Quiz 1 Content (Ch. 1-4) - Vocabulary Flashcards

Vocabulary flashcards covering key auditing concepts from Chapters 1-4.

Auditing

An independent check of financial statements to confirm they are fair and accurate, and that internal controls work well.

Information risk

The danger that financial statements might contain big mistakes that users don't notice. Auditing helps lessen this risk.

Auditing vs. accounting

Auditing is about independently checking financial statements and giving an opinion on them. Accounting is about recording, classifying, and reporting financial transactions.

Assurance services

Professional services that are independent and help improve the quality of information for people making decisions. This includes audits and reviews. Ex: mystery shopping,

Attestation

A type of assurance service where a professional examines and reports on a specific topic or claim about that topic. Ex: internal control audit

Audit

A formal attestation specially focused on financial statements, aiming to give an official opinion on them. Ex: annual financial statement audit

Non-assurance services

Services that do not provide a guarantee or opinion on information, like keeping books, tax planning, or giving business advice. Ex: tax preperation, Management consultation

Financial statement audit

Checking a company's financial statements to give an opinion on if they are presented fairly according to accounting rules.

Operational audit

Checking how efficient and effective a company's operations and procedures are.

Compliance audit

Checking if a company follows relevant laws, rules, and its own internal policies.

Auditing and Attestation (AUD)

One of the three mandatory parts of the CPA Exam, covering auditing and assurance topics.

Taxation and Regulation (REG)

A CPA Exam section that covers tax and regulatory matters.

Financial Accounting and Reporting (FAR)

A CPA Exam section that covers financial accounting and reporting.

Business Analytics and Reporting (BAR)

One of the optional CPA Exam sections; focuses on using data for analysis and reporting.

Information Systems and Controls (ISC)

One of the optional CPA Exam sections; focuses on how information systems work and their controls.

Tax Compliance and Planning (TCP)

One of the optional CPA Exam sections; focuses on following tax rules and planning tax strategies.

Limited Liability Partnership (LLP)

A business structure where partners have limited personal responsibility for the business debts; partners usually manage the firm, but staff are not owners.

Audit staff vs. owners (in LLP)

Audit staff and managers are employees, not owners. Owners are partners who help manage the firm and share in its profits.

PCAOB

Public Company Accounting Oversight Board; it sets audit rules for public companies and inspects audit firms.

SEC (Securities and Exchange Commission)

The U.S. government body responsible for enforcing securities laws and overseeing financial markets.

AICPA independence standards

Rules about independence found in the American Institute of CPAs’ professional code, which apply to all audits.

SEC independence standards

Extra independence rules for audits of public companies, set by the SEC.

Independence regulator for public company audits

The SEC enforces additional independence rules for public company audits, beyond what the AICPA requires.

Risk-based vs. statistical sampling

PCAOB inspections focus on riskier audit engagements. Statistical sampling means every engagement has an equal chance of being inspected.

Sarbanes-Oxley Act (SOX)

A 2002 law that created the PCAOB, limited non-audit services, required audits of internal controls (Section 404), and made CEOs/CFOs certify financial statements.

Section 404(b)

A part of SOX that requires large public companies to have their internal controls over financial reporting audited.

Professional skepticism

Approaching an audit with a questioning mind and carefully evaluating all evidence and claims.

Client Acceptance/Continuation

The process of deciding whether to take on a new client or continue working with an existing one, to ensure quality and maintain independence.

Users of public company financial statements

People like investors, creditors, analysts, and regulators who use these statements to make decisions.

Users of private company financial statements

Owners, managers, lenders, potential investors, employees, and others who rely on these statements.

Unmodified (Unqualified) opinion

An auditor's statement that financial statements are presented fairly, in all important ways, according to the right accounting rules.

Qualified opinion

An auditor's opinion that says the financial statements are fair, except for certain specific, important mistakes or limitations in the audit scope.

Adverse opinion

An auditor's opinion that states the financial statements contain very important and widespread mistakes, and are not presented fairly.

Disclaimer of opinion

An auditor's statement that they cannot give an opinion on the financial statements because they didn't get enough evidence or had severe limits on their audit work.

Emphasis of matter paragraph

An extra paragraph in an unqualified audit opinion that highlights an important issue (like a company's ability to continue operating) without changing the overall positive opinion.

Components of a standard unqualified opinion

Includes a title (Independent Auditor's Report), who it's addressed to, the opinion itself, the basis for the opinion, the auditor's signature and address, and the date. Sometimes it also includes separate sections for responsibilities and critical audit matters.

Balance sheet, income statement, statement of changes in equity, cash flows, and notes

The main historical financial reports that are audited together, with notes providing detailed explanations.

Explanatory paragraph

A paragraph in an audit report that explains special situations to help users better understand the financial statements.

Materiality

The size of a mistake or missing information that would be significant enough to influence the decisions of users.

SOX Section 404(b) requirement

The rule from the Sarbanes-Oxley Act that requires audits of internal controls over financial reporting for large public companies.

Ethics vs. rules/regulations

Ethics are basic moral beliefs, while rules/regulations are formal standards and laws that govern behavior.

Who appoints external auditors for public company audits

The Audit Committee of the Board of Directors; this committee also pays and oversees the auditor.

AICPA Code of Professional Conduct components

It has three parts: Principles (broad ideas), Rules (specific requirements), and Interpretations (guidance) that direct professional conduct and independence.

Direct financial interest (independence)

Directly owning or having a financial stake in a client, which could make an auditor seem not independent.

Indirect financial interest (independence)

Having an indirect stake in a client, for example, through a mutual fund that owns client shares, which could affect independence.

PCAOB independence rotation

Audit partners must change roles and rotate off a specific audit engagement every five years.

Rotation requirement (PCAOB)

Yes, lead audit partners are required to rotate off engagements after a certain period, usually five years.

Punishments for inappropriate auditor behavior

Actions taken by the State Board of Accountancy, disciplinary measures by the AICPA, and enforcement or penalties by the PCAOB.

Independence in fact and in appearance

Auditors must genuinely be independent (in "fact") and also appear independent to others (in "appearance").

Audit committee independence and expertise

Audit committees must be fully independent from management and must include at least one financial expert; they are also responsible for approving non-audit services.