AAT Level 4 Audit and Assurance key terms

The requirement that financial statements present information honestly, consistently with accounting standards, and without material misstatement, so a reader can rely on them for economic decisions.

The high but not absolute level of confidence an auditor obtains that financial statements are free from material misstatement, acknowledging inherent limitations such as sampling and judgement.

The difference between what the public believes an audit does and what an audit actually delivers, for example assuming auditors guarantee the absence of fraud.

The formal conclusion in the auditor's report stating whether the financial statements give a true and fair view, expressed as unmodified, qualified, adverse or a disclaimer.

An audit conclusion other than unmodified, issued when the auditor disagrees with the treatment or disclosures, or cannot obtain sufficient appropriate evidence on a material matter.

The assumption that an entity will continue trading for the foreseeable future; auditors assess whether this basis remains appropriate and whether disclosures are adequate.

The state of being free from relationships or interests that could compromise objectivity, covering both independence of mind and the appearance of independence.

The ethical principle requiring an auditor to avoid bias, conflict of interest or undue influence from others so that judgements are made impartially.

A risk to independence arising where the auditor has a financial or other interest that could improperly influence judgement, such as a fee dependency or shareholding in the client.

A risk to independence arising where the auditor evaluates work they themselves previously performed, such as preparing the figures they later audit.

An action or control, such as a second-partner review or removing an individual from the engagement, that reduces a threat to independence to an acceptable level.

The ethical duty not to disclose client information obtained during an engagement except where permitted by law, required by regulators, or with the client's consent.

An attitude of questioning and critical assessment of evidence, remaining alert to indications of misstatement, fraud or bias rather than accepting information at face value.

An intentional act by management, employees or third parties involving deception to obtain an unfair or illegal advantage, including misappropriation of assets and fraudulent financial reporting.

The risk that the auditor expresses an inappropriate opinion on financial statements that are materially misstated, made up of inherent, control and detection risk.

The susceptibility of an assertion to material misstatement before considering any related internal controls, driven by the nature of the item or the business environment.

The risk that a material misstatement could occur and not be prevented or detected on a timely basis by the entity's internal controls.

The risk that audit procedures fail to detect a material misstatement that exists, which the auditor manages by designing effective and sufficient testing.

The threshold above which omissions or misstatements could influence the economic decisions of users, used to plan the audit and evaluate uncorrected errors.

An amount set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements together exceed materiality.

The documented strategy setting out the nature, timing and extent of audit procedures, based on assessed risks, materiality and the auditor's understanding of the entity.

The representations by management embodied in the financial statements, such as occurrence, completeness, accuracy, valuation and rights, which auditors test to direct procedures.

The policies and procedures designed by those charged with governance to provide reasonable assurance about reliable reporting, effective operations and compliance with laws.

A control that separates authorising, recording and custody tasks between different people so that no single individual can both commit and conceal an error or fraud.

A procedure tracing a small number of transactions through the whole system from initiation to recording, used to confirm the auditor's understanding of controls.

The auditor's record of the client's accounting and control systems, typically using narrative notes, flowcharts or questionnaires, forming the basis for assessing control risk.

A procedure performed to evaluate whether internal controls operate effectively throughout the period, such as inspecting evidence of authorisation on sampled transactions.

Procedures designed to detect material misstatements at the assertion level, comprising tests of detail on transactions and balances and substantive analytical procedures.

All the information used by the auditor in reaching conclusions, which must be sufficient in quantity and appropriate in relevance and reliability.

Evidence obtained directly from a third party, such as a bank or customer, in response to the auditor's request, generally regarded as more reliable than internally generated evidence.

Evaluations of financial information by comparing it with expectations, such as prior periods, budgets or ratios, to identify unusual fluctuations warranting further investigation.

The risk that the auditor's conclusion based on a sample differs from the conclusion that would be reached by testing the entire population.

Events occurring between the reporting date and the date the auditor signs the report that may require adjustment to, or disclosure in, the financial statements.

A letter from management confirming responsibilities and specific assertions, obtained as necessary audit evidence but never a substitute for other sufficient appropriate evidence.

A written agreement setting out the scope, responsibilities and terms of an audit or assurance engagement, signed before work begins to prevent misunderstandings.

An independent appraisal function within an organisation that evaluates risk management, control and governance, reporting to management or those charged with governance.

An assessment of whether resources are used economically, efficiently and effectively, often examined in public sector performance audits.

An assurance engagement where the practitioner reports factual findings from specified procedures without expressing an opinion or conclusion.