Chapter 2 - Vocabulary

Question 1

American Institute of Certified Public Accountants (AICPA)

Answer 1

The body charged with establishing auditing standards for the auditing of non public entities through the Statements of Auditing Standards (SAS’s) issued by the Auditing Standards Board (ASB).

Question 2

Audit Plan

Answer 2

A list of the audit procedures auditors need to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements.

Question 3

Audit Procedures

Answer 3

The specialized actions auditors take to obtain evidence in an engagement.

Question 4

Auditing standards

Answer 4

The audit quality guides that apply to all audits.

Question 5

Control Risk

Answer 5

The probability that a material misstatement (error or fraud) will not be prevented or detected on a timely basis by the entity’s internal controls.

Question 6

Detection Risk

Answer 6

The risk that the audit team’s substantive procedures will fail to detect material misstatement.

Question 7

Due Care

Answer 7

A level of performance that would be exercised by reasonable auditors in similar circumstances; auditors are expected to possess the skills and knowledge of others in their profession and are not expected to be infallible.

Question 8

Engagement Quality Control Review

Answer 8

An internal evaluation of the significant judgements made by the audit team and the conclusions reached in formulating its report on an engagement conducted by that firm.

Question 9

Evidence

Answer 9

The information used by auditors in arriving at the conclusion on which the audit opinion is based, which includes the underlying accounting data and all available corroborating information.

Question 10

Financial Reporting Framework

Answer 10

A set of criteria used to determine the measurement, recognition, presentation, and disclosure of material items in the financial statements.

Question 11

Generally Accepted Auditing Standards (GAAS)

Answer 11

Standards that identify necessary qualifications and characteristics of auditors and guide the conduct of the audit examination.

Question 12

Independence in Fact

Answer 12

An auditor’s mental attitude and impartiality with respect to the client.

Question 13

Independence in Appearance

Answer 13

The extent to which others perceive auditors to be independent.

Question 14

Inherent Risk

Answer 14

The probability that material misstatement (fraud or error) will occur in an account balance or class of transaction.

Question 15

Inspection

Answer 15

An evaluation of an accounting firms audit engagements and system of quality control conducted by the PCAOB and required for any firms providing audit services to public entities.

Question 16

Internal Control

Answer 16

The policies and procedures implemented by an entity to prevent or detect material accounting errors or frauds and provide for their correction on a timely basis.

Question 17

Materiality

Answer 17

As it relates to financial reporting, the dollar amount that would influence lending or investing decisions of financial statement users.

Question 18

Professional Judgement

Answer 18

The application of relevant training, knowledge, and experience in making informed decisions about appropriate courses of action during the audit engagement.

Question 19

Public Company Accounting Oversight Board (PCAOB)

Answer 19

The body can gather with establishing audit standards for the audits of public entities through the issuance of Auditing Standards. Also responsible for inspecting firms that perform audits on public entities.

Question 20

Public Entity

Answer 20

An entity that offers registered securities, such as stock and bonds, for sale to the general public.

Question 21

Reasonable Assurance

Answer 21

Concept that a GAAS audit may not detect all material misstatements and auditors are not insurers or guarantors regarding the fairness of the entity’s financial statements.

Question 22

Risk of Material Misstatement

Answer 22

The combined probability that a material miss statement (error or fraud) will occur and not be prevented or detected on a timely basis by the entity’s internal controls.

Question 23

Substantive Procedures

Answer 23

Procedures used by auditors to obtain assurance as to the fairness of the entity’s financial statements.

Question 24

System of Quality Control

Answer 24

The policies and procedures implemented by a firm to provide with reasonable assurance that the firm and its personnel: (1) comply with professional standards and applicable legal and regulatory requirements. (2) issue reports that are appropriate in the circumstances.

Question 25

Unmodified (unqualified) Opinion

Answer 25

And opinion which concludes that the financial statements present an entity’s financial condition, results of operations, and cash flows in conformity with GAAP.