D215 Terms

Ability of cash flow from operations to cover current debt and dividends

Measures ability to cover current debt maturities and dividends with operating cash flow.

Accounting estimate

An approximation of a monetary amount when a precise means of measurement is not available.

Accounting records

Client's records of the initial accounting entry and supporting documents.

Acid-test (quick) ratio

Measures ability to meet short-term obligations with liquid assets such as cash, short-term investments, and receivables.

Advance shipping notice (ASN)

An electronic acknowledgement of a transaction by a supplier indicating goods shipped, prices, and other information such as freight costs or taxes.

Adverse interest threat

The threat that a CPA will not act with objectivity because the CPA's interests are opposed to the client's interests.

Adverse opinion

Auditors state the financial statements are not fairly presented due to a pervasively material departure from the applicable financial reporting framework.

Advocacy threat

The threat that a CPA will promote a client's interests or position to the point that his or her objectivity or independence is compromised.

Allowance for sampling risk (ASR)

A measure of the uncertainty associated with not sampling the entire population.

Analytical procedures

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data; analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.

Appropriate

Refers to the quality of audit evidence gathered.

Assertions

Statements or representations, explicit or implied, made by management regarding the recognition, measurement, presentation, and disclosure of items included in the financial statements.

Assurance services

Independent professional services that improve the quality of information, or its context, for decision makers.

Attestation services

Services performed when an independent practitioner, or CPA, is engaged to issue a report on subject matter that is the responsibility of another party.

Attribute sampling

A sampling technique used to reach a conclusion about a population in terms of a rate (frequency) of occurrence.

Audit committee

A committee of the board of directors responsible for oversight of internal controls, financial reporting and disclosure in the financial statements, regulatory compliance, and the company's independent auditors.

Audit data analytics (ADA)

The science and art of discovering and analyzing patterns, identifying anomalies, and extracting other useful information in data underlying or related to the subject matter of an audit through analysis, modeling, and visualization for planning and performing the audit.

Audit evidence

Information gathered by the auditor that is used when forming an opinion on the fair presentation of a client's financial statements.

Audit program

A listing of details of the audit procedures to be used when testing controls, conducting detailed substantive audit procedures, and completing the audit.

Audit risk

The risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Audit sampling

The selection and evaluation of less than 100% of the population of audit relevance such that the auditor expects the items selected (the sample) to be representative of the population and, thus, likely to provide a reasonable basis for conclusions about the population.

Audit services

Services by an independent CPA that provide financial statement users with (1) an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework and, in some cases, (2) an opinion on the effectiveness of ICFR, which enhances the degree of confidence that intended users can place in the financial statements.

Audit strategy

The determination of the amount of time spent testing the client's internal controls and conducting detailed testing of transactions and account balances.

Bank confirmation

Correspondence sent directly by the auditors to their client's bank requesting information such as cash held in the bank and details of any loans with the bank and interest rates charged.

Basic precision (BP)

The amount of estimated misstatement in the population, even if no misstatements are detected in the sample.

Benchmarking

An audit testing strategy that can be used to allow evidence obtained in prior audit periods to support a conclusion about IT application controls in the current audit period.

Bid rigging

An employee assists a vendor in winning a competitive bid for a contract; employee is compensated, usually in the form of a cash payment.

Bill-and-hold transactions

A customer is billed for goods, but goods are not shipped; accounting principles have very narrow criteria for when revenue can be recognized for a bill-and-hold transaction; the transaction must be initiated by the customer, and the customer must have a sound economic reason for purchasing the goods and asking the seller to continue to hold the goods.

Board of directors

A group that represents the shareholders and is responsible for ensuring the company is being run to benefit the shareholders.

Bond trustee

A bond trustee is usually a commercial bank or a trust company that is given fiduciary powers by a bond issuer to enforce the terms of a bond indenture; the trustee sees that bond interest payments are made as scheduled and protects the interests of the bondholders if the issuer defaults.

Breach of contract

A binding agreement is not honored by one or more parties to a contract.

Cash earnings per share (CEPS) ratio

Shows cash flow capacity of a company for each common share issued.

Classical variables sampling

A sampling method that uses normal distribution theory to select a sample from a population and evaluate the characteristics of a population based on the results of the sample.

Close relative

A covered member's parents, nondependent children, brothers and sisters, or stepbrothers or stepsisters.

Closing procedures

Processes used by a client when finalizing the accounts for an accounting period.

Cluster analysis

The process of discovering groups (termed clusters in data science) of similar items in a set of data; items in the same group are similar, while items in different groups are not as similar.

Common law

Law based on justice, reason, and common sense, rather than on absolute rules.

Common-size analysis

A comparison of account balances to a single line item.

Compilation engagement

An engagement in which a CPA applies accounting and financial expertise to assist management in the presentation of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.

Compilation of inventory values

The client's documentation behind the value for inventory in the general ledger; this shows the quantity of each item in inventory and the values assigned to each item in inventory.

Compliance audit

An audit to determine whether the entity has conformed with regulations, rules, or processes.

Component

An entity or business activity whose financial information is required by an applicable financial reporting framework to be included in group financial statements.

Component auditor

An audit firm that performs work on the financial information of a component that will be used as audit evidence for the group audit.

Confirmation bias

The tendency to seek or interpret evidence in ways that support pre-existing beliefs or expectations.

Consignment inventory

Inventory that is sent by its owner (consignor) to an agent (consignee) who undertakes to sell the goods; the consignee has an obligation to pay the consignor when the goods are sold by the consignee.

Consignment sales

May occur in a transaction between a manufacturer and a wholesaler, when the seller retains title to inventory in the wholesaler's possession, and the sale is completed when the wholesaler sells the inventory forward; a consignment sale may be created in economic substance when the terms of sale create uncertainties about whether the wholesaler assumes risk of ownership upon receipt of goods.

Control activities

Policies and procedures that help ensure that management directives are carried out.

Control environment

The attitudes, awareness, and actions of management and those charged with governance concerning the entity's internal control and its importance in the entity.

Control exception (deviation)

An observed condition that provides evidence that the control being tested did not operate as intended.

Control risk

The risk that a client's system of internal controls will not prevent or detect a material misstatement on a timely basis.

Corporate governance

The people, systems, and processes within companies used to ensure that companies are well-managed and that risks are identified and controlled by management and entity personnel.

Covered member

A person in a position to potentially influence attest decisions or the outcome of an attest engagement.

Criminal liability

Subjects auditors to penalties of fines or imprisonment or both; the only entities that can bring charges for criminal causes of action are federal or state governments.

Critical accounting estimates

Accounting estimates whose nature and impact on the financial statements are material because of the high levels of subjectivity and judgment necessary to account for highly uncertain matters.

Critical accounting policies and practices

Accounting policies and practices that are most important to the portrayal of the company's financial condition and results, and require management's most difficult, subjective, or complex judgments.

Critical audit matter (CAM)

Any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment.

Current file

Contains client information that is relevant for the duration of one audit.

Current ratio

Measures ability to meet short-term obligations as they come due.

Cutoff bank statement

A bank statement for the period subsequent to the date of the balance sheet that the client requests the bank to send directly to the auditor.

Cycle counts

The client will frequently identify a small portion of items in the perpetual inventory, count actual inventory, and investigate discrepancies; the client will usually vouch items in the perpetual records to the actual inventory on hand (testing existence), and also count inventory on hand for other items and then trace results to the perpetual records (testing completeness).

Debt-to-equity ratio

Measures the relative proportion of equity and debt used to finance total assets.

Deficiency in internal control (control deficiency)

A deficiency in the design or operations of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis.

Desired level of assurance

The level of assurance that the sample is representative of the population; the auditor wants to choose a level of assurance so tolerable misstatement is less likely to be exceeded by the actual misstatement in the population.

Detection risk

The risk that the auditor's testing procedures will not be effective in detecting a material misstatement.

Detective controls

Controls applied after transactions have been processed to identify whether fraud or errors have occurred, and to rectify the fraud or errors on a timely basis.

Difference method

A method of estimating the audited value of the population where the auditor adds (or subtracts) the projected difference between the audited value and book value of the sample to the book value of each stratum.

Direct and material effect

A situation in which noncompliance with laws and regulations impacts amounts and disclosures already included in the financial statements.

Disclaimer of opinion

Auditors provide no opinion on the financial statements due to a pervasively material scope limitation or lack of independence from the client.

Disclosure committee

A committee often led by the CFO or chief legal officer with the purpose of helping ensure that financial statement disclosures are accurate, complete, and fairly presented in all material respects.

Dual dating

Showing two dates on an audit report; one date is the end of fieldwork and the other is the date of a revision to the financial statements that occurred after the end of fieldwork.

Dual-purpose test

A substantive test of a transaction and a test of control relevant to that transaction that are performed concurrently.

Due care defense

The auditor's documentation should provide evidence that the audit was performed in accordance with auditing standards generally accepted in the United States.

Due diligence defense

An audit firm must show that it made a reasonable investigation, that the firm followed auditing standards, and accordingly had reasonable grounds to believe, and did believe, that the statements certified were true at the date of the statements and as of the time the registration statement became effective.

Due professional care

Exercising due professional care expected of other CPAs in the performance of professional services.

Earnings per share (EPS) ratio

Measures the earnings return on each common share issued.

Electronic invoice presentment and payment (EIPP) systems

An electronic system that uses a third-party payment process to settle a business-to-business transaction.

Emphasis-of-matter paragraph

A paragraph included in the auditor's report that is required by generally accepted auditing standards, or is included at the auditor's discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's professional judgment, is of such importance that it is fundamental to users' understanding of the financial statements.

Engagement letter

Sets out the terms of the audit engagement, to avoid any misunderstandings between the auditor and the client.

Engagement partner

Partner or other person in the firm who is responsible for the audit engagement and its performance and for the auditor's report that is issued on behalf of the firm.

Engagement quality control reviewer

A partner or other person in the firm, who is not part of the engagement team, who has sufficient and appropriate experience and authority to objectively evaluate the significant judgments that the engagement team made and the conclusions it reached in formulating the auditor's report.

Entity-level controls

The client's control environment, risk assessment process, information system, control activities, and monitoring of controls that exist at the organizational level.

Entity-level risk

Client risk that affects multiple financial statement accounts, assertions, and transaction classes.

Error

An unintentional misstatement in amounts or disclosures in the financial statements.

Estimation uncertainty

The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement.

Evaluated receipt settlement (ERS)

A highly automated business process between suppliers and purchasers to exchange data electronically and execute a purchase transaction electronically.

Examining subsequent payments

Examining vouchers paid after the balance sheet date (or an interim date) to determine if the payment is for an obligation that existed as of the balance sheet date (or an interim date) and whether the obligation was in fact recorded as of the balance sheet date (or an interim date).

Executive directors

Employees of the company who also hold a position on the board of directors.

Expected misstatement (EM)

The amount of misstatement the auditor expects in a transaction class or account balance when performing a substantive test.

Expected rate of deviation in the population

The rate at which the auditor expects controls not to function as planned.

Extent of an audit procedure

The determination of the quantity of audit procedures to be performed.

External confirmation

An audit procedure in which the auditor corresponds directly with a third party, either in paper or electronic form, and the third party responds directly to the auditor on the matter(s) included in the confirmation.

False positives

Items incorrectly identified as notable items.

Familiarity threat

The threat that, due to a long or close relationship with a client, a CPA will become too sympathetic to the client's interests or too accepting of the client's work or product.

Financing activities

Transactions and events whereby cash is obtained from, or repaid to, lenders (debt financing) or owners (equity financing).

FOB destination

Title passes from seller to buyer when goods arrive at the customer's warehouse.

FOB shipping point

Title passes from seller to buyer when goods are shipped.

Foreseeable parties

Individuals or entities who the auditor either knew, or should have known, would rely on the audit report.

Foreseen class

A limited class of third parties known to be relying on the financial statements.

Fraud (auditor legal liability)

Intentional deception, such as misrepresentation, concealment, or nondisclosure of a material fact, that results in injury to another.

Fraud (client management)

An intentional act through the use of deception that results in a misstatement in financial statements that are the subject of an audit.