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Chapters 4-6
Significant terms for Chapters 4-6
| Question | Answer |
|---|---|
| Breach of contract | Failure to perform a contractual duty that has not been excused; for audit firms, the parties to a contract normally include clients and designated third-party beneficiaries. |
| Class action lawsuits | Lawsuits brought on behalf of Lg group of plaintiffs to consolidate suits & encourage consistent judgments & minimize litigation costs; plaintiff s/h may bring suit for themselves & all other in similar situation, i.e., all s/h of record at specific date |
| Common law | Liability concepts are developed through court decisions based on negligence, gross negligence, or fraud. |
| Confidential information | Info obtained during the conduct of an audit related to client's business or business plans; auditor is prohibited from communicating confidential information except in very specific instances defined by the Code or with client's specific authorization |
| Contingent fee | A fee established for the performance of any service in which a fee will not be collected unless a specified finding or result is attained, or in which the amount of the fee depends on the finding or results of such services |
| Contingent fee cases | Lawsuits brought by plaintiffs with compensation for their attorneys being contingent on the outcome of the litigation |
| Contract law | Liability occurs where there is a breach of contract. The contract is usually between the external auditor and the client for the performance of the FS audit. |
| Covered member | An individual on the audit engagement team, an individual in a position to influence the audit engagement, or a partner in the office in which the lead audit engagement partner primarily practices in connection with the audit engagement |
| Deep-pocket theory | The practice of suiting another party not based on the level of their true fault in a legal action, but based instead on the perceived ability of that party to pay damages. |
| Direct financial interested | Financial int. owned directly by, or under ctrl of, an ind. or entity or beneficially owned through investment vehicle, estate or trust when beneficiary ctrls intermediary or has auth to supervise or participate in the intermediary's investment decisions |
| Ethical dilemma | A situation in which moral duties or obligations conflict; an ethically correct action may conflict with an individual's immediate self-interest |
| Expectations gap | A misunderstanding whereby s/h mistakenly believe they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the F/S |
| Foreseeable user | Those not known specifically by the auditor to be using the FS, but recognized by general knowledge as current and potential creditors and investors who will use them |
| Foreseen user | Individually unknown third parties who are members of a known or intended class of third-party users who the auditor, through knowledge gained from interactions with the client, can foresee will use the statements. |
| Fraud | Intentional concealment or misrepresentation of a material fact with the intent to deceive another person, causing damage to the deceived person. |
| Gross negligence | Failure to use even minimal care or evidence of activities that show a recklessness or careless disregard for the truth; evidence may not e present, but may be inferred by a judge or jury because of the carelessness of the defendant's conduct |
| Identified user | Third-party beneficiaries and other users when the auditor has specific knowledge that known users will be utilizing the financial statements in making specific economic decisions |
| Indirect financial interest | A financial interest in which the beneficiary neither controls the intermediary nor has the authority to supervise or participate in the intermediary's investment decisions. |
| Joint and several liability | A type of liability that apportions losses among all defendant who have an ability to pay for the damages, regardless of the level of fault |
| Negligence | Failure to exercise reasonable care, thereby causing harm to another or to property |
| Objectivity | An impartial, unbiased mental attitude that auditors should maintain |
| Privileged communication | Information about a client that cannot be subpoenaed by a court of law to e used against a client; itallows no exceptions to confidentiality |
| Principles of professional conduct | Broad principles that articulate auditors' responsibilities & their requirements to act in the public interest, to act with integrity & objectivity, to be independent, to exercise due care, and to perform an appropriate scope of services |
| Professional judgment | The application of relevant professional knowledge and experience to the facts and circumstances in order to reach a conclusion or make a decision |
| Proportionate liability | Payment by an individual defendant based on the degree of fault of the individual |
| Prospectus | 1st part of a reg stmt filed with SEC, issued as part of a public offering of debt or equity, used to solicit prospective investors in a new security issue containing audited FS. The Sec Act of 1933 imposes liability for misstatements in a prospectus |
| Rights theory | An ethical thery that identifies a hierarchy of rights that should be considered in solving ethical dilemmas. |
| Rules of conduct | Detailed guidance to assist auditor in applying the broad principles in the AICPA's Code of Prof Conduct; the rules have evolved over time as professionals have encountered specific ethical dilemmas in complying with the principles of the Code |
| Scienter | Knowledge on the part of the person making the representations, at the time they are made, that they are false; intent |
| Stakeholders | Those parties who have a vested interested in, or are affected by, the decision resulting from an ethical dilemma. |
| Statutory law | Laws developed through legislation, such as the Securities Act of 1933 and the Securities Exchange Act of 1934. |
| Third-party beneficiary | A person who was not a party to a contract but is named in the contract as one to whom the contracting parties intended that benefits be given |
| Tort | A civil wrong, other than breach of contract, based on negligence, constructive fraud, or fraud. |
| Utilitarian theory | Ethical theory that systematically considers all potential stakeholders who may be affected by ethical decision & seeks to measure effects of decision on each party; seeks to facilitate decisions results in greatest amt of good for the greatest # of ppl |
| Audit Evidence | Information used by the auditor in arriving at the conclusions on which the auditor's opinion is based |
| Appropriate audit evidence | The measure of the quality of audit evidence (that is, its relevance and reliability in providing support for the conclusions on which the auditor's opinion is based). |
| Audit procedures | Procedures designed to obtain audit evidence to support the audit opinion(s). 3 categories of procedures include risk assessment procedures, tests of controls, and substantive procedures (incl substantive analytical procedures and tests of details). |
| Audit program | An audit document that lists the audit procedures to be followed in gathering audit evidence and helps those in charge of the audit to monitor the progress and supervise the work |
| Control risk | Risk that a misstatement due to error or fraud that could occurring an assertion and that could be material, indiv. or in comb. with other misstatements, will not be prevented or detected on a timely basis by the org's internal control. |
| Control Risk function | Function of the effectiveness of the design and operation of internal control |
| Controls reliance audit | An audit hat includes tests of controls and substantive procedures |
| Dual-purpose test | A substantive test and a related test of a relevant control that are performed concurrently, for example a substantive test of sales transactions performed concurrently with a test over those transactions. |
| Inherent risk | Susceptibility of an assertion to a misstatement, due to error or fraud, that could be material, individually, or in combination with other misstatements, before consideration of any related controls |
| Risk assessment procedure | Performed by the auditor to obtain info for identifying and assessing the risk of Material Misstatement in the FS whether due to error or fraud. Alone, RAPs do not provide appropriate evidence on which to base an audit opinion, but used in planning |
| Substantive audit | An audit that includes substantive procedures and does not include tests of controls |
| Substantive procedure | Procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise tests of details and substantive analytical procedures |
| Sufficient audit evidence | The measure of the quantity of audit evidence |
| Test of controls | An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements, typically at the assertion level. |
| Accounting records | The records of initial accounting entries and supporting records |
| Analytical procedures | Evaluations of financial information through analyzing plausible relationships among both financial and nonfinancial data. |
| Appropriateness of audit evidence | A measure of the quality of audit evidence, and includes both the relevance and reliability of the evidence. |
| Audit Adjustment | Correction of a misstatement of FS that was or should have been proposed by the auditor, whether or not recorded by mgmt. that could, either individually or when aggregated with other misstatements, have a material effect on the company's FS |
| Audit documentation | The written record that forms the basis for the auditor's conclusions |
| Audit program | A workpaper that specifies the procedures to be performed in gathering audit evidence and is used to record the successful completion of each audit step |
| Auditor's specialist | An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. May be internal/external |
| Corroboration | Obtaining sufficient evidence that management's explanation is accurat |
| Cross-footing | Checking the agreement of the cross-addition of a number of columns of figures that sum to a grand total. |
| Cutoff period | A period of time usually covering several days before and after the client's balance sheet date. |
| Cutoff tests | Procedures applied to transactions selected from those recorded during the cutoff period to provide evidence as to whether the transactions have been recorded in the proper period |
| Direct evidence | Audit evidence that requires only one inference to reach a conclusion about the assertion being tested. Usually that inference is that the sample taken is representative of the population as a whole |
| Directional testing | Testing acct balances that considers the type of misstatement likely to occur in the acct balance & the corresponding evidence provided by other accounts that have been tested. |
| Examples of directional testing | The auditor normally tests assets/expenses for overstmt, liabilities/revenues for understmt, because (1) major risks of MStmts on those accts are in those directions or (2) tests of other accts provide evidence of possible MStmts in the other direction |
| Disaggregation | Breaking data down into their component parts, such as different time periods, geographical locations, customer type, or product lines |
| Footing | Adding a column of figures to verify the correctness of the client's totals |
| Indirect evidence | Audit evidence that requires a linkage of inferences to provide assurance about the assertion being testing, that is, one or more inferences are made. Examples include inferences made when using analytical procedures as audit evidence. |
| Interim date | A date at which audit evidence is collected earlier than the balance sheet date |
| Management's specialist | An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the FS. |
| Quantification | Determining whether management's explanation for observed differences can in fact account for the observed differences. |
| Reasonableness test | The development of an expected value of an account by using data partly or wholly independent of the client's accounting information system |
| Recalculating estimated amounts | Recomputing an amount that the client has already estimated, such as recomputing the allowance for doubtful accounts based on a formula related to the aging of accounts receivable ending balances. |
| Related-party transactions | Transactions that a client has with other companies or people who may be related to either the client or client's senior manager |
| Relevance of audit evidence | Evidence that provides insight on the validity of the assertion being tested; that is, the evidence bears directly on the assertion being tested |
| Reliability of audit evidence | A measure of the quality of the underlying evidence. It is influenced by risk, potential mgmt bias associated with the evidence, and the quality of he internal control system underlying the preparation of the evidence |
| Reperformance | The auditor's independent execution of controls that were originally performed as part of the entity's internal control |
| Roll-forward period | The period between the confirmation date and the balance sheet date |
| Scanning | A type of analytical procedure involving the auditor's review of accounting data to identify significant or unusual items to test |
| Significant issues or audit findings | Substantive matters that are important to the procedures performed, evidence obtained, or conclusions reached on an audit |
| Sufficiency of evidence | Measure of the quantity of audit evidence |
| Tests of extensions | Recomputing items involving multiplication. |
| Tracing | Taking a sample of original source documents and ensuring that the transactions related to the source documents have been recorded in the appropriate journal and general ledger. |
| Vouching | Taking a sample of recorded transactions and obtaining the original source documents supporting the recorded transaction. |
Created by:
Dawn1231
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