concepts of auditing midterm

summer 2026

Assurance Services

Professional services that enhance the quality of information (or its context) for decision makers.

Attest Engagement

A type of assurance service where the CPA issues a report on subject matter or an assertion that is the responsibility of another party (e.g., management).

Attest

To bear witness to, certify, or declare something to be correct, true, or genuine in an official capacity.

Subject Matter

The information being examined in an attest engagement (e.g., financial statements, internal controls).

Suitable Criteria

The benchmarks or standards used to measure and evaluate the subject matter (e.g., GAAP, COSO framework).

Reasonable Assurance

A high level of confidence (but not absolute) that the financial statements are free from material misstatement — the level of assurance provided by an audit.

Limited Assurance

A lower level of assurance (negative assurance) provided by a review engagement — "we are not aware of any material modifications."

Examination (Audit)

An attest engagement providing reasonable assurance (highest level) — the CPA issues an opinion.

Review

An attest engagement providing limited assurance — procedures limited to inquiry and analytical procedures.

Agreed-Upon Procedures

An attest engagement where the CPA performs specific procedures (determined by the user) and reports findings — but provides no assurance or opinion.

Integrated Audit

An audit that provides assurance on both the financial statements and internal control over financial reporting — required for public companies under SOX.

Forensic Audit

An investigative audit performed when fraud is suspected or found — often used for legal proceedings.

CPA (Certified Public Accountant)

Independent auditor who audits financial statements, provides tax and consulting services, and serves the public interest.

Internal Auditor

An employee of the company who evaluates risks, internal controls, and operations — reports to management or the audit committee.

GAO (Government Accountability Office) Auditor

Audits U.S. federal government programs and reports to Congress.

IRS Auditor

Audits tax returns to ensure compliance with tax laws.

Bank Examiner

Audits banks to verify cash, securities, loans, and compliance with banking laws.

AICPA (American Institute of Certified Public Accountants)

The national professional organization of CPAs — sets ethical and auditing standards for nonpublic companies, provides CPE, and regulates members.

PCAOB (Public Company Accounting Oversight Board)

Created by SOX to oversee auditors of public companies — sets auditing standards, inspects firms, and sanctions violators.

SEC (Securities and Exchange Commission)

U.S. government agency that regulates securities markets — requires full disclosure from public companies and oversees the PCAOB.

FASB (Financial Accounting Standards Board)

Sets GAAP for nongovernmental entities (public companies, private companies, nonprofits).

GASB (Government Accounting Standards Board)

Sets accounting standards for state and local governments.

FASAB (Federal Accounting Standards Advisory Board)

Sets accounting standards for the U.S. federal government.

Sarbanes-Oxley Act (SOX)

2002 law that created the PCAOB, restricted consulting services for audit clients, and toughened penalties for corporate fraud.

Registration Statement

A document filed with the SEC when a company wants to sell securities to the public — includes audited financial statements.

Information Risk

The risk that financial information is materially misstated — audits reduce this risk.

Business Risk

The risk that a company will not be able to meet its financial obligations due to economic conditions or poor management decisions — audits do not address this risk.

State Board of Accountancy

The government body that issues CPA licenses and can suspend or revoke them.

NASBA (National Association of State Boards of Accountancy)

The national organization that helps coordinate state boards and administer the CPA exam.

Peer Review

An external review of a CPA firm's quality control system — performed by another CPA firm to check compliance with professional standards.

Industry Specialization

CPA firms developing deep expertise in specific industries — helps them be more effective auditors and provide better consulting advice.

Forensic Audit

An investigative audit performed when fraud is suspected or found — often used for legal proceedings.

GAAS (Generally Accepted Auditing Standards)

Auditing standards for nonpublic company audits — issued by the AICPA (Auditing Standards Board).

PCAOB Standards

Auditing standards for public company audits — issued by the PCAOB.

SAS (Statements on Auditing Standards)

Official pronouncements issued by the AICPA's Auditing Standards Board — establish GAAS for nonpublic company audits.

SSAE (Statements on Standards for Attestation Engagements)

AICPA standards for attestation engagements other than financial statement audits (e.g., financial forecasts, internal controls).

SSARS (Statements on Standards for Accounting and Review Services)

AICPA standards for reviews and compilations (not audits) of nonpublic company financial statements.

Unconditional Responsibility (GAAS)

The auditor must comply — no exceptions (words: "must," "shall").

Presumptively Mandatory Responsibility (GAAS)

The auditor should comply, except in rare documented cases (word: "should").

Responsibility to Consider (PCAOB)

The auditor considers the matter but decides based on professional judgment (words: "may," "might," "could").

GAAS Hierarchy — Level 1

Standards — must be applied (SASs, PCAOB standards).

GAAS Hierarchy — Level 2

Interpretive Publications — recommendations on applying standards (AICPA Audit Guides, Statements of Position).

GAAS Hierarchy — Level 3

Other Auditing Publications — no authoritative status, but helpful (articles, textbooks, practice alerts).

System of Quality Management

A CPA firm's internal framework of policies and procedures designed to ensure that all engagements are performed in accordance with professional standards.

Engagement Quality Review

A review of significant judgments and conclusions made by the engagement team — completed before the audit report is released.

Inspection (PCAOB)

A review conducted by PCAOB staff of a registered audit firm's work — to ensure compliance with professional standards.

Leadership Responsibilities for Quality

The firm's internal culture must recognize that quality is essential — commercial considerations must not override quality.

quality comes first for leadership

Relevant Ethical Requirements

This component ensures the firm has policies to comply with ethics and independence rules, such as those in the AICPA Code of Professional Conduct . It covers not just the CPA's own conduct, but may also extend to others involved in engagements, like network firms or service providers

firm and personnel comply with ethical requirements

Acceptance and Continuance:

This involves making good decisions about which clients to take on or keep. The firm must have policies to evaluate potential and existing clients for independence, integrity, and risks . This assessment is a critical part of firm-wide risk management

will accept and continue relationships only when background info found, key management, can comply with legal ad ethical requirements

Resources (HR)

This covers having the right people, skills, and technology to perform engagements properly. It includes obtaining, developing, allocating, and maintaining the necessary resources . For example, this could involve professional development programs to maintain competencies .

wanna make sure accountants will catch things, need good recruitment process

Engagement Performance

This component focuses on the firm's actions to promote and support consistent, high-quality work on its engagements . It includes policies for planning, performing, supervising, and reviewing engagements, as well as handling consultations and resolving differences of opinion .

design policies and procedures that track progress of engagement

Monitoring

This is the process for evaluating the design and operating effectiveness of the entire quality management system . It involves performing monitoring activities, identifying deficiencies, and taking action to fix them . This is a post-implementation requirement to ensure the system is working

communicate and monitor partners to make sure everything good

Error

An unintentional misstatement in the financial statements (e.g., mathematical mistakes, oversight).

Fraud

An intentional act that causes a misstatement in the financial statements.

Fraudulent Financial Reporting

Management intentionally manipulates financial statements (e.g., inflating revenue, hiding expenses).

Misappropriation of Assets

Theft of company assets by employees or others (e.g., stealing cash, inventory).

Inherent Risk

The risk of material misstatement of an assertion before considering internal controls — based on the nature of the account/transaction.

Control Risk

The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls.

Detection Risk

The risk that the auditor's procedures will fail to detect a material misstatement — the one risk the auditor can control by doing more testing.

Audit Risk

The risk that the auditor expresses an inappropriate opinion (e.g., gives a clean opinion when the financial statements are materially misstated).

Going Concern

The assumption that a company will continue to operate for the foreseeable future (usually one year).

FASB Concepts Statements

Nonauthoritative guidance used when there is no specific authoritative GAAP — provides a framework of accounting principles.

ERISA Section 103(a)(3)(C) Audit

An audit of an employee benefit plan (e.g., 401(k) plan) required under federal law.

Single Audit

A comprehensive audit required for nonprofit organizations and government entities that spend $750,000 or more in federal funds in a year.

Direct Effect Laws & Regulations

Laws that directly affect financial statement amounts (e.g., tax laws) — auditor must obtain reasonable assurance of compliance.

Indirect Effect Laws & Regulations

Laws that do not directly affect financial statement amounts (e.g., environmental laws) — auditor only needs to be aware and inquire.

Unmodified (Unqualified) Opinion

A "clean" opinion — the financial statements are fairly presented in accordance with GAAP.

Qualified Opinion

An "except for" opinion — the financial statements are mostly fairly presented, except for one specific material issue (misstatement or scope limitation) that is not pervasive.

Adverse Opinion

The financial statements are not fairly presented — misstatements are material and pervasive.

Disclaimer of Opinion

The auditor has no opinion — due to a significant scope limitation that is material and pervasive.

Emphasis-of-Matter Paragraph

An additional paragraph added to an unmodified report to draw attention to a matter that is properly disclosed in the financial statements (e.g., going concern, accounting change).

Other-Matter Paragraph

An additional paragraph added to the audit report to draw attention to a matter other than those presented in the financial statements (e.g., predecessor auditor's report, restatement).

Critical Audit Matter (CAM)

A PCAOB-required disclosure of matters that (1) relate to material accounts/disclosures and (2) involved especially challenging, subjective, or complex auditor judgment. Applies only to public companies.

Key Audit Matter (KAM)

An AICPA concept similar to CAMs — optional for nonpublic companies, applied when the client engages the auditor to include them.

Going Concern Emphasis Paragraph

Added when there is substantial doubt about the company's ability to continue — opinion remains unmodified if properly disclosed.

Consistency (Accounting Change) Paragraph

Added when a company changes an accounting principle that has a material effect — opinion remains unmodified if the change is justified and properly disclosed.

Restatement Paragraph

Added when previously issued financial statements are corrected and reissued — an "Other Matter" paragraph.

Scope Limitation

When the auditor is unable to obtain sufficient appropriate audit evidence — may lead to a qualified opinion or disclaimer.

Pervasive Misstatement

A misstatement that is not confined to specific accounts, represents a substantial proportion of the financial statements, or is fundamental to users' understanding.

Group Financial Statements

Consolidated financial statements of a parent company and its subsidiaries — may involve multiple auditors (group auditor and component auditors).

Group Auditor

The lead audit firm that performs the majority of the work and issues the overall opinion on group financial statements.

Component Auditor

A different audit firm that audits a specific component (subsidiary, division) of a group — the group auditor may or may not take responsibility for their work.

Division of Responsibility

When the group auditor refers to a component auditor's work in the report — the group auditor does not take responsibility for that portion.

Report Date

No earlier than the date on which the auditor obtained sufficient appropriate audit evidence to support the opinion.

Auditor Tenure

The year the audit firm began serving as the auditor — required to be disclosed in public company audit reports.

Form 10-K

The annual report filed with the SEC — includes audited financial statements.

Form 10-Q

The quarterly report filed with the SEC — includes reviewed (not audited) financial statements.

Form 8-K

The current report filed with the SEC to disclose significant events (e.g., mergers, acquisitions, bankruptcy).

Registration Statement (Forms S-1 through S-11)

Filed with the SEC when a company offers securities to the public — includes audited financial statements.