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  1. accounting and review services
    • are 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
  2. adjusting entries
    • are accounting entries made at the
    • end of an accounting period to allocate items between accounting periods
  3. adverse
    • An audit opinion that the financial
    • statements as a whole are not in conformity with U.S. GAAP
  4. analytical procedure
    • 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
  5. appropriate
    • audit evidence is relevant
    • (pertains to the proposition supported) and reliable (trustworthy).
  6. arm's length transactions
    • are 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.
  7. assertion
    • 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, presentation, and disclosure
  8. audit adjustment
    • is a correction of a financial
    • information misstatement identified by the auditor, whether recorded or not.
  9. audit documentation (working papers)
    • are 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.
  10. audit objective
    • 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.
  11. audit planning
    • is 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
  12. audit risk
    • 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 (nonsampling risk)
  13. auditing standards board
    • Statements on Auditing Standards are
    • issued by the auditing standards board, the body of the AICPA designated to
    • issue auditing pronouncements.
  14. Lock box
    • banking is a service offered by commercial banks
    • that simplifies collection and processing of account receivables by
    • having payments mailed directly to a location accessible by the bank. If
    • you pay your electric or water bill with a paper check, it will likely go to a lockbox department at a bank.
  15. 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
  16. collateralize
    • To pledge property as
    • security (collateral) for a debt
  17. compile
    (compilation)
    • 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.
  18. completeness
    • 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
  19. 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
  20. consignment
    • Transfer of possession but not title
    • to goods. Title stays with the consignor, while the consignee has possession.
  21. control
    environment
    • is the
    • 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.
  22. control
    risk
    • The risk that
    • material error in a balance or transaction class will not be prevented or
    • detected on a timely basis by internal controls.
  23. cutoff
  24. 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.
  25. detection
    risk
    • The risk audit
    • procedures will lead to a conclusion that material error does not exist when in
    • fact such error does exist.
  26. disclaimer
    (disclaim)
    • A
    • statement that the auditor is unable to express an opinion as to the
    • presentation of financial statements in conformity with U.S. GAAP.
  27. disclosure
    • Revealing information. Financial
    • statement footnotes are one way of providing necessary disclosures.
  28. dual
    date
    • If a major event
    • comes to the auditor's attention between the report date and issuance of the
    • report, the financial statements may include the event as an adjustment or
    • disclosure. The auditor dual dates the audit report (as of the end of workpaper
    • review, except footnote XX, which is dated later)
  29. dual-purpose
    test.
    • Audit procedures
    • are classified as substantive tests or tests of controls. If a procedure
    • provides both types of evidence it is a dual-purpose test.
  30. examination
    • is evaluating the preparation of prospective statements, support underlying
    • assumptions, and presentation. The accountant reports whether, in his or her
    • opinion, the statements conform to AICPA guidelines and assumptions provide a
    • reasonable basis for the responsible party's forecast. The accountant should be
    • independent, proficient, plan the engagement, supervise assistants, and obtain
    • sufficient evidence to provide a reasonable basis for the report.
  31. existence
    • Assertions about existence deal with
    • whether assets or liabilities exist at a given date. For example, management
    • asserts that finished goods inventories in the balance sheet are available for
    • sale.
  32. extent of an audit test
    • is the sample size. A small number of transactions provides less
    • assurance than a large sample. There is more risk your conclusion will be
    • incorrect if you use a smaller sample size
  33. fasab
    • Federal Accounting Standards Advisory Board. An organization that sets
    • GAAP in the U.S. for federal government entities.
  34. field
    work
    • The performance
    • of audit procedures outside the CPA's office. Much field work, but not all, is
    • done in the client's offices after the balance sheet date.
  35. foot
    • a column is to add a column of
    • numbers. To test footing is to add the
    • column again to check accuracy
  36. fraud
    • A deliberate deception to secure
    • unfair or unlawful gain. False representation intended to deceive relied on by
    • another to that person's injury. Fraud includes fraudulent financial reporting
    • undertaken to render financial statements misleading, sometimes called
    • management fraud, and misappropriation of assets, sometimes called
    • defalcations.
  37. gaas
    • Generally Accepted
    • Auditing Standards.” The ten auditing standards adopted by the membership of
    • the AICPA. Auditing standards differ from audit procedures in that
    • "procedures" relate to acts to be performed, whereas
    • "standards" deal with quality of the performance of those acts and
    • objectives of the procedures.
  38. general
    journal
    • A book of
    • original entry in a double-entry system. The journal lists transactions and
    • indicates accounts to which they are posted. The general journal includes all
    • transactions not included in specialized journals used for cash receipts, cash
    • disbursements, and other common transactions
  39. General Ledger
    • A record to
    • which monetary transactions are posted (in the form of debits and credits) from
    • a journal. It is the final record from which financial statements are prepared.
    • General ledger accounts are often control accounts that report totals of
    • details included in subsidiary ledgers
  40. general
    standard
    • In the ten
    • U.S. generally accepted auditing standards there are three general standards:
    • 1. The examination is to be performed by a person or persons having adequate
    • technical training and proficiency as an auditor. 2. In all matters relating to
    • the assignment, an independence in mental attitude is to be maintained by the
    • auditor. 3. Due professional care is to be exercised in performing the
    • examination and preparation of the report.
  41. going
    concern assumption
    • assumes the company will continue in
    • operation long enough to realize its investment in assets through operations
    • (as opposed to sale). Presenting assets at historical cost is justified by
    • assuming productive assets will be used rather than sold. This makes market
    • values irrelevant and supports accounting methods that match the actual cost of
    • an asset to periods benefited.
  42. implicitly
    • Implied or understood even though not
    • directly expressed.
  43. independent
    • In all matters
    • relating to the assignment, an independence in mental attitude is to be
    • maintained by the auditors. This means freedom from bias, which is possible
    • even when auditing one's own business (independence in fact). However, it is
    • important that the auditor be independent in appearance (that others believe
    • the auditor is independent).
  44. inherent
    risk
    • The
    • susceptibility of a balance or transaction class to error that could be
    • material, when aggregated with other errors, assuming no related internal
    • controls.
  45. internal
    control
    • Policies and
    • procedures designed to provide reasonable assurance that specific entity
    • objectives will be achieved. It consists of the control environment, risk
    • assessment, control activities, information and communications, and monitoring
  46. introductory
    paragraph
    • The first
    • paragraph of the auditor's standard report which identifies the financial
    • statements audited and states the financial statements are the responsibility
    • of management and that the auditor's responsibility is to express an opinion on
    • the financial statements based on the audit.
  47. invoice
    • An itemized list of goods shipped or
    • services rendered with costs.
  48. An itemized list of goods shipped or
    services rendered with costs.
    • The company in which an investment is
    • held. Often used to describe an equity method investment, in which the investor
    • reports a share of the investee's net income
  49. journal
    • A book of original entry in a
    • double-entry system. The journal lists all transactions and the accounts to
    • which they are posted.
  50. kiting
    • Drawing a check on insufficient funds
    • to take advantage of the time required for collection
  51. lead
    schedule
    • The schedule
    • at the beginning of audit documentation that summarizes the detailed schedules
  52. liquidity
    • The availability of cash or ability
    • to obtain it quickly. Debt paying ability.
  53. lockbox
    • (bank lockbox) speeds the
    • availability of funds from cash collections by reducing the time from the
    • customer mailing the check until the funds are available to spend. Remittances
    • are sent to a bank near the customer and the bank deposits funds speedily to
    • the payee's account
  54. management
    representation letter
    • A
    • letter addressed to the auditor, signed by the client's chief executive officer
    • and chief financial officer. During an audit, management makes many
    • representations to the auditor. Written representations from management in the
    • letter confirm oral representations given to the auditor, document the
    • continuing appropriateness of such representations, and reduce the possibility
    • of misunderstanding.
  55. material (materiality)
    • Information important enough to change an investor's decision.
    • Insignificant information has no effect on decisions, so there is no need to
    • report it. Materiality includes the absolute value and relationship of an
    • amount to other information.
  56. memos
    • Written records supporting journal
    • entries. Credit memos support credits, while debit memos support debit entries
  57. mitigating
    Reducing in force or intensity.
  58. nature of audit testing
    • means the type of testing, such as tests of internal controls, tests of
    • transactions, or tests of balances in balance sheet accounts
  59. negative
    confirmation request
    • The
    • negative form of accounts receivable confirmation asks the client's customer to
    • respond only if the customer disagrees with the balance determined by the
    • client. The positive form asks the customer to respond whether the customer
    • agrees or disagrees with the client's receivable balance. The negative form is
    • used when controls over receivables are strong and accounts receivable consists
    • of many accounts with small balances. The positive form is used when controls
    • are weak or there are fewer, but larger, accounts
  60. occurrence
    • Assertions about occurrence deal with
    • whether recorded transactions have occurred during a given period. For example,
    • management asserts that sales in the income statement represent the exchange of
    • goods or services with customers for cash or other consideration.
  61. obligations
    • Assertions about obligations deal
    • with whether liabilities are obligations of the entity at a given date. For
    • example, management asserts that amounts capitalized for leases in the balance
    • sheet represent the cost of the entity's rights to leased property and that the
    • corresponding lease liability represents an obligation of the entity
  62. opinion
    paragraph
    • The
    • paragraph in the audit report that expresses the auditor's conclusions. The
    • wording of the standard, unqualified opinion paragraph is: "In our
    • opinion, the financial statements referred to above present fairly, in all
    • material respects, the financial position of XYZ Company at December 31, year
    • A, and the results of its operations and its cash flows for the year then ended
    • in conformity with U.S. generally accepted accounting principles."
  63. other
    comprehensive basis of accounting
    • (OCBOA) means a definite set of criteria, other than accounting principles
    • generally accepted in the United States of America or International Financial
    • Reporting Standards (IFRSs), having substantial support underlying the
    • preparation of financial statements prepared pursuant to that basis.
  64. peer
    review
    • A practice
    • monitoring program in which the audit documentation of one CPA firm is
    • periodically reviewed by independent partners of other firms to determine that
    • it conforms to the standards of the profession.
  65. per
    diem
    • An allowance for
    • daily expenses. Often used to reimburse employees for estimated expenses as
    • opposed to accounting for each small component of the expenses
  66. permanent
    audit documentation
    • includes items of continuing accounting significance, such as the analysis of
    • balance sheet accounts and contingencies. Such information from a prior year is
    • used in the current audit and updated each year. Sometimes called the continuing
    • file
  67. personal
    financial statements
    • of
    • individuals present assets and liabilities at estimated current value on an
    • individual's balance sheet (statement of financial condition). A statement of
    • changes in net worth presents major changes in net worth during a period. The
    • accrual basis is used for assets and liabilities, which are presented in order
    • of liquidity and maturity, without classification as to current and noncurrent.
    • The cash value of life insurance less the amount of loans against it is an
    • asset. Deferred income tax on the difference between the income tax basis and
    • estimated current values is presented between liabilities and equity.
  68. pervasive
    • Having the ability to permeate. An
    • error is pervasive if it is material to more than one of the primary financial
    • statements.
  69. plan
    • Audit planning is
    • developing an overall strategy for conduct and scope of the audit. The nature,
    • extent, and timing of planning vary with size and complexity of the entity,
    • experience with the entity, and knowledge of the business. In planning the
    • audit, the auditor considers the entity's business and its industry, its
    • accounting policies and procedures, methods used to process accounting
    • information, the planned assessed level of control risk, and the auditor's
    • preliminary judgment about audit materiality
  70. presentation
    • Assertions about
    • presentation deal with whether particular financial statement components are
    • properly classified and described. For example, management asserts that
    • long-term liabilities in the balance sheet will not mature in one year.
    • Similarly, management asserts that extraordinary items in the income statement
    • are properly classified and described
  71. pro
    forma
    • The objective
    • of pro forma financial information is to show effects on historical financial
    • information as if a proposed event had occurred earlier
  72. prospectus
    • A registration statement filed with
    • the SEC includes audited financial statements (balance sheet, income statement,
    • and statement of cash flows) for the previous three years. A prospectus
    • contains the same information and must be supplied to all parties to whom
    • offers are made. There is a twenty-day waiting period between the filing of the
    • registration statement and the first sale of securities. During this period,
    • preliminary ads and a "red herring" prospectus can be provided to
    • offerees but it must be clearly marked as preliminary.
  73. proxy
    • A power of attorney granting a third
    • party the right to a stockholder's vote. When management or others solicit
    • proxies from stockholders a copy of the proxy statement must be filed with the
    • SEC ten days before mailing the solicitation. The proxy statement must include
    • all information relevant to the matter voted on
  74. qualified
    (qualify)
    • An audit
    • opinion that the financial statements as a whole are presented in conformity
    • with U.S. GAAP, with the exceptions noted.
  75. qualitative
    • Relating to the quality of a trait,
    • as opposed to quantitative, which means expressed as a number.
  76. quantitative
    (quantitatively)
    • Expressed
    • as a number, as opposed to qualitative measurement.
  77. reasonable
    assurance (in internal control)
    • An
    • internal control, no matter how well designed and operated, cannot guarantee
    • that an entity’s objectives will be met because of inherent limitations in all
    • internal control systems.
  78. reconcile (reconciliation)
    • A schedule establishing agreement between separate sources of information, such
    • as accounting records reconciled with the financial statements
  79. relevant
    assertion
    • is a
    • financial statement assertion that has a reasonable possibility of containing a
    • misstatement or misstatements that would cause the financial statements to be
    • materially misstated.
  80. remittance
    • Sending money to someone. A
    • remittance advice is a record of the amount sent, purpose of the payment, and
    • associated account identification.
  81. review
    • To examine again. The overall review
    • of audit documentation is completed after field work. A peer review is a
    • practice monitoring program in which audit documentation of one CPA firm is
    • periodically reviewed by independent partners of other firms to determine that
    • they conform to professional standards. An analytical review is a type of
    • substantive audit procedure. A review of financial statements of a nonpublic
    • company is an engagement that results in the expression of less assurance than
    • an audit, but more than in a compilation. A review of interim financial
    • statements of a public company consists of analytical procedures and inquiries.
  82. risk
    assessment procedures
    • are the audit procedures performed to obtain an understanding of the entity and
    • its environment, including the entity's internal control, to identify and
    • assess the risks of material misstatement, whether due to fraud or error, at
    • the financial statement and relevant assertion levels.
  83. sarbanes-oxley act
    • established the Public Company
    • Accounting Oversight Board and added requirements for publicly traded
    • companies, their officers, boards and auditors. It increased
    • penalties for corporate financial fraud.
  84. sas
    • "Statements on Auditing Standards" are
    • interpretations of U.S. generally accepted auditing standards issued by the
    • AICPA’s auditing standards board
  85. scope
    • The type of engagement. The scope of
    • an engagement might be a review, an audit, or a compilation. A scope limitation
    • is a restriction on the evidence the auditor can gather.
  86. scope
    paragraph
    • The
    • paragraph in the audit report that explains the scope of the engagement. The
    • wording of the standard scope paragraph is: "We conducted our audit in
    • accordance with U.S. generally accepted auditing standards. Those standards
    • require that we plan and perform the audit to obtain reasonable assurance about
    • whether the financial statements are free of material misstatement. An audit
    • includes examining, on a test basis, evidence supporting the amounts and
    • disclosures in the financial statements. An audit also includes assessing the
    • accounting principles used and significant estimates made by management, as
    • well as evaluating the overall financial statement presentation. We believe
    • that our audit provides a reasonable basis for our opinion."
  87. ssars
    • Statements on Standards for
    • Accounting and Review Services (SSARS) are pronouncements concerning unaudited
    • financial information of a nonpublic entity issued by the AICPA Accounting and
    • Review Services Committee.
  88. stratify
    • To arrange a population or a sample
    • in distinct layers. Stratified sampling is used in auditing to select a greater
    • percentage of accounts with high balances than of accounts with low balances
  89. subsequent
    events
    • affect the
    • client and occur between the balance sheet date and issuance of the financial
    • statements. Some such events provide additional evidence about conditions that
    • existed at the balance sheet date, such as the bankruptcy of a customer with a
    • history of financial difficulty. The financial statements are adjusted to
    • reflect this evidence. Conditions that did not exist at the balance sheet date,
    • such as fire that destroyed the client's plant after the balance sheet date,
    • may be so significant as to require disclosure.
  90. subsidiary
    ledger
    • The detailed
    • information that totals to the balance in the general ledger account. The total
    • of all customer accounts receivable included in the subsidiary ledger of
    • accounts receivable is the balance in the general ledger accounts receivable
    • account.
  91. substantive audit
    procedure
    • is a direct test of a financial statement balance designed to
    • detect material misstatements at the assertion level. Substantive procedures
    • comprise tests of details (classes of transactions, account balances, and
    • disclosures), and substantive analytical procedures
  92. test
    of controls (tests of the operating effectiveness of internal controls)
    • Auditors evaluate the design of
    • controls, then determine if the controls are in operation. In order to rely on
    • the controls they must also obtain evidence as to whether the controls are
    • operating effectively.
  93. test
    of detail
    • Direct
    • tests of financial statement balances (substantive audit procedures) that are
    • not analytical procedures. If tests of details are performed as tests of
    • controls as well as substantive tests they are "dual-purpose" tests.
  94. tick
    marks
    • in audit work
    • papers are footnotes represented by a symbol instead of by a number. They
    • indicate procedures that have been carried out on specific items in the work
    • papers.
  95. trial
    balance
    • A statement
    • of open debit and credit accounts in a ledger to test their equality
  96. unqualified
    • An audit opinion that
    • the financial statements are in conformity with U.S. GAAP.
  97. trace
    • Follow a transaction through the
    • steps of the system.
  98. vouch
    • Prove accuracy of
    • accounting entries by tracing to supporting documents.
  99. working
    papers
    • (written audit
    • documentation) Records kept by the auditor of procedures applied, tests
    • performed, information obtained, and pertinent conclusions in the engagement.
  100. write-off
    • Cancellation of part
    • or all of a balance. Costs incurred that have no future utility are charged
    • (written-off) to an expense or loss account, not carried forward as an asset.

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