CPA (ABC) key terms

The threshold at which an omission or misstatement in financial statements could influence the economic decisions of reasonable users. Auditors use it to plan procedures and evaluate whether detected misstatements require correction or disclosure.

An amount set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements together exceed materiality for the financial statements as a whole.

The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated. It combines inherent risk, control risk, and detection risk in the audit risk model.

The susceptibility of an assertion to a material misstatement before considering any related internal controls. It reflects the nature of the account, complexity of transactions, and estimation uncertainty.

The risk that a material misstatement could occur and not be prevented or detected on a timely basis by the entity's internal control. Auditors assess it to determine the extent of substantive testing needed.

The risk that audit procedures performed will fail to detect a material misstatement that exists. It is controlled by the auditor through the nature, timing, and extent of audit procedures.

An audit procedure designed to evaluate the operating effectiveness of controls in preventing or detecting material misstatements at the assertion level. Results support reliance on controls and may reduce substantive testing.

Audit procedures designed to detect material misstatements at the assertion level, including tests of details and substantive analytical procedures. They are required for every relevant assertion regardless of assessed control risk.

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data. They are used in risk assessment, as substantive procedures, and in the overall review near the end of the audit.

Information used by the auditor to reach the conclusions on which the audit opinion is based. Its persuasiveness depends on relevance and reliability, with externally sourced and original documents generally more reliable.

A direct written response from a third party in paper or electronic form obtained by the auditor to verify account balances or other information. It is a highly reliable form of externally sourced audit evidence.

An auditor's conclusion that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. It is the standard clean opinion issued when no material issues remain.

An auditor's opinion stating that, except for the effects of a described matter, the financial statements are fairly presented. It is issued when a material but not pervasive misstatement or scope limitation exists.

An auditor's opinion that the financial statements are not presented fairly because misstatements are both material and pervasive. It is the most severe form of modified opinion on the financial statements.

The assumption that an entity will continue operating for the foreseeable future without liquidation or ceasing operations. Auditors must evaluate substantial doubt about this assumption and disclose related uncertainties appropriately.

Events occurring after the balance sheet date but before the financial statements are issued or available to be issued. They are classified as recognized (adjusting) or nonrecognized (nonadjusting) based on conditions existing at the balance sheet date.

The process of recognizing revenue when performance obligations are satisfied by transferring promised goods or services to customers. The amount recognized reflects consideration expected in exchange for those goods or services.

A promise in a contract with a customer to transfer a distinct good or service. Revenue is recognized when each obligation is satisfied, either at a point in time or over time.

An entity's right to consideration in exchange for goods or services transferred that is conditioned on something other than the passage of time. It differs from a receivable, which is an unconditional right to payment.

The present value of unpaid lease payments over the lease term, discounted using the rate implicit in the lease or the lessee's incremental borrowing rate. It is recognized by lessees for most leases.

An asset representing a lessee's right to use an underlying asset for the lease term, measured at the initial lease liability plus initial direct costs and prepayments, less incentives and accumulated amortization.

The excess of consideration transferred in a business combination over the fair value of identifiable net assets acquired. It is not amortized but tested for impairment at least annually.

A condition in which the carrying amount of an asset exceeds its recoverable amount or fair value. The asset is written down and a loss is recognized in earnings.

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is an exit price concept under the fair value hierarchy.

A method of accounting that records revenues when earned and expenses when incurred, regardless of when cash changes hands. It distinguishes accruals from deferrals and supports matching of revenues and expenses.

A liability arising when an entity receives consideration from a customer before transferring promised goods or services. It is recognized as revenue when the related performance obligation is satisfied.

A transaction in which an acquirer obtains control of one or more businesses. It is accounted for using the acquisition method, recognizing identifiable assets and liabilities at fair value.

A measure of the portion of a company's profit allocated to each outstanding share of common stock. Basic EPS excludes dilution while diluted EPS reflects the effect of potential common shares.

Potential common shares that would reduce earnings per share if exercised or converted, such as options, warrants, and convertible securities. They are included in diluted EPS using the treasury stock or if-converted method.

For tax purposes, all income from whatever source derived unless specifically excluded by law. It is the starting point for computing taxable income after allowable deductions.

Gross income reduced by certain above-the-line deductions such as retirement contributions and self-employment tax. It is the base for computing many limitations and is reported on the individual return.

An amount subtracted from gross income or adjusted gross income to arrive at taxable income. Deductions may be claimed above the line or below the line, subject to statutory limits and substantiation rules.

The amount used to measure gain or loss on the sale or disposition of property, generally the taxpayer's cost adjusted for improvements and certain events. It determines taxable gain when an asset is sold.

Gain from the sale or exchange of a capital asset, taxed at preferential rates if long-term. Short-term gains are generally taxed at ordinary income rates.

The length of time an asset is owned, which determines whether gain or loss is short-term or long-term. For capital assets held more than one year, long-term treatment applies.

A tax-deferred exchange of business or investment real property for other real property of like kind. Gain is deferred when no boot is received, and basis carries over to the replacement property.

Regulations governing practice before the Internal Revenue Service, setting standards for tax return positions, advising clients, and professional conduct. It imposes penalties for disreputable or incompetent practice.