accounting and review services
- are governed by official
- pronouncements covering compilation and review engagements. Compilation is
- presenting in the form of financial statements information that is the
- representation of management (owners) without expressing assurance. Review is
- inquiry and analytical procedures to provide the accountant a basis for
- expressing limited assurance that there are no material modifications that
- should be made to the statements for them to be in conformity with U.S.
- generally accepted accounting principles
- are accounting entries made at the
- end of an accounting period to allocate items between accounting periods
- An audit opinion that the financial
- statements as a whole are not in conformity with U.S. GAAP
- A comparison of financial statement
- amounts with an auditor's expectation. An example is to compare actual interest
- expense for the year (a financial statement amount) with an estimate of what
- that interest expense should be. The estimate can be found by multiplying a
- reasonable interest rate times the average balance of interest bearing debt
- outstanding during the year (the auditor's expectation). If actual interest
- expense differs significantly from the expectation, the auditor explains the
- difference in audit documentation
- audit evidence is relevant
- (pertains to the proposition supported) and reliable (trustworthy).
arm's length transactions
- are transactions between people who
- have no relationship other than that of buyer and seller. The price is the true fair market value of
- the goods or services sold. If you buy or sell something to a close
- relative, you might give better terms than to an unrelated party, so the price
- might not represent the true market value of the goods or services.
- Management asserts financial
- statements are correct with regard to existence or occurrence of assets,
- liabilities or transactions, completeness of information in the financial
- statements, rights and obligations at a point in time, appropriate valuation or
- allocation, presentation, and disclosure
- is a correction of a financial
- information misstatement identified by the auditor, whether recorded or not.
audit documentation (working papers)
- are records kept by
- the auditor of procedures applied, tests performed, information obtained, and
- pertinent conclusions reached in the engagement. The documentation provides the
- principal support for the auditor's report.
- In obtaining evidence in support of
- financial statement assertions, the auditor develops specific audit objectives
- in light of those assertions. For example, an objective related to the
- completeness assertion for inventory balances is that inventory quantities
- include all products, materials, and supplies on hand.
- is developing an overall strategy for
- the audit. The nature, extent, and timing of planning varies with size and
- complexity of the entity, experience with the entity, and knowledge of the
- entity's business
- A combination of the risk that
- material errors will occur in the accounting process and the risk the errors
- will not be discovered by audit tests. Audit risk includes uncertainties due to
- sampling (sampling risk) and to other factors (nonsampling risk)
auditing standards board
- Statements on Auditing Standards are
- issued by the auditing standards board, the body of the AICPA designated to
- issue auditing pronouncements.
- banking is a service offered by commercial banks
- that simplifies collection and processing of account receivables by
- having payments mailed directly to a location accessible by the bank. If
- you pay your electric or water bill with a paper check, it will likely go to a lockbox department at a bank.
bill of lading
- A document issued by a carrier to a
- shipper, listing and acknowledging receipt of goods for transport and
- specifying terms of delivery
- To pledge property as
- security (collateral) for a debt
- compilation is presenting in the form of financial statements information that
- is the representation of management without expressing assurance. Compilation
- of a financial projection is assembling prospective statements based on
- assumptions of a responsible party, considering appropriateness of
- presentation, and issuing a compilation report. No assurance is provided on the
- statements or underlying assumptions. The accountant need not be independent.
- Assertions about
- completeness deal with whether all transactions and accounts that should be in
- the financial statements are included. For example, management asserts that all
- purchases of goods and services are included in the financial statements.
- Similarly, management asserts that notes payable in the balance sheet include
- all such obligations of the entity
basis of accounting
- complete set of rules other than U.S. GAAP applied to all items in a set of
- financial statements. Examples include a basis of accounting required by a
- regulatory agency, a basis of accounting the entity uses for its income tax
- return and the cash receipts and disbursements basis
- Transfer of possession but not title
- to goods. Title stays with the consignor, while the consignee has possession.
- is the
- attitude, awareness, and actions of the board, management, owners, and others
- about the importance of control. This includes integrity and ethical rules,
- commitment to competence, board or audit committee participation,
- organizational structure, assignment of authority and responsibility, and human
- resource policies and practices.
- The risk that
- material error in a balance or transaction class will not be prevented or
- detected on a timely basis by internal controls.
Designating a point
- of termination. An auditor uses tests of cutoff to obtain evidence that
- transactions for each year are included in the financial statements of the
- appropriate year.
- The risk audit
- procedures will lead to a conclusion that material error does not exist when in
- fact such error does exist.
- statement that the auditor is unable to express an opinion as to the
- presentation of financial statements in conformity with U.S. GAAP.
- Revealing information. Financial
- statement footnotes are one way of providing necessary disclosures.
- If a major event
- comes to the auditor's attention between the report date and issuance of the
- report, the financial statements may include the event as an adjustment or
- disclosure. The auditor dual dates the audit report (as of the end of workpaper
- review, except footnote XX, which is dated later)
- Audit procedures
- are classified as substantive tests or tests of controls. If a procedure
- provides both types of evidence it is a dual-purpose test.
- is evaluating the preparation of prospective statements, support underlying
- assumptions, and presentation. The accountant reports whether, in his or her
- opinion, the statements conform to AICPA guidelines and assumptions provide a
- reasonable basis for the responsible party's forecast. The accountant should be
- independent, proficient, plan the engagement, supervise assistants, and obtain
- sufficient evidence to provide a reasonable basis for the report.
- Assertions about existence deal with
- whether assets or liabilities exist at a given date. For example, management
- asserts that finished goods inventories in the balance sheet are available for
extent of an audit test
- is the sample size. A small number of transactions provides less
- assurance than a large sample. There is more risk your conclusion will be
- incorrect if you use a smaller sample size
- Federal Accounting Standards Advisory Board. An organization that sets
- GAAP in the U.S. for federal government entities.
- The performance
- of audit procedures outside the CPA's office. Much field work, but not all, is
- done in the client's offices after the balance sheet date.
- a column is to add a column of
- numbers. To test footing is to add the
- column again to check accuracy
- A deliberate deception to secure
- unfair or unlawful gain. False representation intended to deceive relied on by
- another to that person's injury. Fraud includes fraudulent financial reporting
- undertaken to render financial statements misleading, sometimes called
- management fraud, and misappropriation of assets, sometimes called
- Generally Accepted
- Auditing Standards.” The ten auditing standards adopted by the membership of
- the AICPA. Auditing standards differ from audit procedures in that
- "procedures" relate to acts to be performed, whereas
- "standards" deal with quality of the performance of those acts and
- objectives of the procedures.
- A book of
- original entry in a double-entry system. The journal lists transactions and
- indicates accounts to which they are posted. The general journal includes all
- transactions not included in specialized journals used for cash receipts, cash
- disbursements, and other common transactions
- A record to
- which monetary transactions are posted (in the form of debits and credits) from
- a journal. It is the final record from which financial statements are prepared.
- General ledger accounts are often control accounts that report totals of
- details included in subsidiary ledgers
- In the ten
- U.S. generally accepted auditing standards there are three general standards:
- 1. The examination is to be performed by a person or persons having adequate
- technical training and proficiency as an auditor. 2. In all matters relating to
- the assignment, an independence in mental attitude is to be maintained by the
- auditor. 3. Due professional care is to be exercised in performing the
- examination and preparation of the report.
- assumes the company will continue in
- operation long enough to realize its investment in assets through operations
- (as opposed to sale). Presenting assets at historical cost is justified by
- assuming productive assets will be used rather than sold. This makes market
- values irrelevant and supports accounting methods that match the actual cost of
- an asset to periods benefited.
- Implied or understood even though not
- directly expressed.
- In all matters
- relating to the assignment, an independence in mental attitude is to be
- maintained by the auditors. This means freedom from bias, which is possible
- even when auditing one's own business (independence in fact). However, it is
- important that the auditor be independent in appearance (that others believe
- the auditor is independent).
- susceptibility of a balance or transaction class to error that could be
- material, when aggregated with other errors, assuming no related internal
- 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
- 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.
- An itemized list of goods shipped or
- services rendered with costs.
An itemized list of goods shipped or
services rendered with costs.
- 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
- A book of original entry in a
- double-entry system. The journal lists all transactions and the accounts to
- which they are posted.
- Drawing a check on insufficient funds
- to take advantage of the time required for collection
- The schedule
- at the beginning of audit documentation that summarizes the detailed schedules
- The availability of cash or ability
- to obtain it quickly. Debt paying ability.
- (bank lockbox) 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
- 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.
- 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.
- Written records supporting journal
- entries. Credit memos support credits, while debit memos support debit entries
Reducing in force or intensity.
nature of audit testing
- means the type of testing, such as tests of internal controls, tests of
- transactions, or tests of balances in balance sheet accounts
- 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
- 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.
- Assertions about obligations deal
- with whether liabilities are obligations of the entity at a given date. For
- example, management asserts that amounts capitalized for leases in the balance
- sheet represent the cost of the entity's rights to leased property and that the
- corresponding lease liability represents an obligation of the entity
- 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."
comprehensive basis of accounting
- (OCBOA) means 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.
- A practice
- monitoring program in which the audit documentation of one CPA firm is
- periodically reviewed by independent partners of other firms to determine that
- it conforms to the standards of the profession.
- An allowance for
- daily expenses. Often used to reimburse employees for estimated expenses as
- opposed to accounting for each small component of the expenses
- includes items of continuing accounting significance, such as the analysis of
- balance sheet accounts and contingencies. Such information from a prior year is
- used in the current audit and updated each year. Sometimes called the continuing
- individuals present assets and liabilities at estimated current value on an
- individual's balance sheet (statement of financial condition). A statement of
- changes in net worth presents major changes in net worth during a period. The
- accrual basis is used for assets and liabilities, which are presented in order
- of liquidity and maturity, without classification as to current and noncurrent.
- The cash value of life insurance less the amount of loans against it is an
- asset. Deferred income tax on the difference between the income tax basis and
- estimated current values is presented between liabilities and equity.
- Having the ability to permeate. An
- error is pervasive if it is material to more than one of the primary financial
- Audit planning is
- developing an overall strategy for conduct and scope of the audit. The nature,
- extent, and timing of planning vary with size and complexity of the entity,
- experience with the entity, and knowledge of the business. In planning the
- audit, the auditor considers the entity's business and its industry, its
- accounting policies and procedures, methods used to process accounting
- information, the planned assessed level of control risk, and the auditor's
- preliminary judgment about audit materiality
- Assertions about
- presentation deal with whether particular financial statement components are
- properly classified and described. For example, management asserts that
- long-term liabilities in the balance sheet will not mature in one year.
- Similarly, management asserts that extraordinary items in the income statement
- are properly classified and described
- The objective
- of pro forma financial information is to show effects on historical financial
- information as if a proposed event had occurred earlier
- A registration statement filed with
- the SEC includes audited financial statements (balance sheet, income statement,
- and statement of cash flows) for the previous three years. A prospectus
- contains the same information and must be supplied to all parties to whom
- offers are made. There is a twenty-day waiting period between the filing of the
- registration statement and the first sale of securities. During this period,
- preliminary ads and a "red herring" prospectus can be provided to
- offerees but it must be clearly marked as preliminary.
- A power of attorney granting a third
- party the right to a stockholder's vote. When management or others solicit
- proxies from stockholders a copy of the proxy statement must be filed with the
- SEC ten days before mailing the solicitation. The proxy statement must include
- all information relevant to the matter voted on
- An audit
- opinion that the financial statements as a whole are presented in conformity
- with U.S. GAAP, with the exceptions noted.
- Relating to the quality of a trait,
- as opposed to quantitative, which means expressed as a number.
- as a number, as opposed to qualitative measurement.
assurance (in internal control)
- internal control, no matter how well designed and operated, cannot guarantee
- that an entity’s objectives will be met because of inherent limitations in all
- internal control systems.
- A schedule establishing agreement between separate sources of information, such
- as accounting records reconciled with the financial statements
- is a
- financial statement assertion that has a reasonable possibility of containing a
- misstatement or misstatements that would cause the financial statements to be
- materially misstated.
- Sending money to someone. A
- remittance advice is a record of the amount sent, purpose of the payment, and
- associated account identification.
- To examine again. The overall review
- of audit documentation is completed after field work. A peer review is a
- practice monitoring program in which audit documentation of one CPA firm is
- periodically reviewed by independent partners of other firms to determine that
- they conform to professional standards. An analytical review is a type of
- substantive audit procedure. A review of financial statements of a nonpublic
- company is an engagement that results in the expression of less assurance than
- an audit, but more than in a compilation. A review of interim financial
- statements of a public company consists of analytical procedures and inquiries.
- are the audit procedures performed to obtain an understanding of the entity and
- its environment, including the entity's internal control, to identify and
- assess the risks of material misstatement, whether due to fraud or error, at
- the financial statement and relevant assertion levels.
- established the Public Company
- Accounting Oversight Board and added requirements for publicly traded
- companies, their officers, boards and auditors. It increased
- penalties for corporate financial fraud.
- "Statements on Auditing Standards" are
- interpretations of U.S. generally accepted auditing standards issued by the
- AICPA’s auditing standards board
- The type of engagement. The scope of
- an engagement might be a review, an audit, or a compilation. A scope limitation
- is a restriction on the evidence the auditor can gather.
- paragraph in the audit report that explains the scope of the engagement. The
- wording of the standard scope paragraph is: "We conducted our audit in
- accordance with U.S. generally accepted auditing standards. Those standards
- require that we plan and perform the audit to obtain reasonable assurance about
- whether the financial statements are free of material misstatement. An audit
- includes examining, on a test basis, evidence supporting the amounts and
- disclosures in the financial statements. An audit also includes assessing the
- accounting principles used and significant estimates made by management, as
- well as evaluating the overall financial statement presentation. We believe
- that our audit provides a reasonable basis for our opinion."
- Statements on Standards for
- Accounting and Review Services (SSARS) are pronouncements concerning unaudited
- financial information of a nonpublic entity issued by the AICPA Accounting and
- Review Services Committee.
- To arrange a population or a sample
- in distinct layers. Stratified sampling is used in auditing to select a greater
- percentage of accounts with high balances than of accounts with low balances
- affect the
- client and occur between the balance sheet date and issuance of the financial
- statements. Some such events provide additional evidence about conditions that
- existed at the balance sheet date, such as the bankruptcy of a customer with a
- history of financial difficulty. The financial statements are adjusted to
- reflect this evidence. Conditions that did not exist at the balance sheet date,
- such as fire that destroyed the client's plant after the balance sheet date,
- may be so significant as to require disclosure.
- The detailed
- information that totals to the balance in the general ledger account. The total
- of all customer accounts receivable included in the subsidiary ledger of
- accounts receivable is the balance in the general ledger accounts receivable
- is a direct test of a financial statement balance designed to
- detect material misstatements at the assertion level. Substantive procedures
- comprise tests of details (classes of transactions, account balances, and
- disclosures), and substantive analytical procedures
of controls (tests of the operating effectiveness of internal controls)
- Auditors evaluate the design of
- controls, then determine if the controls are in operation. In order to rely on
- the controls they must also obtain evidence as to whether the controls are
- operating effectively.
- tests of financial statement balances (substantive audit procedures) that are
- not analytical procedures. If tests of details are performed as tests of
- controls as well as substantive tests they are "dual-purpose" tests.
- in audit work
- papers are footnotes represented by a symbol instead of by a number. They
- indicate procedures that have been carried out on specific items in the work
- A statement
- of open debit and credit accounts in a ledger to test their equality
- An audit opinion that
- the financial statements are in conformity with U.S. GAAP.
- Follow a transaction through the
- steps of the system.
- Prove accuracy of
- accounting entries by tracing to supporting documents.
- (written audit
- documentation) Records kept by the auditor of procedures applied, tests
- performed, information obtained, and pertinent conclusions in the engagement.
- Cancellation of part
- or all of a balance. Costs incurred that have no future utility are charged
- (written-off) to an expense or loss account, not carried forward as an asset.