Glossary 2

  1. GAAP
    • is a technical accounting term that encompasses the conventions, rules, and
    • procedures necessary to define accepted accounting practice at a particular
    • time. GAAP includes not only broad guidelines of general application, but
    • also detailed practices and procedures. Those conventions, rules, and
    • procedures provide a standard by which to measure financial presentations.
  2. FASB
    • is an independent quthoritqtive body created in 1973 to replace the AICPA
    • Accounting Principles Board and authorized by the AICPA Code of Professional Conduct as a
    • pomulgator of GAAP , Primarily for non govermental entities.
  3. Audit Plan
    • A more
    • detailed than the audit strategy and documents the nature, timing, and extent
    • of procedures to
    • be performed to obtain sufficient appropriate audit evidence. It is also
    • called the audit program.
  4. Audit Planning
    • Developing
    • an overall audit strategy for the expected conduct, organization, and
    • staffing of the audit.
  5. Audit report date
    • The
    • date that the auditor has obtained sufficient appropriate audit evidence to
    • support his or her
    • opinion on the financial statements.
  6. Audit Risk
    • The
    • risk that the auditor may unknowingly fail to appropriately modify his or her
    • opinion on financial
    • statements that are materially misstated.
  7. Audit Sampling
    • The
    • application of an audit procedure to less than 100% of the items within an
    • account balance or
    • class of transactions for the purpose of evaluating some characteristic of
    • the balance or class.
  8. Audit Strategy
    • The
    • auditor's operational approach to achieving the objectives of the audit. It
    • is a high level
    • description of the audit scope. It includes matters such as identifying
    • material account balances, identifying audit
    • areas with a higher risk of material misstatement, the overall responses to
    • those higher risks, and the planned audit
    • approach by area.
  9. Control Risk
    • The
    • risk that a misstatement that could occur in a relevant assertion and that
    • could be material, either
    • individually or when aggregated with other misstatements, will not be
    • prevented or detected on a timely basis by the
    • entity's internal control.
  10. Detection Risk
    • The
    • risk that the auditor's procedures will not detect a misstatement that exists
    • in a relevant assertion
    • that could be material, either individually or when aggregated with other
    • misstatements.
  11. Document completion Date
    • The
    • final assembly and completion of the audit file should occur within 60
    • days
    • of the report release date. SAS No. 103 refers to this date as the
    • documentation completion date. After this date, the
    • auditor must not delete or discard any documentation prior to the required
    • five year retention period.
  12. engagemement letter
    • The
    • audit engagement letter states explicitly the terms of the engagement or
    • audit, including
    • what is expected of the auditor and of the client. SAS No. 108, Planning
    • and Supervision, requires the auditor to
    • establish an understanding with the client about the services to be
    • performed for each engagement and to document
    • that understanding through a written engagement letter.
  13. Fraud
    • While
    • fraud has a broad legal concept, the auditor's interest relates to fraudulent
    • acts that would cause a
    • material misstatement of financial statements. Fraud is compared to error
    • and the auditor is concerned whether the
    • action that resulted in material misstatement in the financial statements
    • was intentional, fraud, or unintentional, error.
    • The auditor is concerned with two types of misstatements in financial
    • statements: (1) misstatements arising from
    • fraudulent financial reporting such as intentional misstatements or
    • omissions of amounts or disclosures and (2)
    • misstatements arising from misappropriation of assets, defalcations,
    • involving such things as theft of the
    • company's assets, which causes the financial statements to not be presented
    • in conformity with GAAP.
  14. Independence
    • To be
    • free from conflicts of interest and bias, self governing, impartial, not
    • subject to control by
    • others, not requiring or relying on something else, not contingent, and
    • acting with integrity and objectivity (i.e., with
    • judgment that is unimpaired and without bias or prejudice).
  15. Inherent Risk
    • The
    • susceptibility of a relevant assertion to a misstatement that could be
    • material, either individually
    • or when aggregated with other misstatements, assuming that there are no
    • related controls.
  16. Inquiry
    • Inquiry
    • is one of the five basic methods of obtaining audit evidence. An inquiry is
    • the seeking of appropriate
    • information from knowledgeable persons inside (both management and staff)
    • or outside the entity (e.g., bankers,
    • attorneys, vendors, customers, predecessor auditor) with the approval of
    • management. Inquiries are generally
    • achieved by asking questions and receiving responses. Inquiries of
    • management are used extensively in
    • investigating unusual fluctuations or items, fraud, errors, and contingent
    • liabilities. The confirmation process consists
    • of obtaining a written response from independent parties to specific
    • inquiry to corroborate information contained in
    • the accounting records.
  17. Internal control
    • According
    • to the Committee of Sponsoring Organizations of the Treadway Commission's
    • (COSO)
    • Internal Control Integrated Framework, there are five elements of internal
    • control: (1) control environment, (2) risk
    • assessment, (3) information and communication, (4) monitoring, and (5)
    • control activities.
  18. Managing Agent
    • A CIRA
    • may be internally managed, but it is relatively common for a CIRA to use a
    • managing agent
    • or property management company for various operational and financial
    • functions, such as bookkeeping and
    • accounting services.
  19. Observation
    • Observation
    • is one of the five basic methods of obtaining audit evidence. It is looking
    • at a process or
    • procedures being performed by others. Observation is especially useful in
    • the counting of inventory and in testing
    • internal control procedures and computer processing of accounting data and
    • other activities that do not leave an
    • audit trail.
  20. Overall Risks
    • Risks
    • of material misstatement that relate pervasively to the financial statements
    • taken as a whole and
    • potentially affect many relevant assertions.
  21. Preliminary
    analytical procedures:
    • Analytical
    • procedures should applied in audits of financial statements to assist
    • the auditor in planning the nature, timing, and extent of other auditing
    • procedures. They focus on (1) enhancing the
    • auditor's understanding of the client's business and the transactions and
    • events that have occurred since the last
    • audit date and (2) identifying areas that may represent specific risks
    • relevant to the audit.
  22. Relevant
    • An
    • assertion that has a meaningful bearing on whether the class of transactions,
    • account
    • balance, or disclosure is materially misstated.
  23. Report release date
    • The
    • date that the auditor gives the client permission to use the auditor's report
    • in connection
    • with the financial statements.
  24. Risk of material misstatement
    • At the
    • individual account balance, class of transaction, or disclosure level, the
    • risk
    • of material misstatement consists of inherent risk and control risk.
  25. Understanding
    the entity and its environment:
    • The
    • second standard of field work requires an understanding of
    • the entity and its environment, including its internal control." The
    • auditor's focus in obtaining the required level of
    • understanding should be on attaining a knowledge level sufficient to
    • identify the risks of material misstatement of
    • the financial statements and to design the nature, timing, and extent of
    • further audit procedures.
  26. management rep letter
    • A
    • management representation letter is a letter addressed to the auditor that
    • has been drafted by the auditor and given to the client's senior management
    • to sign. The prmary purpose of such a letter includes:

    • * the minimization of
    • misunderstandings between the client's management and the auditor.
    • * the commitment to writing of
    • representations previously made verbally by management to the auditor.
    • * the provision of corroborative
    • evidence
  27. Compiliation
    • Preparation
    • of financial statements from information supplied by management without the
    • accountant expressing any assurance on them.
  28. Review
    • .
    • Inquiry and analytical procedures intended to provide a reasonable basis for
    • expressing limited assurance that the accountant is not aware of any material
    • modifications that should be made to the financial statements to make them
    • conform to generally accepted accounting principles (GAAP) or other
    • comprehensive basis of accounting (OCBOA).
  29. What give the highest assurance
    • #
    • Audits ‑ High Assurance

    • Defined: An audit is an objective examination and evaluation of financial
    • records. All information provided during an audit undergoes a verification
    • process to confirm the financial statements are fairly stated and free of
    • material misstatements. Audits provide the highest level of assurance.
    • # Reviews ‑ Limited Assurance

    • Defined: A review is a limited analysis of any material modifications that
    • should be made in order for financial statements to be in conformity with
    • generally accepted accounting principles. A review is less comprehensive than
    • an audit; therefore, it is an expression of "limited
    • assurance."
    • # Compilations ‑ No Assurance

    • Defined: A compilation is the preparation of a report in the form of a
    • financial statement based upon information provided by the company or client.
    • The information being compiled and reported does not go through a
    • verification process and no assurance is expressed that the statements are in
    • conformity with generally accepted accounting principles
  31. Compiled financial statements
    • The CPA
    • does not
    • express an opinion or any other form of assurance on compiled
    • financial statements.
  32. Reviewed financial statements
    • limited
    • assurance that no material
    • modifications are necessary in order for the financial statements to
    • be
    • in conformity with generally accepted accounting principles.
  33. Audit Financial statements
    • reasonable
    • assurance that the financial
    • statements are not materially misstated.
  34. What is the difference between accounts payable and accrued expenses payable?
    • I would use the liability account Accounts Payable for
    • suppliers’ invoices that have been received and must be paid. As a
    • result, the balance in Accounts Payable is likely to be a precise amount
    • that agrees with supporting documents such as invoices, agreements,
    • etc.
    • I would use the liability account Accrued Expenses Payable
    • for the accrual type adjusting entries made at the end of the accounting
    • period for items such as utilities, interest, wages, and so on. The
    • balance in the Accrued Expenses Payable should be the total of the
    • expenses that were incurred as of the date of the balance sheet, but
    • were not entered into the accounts because an invoice has not been
    • received or the payroll for the hourly wages has not yet been processed,
    • etc. The amounts recorded in Accrued Expenses Payable will often be
    • estimated amounts supported by logical calculations.
  35. July 1, 2009—The Financial Accounting Standards Board (FASB) today launched the FASB Accounting Standards CodificationTM as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP)
    • The Codification is effective for interim and annual periods ending
    • after September 15, 2009. All existing accounting standards documents
    • are superseded as described in FASB Statement No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles. All other accounting literature not included in the Codification is nonauthoritative.

    • The Codification reorganizes the thousands of U.S. GAAP pronouncements
    • into roughly 90 accounting topics and displays all topics using a
    • consistent structure. It also includes relevant Securities and Exchange
    • Commission (SEC) guidance that follows the same topical structure in
    • separate sections in the Codification.

    • While the Codification does not change GAAP, it introduces a new
    • structure—one that is organized in an easily accessible, user-friendly
    • online research system. The FASB expects that the new system will reduce
    • the amount of time and effort required to research an accounting issue,
    • mitigate the risk of noncompliance with standards through improved
    • usability of the literature, provide accurate information with real-time
    • updates as new standards are released, and assist the FASB with the
    • research efforts required during the standard-setting process.

    • The FASB Accounting Standards CodificationTM
    • excludes governmental accounting standards. It codified all standards
    • issued by a standard setter within levels A through D of the
    • pre-Codification GAAP hierarchy, with non-SEC content listed below:
    • Financial Accounting Standards Board (FASB)

    • Statements (FAS)
    • Interpretations (FIN)
    • Technical Bulletins (FTB)
    • Staff Positions (FSP)
    • Staff Implementation Guides (Q&A)
    • Emerging Issues Task Force (EITF)
    • AbstractsAppendix D Topics
    • Derivative Implementation Group (DIG)
    • Issues
    • Accounting Principles Board (APB)
    • Opinions
    • Accounting Research Bulletins (ARB)
    • Accounting Interpretations (AIN)
    • American Institute of Certified Public Accountants (AICPA)
    • Statements of Position (SOP)
    • Audit and Accounting Guides (AAG)—only incremental accounting guidance
    • Practice Bulletins (PB)
    • Technical Inquiry Service (TIS)—only for Software Revenue Recognition.
  36. In the United States, the Auditing Standards Board (ASB)
    is the senior technical committee designated by the American Institute of Certified Public Accountants (AICPA) to issue auditing, attestation, and quality control statements, standards and guidance to certified public accountants (CPAs) for non-public company audits.[
  37. Generally Accepted Accounting Principles (GAAP) is a term used to refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as
    • Accounting Standards. GAAP includes the standards, conventions,
    • and rules accountants follow in recording and summarizing transactions,
    • and in the preparation of financial statements.
  38. The term "GAAP" is an abbreviation for Generally Accepted Accounting
    Principles (GAAP). GAAP is a codification of how CPA firms and
    corporations prepare and present their business income and expense,
    assets and liabilities on their financial statements. GAAP is not
    • a single accounting rule, but rather the aggregate of many rules on how
    • to account for various transactions. The basic principles underlying
    • GAAP accounting are set forth below.
  39. When preparing financial statements using GAAP, most American
    corporations and other business entities use the many rules of how to
    report business transactions based upon the various GAAP rules. This
    provides for consistency in the reporting of companies and businesses so
    that financial analysts
    • Banks, Shareholders and the SEC can have all reporting companies
    • preparing their financial statements using the same rules and reporting
    • procedures. This allows for an "Apple to Apple" comparison of any
    • corporation or business entity with another. Thus, if Company A reports
    • $1,000,000 of net income, using GAAP, then the public and other users of
    • financial statements can compare that net income to another company
    • that is reporting $500,000 of net income, using GAAP.
    • The rules and procedures for reporting under GAAP are complex and
    • have developed over a long period of time. Currently there are more than
    • 150 "pronouncements" as to how to account for different types of
    • transactions, ranging from how to report regular income from the sale of
    • goods, and its related inventory values, to accounting for incentive
    • stock option distributions. By using consistent principles, all
    • companies reporting under GAAP report these transactions on their
    • financial statements in a consistent manner.
  40. The various rules and pronouncements come from the Financial Accounting
    Standards Board (FASB) which is a non-profit organization that the
    accounting profession has created to promulgate the rules of GAAP
    reporting and to amend the rules of GAAP reporting as occasion requires.
    The more recent pronouncements come as
    • Statements of the Financial Accounting Standards (SFAS). Changes in the
    • GAAP rules can carry tremendous impact upon American business. For
    • example, when FASB stopped requiring banks to mark their assets (loans)
    • to the lower of cost or market (i.e. value of a foreclosed home loan),
    • the effect on a bank's "net worth" as defined by GAAP can change
    • dramatically. While generally neutral, there is some pressure on the
    • FASB to yield to industry or political pressure when it makes its rules.
  41. Nonetheless, since all companies report using the same set of rules,
    knowing the rules of GAAP reporting can tell the user of financial
    statements a great deal. The study of accounting, in large part
    entails learning the many rules and promulgations set forth by FASB and how to apply those rules to actual business events.
  42. Financial Accounting is information that must be assembled and
    reported objectively. Third-parties who must rely on such information
    have a right to be assured that the data are free from bias and
    inconsistency, whether deliberate or not. For this reason, financial
    accounting relies on certain standards or guides that are called
    "Generally Accepted Accounting Principles" (GAAP).
    Principles derive from tradition, such as the concept of matching. In
    any report of financial statements (audit, compilation, review, etc.),
    the preparer/auditor must indicate to the reader whether or not the
    information contained within the statements complies with GAAP.
    Principle of regularity: Regularity can be defined as conformity to enforced rules and laws.

    • Principle of consistency: This principle states that when a
    • business has once fixed a method for the accounting treatment of an
    • item, it will enter all similar items that follow in exactly the same
    • way.

    Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.

    Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.

    • Principle of non-compensation: One should show the full
    • details of the financial information and not seek to compensate a debt
    • with an asset, revenue with an expense, etc. (see convention of conservatism)

    • Principle of prudence: This principle aims at showing the
    • reality "as is": one should not try to make things look prettier than
    • they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable.

    • Principle of continuity: When stating financial information,
    • one should assume that the business will not be interrupted. This
    • principle mitigates the principle of prudence: assets do not have to be
    • accounted at their disposable value, but it is accepted that they are at
    • their historical value (see depreciation and going concern).

    • Principle of periodicity: Each accounting entry should be
    • allocated to a given period, and split accordingly if it covers several
    • periods. If a client pre-pays a subscription (or lease, etc.), the given
    • revenue should be split to the entire time-span and not counted for
    • entirely on the date of the transaction.

    Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.

    Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy is taken.
  43. On July 1, 2009, the Financial Accounting Standards Board (the FASB),
    approved the Accounting Standards Codification (ASC) as "the single
    source of authoritative U.S. accounting and reporting standards, other
    than guidance issued by the Securities and Exchange Commission (the
    • The Codification superseded
    • (replaced) all then-existing SEC accounting and reporting standards by
    • reorganizing the existing authoritative literature.

    • Now, only one level of authoritative U.S. GAAP exists, other than guidance
    • issued by the Securities and Exchange Commission (SEC). All other literature is non-authoritative.
  44. The FASB Accounting Standards Codification (ASC) reorganizes accounting literature.
    In addition to General Principles
    (Topic 105), offering an explanation of Generally Accepted Accounting
    Principles (GAAP),
    the Seven financial accounting and reporting categories,
    which are numbered, are:
    • Presentation (Topics 205 through 280)
    • Assets (Topics 305 through 360)
    • Liabilities (Topics 405 through 480)
    • Equity (Topic 505
    • )Revenue (Topic 605)
    • Expenses (Topics 705 through 740)
    • Broad transactions (Topics 805 through 860)
    • Industry Category (Topics 905 through 944) contains specific industry guidance
  45. Statements on Auditing Standards, commonly abbreviated as SAS, provide guidance to external auditors on
    • generally accepted auditing standards (abbreviated as GAAS) in regards to auditing an entity and issuing a report.
    • They are usually issued by the certified public accountant
    • authoritative body in the region where the standards apply, such as the American Institute of Certified Public Accountants in the United States
  46. Do you remember memorizing the 10 Generally Accepted Auditing Standards
    for the CPA Exam? Well, that’s gone. Four years ago the Auditing
    Standards Board announced a major project to simplify and clarify GAAS
    and to converge wherever possible with International Standards of
    Auditing.While most of the extant requirements have carried over to the revised
    standards, practitioners in smaller firms should develop a plan to train
    their staff on changes. At press time, the AICPA publication staff was
    in the process of writing a “Super SAS,” which will codify all of the
    approved clarified standards the ASB has issued over the past three

    Statements on Auditing Standards (SAS) have been issued by the ASB for
    about 40 years. The approximately 120 SAS do not have a standard format
    or formal attempt to use language consistently. Each SAS is codified in
    the “AU” section of the AICPA’s Professional Standards.
  47. The extant AU sections where organized around the 10 GAAS. The clarified
    GAAS, however, are constructed around the auditor’s objectives to
    obtain reasonable assurance that the financial statements as a whole are
    free from material misstatement and to report on the financial
    statements in accordance with the auditor’s findings
    • Accordingly, each AU section will describe a specific auditor objective
    • which, when combined with other AU sections, provide the standards
    • needed to fulfill the auditor’s overall objectives. The AU sections will
    • be re-codified to fit more logically into the framework of the
    • auditor’s overall objective. For example:
    • 200—General Principles and Responsibilities
    • 300/400—Risk Assessment and Response to Assessed Risks
    • 500—Audit Evidence
    • 600—Using the Work of Others
    • 700—Audit Conclusions and Reporting
    • 800—Special Considerations
    • 900—Special Considerations in the U.S.
Card Set
Glossary 2