audit terms by ammar.acca

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									Basic Auditing & Assurance terms                   Volume 1

                           By Ammar Mushtaq Khan              1
Basic Auditing & Assurance terms                                   Volume 1

   This booklet is issued only with the single purpose is that to help the
 student in making clear understanding about audit & assurance terms.
     Any decision took on the basis of this booklet will not create any
                  responsibility or liability on the author.
 The user of this booklet is ethically & legally bound to take permission
  from author before copying, issuing, & reprinting it, wholly or partly.
 Some students & fellow will find that there are some terms are missing.
So if such case happens to you please mail me that term so I include it in
                              the next volume.
                        Thanks for your cooperation

                            Ammar Mushtaq Khan


                           By Ammar Mushtaq Khan                              2
Basic Auditing & Assurance terms                                    Volume 1
                                          fair value, the term fair value
                                          accounting estimates is used

A                                         Or
                                           An approximation of a financial
                                          statement element. Estimates are
                                          included in historical financial
Acceptance sampling                       statements because some amounts
                                          are uncertain pending outcome of
 is sampling to determine whether         future events and relevant data
internal control compliance is greater    about events that have occurred
than or less than the tolerable           cannot be accumulated on a timely,
deviation rate.                           cost-effective basis.
Accounting and review services            Accounting principles
are      governed       by     official    are alternative ways of reporting and
pronouncements               covering     disclosing information in financial
compilation         and        review     statements and related footnotes.
engagements.        Compilation      is
presenting in the form of financial       Accounts receivable
statements information that is the         Debts due from customers from
representation     of    management       sales of products and services
(owners)      without      expressing     reported as a current asset.
assurance. Review is inquiry and
analytical procedures to provide the
accountant a basis for expressing         Accounting records
limited assurance that there are no        are the records of initial accounting
material modifications that should be     entries and supporting records, such
made to the statements for them to        as checks and records of electronic
be in conformity with U.S. generally      fund transfers; invoices; contracts;
accepted accounting principles.           the general and subsidiary ledgers;
Accounting data                           journal entries and other adjustments
                                          to the financial statements that are
includes journals, ledgers and other
                                          not reflected in journal entries; and
records, such as spreadsheets, that
                                          records, such as work sheets and
support financial statements. It may
                                          spreadsheets,      supporting     cost
be in computer readable form or on
                                          allocations,            computations,
                                          reconciliations, and disclosures.
Accounting estimate
                                          Accounting research bulletins
means an approximation of a
                                          (ARBs) were issued years ago to set
monetary amount in the absence of
                                          generally     accepted    accounting
a precise means of measurement.
                                          principles. Some have not been
This term is used for an amount
                                          superseded by pronouncements of
measured at fair value where there is
                                          the Financial Accounting Standards
estimation uncertainty, as well as for
                                          Board. Those old pronouncements
other    amounts      that    require
                                          still qualify as generally accepted
estimation.    Where       accounting
                                          accounting principles.
estimates involving measurement at

                            By Ammar Mushtaq Khan                             3
Basic Auditing & Assurance terms                                    Volume 1
                                           agreed to the procedures to be
Activity                                   performed since others, unaware of
means an action or actions                 the reasons for the procedures may
associated with a function or              misinterpret the results
program, including administrative
and internal control functions, that
are integral to the operations of a         An engagement where the client
business unit or an entity. The            specifies     procedures    and      the
economy, efficiency or effectiveness       accountant agrees to perform those
of the activity is the subject matter of   procedures. An accountant may
a performance engagement.                  accept an engagement to apply
                                           agreed-upon procedures to financial
                                           statement elements, where the
Adjusting entries
                                           scope of the engagement is not
are accounting entries made at the         sufficient to express an opinion, if the
end of an accounting period to             users assume responsibility for
allocate items between accounting          sufficiency of the procedures, and
periods.                                   use of the report is restricted to
Adverse                                    specified users.
 An audit opinion that the financial
statements as a whole are not in           American Institute of Certified Public
conformity with GAAP or standards.         Accountants.      The    professional
Advisory services                          organization of CPAs in the U.S. It is
                                           a private organization of CPAs, not
are a consulting service in which the      an arm of the government. Each
auditors develops the findings,            state issues CPA certificates, not the
conclusions, and recommendations           AICPA. Since each state makes its
presented for client decision-making.      own laws, each state could prepare
This differs from attestation, where       and     grade    their   own     CPA
the auditor expresses a conclusion         examination. However, each state
about a written assertion of another.      uses the uniform CPA exam
Aggregate (aggregated)                     prepared and graded by the AICPA.

Constituting the whole. Aggregate          Allocation
expenses include expenses of all            Distribution according to a plan.
divisions combined for the entire          Depreciation,    amortization, and
year.                                      depletion are methods to allocate
Agreed-upon procedures                     costs to periods benefited.

means an engagement in which an            Allowance for doubtful accounts
auditor is engaged to carry out those      A contra asset account with a credit
procedures of an audit nature to           balance used to reduce the carrying
which the auditor and the entity and       amount of accounts receivable to net
any appropriate third parties have         realizable value. The allowance
agreed and to report on factual            balance is the estimated total of
findings. The recipients of the report     uncollectible accounts included in
form their own conclusions from the        accounts receivable.
report by the auditor. The report is
restricted to those parties that have

                             By Ammar Mushtaq Khan                               4
Basic Auditing & Assurance terms                                       Volume 1

                                           Annual report
Allowance for sampling risk
                                           means a document issued by an
The difference between a sample            entity, ordinarily on an annual basis,
estimate     and      the     projected    which includes its financial report
population     characteristic    at    a   together with the auditor’s report
specified    sampling      risk.    This   thereon.
allowance is also the difference
between the expected error rate and        Anomaly
the tolerable deviation rate.              means a misstatement or deviation
Analytical procedure                       that is demonstrably not
                                           representative of misstatements or
means evaluations of financial             deviations in a population.
information through analysis of
plausible relationships among both         APB opinions
financial and non-financial data.
Analytical       procedures        also     The Accounting Principles Board
encompass such investigation as is         existed    before    the  Financial
necessary of identified fluctuations or    Accounting Standards Board. It
relationships that are inconsistent        issued opinions, some of which are
with other relevant information or         still part of generally accepted
that differ from expected values by a      accounting principles.
significant amount.                        Applicable     financial    reporting
Or                                         framework

A comparison of financial statement        means      the financial     reporting
amounts       with    an     auditor's     framework adopted by management
expectation. An example is to              and, where appropriate, those
compare actual interest expense for        charged with governance in the
the year (a financial statement            preparation of the financial report
amount) with an estimate of what           that is acceptable in view of the
that interest expense should be. The       nature of the entity and the objective
estimate can be found by multiplying       of the financial report, or that is
a reasonable interest rate times the       required by law or regulation
average balance of interest bearing        or
debt outstanding during the year (the
auditor's expectation). If actual           is the financial reporting framework
interest expense differs significantly     adopted in the preparation of the
from the expectation, the auditor          financial    statements      that  is
                                           acceptable in view of the nature of
explains the difference in audit
                                           the entity and the objective of the
                                           financial statements, or that is
Analyze                                    required by law or regulation.
 Identify and classify items for further
study.                                     Fair presentation framework
                                            means a financial reporting
Expected.                                  framework that requires compliance
                                           with the requirements of the
                                           framework and:
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Basic Auditing & Assurance terms                                      Volume 1
                                           application control
(a) Acknowledges explicitly or
                                            Programmed       procedure   in
implicitly that, to achieve fair
                                           application software designed to
presentation of the financial report, it
                                           ensure completeness and accuracy
may be necessary for management
                                           of information.
to provide disclosures beyond those
specifically required by the               Appropriate
framework; or                              Audit evidence is relevant (pertains
                                           to the proposition supported) and
(b) Acknowledges explicitly that it        reliable (trustworthy).
may be necessary for management
to depart from a requirement of the        Approve
framework to achieve fair                   To authorize. A manager authorizes
presentation of the financial report.      a cash payment by signing a
Such departures are expected to be         voucher providing approval for the
necessary only in extremely rare           disbursement.
                                           Arm’s length transactions
The term compliance framework               are transactions between people
means a financial reporting                who have no relationship other than
framework that requires compliance         that of buyer and seller. The price is
with the requirements of the               the true fair market value of the
framework, but does not contain the        goods or services sold. If you buy or
acknowledgements in (a) or (b)             sell something to a close relative,
above. (see Fair presentation              you might give better terms than to
framework)                                 an unrelated party, so the price
                                           might not represent the true market
Applicable financial reporting             value of the goods or services.
 means a financial reporting
framework that is designed to              An audit procedure to determine or
achieve fair presentation.                 to discover with certainty. For
                                           example, to ascertain the date on
Applied criteria                           which an investment was purchased
means the criteria applied by              by examining source documents.
management in the preparation of           Assertion
the summary financial statements
                                           Management       asserts      financial
Appropriateness (of audit                  statements are correct with regard to
evidence)                                  existence or occurrence of assets,
means the measure of the quality of        liabilities    or        transactions,
audit evidence; that is, its relevance     completeness of information in the
and its reliability in providing support   financial statements, rights and
for the conclusions on which the           obligations at a point in time,
auditor’s opinion is based.                appropriate valuation or allocation,
                                           presentation, and disclosure.

                             By Ammar Mushtaq Khan                               6
Basic Auditing & Assurance terms                                      Volume 1

Assertion-based engagement                 Assurance engagement risk
means a compliance engagement
where an entity asserts compliance         means the risk that the practitioner
with requirements as measured by           expresses an inappropriate
the suitable criteria, and the             conclusion when the subject matter
assurance practitioner evaluates and       information is materially misstated.
expresses a conclusion to enhance
the intended user’s confidence in the      Assurance practitioner
entity’s assertion.                        means a person or an organisation,
                                           whether in public practice, industry,
Assertion-based engagement                 commerce or the public sector,
means a performance engagement             providing assurance services.
where the assurance practitioner
reports on assertions prepared by          Attest (attestation) report
the responsible party regarding the         In an attest engagement, a
economy, efficiency or effectiveness       practitioner    issues     a   written
of the activity.                           conclusion about the reliability of a
                                           written assertion that is the
                                           responsibility of another.
                                           Attestation risk
means analyse identified risks to
conclude on their significance.             is the risk the CPA may unknowingly
“Assess,” by convention, is used only      fail to modify the report on
in relation to risk. (also see Evaluate)   management’s assertion. It is
Or                                         composed of inherent risk, control
To determine the value, significance,      risk, and detection risk.
or extent of.                              Attorney’s letter
Assessed                                    is signed by the client's lawyer and
                                           addressed to the auditor. It is the
 Determined. The level of control risk
                                           auditor's    primary     means     to
determined by the auditor, based on
tests of controls, is the assessed         corroborate information furnished by
level of control risk.                     management about litigation, claims,
                                           and assessments.
                                           Attribute sampling
The level of confidence one has.
                                            The characteristic tested is a
Assurance engagement                       property that has only two possible
 is an engagement in which an              values (an error exists or it does
accountant issues a report designed        not).
to enhance the degree of confidence        Audit adjustment
of third parties and management
                                            is a correction of a financial
about the outcome of an evaluation
or    measurement     of    financial      information misstatement identified
statements (subject matter) against        by the auditor, whether recorded or
an applicable financial reporting          not.
framework (criteria).

                             By Ammar Mushtaq Khan                                 7
Basic Auditing & Assurance terms                                     Volume 1
                                          order to provide the auditor with a
                                          reasonable basis on which to draw
                                          conclusions about the entire
Audit committee                           population.
A committee of the board of directors
responsible for oversight of the          Audited financial report
financial reporting process, selection
of the independent auditor, and           means a financial report or a
receipt of audit results.                 complete set of financial statements
                                          audited by the auditor in accordance
Audit documentation                       with Australian Auditing Standards,
 (working papers) are records kept        and from which the summary
by the auditor of procedures applied,     financial statements are derived.
tests     performed,        information
obtained, and pertinent conclusions       Audit objective
reached in the engagement. The
documentation provides the principal       In obtaining evidence in support of
support for the auditor's report.         financial statement assertions, the
                                          auditor develops specific audit
Audit evidence                            objectives    in    light  of    those
 is information used by the auditor in    assertions.     For     example,    an
arriving at the conclusions on which      objective      related      to     the
the auditor's opinion is based.           completeness assertion for inventory
                                          balances is that inventory quantities
Audit Expert Systems                      include all products, materials, and
Expert or decision support systems        supplies on hand.
that can be used to assist IS
Auditors in the decision-making           Audit planning
process by automating the                 Is developing an overall strategy for
knowledge of experts in the field.        the audit. The nature, extent, and
This technique includes automated         timing of planning varies with size
risk analysis, system software, and       and complexity of the entity,
control objectives software               experience with the entity, and
packages.                                 knowledge of the entity's business.
                                          Audit Program
Audit file
means one or more folders or other        A series of steps to achieve an audit
storage media, in physical or             objective
electronic form, containing the
records that comprise the audit           Audit risk
documentation   for   a   specific         A combination of the risk that
engagement                                material errors will occur in the
Audit sampling (sampling)                 accounting process and the risk the
                                          errors will not be discovered by audit
 means the application of audit           tests.      Audit     risk    includes
procedures to less than 100% of           uncertainties due to sampling
items within a population of audit        (sampling risk) and to other factors
relevance such that all sampling          (non sampling risk).
units have a chance of selection in

                            By Ammar Mushtaq Khan                               8
Basic Auditing & Assurance terms                                   Volume 1
Auditor                                   Authorize (authorization)
                                           To give permission for. A manager
means the person or persons
                                          authorizes a transaction by signing a
conducting the audit, usually the
                                          voucher         authorizing       the
engagement partner or other
members of the engagement team,
or, as applicable, the firm. Where an
Auditing Standard expressly intends
that a requirement or responsibility
be fulfilled by the engagement
partner, the term “engagement
partner” rather than “auditor” is used.
“Engagement partner” and “firm” are
to be read as referring to their public
sector equivalents where relevant.

Auditor’s expert

 means an individual or organisation
possessing expertise in a field other
than accounting or auditing, whose
work in that field is used by the
auditor to assist the auditor in
obtaining sufficient appropriate audit
evidence. An auditor’s expert may be
either an auditor’s internal expert
(who is a partner or staff, including
temporary staff, of the auditor’s firm
or a network firm), or an auditor’s
external expert. “Partner” and “firm”
should be read as referring to their
public sector equivalents where

Auditor’s point estimate or
auditor’s range
 means the amount, or range of
amounts, respectively, derived from
audit evidence for use in evaluating
management’s point estimate.

Auditing standards board
Statements on Auditing Standards
are issued by the auditing standards
board, the body of the AICPA
designated    to   issue     auditing

                            By Ammar Mushtaq Khan                             9
Basic Auditing & Assurance terms                                    Volume 1
                                            asset management discretion. The
                                            person establishing the trust also

B                                           gives up the right to information
                                            regarding the assets.

                                            Blowing a Budget

                                            To exceed the number of hours you
Backup                                      are budgeted to complete a task by a
                                            considerable amount.
A copy of a computer program or
data stored separately from the
Batch                                        When a large amount of the work
A set of computer data or jobs to be        required on an audit is shifted closer
processed in a single program run.          toward the deadline instead of
                                            completed in a steady fashion
Benford’s law                               throughout the time allotted toward
is a mathematical law that applies to       the audit.
any population of numbers derived
from other numbers (such as the             Business risks
dollar amount of a sale, found by           a risk resulting from significant
multiplying the quantity sold times         conditions, events, circumstances,
the unit price). It holds that 30% of       actions or inactions that could
the time the first non-zero digit of this   adversely affect an entity’s ability to
derived number will be one, and it          achieve its objectives and execute its
will be a nine only 4.6% of the time.       strategies, or from the setting of
Ben ford’s law is used by auditors to       inappropriate      objectives      and
identify fictitious populations of          strategies.
Bill of lading
                                             Risks that could adversely affect an
A document issued by a carrier to a         entity's ability to achieve its
shipper, listing and acknowledging          objectives and execute its strategies
receipt of goods for transport and          or from the setting of inappropriate
specifying terms of delivery.               objectives and strategies.

Black Hole

Often used in several contexts,
however most commonly for a large
client that you work at for an
extended period of time.

Blind trust
A financial arrangement in which a
person avoids possible conflict of
interest by transferring financial
affairs to a fiduciary who has sole
                             By Ammar Mushtaq Khan                              10
Basic Auditing & Assurance terms                                      Volume 1
                                           Check digit

                                           A redundant digit added to a code to
                                           check accuracy of other characters
                                           in the code.
                                           Check register

CAATs -(Computer Assisted Audit             A listing of checks issued in numeric
Techniques)                                sequence and in order by date
any automated audit techniques,            issued.
such as generalized audit software,        Classification
utility software, test data, application
                                            Arrangement or grouping. Assets
software tracing and mapping, and
                                           and liabilities are normally classified
audit expert systems.
                                           as current or non current.
The Committee on the Financial             COBIT
Aspects of Corporate Governance,           Control Objectives for Information
set up in May 1991 by the UK               and related Technology, the
Financial Reporting Council, the           international set of IT control
London Stock Exchange and the UK           objectives published by ISACF, ©
accountancy profession, was chaired        1998, 1996.
by Sir. Adrian Cadbury and produced
a report on the subject commonly           COCO
known, in the UK, as the Cadbury           Criteria Of Control, published by the
Report                                     Canadian Institute of Chartered
                                           Accountants in 1995
Cancel supporting documents                Collateralize
 To mark supporting documents as            To pledge property as security
having been used to support a              (collateral) for a debt.
transaction so the same documents
can't be used to support another           Collusion
transaction. An example is stamping        A secret agreement between two or
vouchers "paid.”                           more parties for fraud or deceit.
Capitalized                                Comfort letter
Recorded as an asset. A capitalized        A letter written by the auditor to an
lease is in substance a purchase to        underwriter of securities, which
the lessee. An asset is recorded           expresses an opinion about whether
equal to the present value of the          the audited financial statements and
lease payments, which is also              schedules      in   the    registration
recorded as a liability. Payments,         statement comply as to form with
partly interest and partly principal,      applicable accounting requirements
are made on the lease liability. The       of the SEC and related rules and
leased asset is depreciated by the         regulations adopted by the SEC.
lessee as though it were legally           Procedures performed are specified
owned by the lessee.                       by the underwriter.
Caveat                                     Comparability
A warning or caution.
                             By Ammar Mushtaq Khan                              11
Basic Auditing & Assurance terms                                       Volume 1
Users       evaluate       accounting      balance increases the effective
information by comparison. Similar         interest rate to the bank since the net
companies account for similar              amount loaned is reduced but the
transactions in similar ways. Another      interest paid is unchanged.
goal is comparison of one company's
information from one period to the
next (consistency). Operating trends       of an internal audit staff is a function
should not be disguised by changing        of qualifications, including education,
accounting methods.                        certification, and supervision.
Comparative                                Compilation engagement
Financial statements of a prior period     means an engagement in which
shown with those of the current            accounting expertise, as opposed to
period to aid in comparisons               auditing expertise, is used to collect,
between periods.                           classify and summarise financial
Comparative financial report
                                           Compile (compilation)
means comparative information               A compilation is presenting in the
where amounts and other                    form     of    financial   statements
disclosures for the prior period are       information that is the representation
included for comparison with the           of management without expressing
financial report of the current period     assurance. Compilation of a financial
but, if audited, are referred to in the    projection is assembling prospective
auditor’s opinion. The level of            statements based on assumptions of
information included in that               a responsible party, considering
comparative financial report is            appropriateness of presentation, and
comparable with that of the financial      issuing a compilation report. No
report of the current period.              assurance is provided on the
                                           statements         or       underlying
Comparative information                    assumptions. The accountant need
                                           not be independent.
means the amounts and disclosures
included in the financial report in        Complementary user entity
respect of one or more prior periods       controls
in accordance with the applicable
financial reporting framework.             means controls that the service
                                           organisation assumes, in the design
                                           of its service, will be implemented by
Compare (comparison)                       user entities, and which, if necessary
An audit procedure. The auditor            to achieve control objectives, are
observes similarities and differences      identified in the description of its
between items such as an account           system.
from one year to the next.
                                           Complete set of financial
Compensating balance                       statements
 An offsetting balance. A requirement
by some banks that a borrower              means financial statements and
maintain a minimum balance in a            related notes as determined by the
checking or savings account as a           requirements of the applicable
condition of a loan. The offsetting        financial reporting framework. For
                            By Ammar Mushtaq Khan                             12
Basic Auditing & Assurance terms                              Volume 1
example, a complete set of financial     Compliance engagement risk
statements as described in
Accounting Standard AASB 101             means the risk that the assurance
Presentation of Financial                practitioner expresses an
Statements1 includes:                    inappropriate conclusion when the
(a) a statement of financial position    entity is materially non compliant
as at the end of the period;             with the requirements as measured
(b) a statement of comprehensive         by the suitable criteria.
income for the period;
(c) a statement of changes in equity     Compliance framework—relating to
for the period;                          financial reporting (see Applicable
(d) a statement of cash flows for the    financial reporting framework and
period; and                              General purpose framework)
(e) notes, comprising a summary of
significant accounting policies and      Compliance framework
other explanatory information
                                         means a framework used by the
                                         entity, which is designed to ensure
                                         that the entity achieves compliance,
Assertions about completeness deal       and includes governance structures,
with whether all transactions and        programs, processes, systems,
accounts that should be in the           controls and procedures
financial statements are included.
For example, management asserts          Component
that all purchases of goods and          means an entity or business activity
services are included in the financial   for which group or component
statements. Similarly, management        management prepares financial
asserts that notes payable in the        information that should be included
balance sheet include all such           in the group financial report.
obligations of the entity.
Compliance                               Component auditor
                                          means an auditor who, at the
means adherence by the entity to the     request of the group engagement
requirements as measured by the          team, performs work on financial
suitable criteria.                       information related to a component
Or                                       for the group audit.
Following applicable internal control
procedures, rules, or laws.              Component management
                                         means management, or those
                                         charged with governance,
Compliance engagement
                                         responsible for the preparation of the
                                         financial information of a component.
means an assurance engagement in
which an assurance practitioner
                                         Component materiality
expresses a conclusion, after
                                         means the materiality level for a
evaluating an entity’s compliance
                                         component determined by the group
with the requirements as measured
                                         engagement team
by the suitable criteria.

                           By Ammar Mushtaq Khan                              13
Basic Auditing & Assurance terms                                     Volume 1
Comprehensive          basis       of    services, transaction services, and
accounting                               staff and support services.
A complete set of rules other than       Contingency
GAAP applied to all items in a set of
                                          is an existing condition involving
financial    statements.    Examples
                                         uncertainty as to possible gain (gain
include a basis of accounting
                                         contingency)        or      loss    (loss
required by a regulatory agency, a       contingency) that will be resolved by
basis of accounting the entity uses      future events. Estimates, such as the
for its income tax return and the cash   useful life of an asset, are not
receipts and disbursements basis.        contingencies. Eventual expiration of
Computer controls                        the asset's utility is not uncertain.
 Internal controls performed by          Continuing auditor
computer (software controls) as           is the auditor of the current year
opposed to manual controls. Also         who also audited the financial
means general and application            statements of the client for the
controls   over     the  computer        previous year.
processing of data.
                                         Continuing                 accounting
Condensed financial statements
are presented in considerably less
detail than complete financial            means matters normally included in
statements.                              the permanent audit documentation,
                                         such as the analysis of balance
                                         sheet accounts, and those relating to
Confirm (confirmation)                   contingencies. Such information from
                                         a prior year is used by the auditor in
Communication with outside parties
                                         the current year's audit and is
to authenticate internal evidence.
                                         updated each year.
 Transfer of possession but not title
                                         A policy or procedure that is part of
to goods. Title stays with the
                                         internal control.
consignor, while the consignee has
possession.                              Control accounts
Consistency                               are general ledger accounts that
                                         report totals of details included in
 To    achieve     comparability  of
                                         subsidiary ledger accounts.        For
information over time, the same
                                         example, Accounts Receivable is a
accounting     methods     must  be
                                         general ledger account with a
followed. If accounting methods are
                                         balance equal to the total of the
changed from period to period, the
effects must be disclosed.               individual receivables included in the
                                         subsidiary     accounts     receivable
Consulted                                ledger.
Sought advice or information.            Control activities
Consulting                               means those policies and
                                         procedures that help ensure that
 services performed by CPAs include      management directives are carried
consultations, advisory services,        out. Control activities are a
implementation services, product         component of internal control.
                           By Ammar Mushtaq Khan                               14
Basic Auditing & Assurance terms                                       Volume 1
                                            Corporate governance
                                            The system by which organizations
Control deficiencies
                                            are directed and controlled. Boards
 exist when the design or operation         of directors are responsible for the
of a control does not allow                 governance of their organization.
employees,    in   their   assigned
functions, to prevent or detect
misstatements on a timely basis.            Corresponding figures
                                            means comparative information
Control environment                         where amounts and other
 is the attitude, awareness, and            disclosures for the prior period are
actions of the board, management,           included as an integral part of the
owners, and others about the                current period financial report, and
importance of control. This includes        are intended to be read only in
integrity    and     ethical    rules,      relation to the amounts and other
commitment to competence, board             disclosures relating to the current
or audit committee participation,           period (referred to as “current period
organizational structure, assignment        figures”). The level of detail
of authority and responsibility, and        presented in the corresponding
human      resource    policies   and       amounts and disclosures is dictated
practices.                                  primarily by its relevance to the
                                            current period figures.

Control policies and procedures             Corroborate         (corroborating)
Control activities are the policies and     (corroboration) (corroborative)
procedures       that   help     ensure      To strengthen with other evidence,
management directives are carried           to make more certain.
out. Those pertinent to an audit
include     performance        reviews,
information processing, physical            COSO
controls and segregation of duties.         The Committee of Sponsoring
                                            Organizations of the Tread way
Control risk                                Commission produced the "Internal
 The risk that material error in a          Control - Integrated Framework"
balance or transaction class will not       report in 1992, commonly known as
be prevented or detected on a timely        the COSO Report.
basis by internal controls. (See Risk
of material misstatement)                   Criteria
                                            means reasonable and acceptable
                                            standards of performance against
Controller                                  which the extent of economy,
An officer who supervises financial         efficiency or effectiveness of an
affairs of an entity. In internal control   activity may be assessed.
the controller is often the person with
record keeping (general ledger)             Suitable criteria have the following
responsibilities, as contrasted with        characteristics:
asset       custody,       management
decision-making, and internal audit         (a) relevance: relevant criteria
functions.                                  contribute to conclusions that assist

                             By Ammar Mushtaq Khan                                 15
Basic Auditing & Assurance terms                                  Volume 1
decision-making by the intended            bank, which is custodian of the
users;                                     company's securities.
(b) completeness: criteria are
sufficiently complete when relevant        Possession.
factors that could affect the              Cutoff
conclusions in the context of the
performance engagement                     Designating a point of termination.
circumstances are not omitted.             An auditor uses tests of cutoff to
Complete criteria include, where           obtain evidence that transactions for
relevant, benchmarks for                   each year are included in the
presentation and disclosure;               financial    statements    of    the
                                           appropriate year.
(c) reliability: reliable criteria allow
reasonably consistent evaluation or
measurement of the activity,
including when used in similar
circumstances by similarly qualified
assurance practitioners;

(d) neutrality: neutral criteria
contribute to conclusions that are
free from bias; and

(e) understandability:
understandable criteria contribute to
conclusions that are clear,
comprehensive, and not subject to
significantly different interpretations.

Enumerate some characteristic such
as the number of items in inventory.
Cumulative effect
 of changing to a new accounting
principle is the effect on retained
earnings at the beginning of the
current period.
Current ratio
 Total current assets divided by total
current liabilities.
 One who has possession or is in
charge of something. Some entities
entrust investment securities to a
                        By Ammar Mushtaq Khan                                16
Basic Auditing & Assurance terms                                        Volume 1
                                           detect and correct, misstatements in
                                           the financial report on a timely basis;

D                                          or

                                           (b) A control necessary to prevent, or
                                           detect and correct, misstatements in
                                           the financial report on a timely basis
Date of approval of the financial          is missing.
report                                     Detection risk
 means the date on which all the
statements that comprise the               means the risk that the procedures
financial report, including the related    performed by the auditor to reduce
notes, have been prepared and              audit risk to an acceptably low level
those with the recognised authority        will not detect a misstatement that
have asserted that they have taken         exists and that could be material,
responsibility for that financial report   either individually or when
                                           aggregated with other
Date of report                             misstatements.
means the date the assurance                Or
practitioner signs the report.             The risk audit procedures will lead to
                                           a conclusion that material error does
Date of the auditor’s report               not exist when in fact such error
 means the date the auditor dates          does exist.
the report on the financial report in
                                           Detective control
accordance with standards.
                                            A control designed to discover an
Date of the financial report               unintended event or result.
 means the date of the end of the          Deviation
latest period covered by the financial
report.                                    Departure from prescribed internal
                                           control. Often expressed as a rate at
Date the financial report is issued        which the departure occurs.
means the date that the auditor’s          Direct reporting engagement
report and audited financial report        means a compliance engagement
are made available to third parties        where the assurance practitioner
                                           directly evaluates an entity’s
Defalcation                                compliance with requirements as
To misuse or embezzle funds.               measured by the suitable criteria and
                                           expresses a conclusion to the
Deficiency                                 intended users in a compliance
 An internal control shortcoming or        report.
opportunity to strengthen internal
controls.                                  Direct reporting engagement
                                           means performance engagements
Deficiency in internal control
                                           where the assurance practitioner
                                           directly undertakes the evaluation or
                                           measurement of the activity to report
(a) A control is designed,
                                           on the economy, efficiency or
implemented or operated in such a
                                           effectiveness of the activity.
way that it is unable to prevent, or
                             By Ammar Mushtaq Khan                              17
Basic Auditing & Assurance terms                                  Volume 1
Economy                                  Dollar unit sampling (also known
means the acquisition of the             as probability proportional to size
appropriate quality and quantity of      sampling)
resources at the appropriate times
                                          A sampling plan that bases the
and at the lowest cost.
                                         likelihood of selecting a particular
                                         account on the relative size of that
means the use of resources such
                                         account, so larger accounts have a
that output is optimised for any given
                                         greater probability of being selected
set of resource inputs, or input is
                                         for the sample than smaller
minimised for any given quantity and
quality of output.
Effectiveness                            Dual date
means the achievement of the              If a major event comes to the
objectives or other intended effects     auditor's attention between the report
of activities at a program or entity     date and issuance of the report, the
level.                                   financial statements may include the
                                         event     as    an    adjustment   or
Disclaimer (disclaim)                    disclosure. The auditor dual dates
                                         the audit report (as of the end of
 A statement that the auditor is         work paper review, except footnote
unable to express an opinion as to       XX, which is dated later).
the   presentation   of    financial
statements in conformity with U.S.       Dual-purpose test
GAAP.                                    Audit procedures are classified as
Disclosure                               substantive tests or tests of controls.
                                         If a procedure provides both types of
Revealing information. Financial         evidence it is a dual-purpose test.
statement footnotes are one way of
providing necessary disclosures.
                                         Due Care
Discovery sampling
                                         Diligence which a person would
 Acceptance sampling (sampling to        exercise under a given set of
determine whether internal control       circumstances.
compliance is greater than or less
than the tolerable deviation rate)       Due professional care
when    the     expected   attribute     Diligence which a person, who
occurrence rate is zero.                 possesses a special skill, would
                                         exercise under a given set of
Document              (documentary)
Written or printed paper that bears
information that can be used to
furnish decisive evidence. Could also
be a recording, computer readable
information, or a photograph.

                           By Ammar Mushtaq Khan                             18
Basic Auditing & Assurance terms                                       Volume 1

                                           Producing a desired outcome. An
                                           audit procedure is effective if the
                                           evidence    supports   a    correct
EDI                                        Efficiency
“Electronic Data Interchange” is the       The ratio of the audit evidence
use of communication between an            produced to audit resources used.
entity and customers or suppliers to
transact business electronically.
                                           Element of a financial statement
Purchases, shipping, billing, cash
                                           means an element, account or item
receipts, and cash disbursements
                                           of a financial statement
can be completed entirely by
exchanging electronic messages.
                                           Embedded audit modules
Edit checks
                                            are included in the client’s data
 Reasonableness, validity, limit, and
                                           processing systems to facilitate the
completeness    tests    that     are
                                           acquisition of data needed by
programmed routines designed to
check input data and processing
results for completeness, accuracy         Embedded control performance
and reasonableness.                        deals with unexpected changes to
EDP                                        data.
 “Electronic  Data     Processing”.        Embezzlement
Processing   of   information   by         To take assets in violation of trust.
computer as opposed to handwritten
records.                                   Emphasis of Matter paragraph
                                           means a paragraph included in the
Effective income tax rate                  auditor’s report that refers to a
 The income tax provision (expense)        matter appropriately presented or
shown on an income statement               disclosed in the financial report that,
divided by pretax income. This             in the auditor’s judgement, is of such
differs from the statutory rate            importance that it is fundamental to
because of deductions, credits, and        users’ understanding of the financial
exclusions.                                report
Effective internal control
Reasonable       assurance       that
operational objectives are achieved,        is scrambling data so it is
that published financial statements        meaningless to anyone but the
are reliably prepared, and that the        intended recipient, who has the key
entity complies with applicable laws       to unscramble the data.
and regulations.                           Engagement documentation
                                           means the record of work performed,
                                           relevant evidence obtained, and
                                           conclusions the assurance
                             By Ammar Mushtaq Khan                                 19
Basic Auditing & Assurance terms                                        Volume 1
practitioner reached (terms such as       Engagement quality control
“working papers” or “work papers”         review
are sometimes used).                      means a process designed to
Engagement letter means the written       provide an objective evaluation, on
terms of an engagement in the form        or before the date of the auditor’s
of a letter.                              report, of the significant judgements
                                          the engagement team made and the
Engagement letter                         conclusions it reached in formulating
                                          the auditor’s report. The engagement
A letter that represents the
                                          quality control review process is for
understanding          about    the
                                          audits of financial reports of listed
engagement between the client and
the CPA / auditor. The letter             entities and those other audit
identifies the financial statements       engagements, if any, for which the
and describes the nature of               firm has determined an engagement
procedures to be performed. It            quality control review is required.
includes the objectives of the
                                          Engagement quality control
procedures, an explanation that the
                                          review (in the context of ASQC 1)
financial     information    is the
                                          means a process designed to
responsibility of the company's
                                          provide an objective evaluation, on
management, and a description of
                                          or before the date of the report, of
the form of report.
                                          the significant judgements the
                                          engagement team made and the
Engagement partner                        conclusions it reached in formulating
 means the partner or other person        the report. The engagement quality
in the firm who is responsible for the    control review process is for audits of
audit engagement and its                  financial reports of listed entities and
performance, and for the auditor’s        those other engagements, if any, for
report that is issued on behalf of the    which the firm has determined an
firm, and who, where required, has        engagement quality control review is
the appropriate authority from a          required.
professional, legal or regulatory
body. “Engagement partner” should         Engagement quality control
be read as referring to a public          reviewer
sector equivalent where relevant.         means a partner, other person in the
                                          firm, suitably qualified external
Engagement partner                        person, or a team made up of such
(in the context of QC) means the          individuals, none of whom is part of
partner or other person in the firm       the engagement team, with sufficient
who is responsible for the assurance      and appropriate experience and
engagement and its performance,           authority to objectively evaluate the
and for the report that is issued on      significant judgements the
behalf of the firm, and who, where        engagement team made and the
required, has the appropriate             conclusions it reached in formulating
authority from a professional, legal or   the auditor’s report.
regulatory body. “Engagement
partner” should be read as referring
to a public sector equivalent where

                            By Ammar Mushtaq Khan                              20
Basic Auditing & Assurance terms                                     Volume 1
                                           competence,      board    or     audit
Engagement team                            committee participation, organization
means all partners and staff               structure, assignment of authority
performing the engagement, and any         and responsibility, and human
individuals engaged by the firm or a       resource policies and practices.
network firm who perform audit
procedures on the engagement. This
excludes an auditor’s external expert      Error means an unintentional
engaged by the firm or a network           misstatement in a financial report,
firm. (also see Auditor’s expert)          including the omission of an amount
                                           or a disclosure
Engagement team                            Or
 (in the context of QC ) means all         Unintentional     misstatements    or
partners and staff performing the          omissions in financial statements.
engagement, and any individuals            Errors may involve mistakes in
engaged by the firm or a network           gathering or processing accounting
firm who perform procedures on the         data, incorrect estimates from
engagement. This excludes external         oversight or misinterpretation of
experts engaged by the firm or a           facts, and mistakes in application of
network firm.                              principles    relating   to    amount,
                                           classification,     presentation   or
Enterprise      risk     management        disclosure.
(ERM)                                      Estimation sampling
identifies risks and opportunities,         is sampling to estimate the actual
assesses them for likelihood and           value of a population characteristic
magnitude, determines responses            within   a   range    of   tolerable
strategy, and monitors progress.           misstatement.
ERM integrates strategic planning,
operations       management,         and   Estimation uncertainty
internal control. Monitoring ERM is        means the susceptibility of an
part of internal control activities.       accounting estimate and related
                                           disclosures to an inherent lack of
                                           precision in its measurement
Entity’s risk assessment process
means a component of internal
control that is the entity’s process for   Evaluate
identifying business risks relevant to      means identify and analyse the
financial reporting objectives and         relevant issues, including performing
deciding about actions to address          further procedures as necessary, to
those risks, and the results thereof.      come to a specific conclusion on a
                                           matter. “Evaluation,” by convention,
                                           is used only in relation to a range of
Environment                                matters, including evidence, the
 The control environment is the            results of procedures and the
attitude, awareness, and actions of        effectiveness of management’s
the board, management, owners,             response to a risk. (also see Assess)
and others about importance of
control. It includes integrity and
ethical    rules, commitment     to
                             By Ammar Mushtaq Khan                             21
Basic Auditing & Assurance terms                                       Volume 1
Evidence (evidential matter)              Execute (execution)
includes written and electronic           To carry out an internal control
information (such as checks, records      procedure, such as to sign and mail
of electronic fund transfers, invoices,   a check after inspecting supporting
contracts, and other information) that    documents.
permits the auditor to reach
conclusions through reasoning.
                                          Assertions about existence deal with
                                          whether assets or liabilities exist at a
 is evaluating the preparation of         given     date.      For      example,
prospective statements, support           management asserts that finished
underlying     assumptions,      and      goods inventories in the balance
presentation. The accountant reports      sheet are available for sale.
whether, in his or her opinion, the       Expenditure
statements conform to AICPA
guidelines and assumptions provide         Cash paid or liability incurred.
a    reasonable    basis    for   the     Experienced auditor
responsible party's forecast. The         means an individual (whether
accountant should be independent,         internal or external to the firm) who
proficient, plan the engagement,          has practical audit experience, and a
supervise assistants, and obtain          reasonable understanding of:
sufficient evidence to provide a
reasonable basis for the report.          (a) Audit processes;
Examine (examining)                       (b) Standards and applicable legal
                                          and regulatory requirements;
 As an audit procedure to examine
                                          (c) The business environment in
something is to look at it critically.
                                          which the entity
                                          operates; and
Exception                                 (d) Auditing and financial reporting
 means a response that indicates a        issues relevant to the entity’s
difference between information            industry.
requested to be confirmed, or
contained in the entity’s records, and    Expert (Expertise)
information provided by the               means skills, knowledge and
confirming party.                         experience in a particular field.

Except for                                Explanatory
A qualified opinion. An auditor can       A paragraph added to an audit report
qualify the audit opinion for both        to explain something, such as the
departures from U.S. GAAP in the          reason for a qualified or adverse
financial statements and restrictions     opinion.
on the scope of the audit. The
opinion paragraph of the qualified
report is worded "In our opinion,          Fully and clearly expressed, leaving
except for..."                            nothing implied.

                            By Ammar Mushtaq Khan                                22
Basic Auditing & Assurance terms                    Volume 1

means to multiply one number by
another (to test extensions is to test
the accuracy of multiplication done
by the client). To extend audit
procedures is to apply additional
audit procedures to obtain more
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.

External confirmation
 means audit evidence obtained as a
direct written response to the auditor
from a third party (the confirming
party), in paper form, or by electronic
or other medium

                            By Ammar Mushtaq Khan          23
Basic Auditing & Assurance terms                                      Volume 1
                                          notes, and an assertion statement by
                                          those responsible for the financial
                                          report. The related notes ordinarily

F                                         comprise a summary of significant
                                          accounting policies and other
                                          explanatory information. The
                                          requirements of the applicable
                                          financial reporting framework
                                          determine the form and content of
                                          the financial report.
Field work
 The    performance      of      audit    Financial statement
procedures outside the CPA's office.       means a structured representation
Much field work, but not all, is done     of historical financial information,
in the client's offices after the         intended to communicate an entity’s
balance sheet date.                       economic resources or obligations at
                                          a point in time or the changes therein
FIFO                                      for a period of time in accordance
“First In First Out” inventory cost       with a financial reporting framework.
flow.                                     What constitutes a financial
                                          statement is determined by the
Financial forecasts
                                          requirements of the applicable
are prospective financial statements      financial reporting framework.
that present expected future financial
position, results of operations, and
                                          Financial reporting framework
cash flows based on expected
conditions. A financial forecast is of     is a set of criteria used to determine
the most likely future scenario.          measurement,                recognition,
                                          presentation, and disclosure of all
Financial institution confirmation
                                          material items appearing in the
                                          financial statements.
 A confirmation sent to the client's
                                          financial statements are a structured
bank or other financial institution
                                          representation of historical financial
asking the bank to confirm directly to
                                          information, including related notes,
the   auditor    information   about
                                          intended to communicate an entity's
balances at a particular date.
                                          economic resources and obligations
Financial projections                     at a point in time or the changes
 are prospective financial statements     therein for a period of time in
that present, given one or more           accordance with a financial reporting
hypothetical assumptions, an entity's     framework.
expected financial position, results of   Firm
operations, and changes in financial       means a sole practitioner,
position. A financial projection          partnership or corporation or other
includes       several      alternative   entity of assurance practitioners.
scenarios while a forecast is the         “Firm” should be read as referring to
single most likely scenario.              a public sector equivalent where
Financial report means,                   relevant.
a complete set of financial
statements, including the related
                            By Ammar Mushtaq Khan                              24
Basic Auditing & Assurance terms                   Volume 1

 A schematic representation of a
sequence of operations in an
accounting system or computer
program. Also called a flow diagram
or flow sheet.
a column is to add a column of
numbers. To test footing is to add
the column again to check accuracy.
means prospective financial
information prepared on the basis of
assumptions as to future events
which management expects to take
place and the actions management
expects to take as of the date the
information is prepared (best-
estimate assumptions).

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 defalcations.
Fraud risk factors
 means events or conditions that
indicate an incentive or pressure to
commit fraud or provide an
opportunity to commit fraud.

Fraudulent financial reporting
means financial reporting involving
intentional misstatements, including
omissions of amounts or disclosures
in a financial report, to deceive
financial report users

                           By Ammar Mushtaq Khan          25
Basic Auditing & Assurance terms                                  Volume 1
                                          receipts, cash disbursements, and
                                          other common transactions.

                                          General ledger
                                           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
GAAP                                      financial statements are prepared.
                                          General ledger accounts are often
“Generally     Accepted    Accounting     control accounts that report totals of
Principles.”                              details   included    in   subsidiary
GAAS                                      ledgers.
“Generally     Accepted       Auditing    General purpose financial report
Standards.”     The    ten    auditing    means a financial report prepared in
standards      adopted      by     the    accordance with a general purpose
membership of the AICPA. Auditing         framework.
standards     differ    from    audit
procedures in that "procedures"           General purpose framework
relate to acts to be performed,           means a financial reporting
whereas "standards" deal with             framework designed to meet the
quality of the performance of those       common financial information needs
acts    and    objectives    of    the    of a wide range of users. The
procedures.                               financial reporting framework may be
                                          a fair presentation framework or a
GASB                                      compliance framework.
Government Accounting Standards
Board. A nongovernment private            Generalized audit software
organization that sets GAAP in the
United    States    for  nonfederal       Packaged computer programs used
governmental entities.                    on a variety of computers during
                                          audit field work to read computer
                                          files, select information, perform
General controls                          calculations, create data files, and
                                          print reports in a format specified by
 Policies and procedures to assure        the auditor.
proper operation of computer
systems, including controls over          Going concern assumption
network     operations,    software       assumes the company will continue
acquisition and maintenance, and          in operation long enough to realize
access security.                          its investment in assets through
General journal                           operations (as opposed to sale).
                                          Presenting assets at historical cost is
 A book of original entry in a double-    justified by assuming productive
entry system. The journal lists           assets will be used rather than sold.
transactions and indicates accounts       This makes market values irrelevant
to which they are posted. The             and supports accounting methods
general     journal    includes     all   that match the actual cost of an
transactions     not    included    in    asset to periods benefited.
specialized journals used for cash
                            By Ammar Mushtaq Khan                             26
Basic Auditing & Assurance terms                                      Volume 1
Governance                                means the partner or other person in
                                          the firm who is responsible for the
 means the role of person(s) or
                                          group audit engagement and its
organisation(s) with responsibility for
                                          performance, and for the auditor’s
overseeing the strategic direction of
                                          report on the group financial report
the entity and obligations related to
                                          that is issued on behalf of the firm.
the accountability of the entity
                                          Where joint auditors conduct the
Government auditing standards             group audit, the joint engagement
A book issued by the comptroller          partners and their engagement
general of the United States,             teams collectively constitute the
sometimes called the "yellow book."       group engagement partner and the
Government Auditing Standards             group engagement team.
contains standards for audits of
government               organizations,   Group engagement team
programs, activities, and functions       means partners, including the group
and of government assistance              engagement partner, and staff who
received by organizations. The audit      establish the overall group audit
is designed to provide reasonable         strategy, communicate with
assurance of detecting material           component auditors, perform work
misstatements        resulting     from   on the consolidation process, and
noncompliance with provisions of          evaluate the conclusions drawn from
contracts or grant agreements that        the audit evidence as the basis for
have a direct and material effect on      forming an opinion on the group
determination of financial statement      financial report.
amounts, are followed when required
by law, regulation, agreement,            Group financial report
contract, or policy.                      means a financial report that
                                          includes the financial information of
Gross margin percentage                   more than one component. The term
 The gross margin from an income          “group financial report” also refers to
statement divided by net sales            combined financial reports
revenue.                                  aggregating the financial information
                                          prepared by components that have
Group                                     no parent but are under common
means all the components whose            control.
financial information is included in
the group financial report. A group       Group management
always has more than one                  means management, or those
component.                                charged with governance,
                                          responsible for the preparation of the
Group audit                               group financial report.
means the audit of a group financial
report.                                   Group-wide controls
                                          means controls designed,
Group audit opinion                       implemented and maintained by
means the audit opinion on the            group management over group
group financial report.                   financial reporting.
Group engagement partner

                            By Ammar Mushtaq Khan                              27
Basic Auditing & Assurance terms                                      Volume 1
                                            Historical financial information,
                                            other than a financial

H                                           (a) Specific components, elements,
                                            accounts or items of a financial
                                            report, such as:
                                            (i) A single financial statement, for
Hard copy                                   example, an income statement or
                                            balance sheet.
A printed copy of information as            (ii) Accounts receivable.
opposed to information stored in            (iii) Impairment of asset accounts.
computer readable form.                     (iv) Inventory.
Hardware                                    (v) The liability for accrued benefits
                                            of a defined benefits plan.
 A computer and associated physical         (vi) The recorded value of identified
equipment       involved   in    data       intangible assets.
processing       or   communications        (vii) Pro-forma historical financial
functions as opposed to software            information and adjustments.
(the computer programs that provide         (viii) The liability for “incurred but not
instructions the computer follows).         reported” claims in an insurance
Hardware control                            portfolio, including related
                                            explanatory notes.
 Computer controls built into physical
equipment by the manufacturer.
                                            (b) Other information derived from
Hash total                                  financial records, such as:
A control total that has no meaning         (i) A schedule of externally managed
in itself except for control, e.g., total   assets and income of a private
social      security   numbers         of   pension plan, including related
employees paid.                             explanatory notes.
                                            (ii) A schedule of net tangible assets,
Hedges                                      including related explanatory notes.
 protect an entity against the risk of      (iii) A schedule of disbursements in
adverse     price   or    interest-rate     relation to a leased property,
movements on its assets, liabilities,       including related explanatory notes.
or anticipated transactions. A hedge        (iv) A schedule of profit participation
reduces risk by counterbalancing            or employee bonuses, including
losses with gains on separate               related explanatory notes.
                                            (c) Financial statements prepared in
                                            accordance with a financial reporting
Historical financial information            framework that is not designed to
means information expressed in              achieve fair presentation, such as
financial terms in relation to a            condensed financial statements and
particular entity, derived primarily        an entity’s internal management
from that entity’s accounting system,       accounts.
about economic events occurring in
past time periods or about economic
conditions or circumstances at points
in time in the past.

                             By Ammar Mushtaq Khan                                  28
Basic Auditing & Assurance terms                                      Volume 1
                                          previously obtained and, possibly,
                                          about the basis for the auditor’s

I                                         opinion on the financial report.
                                          Incorrect acceptance
                                           The risk of incorrect acceptance is
                                          the risk the sample supports the
Image-processing systems                  conclusion that the recorded balance
                                          is not materially misstated when it is
scan documents into electronic            materially misstated.
images for storage. Reference and
source documents may not be               Incorrect rejection
retained after conversion.                 The risk of incorrect rejection is the
Immaterial                                risk the sample supports the
                                          conclusion that the recorded balance
 Of no importance. Something in           is materially misstated when it is not
financial statements that will not        materially misstated.
change decisions of investors.
Implementation of internal control
                                          In all matters relating to the
means the auditor determines that         assignment, an independence in
the relevant controls exist and that      mental attitude is to be maintained
the entity is using them.                 by the auditors. This means freedom
Implicitly                                from bias, which is possible even
                                          when auditing one's own business
Implied or understood even though         (independence in fact). However, it is
not directly expressed.                   important that the auditor be
Implied control performance               independent in appearance (that
                                          others believe the auditor is
 deals with expected changes to           independent).
                                          Inference control
Incompatible duties
                                           is a control used in the output of
Internal control systems rely on          databases to stop a person who has
separation of duties to reduce the        access to only summary information
chance of errors or fraud. Duties are     from being able to determine (infer) a
incompatible if they should be            particular value for a particular
separated for control. For example,       record.
one person should not be in a
position to both embezzle funds and       Information systems
to hide the embezzlement by               consist of infrastructure (physical
changing         the        recorded      and      hardware     components),
accountability.                           software,    people,     procedures
Inconsistency                             (manual and automated), and data.
means     other   information    that    Information system relevant to
contradicts information contained in     financial reporting
the audited financial report. A          means a component of internal
material inconsistency may raise         control that includes the financial
doubt about the audit conclusions        reporting system, and consists of the
drawn     from     audit    evidence     procedures and records established
                          By Ammar Mushtaq Khan                              29
Basic Auditing & Assurance terms                                       Volume 1
to initiate, record, process and report    (as an audit procedure) means
entity transactions (as well as events     examining records or documents,
and conditions) and to maintain            whether internal or external, in paper
accountability for the related assets,     form, electronic form, or other media,
liabilities and equity.                    or a physical examination of an
Inherent limitation
 The potential effectiveness of an
entity's internal control is subject to     (in the context of QC) means in
inherent limitations. Human fallibility,   relation to completed engagements,
collusion, and management override         procedures designed to provide
                                           evidence     of    compliance  by
are examples.
                                           engagement teams with the firm’s
Inherent risk                              quality    control   policies and
The susceptibility of a balance or         procedures
transaction class to error that could      Integrated test facility (integrated
be material, when aggregated with          test data)
other errors, assuming no related
                                            A "dummy" unit (e.g., a department
internal controls.
                                           or employee) is established. Test
Initial audit engagement                   (fictitious) transactions are posted to
means an engagement in which               the dummy unit during the normal
either:                                    processing cycle. If test transactions
                                           are processed correctly that provides
(a) The financial report for the prior     evidence that transactions of other
period was not audited; or                 units are processed correctly as well.
(b) The financial report for the prior
period was audited by a predecessor        Integrity
auditor.                                   Consistent adherence to an ethical
                                           code. If client management lacks
                                           integrity the auditor must be more
Input controls
                                           skeptical than usual.
 Computer controls designed to
provide reasonable assurance that          Intended users
                                            means the person, persons or class
transactions are properly authorized
                                           of persons for whom the assurance
before processed by the computer,
                                           practitioner prepares the compliance
accurately converted to machine
                                           report. The responsible party may be
readable form and recorded in the
                                           one of the intended users, but not
computer, that data files and
                                           the sole user.
transactions are not lost, added,
duplicated or improperly changed,
and that incorrect transactions are        Interim audit procedures
rejected, corrected and, if necessary,      are done during the year under
resubmitted on a timely basis.             audit, before year-end.
Inquire (inquiry)
                                           Interim financial information
Ask questions of client personnel.          means financial statements of a
                                           time period less than a full year.
                                           Interim financial report
                            By Ammar Mushtaq Khan                              30
Basic Auditing & Assurance terms                                      Volume 1
means a financial report that is            The first paragraph of the auditor's
prepared in accordance with an             standard report which identifies the
applicable      financial      reporting   financial statements audited and
framework for a period that is shorter     states the financial statements are
than the entity’s financial year           the responsibility of management
                                           and that the auditor's responsibility is
Internal audit function
                                           to express an opinion on the
 means      an    appraisal   activity     financial statements based on the
established or provided as a service       audit.
to the entity. Its functions include,
amongst other things, examining,           Inventory tag
evaluating and monitoring the               A tag attached to inventory items
adequacy and effectiveness of              that identifies the inventory items to
internal control                           aid in counting the physical
Internal auditors
are employees of the client                Inverse
responsible for providing analyses,         The opposite or reverse. An inverse
evaluations,              assurances,      relationship between two variables
recommendations,        and     other      means that when one increases the
information     to     the     entity's    other decreases.
management       and     board.     An
important responsibility of internal
auditors is to monitor performance of       The company        in which an
controls.                                  investment is held. Often used to
                                           describe    an     equity    method
Internal control
                                           investment, in which the investor
 Policies and procedures designed to       reports a share of the investee's net
provide reasonable assurance that          income.
specific entity objectives will be         Investigate
achieved. It consists of the control        means to enquire into matters
environment,      risk   assessment,       arising from other procedures to
control activities, information and        resolve them.
communications, and monitoring.
Internal control questionnaire
 A list of questions about the existing    An itemized list of goods shipped or
internal control system to be              services rendered with costs.
answered (with answers such as
yes, no, or not applicable) during         ISB
audit fieldwork. The questionnaire is      Independence Standards Board.
a part of the documentation of the
auditor's understanding of the client's    Issuer
internal controls.                          is a company that must file reports
Internal control weakness                  with the SEC.       This includes
                                           companies with securities traded on
 A defect in the design or operation       a stock exchange and larger
of internal controls.                      companies traded over-the-counter.
Introductory paragraph

                            By Ammar Mushtaq Khan                               31
Basic Auditing & Assurance terms                                     Volume 1

J                                        L
Journal                                  Lapping
A book of original entry in a double-    A scheme to cover an embezzlement
entry system. The journal lists all      by using payments made by one
transactions and the accounts to         customer to reduce the receivables
which they are posted.                   balance of another customer.
Just-in-time                             Lead schedule
An inventory system that attempts to      The schedule at the beginning of
minimize inventory costs that do not     audit     documentation        that
add value for the customer. It           summarizes the detailed schedules.
arranges for suppliers to deliver        Lead Sheets
small quantities of raw materials just
before those units are needed in          These are the trial balance broken
production. Storing, insuring, and       out by sections such as Fixed
handling raw materials are costs that    Assets, Receivables, Cash, etc. It
add no value to the product, and are     lists all the groupings of accounts
minimized in a just in time system.      which relate to that testing area
                                         “Last In First Out” inventory cost
                                         Limited assurance engagement
                                         means an assurance engagement
                                         where the assurance practitioner’s
                                         objective is a reduction in assurance

                                         engagement risk to a level that is
                                         acceptable in the circumstances of
                                         the assurance engagement, but
                                         where that risk is greater than for a
                                         reasonable assurance engagement,
                                         as the basis for a negative form of
Kiting                                   expression of the assurance
Drawing a check on insufficient          practitioner’s conclusion. A limited
funds to take advantage of the time      assurance engagement is commonly
required for collection                  referred to as a review.

                                         Limit test (limit check).
                                          A computer program step that
                                         compares data with predetermined
                                         limits as a reasonableness test).

                           By Ammar Mushtaq Khan                            32
Basic Auditing & Assurance terms                                      Volume 1

The availability of cash or ability to
obtain it quickly. Debt paying ability.
Listed entity
means an entity whose shares, stock
or debt are quoted or listed on a         Management
recognised stock exchange, or are         is the person(s) with executive
marketed under the regulations of a       responsibility for the conduct of the
recognised stock exchange or other        entity's operations.
equivalent body.
Lockbox                                   means the person(s) with executive
                                          responsibility for the conduct of the
(Bank       lockbox)   speeds      the    entity’s operations. For some entities
availability of funds from cash           in some jurisdictions, management
collections by reducing the time from     includes some or all of those
the customer mailing the check until      charged with governance, for
the funds are available to spend.         example, executive members of a
Remittances are sent to a bank near       governance board, or an owner-
the customer and the bank deposits        manager
funds speedily to the payee's
account.                                  Management bias
                                          means a lack of neutrality by
                                          management in the preparation of

                                          Management controls
                                          are controls performed by one or
                                          more managers.
                                          Management’s expert
                                          means an individual or organisation
                                          possessing expertise in a field other
                                          than accounting or auditing, whose
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