A control used in the output of databases to stop a person who has access to only summary information from being able to determine (infer) a particular value for a particular record.
Consist of infrastructure (physical and hardware components), software, people, procedures (manual and automated), and data.
- The potential effectiveness of an entity's internal control is subject to inherent limitations.
- Human fallibility, collusion, and management override are examples.
The susceptibility of a balance or transaction class to error that could be material, when aggregated with other errors, assuming no related internal controls.
- Computer controls designed to provide
- reasonable assurance that transactions are properly authorized before processed by the computer,
- accurately converted to machine readable form and recorded in the computer,
- that data files and transactions are not lost, added, duplicated or improperly changed, and that incorrect transactions are rejected, corrected and, if necessary, resubmitted on a timely basis.
- As an audit procedure, to scrutinize or critically examine a document.
- As part of a CPA firm's quality control system, a procedure to monitor the effectiveness of the system.
Integrated test facility
(integrated test data)
- A "dummy" unit (e.g., a department or employee) is established.
- Test (fictitious) transactions are posted to the dummy unit during the normal processing cycle.
- If test transactions are processed correctly that provides evidence that transactions of other units are processed correctly as well.
- Consistent adherence to an ethical code.
- If client management lacks integrity the auditor must be more skeptical than usual.
Interim audit procedures
Done during the year under audit, before year-end.
Interim financial information
Financial statements of a time period less than a full year.
- Employees of the client responsible for providing analyses, evaluations, assurances, recommendations, and other information to the entity's management and board.
- An important responsibility of internal auditors is to monitor performance of controls.
- Policies and procedures designed to provide reasonable assurance that specific entity objectives will be achieved.
- It consists of the control environment, risk assessment, control activities, information and communications, and monitoring.
Internal control questionnaire
- A list of questions about the existing internal control system to be answered (with answers such as yes, no, or not applicable) during audit fieldwork.
- The questionnaire is a part of the documentation of the auditor's understanding of the client's internal controls.
Internal control weakness
A defect in the design or operation of internal controls.
The first paragraph of the auditor's standard report which identifies the financial statements audited and states the financial statements are the responsibility of management and that the auditor's responsibility is to express an opinion on the financial statements based on the audit.
A tag attached to inventory items that identifies the inventory items to aid in counting the physical inventory.
- The opposite or reverse.
- An inverse relationship between two variables means that when one increases the other decreases.
- The company in which an investment is held.
- Often used to describe an equity method investment, in which the investor reports a share of the investee's net income.
An itemized list of goods shipped or services rendered with costs.
Independence Standards Board.
- A company that must file reports with the SEC.
- This includes companies with securities traded on a stock exchange and larger companies traded over-the-counter (more than 500 investors with assets over $10 million).
- A book of original entry in a double-entry system.
- The journal lists all transactions and the accounts to which they are posted.
- An inventory system that attempts to minimize inventory costs that do not add value for the customer.
- It arranges for suppliers to deliver small quantities of raw materials just before those units are needed in production.
- Storing, insuring, and handling raw materials are costs that add no value to the product, and are minimized in a just in time system.
Drawing a check on insufficient funds to take advantage of the time required for collection.
A scheme to cover an embezzlement by using payments made by one customer to reduce the receivables balance of another customer.
The schedule at the beginning of audit documentation that summarizes the detailed schedules.
“Last In First Out” inventory cost flow.
A computer program step that compares data with predetermined limits as a reasonableness test (hours worked over 60 per week).
- The availability of cash or ability to obtain it quickly.
- Debt paying ability.
- Speeds the availability of funds from cash collections by reducing the time from the customer mailing the check until the funds are available to spend.
- Remittances are sent to a bank near the customer and the bank deposits funds speedily to the payee's account.
Person(s) with executive responsibility for the conduct of the entity's operations.
Controls performed by one or more managers.
Management representation letter
- A letter addressed to the auditor, signed by the client's chief executive officer and chief financial officer.
- During an audit, management makes many representations to the auditor.
- Written representations from management in the letter confirm oral representations given to the auditor, document the continuing appropriateness of such representations, and reduce the possibility of misunderstanding.
An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements
Controls performed manually, not by computer.
- Information important enough to change an investor's decision.
- Insignificant information has no effect on decisions, so there is no need to report it.
- Materiality includes the absolute value and relationship of an amount to other information.
A deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.
Written records supporting journal entries. Credit memos support credits, while debit memos support debit entries.
To embezzle or appropriate dishonestly for one's own use.
A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework.
Reducing in force or intensity.
Evaluation of the firm’s system of quality control to provide reasonable assurance that it is designed appropriately and operating effectively.
A written description of an internal control system.
Nature of audit testing
The type of testing, such as tests of internal controls, tests of transactions, or tests of balances in balance sheet accounts.
- A statement of what the CPA does not know as opposed to what the CPA believes (positive assurance).
- A statement that the CPA was "not aware of material modifications that should be made to financial statements for them to conform with U.S. generally accepted accounting principles" is negative assurance used in review reports.
Negative confirmation request
- The negative form of accounts receivable confirmation asks the client's customer to respond only if the customer disagrees with the balance determined by the client.
- The positive form asks the customer to respond whether the customer agrees or disagrees with the client's receivable balance.
- The negative form is used when controls over receivables are strong and accounts receivable consists of many accounts with small balances.
- The positive form is used when controls are weak or there are fewer, but larger, accounts.
Means all entities except for those that register their securities with the SEC.
- Audit risk not due to sampling.
- An auditor may apply a procedure to all transactions or balances and fail to detect a material misstatement.
- Non-sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve a specific objective.
- For example, confirming recorded receivables cannot reveal unrecorded receivables.
- Non-sampling risk can be reduced to a negligible level through adequate planning and supervision.
The internal auditors' objectivity depends on the organizational status of the internal audit function, whether the internal auditor has direct access and reports regularly to the board, the audit committee, or owner-manager, and who oversees internal auditor employment decisions.
To do away with something so as to leave no trace.
Watch and test a client action (such as taking inventory).
- Assertions about occurrence deal with whether recorded transactions have occurred during a given period.
- For example, management asserts that sales in the income statement represent the exchange of goods or services with customers for cash or other consideration.
Access to a computer for immediate processing without having to wait for a batch of transactions to be processed at a later time.
How an internal control was applied, the consistency with which it was applied, and by whom.
From continuing operations is reported on an income statement
A CPA's conclusion held with confidence but not substantiated by positive knowledge or proof.
- The paragraph in the audit report that expresses the auditor's conclusions.
- The wording of the standard, unqualified opinion paragraph is: "In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company at December 31, year A, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles."
- A listing of goods or services requested from a supplier with specifications and desired delivery method.
- A company starts the purchase process internally with a requisition, which results in an order being transmitted to a supplier.
- When the supplier ships the goods or provides the service, an invoice is sent to the customer telling the customer the specifications, delivery method, and price of those goods or services.
Other comprehensive basis of accounting
A definite set of criteria, other than accounting principles generally accepted in the United States of America or International Financial Reporting Standards (IFRSs), having substantial support underlying the preparation of financial statements prepared pursuant to that basis.
Financial and nonfinancial information (other than the financial statements and the auditor's report) included in a document containing audited financial statements and the auditor's report thereon, excluding required supplementary information.
- The objective of the overall review stage of the audit is to assess conclusions reached, and evaluate the overall financial statement presentation.
- The overall review includes reading the financial statements and notes and considering adequacy of evidence gathered in response to unusual or unexpected balances.
- Results of an overall review may indicate the need for additional evidence.