CPA AUD key terms

The public's perception that an auditor is objective and free of conflicts, judged by whether a reasonable informed third party would see a relationship as compromising. It can be impaired even when actual objectivity is intact.

The auditor's actual state of mind, meaning the auditor is genuinely unbiased and objective when reaching conclusions. It is internal and unobservable, so it is supplemented by rules protecting appearance.

A person on the audit engagement team, a firm employee who can influence the engagement, a partner in the office that leads the engagement, or certain close family members of those individuals. Their financial and business ties to the client are restricted.

An ownership stake or investment held directly in an audit client, such as shares owned in the auditor's own name. It impairs independence and generally cannot be cured by safeguards.

An investment in a client held through an intermediary such as a mutual fund or trust, where the auditor does not control the investment decisions. Independence may be impaired if the interest is material to the auditor.

A fee arrangement where payment depends on the outcome of a transaction or the result of the work, such as a percentage of a loan obtained. For attest clients it creates a self-interest threat and is generally prohibited.

A threat to independence or objectivity arising when the auditor has a financial or other interest that would benefit from an inappropriate conclusion, such as a large unpaid fee or a business relationship with the client.

A threat that arises when a close or long-standing relationship with a client causes the auditor to become too sympathetic to the client's views or too accepting of its representations.

A requirement that the lead engagement partner and certain other partners rotate off an issuer audit after a specified number of years, reducing the familiarity threat created by long association with one client.

A control or action, such as independent review of engagement work or removal of the affected individual from the team, that reduces a threat to independence to an acceptable level. Safeguards cannot eliminate certain prohibited relationships.

Categories of circumstances that may compromise auditor objectivity, including self-interest, self-review, advocacy, familiarity, and intimidation. Auditors identify threats and apply safeguards or decline the engagement.

The professional duty not to disclose client information obtained during an engagement without proper authority, except where required by law, permitted by the client, or necessary in a legal or disciplinary proceeding.

The state of being impartial and free from bias, conflict of interest, or undue influence of others when performing professional services and reaching conclusions.

An attitude of questioning and critical assessment of evidence, including a heightened awareness of conditions suggesting possible misstatement due to error or fraud, rather than accepting information at face value.

The application of relevant training, knowledge, and experience in making informed decisions about the courses of action appropriate in an audit engagement, documented so that conclusions can be evaluated.

A written agreement between auditor and client that sets out the objective and scope of the audit, management's responsibilities, the auditor's responsibilities, and the expected form of reports.

The amount or nature of misstatements that, individually or in aggregate, would influence the economic decisions of users of the financial statements. It guides planning, evidence gathering, and evaluation of uncorrected misstatements.

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 maximum misstatement in an account balance or class of transactions that an auditor is willing to accept so that, when combined with other misstatements, the total does not exceed materiality.

The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated. It is composed of inherent risk, control risk, and detection risk.

The susceptibility of an assertion to material misstatement before considering any related internal controls, driven by factors such as complexity, estimation, related-party transactions, and industry conditions.

The risk that a material misstatement could occur in an assertion and not be prevented or detected timely by the entity's internal control. It exists independently of the audit.

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

An identified risk of material misstatement judged close to the upper end of the spectrum of inherent risk, often involving complex transactions, significant estimates, or nonroutine related-party dealings. It requires special audit attention.

The risk that intentional misstatement, including fraudulent financial reporting or misappropriation of assets, causes the financial statements to be materially misstated. Auditors presume risk in revenue recognition and management override.

The documented strategy for the engagement describing the nature, timing, and extent of risk assessment and further audit procedures, developed after understanding the entity and its environment.

The risk assessment procedure of gathering knowledge about the client's industry, operations, accounting policies, objectives, and internal control, forming the basis for identifying risks of material misstatement.

The processes designed by those charged with governance and management to provide reasonable assurance about reliable reporting, effective operations, and compliance, comprising the control environment, risk assessment, information systems, control activities, and monitoring.

Procedures, such as inquiry, observation, inspection, or reperformance, performed to evaluate whether internal controls operate effectively and can be relied upon to reduce substantive testing.

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

An evaluation of financial information by comparing recorded amounts to expectations developed from plausible relationships among data, used to obtain evidence about assertions and to identify unusual fluctuations.

The information used by the auditor in arriving at the conclusions on which the opinion is based. It must be sufficient in quantity and appropriate in relevance and reliability.

The measure of the quantity of audit evidence needed, which increases as the risk of material misstatement rises and as the quality or reliability of the evidence obtained decreases.

The measure of the quality of audit evidence, meaning its relevance to the assertion being tested and its reliability. Evidence from independent external sources is generally more reliable than internally generated evidence.

Audit evidence obtained as a direct written response from a third party, such as a bank or customer, to the auditor. It is a reliable source of evidence about account balances and terms.

Applying audit procedures to less than all items in a population so that each sampling unit has a chance of selection, enabling the auditor to draw conclusions about the entire population.

The risk that the auditor's conclusion based on a sample differs from the conclusion that would be reached if the entire population were tested. It is controlled by sample size and selection method.

A written statement from management, dated near the report date, confirming its responsibilities and the completeness and accuracy of representations given to the auditor. It is required evidence but not a substitute for other procedures.

Procedures performed between the date of the financial statements and the date of the auditor's report, and through the report issuance date, to identify events requiring adjustment or disclosure.

The assumption that the entity will continue operating for the foreseeable future without liquidation. Auditors evaluate whether substantial doubt exists and whether disclosures are adequate.

The auditor's conclusion that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. Also called a clean or unqualified opinion.

An opinion issued when the auditor concludes that misstatements are material but not pervasive, or that sufficient appropriate evidence cannot be obtained and the possible effects are material but not pervasive.

An opinion stating that the financial statements are not presented fairly because misstatements are both material and pervasive to the financial statements as a whole.

A statement that the auditor does not express an opinion because a scope limitation prevents obtaining sufficient appropriate evidence and its possible effects are both material and pervasive.

The date on which the auditor has obtained sufficient appropriate evidence to support the opinion, no earlier than the date management approves the financial statements. It establishes the auditor's responsibility for later events.

A paragraph in the auditor's report that draws attention to a matter appropriately presented or disclosed in the financial statements that is fundamental to users' understanding, without modifying the opinion.