BAO Objective Exam flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Accounting Equation

Assets equal liabilities plus equity. Every recorded transaction preserves this equality, which is why the trial balance and balance sheet must always balance after posting.

Accrual Basis

Revenue is recognized when the performance obligation is satisfied and expenses when incurred, independent of cash receipt or payment timing. It produces receivables, payables, and accrual adjustments.

Break-Even Point

The sales volume at which total contribution margin equals fixed costs and profit is zero. In units it equals fixed costs divided by unit contribution margin.

Contribution Margin

Sales revenue minus all variable costs. It measures the amount each unit or sale contributes toward covering fixed costs and then generating operating profit.

Audit Risk Model

Audit risk equals inherent risk times control risk times detection risk. Because detection risk is auditor-controlled, higher inherent or control risk requires more extensive substantive procedures.

Detection Risk

The risk that auditor procedures fail to detect a material misstatement. It is reduced by increasing the nature, timing, or extent of substantive testing.

Materiality

The threshold above which misstatements or omissions could influence a user's economic decisions. It is often set as a percentage of profit, revenue, total assets, or equity.

Deferred Tax Liability

A tax obligation arising from a taxable temporary difference, where accounting income exceeds taxable income now and reverses in future periods at the expected enacted tax rate.

Permanent Tax Difference

An item recognized for accounting but never for tax, or the reverse. It changes the effective tax rate and creates no deferred tax asset or liability.

Effective Tax Rate

Total income tax expense divided by pre-tax accounting income. It differs from the statutory rate because of permanent differences, credits, and rate changes.

Fiduciary Duty

A legal obligation of loyalty and care owed by agents, directors, and trustees. It requires acting in the beneficiary's interest and disclosing conflicts of interest.

Business Judgment Rule

A doctrine shielding directors from liability for poor outcomes when they acted in good faith, with reasonable care, on an informed basis, and without personal conflict.

Apparent Authority

Authority a third party reasonably believes an agent possesses because of the principal's manifestations. The principal is bound even without actual authority granted.

Segregation of Duties

Dividing authorization, custody, recording, and reconciliation among different people so no single individual can both perpetrate and conceal an error or fraud.

IT General Controls

Controls over access management, program changes, system development, and computer operations. They support reliance on automated application controls across the audit period.

SOC 1 Report

An independent report on a service organization's controls relevant to user entities' financial reporting, commonly used by auditors when a client outsources transaction processing.

Batch Totals

Control totals such as record counts, financial totals, or hash totals computed before processing and reconciled afterward to detect lost or altered records.

Control Deficiency

A design or operating shortfall that prevents management or employees from detecting misstatements timely. Severe deficiencies escalate to significant deficiency or material weakness.

Material Weakness

A deficiency, or combination, such that there is a reasonable possibility a material misstatement will not be prevented or detected timely by internal control.

Audit Committee Role

A board subcommittee overseeing financial reporting, internal control, and the external auditor, including appointment, compensation, and independence from management.

Principles-Based Standards

Standards that state objectives and qualitative characteristics, relying on professional judgment rather than detailed bright-line thresholds and scope exceptions.

Revenue Recognition Steps

Identify the contract, identify performance obligations, determine transaction price, allocate the price to obligations, then recognize revenue when each obligation is satisfied.

Net Realizable Value

Estimated selling price in the ordinary course of business minus estimated costs of completion and sale. Inventory is written down when cost exceeds this amount.

Overhead Underapplied

A condition where actual manufacturing overhead exceeds overhead applied to production. The difference is typically closed to cost of goods sold at period end.

Margin of Safety

Budgeted or actual sales minus break-even sales. It measures how far sales can fall before the entity incurs an operating loss.

Relevant Cost

A future cost that differs between decision alternatives. Sunk costs and unchanged allocated fixed costs are excluded from incremental analysis.

Qualified Audit Opinion

Issued when misstatements or scope limitations are material but not pervasive. The opinion paragraph states the basis for qualification clearly.

Temporary Tax Difference

A difference between an asset or liability's carrying amount and its tax base that reverses in future periods, creating a deferred tax asset or liability.

Statute of Frauds

A legal rule requiring certain contracts, such as land sales and agreements not performable within one year, to be evidenced in writing to be enforceable.

Negligence Elements

A plaintiff must prove duty, breach of that duty, actual and proximate causation, and damages. Comparative fault may reduce or bar recovery.

Disaster Recovery Plan

Procedures to restore IT systems and data after a disruptive event, including backups, alternate sites, and tested restoration steps with defined recovery objectives.

Change Management Control

A process requiring authorization, testing, and approval before software changes reach production, preventing unauthorized or defective modifications to automated controls.