ACCA AA key terms

An independent examination of an entity's financial statements and underlying records, performed to express an opinion on whether they give a true and fair view. It adds credibility to information prepared by management.

A high but not absolute level of confidence that the financial statements are free from material misstatement. It is the level of assurance an audit provides, limited by judgement, sampling and inherent uncertainty.

The concept that financial statements present information faithfully, in accordance with the applicable reporting framework, without material bias or omission. Auditors express an opinion on whether this is achieved.

The formal conclusion in the auditor's report stating whether the financial statements are prepared, in all material respects, in accordance with the applicable framework. It may be unmodified or modified.

An audit opinion that is qualified, adverse or a disclaimer, issued when the auditor concludes the financial statements contain material misstatement or sufficient evidence cannot be obtained.

The threshold above which omissions or misstatements could reasonably influence the economic decisions of users of the financial statements. It is a matter of professional judgement and drives the extent of audit work.

An amount set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements together exceed materiality. It guides the design of audit procedures.

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

The susceptibility of an assertion to material misstatement before considering related internal controls. It is influenced by the nature of the entity, its transactions and its 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. It is assessed by understanding and testing the control environment.

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

The policies and procedures designed by those charged with governance and management to provide reasonable assurance about the reliability of reporting, effectiveness of operations and compliance with laws.

The overall attitude, awareness and actions of management and those charged with governance regarding internal control. It sets the tone for the organisation and underpins all other control components.

A control that divides incompatible responsibilities, such as authorising, recording and custody of assets, among different people. It reduces the opportunity for error or fraud to occur undetected.

Audit tests designed to detect material misstatements at the assertion level. They include tests of detail and substantive analytical procedures, and are performed regardless of assessed control risk.

An audit procedure performed to evaluate the operating effectiveness of controls in preventing or detecting material misstatements. Results determine whether the auditor can rely on those controls.

Information used by the auditor to reach conclusions on which the audit opinion is based. It must be sufficient in quantity and appropriate in relevance and reliability.

Evidence obtained directly from a third party in response to a request, such as a bank or customer balance confirmation. It is generally more reliable than internally generated evidence.

Applying audit procedures to less than the whole population so that each sampling unit has a chance of selection, enabling conclusions about the population. It may be statistical or non-statistical.

The assumption that an entity will continue in operation for the foreseeable future without liquidation. Auditors assess management's use of this assumption and report where material uncertainty exists.

A written statement from management confirming certain matters, such as completeness of records or disclosure of related parties. It supports but does not replace other audit evidence.

An intentional act involving deception to obtain an unfair or illegal advantage, such as misappropriation of assets or fraudulent financial reporting. Auditors consider the risk of material misstatement due to fraud.

An attitude of questioning and critical assessment of evidence, remaining alert to indications of misstatement, bias or fraud. It requires the auditor not to assume management is dishonest or unquestionably honest.

The state of being free from relationships or interests that could compromise objectivity, in fact and appearance. It is a fundamental ethical requirement for auditors.

The ethical principle requiring an auditor not to compromise professional judgement because of bias, conflict of interest or undue influence of others. It supports independence and impartial conclusions.

The ethical duty not to disclose information acquired through professional work without proper authority, unless there is a legal or professional right or duty to do so.

A written agreement setting out the terms of an audit engagement, including scope, responsibilities of auditors and management, and the form of reports. It confirms mutual understanding before work begins.

A documented outline of the nature, timing and extent of audit procedures to be performed, based on the auditor's understanding of the entity and assessed risks. It is updated as the audit progresses.

Evaluations of financial information through comparison with expectations, such as ratios, trends or budgets. They are used in risk assessment, as substantive tests and in the final review stage.

Representations by management about the recognition, measurement, presentation and disclosure of items in the financial statements, such as existence, completeness and valuation. Auditors test evidence against them.

The example set by senior management and those charged with governance through their conduct and messaging, which shapes the ethical culture and effectiveness of internal control throughout the organisation.

Events occurring between the reporting date and the date the financial statements are approved that may require adjustment or disclosure. Auditors perform procedures to identify and evaluate them.

The person or persons responsible for overseeing the strategic direction and accountability of the entity, such as the board of directors or audit committee. Auditors communicate significant matters to them.

A subcommittee of the board, typically of independent non-executive directors, that oversees financial reporting, external audit and internal control. It strengthens governance and auditor independence.

Documentation prepared by the auditor recording procedures performed, evidence obtained and conclusions reached. They support the audit opinion and demonstrate the audit was properly planned and conducted.

A service providing limited assurance, primarily through inquiry and analytical procedures, that nothing has come to the practitioner's attention suggesting the financial statements are not prepared in accordance with the framework.

An engagement where the practitioner performs specified procedures and reports factual findings without providing assurance. Users draw their own conclusions from the reported results.

A communication to management, often arising from an audit, reporting deficiencies in internal control identified during the work together with constructive recommendations for improvement.