Glossary of Basic Auditing Terms

From Wikicpa

Contents: Top - 0–9 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

• Adverse opinion: An opinion that the financial statements do not present fairly financial position, results of operations, and changes in financial position, in conformity with generally accepted accounting principles.

• Analytical review procedures: Substantive tests that involve comparisons of financial data for the current year to that of prior years, budgets, nonfinancial date, or industry averages. From a planning standpoint, analytical review procedures help the auditors obtain an understanding of the client’s business, and identify financial statements amounts that appear to be affected by errors or irregularities, or other potential problems.

• Attest function: The primary function of the independent public accountant - to attest to financial statements; that is, to bear witness as to their reliability and fairness - the independent opinion of the CPA lends credibility to audited financial statements.

• Audit: An examination or investigation by independent public accountants of a set of financial statements, and the accounting records and other supporting evidence both within and outside the client’s business.

• Audit committee: A committee of a corporation’s board of directors that engages independent auditors, reviews audit findings, monitors activities of the internal auditing staff, and intervenes in any disputes between management and the independent auditors. Preferably, members of the audit committee are outside directors, that is, members of the board of directors who do not also serve as corporate officers.

• Auditors’ standard report: A very precise document designed to communicate exactly the character and limitations of the responsibility being assumed by the auditors; in standard form, the report consists of a scope paragraph and an opinion paragraph, which cover the basic financial statements.

• Audit risk: The risk that the auditors’ investigation will fail to disclose material deficiencies which exist in the financial statements.

C

• Compilation of financial statements: The preparation of financial statements by CPAs based on representations of management, with the expression of no assurance concerning the statements’ compliance with generally accepted accounting principles

• Compliance audit: An audit to determine whether verifiable data such as income tax returns or other financial reports are in compliance with established criteria.

• Constructive fraud: Performing duties that require exceptional care with such recklessness that persons believing the duties to have been completed carefully are being misled. Differs from fraud in that constructive fraud does not involve knowledge of misrepresentations within the financial statements.

D

• Disclaimer of opinion: A form of report in which the auditors state that they do not express an opinion on the financial statements.

• Due diligence: A CPA firm’s contention that its audit work was adequate to support its opinion on financial statements included in a registration statement filed with the SEC under the Securities Act of 1933

E

• Engagement letter: A formal letter sent by the auditors to the client at the beginning of an engagement summarizing the nature of the engagement, any limitations on the scope of audit work, work to be done by the client’s staff, and the basis for the audit fee. The purpose of engagement letters is to avoid misunderstandings, and they are essential on nonaudit engagements as well as audits.

F

• Fraud: Misrepresentation by a person of a material fact, known by that person to be untrue or made with reckless indifference as to whether the fact is true, with intent to deceive and with result that another party is injured.

I

• Independence: A most important auditing standard, which prohibits CPAs from expressing an opinion on financial statements of an enterprise unless they are independent with respect to such enterprise; independence is impaired by a material financial interest, service as an officer or trustee, loans to or from the enterprise, and various other relationships.

• Internal auditors: Corporation employees who design and execute audit programs to test the efficiency of all aspects of internal control. The primary objective of internal auditors is to evaluate and improve the efficiency of the various operating units of an organization, rather than to express an opinion as to the fairness of financial statements.

• Internal control: All the measures used by a business for the purposes of (a)safeguarding its resources from waste, fraud, and inefficiency; (b) promoting accuracy and reliability in accounting and operating data; (c) encouraging compliance with company policy; and (d) judging the efficiency of operations in all divisions of the business.

• Irregularities: Intentional distortions in financial statements, often accompanied by falsifications in the accounting records

K

• Kiting: Manipulations causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. Kiting schemes are based on the float period—the time necessary for a check deposited in one bank to clear the bank on which it was drawn.

M

• Management letter: A report to management containing the auditors’ recommendations for correcting any deficiencies disclosed by the auditors’ study and evaluation of internal control. In addition to providing management with useful information, a management letter may also help limit the auditors’ liability in the event a control weakness subsequently results in a loss sustained by the client.

• Material: Being of substantial importance. Significant enough to affect evaluations or decisions by users of financial statements. Information that should be disclosed in order that financial statements constitute a fair presentation. Involves both quantitative and qualitative criteria.

N

• Negative confirmation: A confirmation request addressed to the debtor requesting a reply only if the balance shown on the monthly statement is incorrect.

O

• Operational audit: A review of a department or other unit of a business or governmental organization to measure the efficiency of operations.

P

• Peer review: The study and evaluation of a CPA firm’s quality control policies and procedures by another CPA firm or a team of qualified CPAs.

• Positive confirmation: A confirmation request sent to the debtor asking it to confirm directly to the auditors the accuracy of the dollar amount shown on the request. Requires a reply regardless of whether the amount is correct or incorrect.

• Principal auditors: Auditors who use the work and reports of other independent CPAs who have examined the financial statements of one or more subsidiaries, branches, or other segments of the principal auditors’ client.

Q

• Qualified opinion: A modification of the Auditors’ standard report, employing an except for or subject to clause to limit the auditors’ endorsement of the financial statements. A qualified opinion indicates that except for some limitation on the scope of the examination, some departure from generally accepted accounting principles, some inconsistency in the use of accounting principles, or subject to some unresolved uncertainty, the financial statements are fairly presented.

R

• Registration statement: A document including audited financial statements that must be filed with the SEC by any company intending to sell its securities to the public through the mails or interstate commerce. The Securities Act of 1933 provides liability to security purchasers for material misrepresentations in registration statements.

• Review of financial statements: The performance of limited investigative procedures that are substantially less in scope than an audit made in accordance with generally accepted auditing standards. The procedures provide the CPAs with a basis to provide limited assurance that the financial statements are in accordance with generally accepted accounting principles.

S

• Securities Act of 1933: A federal securities statute covering registration statements for securities to be sold to the public. The Act requires auditors to exercise “due diligence,” and creates both civil and criminal penalties for misrepresentation.

• Securities Exchange Act of 1934: A federal securities statute requiring large companies to file annual audited financial statements with the SEC. The Act requires auditors to “act in good faith,” and creates civil and criminal penalties for misrepresentation.

• Scope limitation: Something that prevents the auditors from being able to apply all of the audit procedures that they consider necessary under the circumstances. Scope limitations may be client imposed, may stem from cost considerations, or may be imposed by other entities.

• Substantive tests: Tests of account balances and transactions designed to detect any material errors in the financial statements. The nature, timing, and extent of substantive testing is determined by the auditors’ study and evaluation of the client’s system of internal control.

T

• Tick mark: A symbol used in working papers by the auditor to indicate a specific step in the work performed. Whenever tick marks are used, they must be accompanied by a legend explaining their meaning.

U

• Unqualified opinion: The form of audit report issued when the examination was adequate in scope and the auditors believe that the financial statements present fairly the financial position and operating results in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year.