Auditing Master Practice Set

A comprehensive vocabulary set covering the fundamental terms, standards, and concepts from the master auditing lecture notes.

Auditing (vs. Accounting)

The process of determining whether recorded economic events actually happened, whereas accounting is the recording of those economic events.

Assurance Services

Individual professional services that improve or enhance the quality of information for decision making.

Attestation Services

A type of assurance service in which the CPA firm issues a report about a subject matter or assertion that is the responsibility of another party.

Review

An engagement to obtain limited assurance through analytical procedures and inquiries that no material modifications are needed for financial statements to be in accordance with GAAP; no opinion is issued.

Compilation

Assisting management in presenting financial information in the form of financial statements without providing any assurance or opinion.

Non-assurance Services

Services that do not require an auditor and provide no assurance, such as tax services, bookkeeping, and payroll.

Operational Audit

An audit that evaluates the efficiency and effectiveness of an organization's operating procedures and whether management is meeting organizational goals.

PCAOB (Public Company Accounting Oversight Board)

An entity overseen by the SEC that issues auditing standards and rules for CPA firms that audit public companies (issuers).

Sarbanes-Oxley Act of 2002

Legislation enacted to restore investor confidence that created the PCAOB, required CEO/CFO certification of financial statements, and mandated auditor rotation.

AICPA (American Institute of Certified Public Accountants)

The organization that sets professional requirements for CPAs in four major areas: auditing standards, preparation standards, other attestation standards, and the code of professional conduct.

Peer Review

The process by which people in the same profession review the work and practices of a CPA firm to assess quality and compliance with professional standards.

GAAS (Generally Accepted Auditing Standards)

The auditing standards followed for audits of private companies, specifically the AICPA's Statements on Auditing Standards (SAS).

Agreed-upon Procedures

An engagement where a CPA performs specific steps defined by the client and issues a factual report of findings to specified users only, without an opinion or conclusion.

Reasonable Assurance

A high, but not absolute, level of assurance where perfection is not the standard and the auditor cannot guarantee the detection of every misstatement.

Professional Skepticism

A state of mind where an auditor maintains a questioning mind and critically assesses audit evidence rather than simply trusting the client.

Errors vs. Fraud

Errors are unintentional misstatements or omissions, while fraud is intentional and involves deliberate deception.

Management's Assertions

Claims embedded in the financial statements regarding transactions, account balances, and disclosures for which management is responsible.

Audit Risk

The risk that the auditor issues a wrong opinion, such as an unmodified opinion when the financial statements are materially misstated.

Inherent Risk

The susceptibility of an assertion to a material misstatement assuming there are no related internal controls; it exists independently of the audit.

Control Risk (CR)

The risk that the client's internal control system will fail to prevent, detect, or correct a material misstatement on a timely basis.

Planned Detection Risk (PDR)

The risk that the auditor's own substantive procedures will fail to detect a material misstatement that exists in an account.

Business Risk

The risk that the client's business will fail or not meet its objectives, concerning the client's survival rather than the auditor's opinion.

Planning Materiality (PM)

An allocation of overall materiality to a specific audit area used to guide the scope and focus of testing.

Kiting

A fraud scheme that overstates bank balances by recording a deposit in one account before recording the corresponding withdrawal from another account.

Lapping

A fraud scheme where an employee steals a customer's cash payment and covers it by applying a later payment from a different customer.

Skimming

Taking cash off the top before it is ever recorded in the accounting records.

COSO Framework Components

The five components are Control environment, Risk assessment, Control activities, Information and communication, and Monitoring.

General IT Controls

Controls relating to the overall IT environment including physical security, backups, and access policies.

Application IT Controls

Controls specific to individual transaction processing systems, such as edit checks and input validation.

Parallel Testing

The process of running the old system and new system simultaneously to verify that the new system processes transactions correctly.

Material Weakness

A deficiency in internal controls where there is a reasonable possibility that a material misstatement will not be prevented or detected timely.

Significant Deficiency

A control deficiency less severe than a material weakness but still important enough to merit attention from those charged with governance.

Management Letter

A separate letter from the audit report sent to management identifying internal control weaknesses and offering recommendations for improvement.

Fraud Triangle

The three aspects required for fraud: Pressure (incentive), Opportunity (weak controls), and Rationalization (justifying behavior).

Tone at the Top

The ethical attitude and values modeled by leadership that shape the organization's conduct.

Aged Trial Balance

A listing of receivable balances sorted by age, used to evaluate the adequacy of the allowance for doubtful accounts.

Inventory Obsolescence

Inventory that has lost value and can no longer be sold at normal prices, often detected by the 'dust and rust' physical inspection test.

Lower of Cost or Market

The accounting principle requiring inventory to be reported at the lower of its historical cost or its current net realizable value.

Contingent Liability

A potential future obligation depending on an uncertain event; recorded if probable and estimable, or disclosed if reasonably possible.

Subsequent Events

Events occurring after the balance sheet date but before the audit report is issued that may affect the financial statements.

Type $1$ Subsequent Event

Provides new information about a condition that existed at the balance sheet date, requiring an adjustment to the financial statements.

Type $2$ Subsequent Event

A new event arising after the balance sheet date that requires disclosure in the footnotes but no adjustment.

Management Representation Letter

A required written letter signed by management documenting important representations made during the audit, dated the same as the audit report.

Audit Evidence Reliability Hierarchy

Listed from most to least reliable: Physical Examination, Confirmation, Recalculation, Reperformance, Observation, Inspection, Analytical Procedures, Inquiry.

Independence in Fact

A state where the auditor is genuinely unbiased and objective.

Independence in Appearance

The requirement that a reasonable observer would not question the auditor's objectivity, which is essential for maintaining public confidence.

Audit Committee

A select group of company board members responsible for overseeing financial reporting and the external auditor.

Unmodified Opinion

A 'clean' opinion issued when financial statements are presented fairly in all material respects in accordance with GAAP.

Qualified Opinion

Issued for material but not pervasive GAAP departures or scope limitations, stating that 'except for' the noted issue, the statements are fair.

Adverse Opinion

Issued when misstatements are both material and pervasive, indicating the financial statements do not present fairly.

Disclaimer of Opinion

Issued when the auditor cannot obtain sufficient evidence and the potential effects of undetected misstatements are material and pervasive.

Vouching

The process of tracing from the journal back to source documents to test for Occurrence.

Tracing

The process of starting from source documents and moving to the journal to test for Completeness.

Audit Documentation Retention

Under PCAOB standards, audit documentation must be maintained for a period of $7$ years.

Contingent Fee

A fee for professional services that depends on the findings or results; prohibited in audit and other attest engagements.