Auditing and Assurance Services Vocabulary Flashcards

Vocabulary flashcards covering core concepts from Chapters 1, 2, 3, 4, and 19 of Auditing and Assurance Services.

Principals

Stockholders who are absentee owners with a financial interest in an entity.

Agents

Management personnel who control company resources.

Information Asymmetry

The imbalance of knowledge that exists because stockholders do not know if management is acting in their best interest.

Materiality

The magnitude of an omission or misstatement that would likely change a reasonable person's judgment.

Audit Risk

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

Audit Evidence

Information that helps the auditor evaluate management's assertions, consisting of underlying accounting data plus additional information from client or external sources.

Unqualified Opinion

An audit report issued when financial statements are free of material misstatements; also known as a clean opinion.

Qualified Opinion

An audit report issued when financial statements contain a material misstatement or when the auditor is unable to obtain sufficient evidence on a specific account, expressed as 'except for' the identified issue.

Adverse Opinion

An audit report issued when a misstatement is so material that it pervasively affects interpretation, indicating financial statements are not fairly presented.

Disclaimer of Opinion

An audit report issued when a scope limitation is so severe that the auditor cannot express an opinion on the overall financial statements.

External Auditors

Independent CPA firms that audit financial statements for shareholders and other external users.

Internal Auditors

Employees of a company who report to management and the audit committee to assess internal controls and operations.

Engagement Letter

A formal document that documents the terms of the engagement between the auditor and the client.

Dual-Purpose Tests

Audit procedures that test operating effectiveness of controls and substantive procedures simultaneously on the same transaction or document.

Tolerable Misstatement

The portion of overall materiality allocated to individual accounts or disclosures, often set at $50\text{--}75\text{\%}$ of overall materiality.

Audit Risk Model

The conceptual framework represented by $AR = IR \times CR \times DR$ or $AR = RMM \times DR$.

Inherent Risk ($IR$)

The susceptibility of an assertion to misstatement (error or fraud) before considering any related internal controls.

Control Risk ($CR$)

The risk that internal controls will not prevent or detect a material misstatement on a timely basis.

Detection Risk ($DR$)

The risk that the auditor's procedures will not detect a material misstatement that exists in an assertion.

Risk of Material Misstatement ($RMM$)

The combined assessment of inherent risk and control risk ($RMM = IR \times CR$).

Fraud Risk Triangle

A framework consisting of three conditions for fraud: Incentive/Pressure, Opportunity, and Attitude/Rationalization.

Fraudulent Financial Reporting

Intentionally misstating financial statements through acts such as manipulation, falsification, or intentional omission of transactions.

Misappropriation of Assets

The theft of an entity's assets, typically perpetrated by lower-level employees.

Utilitarian Approach

An ethical theory focusing on trade-offs and consequences to produce the greatest good for the greatest number.

Covered Member

An individual or entity bound by independence rules, including audit team members, those in a position to influence the engagement, and partners providing nonattest services.