BAO Objective Exam key terms

The threshold at which an omission or misstatement could change a user's economic decisions. It is judged in amount and nature, and it guides what is disclosed, tested, and corrected.

Recording revenue when earned and expenses when incurred, regardless of when cash moves. It matches costs to the periods that benefit from them and produces receivables and payables.

The assumption that an entity will continue operating long enough to realize assets and settle liabilities in the normal course. Doubt about it triggers disclosure and audit attention.

Cash received before a performance obligation is satisfied. It sits as a liability until the goods or services are delivered, then is recognized as revenue.

The process of recording revenue when control of promised goods or services transfers to the customer, measured at the transaction price allocated to each performance obligation.

Expenses are recorded in the same period as the revenue they helped generate, rather than when paid. It underpins accruals, depreciation, and cost of goods sold.

Systematic allocation of a tangible asset's depreciable cost over its useful life. It is an accounting estimate, not a measure of market value or cash spent.

A reduction in an asset's carrying amount when its recoverable amount falls below book value. The loss is recognized immediately and may later reverse under some frameworks.

The policies, procedures, and culture an organization uses to safeguard assets, produce reliable reports, and comply with laws. It is a process run by people, not a document.

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

A flaw in design or operation of a control that prevents management or staff from preventing or detecting misstatements on a timely basis. Severe forms are significant deficiencies or material weaknesses.

The chance an auditor issues an unmodified opinion on financial statements that are materially misstated. It combines inherent risk, control risk, and detection risk.

Procedures that gather direct evidence about transactions, balances, or disclosures, such as confirmations, vouching, and analytical review. It responds to assessed risk of misstatement.

The possibility that a conclusion drawn from a sample differs from what testing the whole population would show. It exists even when the sample is selected properly.

The state of being free from relationships or interests that a reasonable observer would see as compromising objectivity. It covers both mind and appearance and is central to audit credibility.

An attitude of questioning and alertness to conditions suggesting misstatement or fraud. It means corroborating management claims rather than accepting them at face value.

A situation where a person's private interest could improperly influence professional judgment. It is managed through disclosure, recusal, or removal of the conflicting interest.

A legal obligation to act in another party's best interest with loyalty and care. Directors, trustees, and agents owe it to the entity and its beneficiaries.

The system of rules, practices, and relationships by which a company is directed and held accountable, balancing interests of shareholders, management, and stakeholders.

The laws, standards, and oversight bodies that govern how entities report, are audited, and are supervised. It sets the rules and the penalties for breaching them.

The exposure to fines, sanctions, or reputational harm from failing to follow laws, regulations, or internal policies. It is managed through monitoring and training.

A model that relates fixed costs, variable costs, sales volume, and price to show how changes in activity affect profit. It relies on contribution margin and the breakeven point.

Sales revenue minus variable costs. It measures how much each unit or dollar of sales contributes to covering fixed costs and then generating profit.

A future cost that differs between alternatives and therefore belongs in a decision. Sunk costs and costs identical under every option are excluded.

The benefit given up by choosing one option over the next best alternative. It is often implicit and absent from accounting records but essential to sound decisions.

Assigning expected costs to products or processes and comparing them with actual results. The differences, called variances, highlight inefficiency or outdated standards.

Breaking down the gap between budgeted and actual performance into causes such as price, volume, and efficiency, so managers can act on the drivers rather than the total.

A quantified plan for a future period covering revenue, costs, cash, and capital. It sets expectations, allocates resources, and provides a benchmark for later performance evaluation.

The amount on which tax is computed after applying the jurisdiction's rules for inclusions, exclusions, deductions, and allowances. It often differs from accounting profit.

A balance reflecting temporary differences between accounting carrying amounts and tax bases, expected to reverse in future periods as tax payable or recoverable.

Arranging affairs within the letter of the law to reduce tax. It is generally lawful, but aggressive schemes may be challenged under anti-avoidance rules or ethics codes.

Illegally concealing income or misrepresenting facts to reduce tax owed. It is a criminal offense distinguished from lawful planning by intent and by falsity.

A legally enforceable agreement built on offer, acceptance, consideration, capacity, and lawful purpose. Breach gives the innocent party remedies such as damages or termination.

The potential for loss from unauthorized access, data breach, ransomware, or system failure. It is addressed through access controls, encryption, monitoring, and incident response plans.

A chronological record of system activity and changes that lets reviewers reconstruct who did what and when. It supports investigation, accountability, and reliable reporting.

The master record of all accounts and balances that feeds the financial statements. Every journal entry ultimately posts here, making it the backbone of the reporting cycle.

Current assets minus current liabilities. It measures short-term liquidity and the cushion available to fund day-to-day operations and obligations.