assertion for inventory balances is that inventory quantities include all products, materials, and supplies on hand.
Developing an overall strategy for the audit. The nature, extent, and timing of planning varies with size and complexity of the entity, experience with the entity, and knowledge of the entity's business.
- A combination of the risk that material errors will occur in the accounting process and the risk the errors will not be discovered by audit tests.
- Audit risk includes uncertainties due to sampling (sampling risk) and to other factors (non-sampling risk).
Auditing Standards Board
Statements on Auditing Standards are issued by the auditing standards board, the body of the AICPA designated to issue auditing pronouncements.
- To give permission for.
- A manager authorizes a transaction by signing a voucher authorizing the disbursement.
A copy of a computer program or data stored separately from the original.
A set of computer data or jobs to be processed in a single program run.
- A mathematical law that applies to any population of numbers derived from other numbers (such as the dollar amount of a sale, found by multiplying the quantity sold times the unit price).
- It holds that 30% of the time the first non-zero digit of this derived number will be one, and it will be a nine only 4.6% of the time.
- Benford's law is used by auditors to identify fictitious populations of numbers.
Bill of Lading
A document issued by a carrier to a shipper, listing and acknowledging receipt of goods for transport and specifying terms of delivery.
- A financial arrangement in which a person avoids possible conflict of interest by transferring financial affairs to a fiduciary who has sole asset management discretion.
- The person establishing the trust also gives up the right to information regarding the assets.
Risks that could adversely affect an entity's ability to achieve its objectives and execute its strategies or from the setting of inappropriate objectives and strategies.
Cancel supporting documents
- To mark supporting documents as having been used to support a transaction so the same documents can't be used to support another transaction.
- An example is stamping vouchers "paid.”
- Recorded as an asset.
- A capitalized lease is in substance a purchase to the lessee.
- An asset is recorded equal to the present value of the lease payments, which is also recorded as a liability.
- Payments, partly interest and partly principal, are made on the lease liability.
- The leased asset is depreciated by the lessee as though it were legally owned by the lessee.
A warning or caution.
A redundant digit added to a code to check accuracy of other characters in the code.
A listing of checks issued in numeric sequence and in order by date issued.
- Arrangement or grouping.
- Assets and liabilities are normally classified as current or non-current.
To pledge property as security (collateral) for a debt.
A secret agreement between two or more parties for fraud or deceit.
- A letter written by the auditor to an underwriter of securities, which expresses an opinion about whether the audited financial statements and schedules in the registration statement comply as to form with applicable accounting requirements of the SEC Act of 1933 and related rules and regulations adopted by the SEC.
- Procedures performed are specified by the underwriter.
- Users evaluate accounting information by comparison.
- Similar companies account for similar transactions in similar ways.
- Another goal is comparison of one company's information from one period to the next (consistency).
- Operating trends should not be disguised by changing accounting methods.
Financial statements of a prior period shown with those of the current period to aid in comparisons between periods.
- An audit procedure.
- The auditor observes similarities and differences between items such as an account from one year to the next.
- An offsetting balance.
- A requirement by some banks that a borrower maintain a minimum balance in a checking or savings account as a condition of a loan.
- The offsetting balance increases the effective interest rate to the bank since the net amount loaned is reduced but the interest paid is unchanged.
Competence of an internal audit staff
A function of qualifications, including education, certification, and supervision.
- A compilation is presenting in the form of financial statements information that is the representation of management without expressing assurance.
- Compilation of a financial projection is assembling prospective statements based on assumptions of a responsible party, considering appropriateness of presentation, and issuing a compilation report.
- No assurance is provided on the statements or underlying assumptions.
- The accountant need not be independent.
- Assertions about completeness deal with whether all transactions and accounts that should be in the financial statements are included.
- For example, management asserts that all purchases of goods and services are included in the financial statements.
- Similarly, management asserts that notes payable in the balance sheet include all such obligations of the entity.
Following applicable internal control procedures, rules, or laws.
Comprehensive basis of accounting
- A complete set of rules other than U.S. GAAP applied to all items in a set of financial statements.
- Examples include a basis of accounting required by a regulatory agency, a basis of accounting the entity uses for its income tax return and the cash receipts and disbursements basis.
- Internal controls performed by computer (software controls) as opposed to manual controls.
- Also means general and application controls over the computer processing of data.
Condensed financial statements
Presented in considerably less detail than complete financial statements.
Communication with outside parties to authenticate internal evidence.
- Transfer of possession but not title to goods.
- Title stays with the consignor, while the consignee has possession.
- To achieve comparability of information over time, the same accounting methods must be followed.
- If accounting methods are changed from period to period, the effects must be disclosed.
Sought advice or information.
Services performed by CPAs include consultations, advisory services, implementation services, product services, transaction services, and staff and support services.
- An existing condition involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) that will be resolved by future events.
- Estimates, such as the useful life of an asset, are not contingencies.
- Eventual expiration of the asset's utility is not uncertain.
The auditor of the current year who also audited the financial statements of the client for the previous year.
Continuing accounting significance
- Means matters normally included in the permanent audit documentation, such as the analysis of balance sheet accounts, and those relating to contingencies.
- Such information from a prior year is used by the auditor in the current year's audit and is updated each year.
A policy or procedure that is part of internal control.
- General ledger accounts that report totals of details included in subsidiary ledger accounts.
- For example, Accounts Receivable is a general ledger account with a balance equal to the total of the individual receivables included in the subsidiary accounts receivable ledger.
Exist when the design or operation of a control does not allow employees, in their assigned functions, to prevent or detect misstatements on a timely basis.
- Attitude, awareness, and actions of the board, management, owners, and others about the importance of control.
- This includes integrity and ethical rules, commitment to competence, board or audit committee participation, organizational structure, assignment of authority and responsibility, and human resource policies and practices.
Control policies and procedures
- Control activities are the policies and procedures that help ensure management directives are carried out.
- Those pertinent to an audit include performance reviews, information processing, physical controls and segregation of duties.
The risk that material error in a balance or transaction class will not be prevented or detected on a timely basis by internal controls.
- An officer who supervises financial affairs of an entity.
- In internal control the controller is often the person with record keeping (general ledger) responsibilities, as contrasted with asset custody, management decision-making, and internal audit functions.
To strengthen with other evidence, to make more certain.
Cumulative effect of changing to a new accounting principle
The effect on retained earnings at the beginning of the current period.
Total current assets divided by total current liabilities.
- One who has possession or is in charge of something.
- Some entities entrust investment securities to a bank, which is custodian of the company's securities.
- Designating a point of termination.
- An auditor uses tests of cutoff to obtain evidence that transactions for each year are included in the financial statements of the appropriate year.