CPA (CPA Exam) key terms

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

The amount or nature of a misstatement that would influence the economic decisions of a reasonable user of the financial statements. Auditors use it to plan procedures and evaluate uncorrected misstatements.

The processes, policies, and procedures designed by management to provide reasonable assurance about reliable financial reporting, effective operations, and compliance with laws. Auditors assess controls to plan the audit.

The risk that a material misstatement will not be prevented or detected on a timely basis by the entity's internal control. It is assessed by the auditor and influences the nature and extent of substantive testing.

The risk that the auditor's procedures will fail to detect a material misstatement. It is managed through the design, timing, and extent of audit procedures and has an inverse relationship with inherent and control risk.

Audit procedures that obtain evidence about material misstatements at the assertion level, including tests of details and substantive analytical procedures. They are required regardless of assessed control risk.

Audit procedures performed to evaluate whether controls are designed and operating effectively to prevent or detect material misstatements. Results support the auditor's assessed level of control risk.

An auditor's conclusion that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in accordance with the applicable financial reporting framework.

An auditor's opinion stating that, except for the effects of a specific matter, the financial statements are fairly presented. The matter is material but not pervasive to the financial statements as a whole.

The assumption that an entity will continue operating for the foreseeable future. Auditors evaluate management's assessment and whether substantial doubt exists about the entity's ability to continue.

Matters that, in the auditor's professional judgment, were of most significance in the audit of the current period's financial statements. They are communicated in the auditor's report for listed entities.

An accounting method in which revenue is recognized when earned and expenses when incurred, regardless of when cash is received or paid. It is required under generally accepted accounting principles.

The process of recognizing revenue when performance obligations are satisfied, using the five-step model: identify the contract, identify obligations, determine price, allocate price, and recognize revenue.

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 a market-based exit price.

An intangible asset representing the excess of the purchase consideration transferred in a business combination over the fair value of identifiable net assets acquired. It is tested for impairment rather than amortized.

A balance sheet amount representing income taxes expected to be paid in future periods because of taxable temporary differences, such as expenses recognized for tax after book recognition.

A financial statement that classifies cash receipts and payments into operating, investing, and financing activities, explaining the change in cash during the period.

An accounting method for investments giving the investor significant influence over the investee. The investment is adjusted for the investor's share of investee earnings or losses and dividends received.

An existing condition, situation, or set of circumstances involving uncertainty about a possible gain or loss. A loss contingency is accrued when it is probable and reasonably estimable; others are disclosed.

Revenues, expenses, gains, and losses that are excluded from net income under GAAP, such as foreign currency translation adjustments and certain pension adjustments. They are reported in other comprehensive income.

A reduction in the carrying amount of an asset when its fair value or recoverable amount falls below the amount recorded on the balance sheet. The loss is recognized in income.

The process of combining the financial statements of a parent and its controlled subsidiaries into a single set of statements, eliminating intercompany balances and transactions.

All income from whatever source derived unless specifically excluded by tax law. It includes wages, business profits, interest, dividends, rents, and gains from property sales.

A taxpayer's cost or other investment in property for tax purposes. It is used to compute gain or loss on sale and determines the amount of depreciation deductions.

Gain from the sale or exchange of a capital asset, such as stock or investment property. Long-term capital gains are generally taxed at preferential rates; netting rules apply.

A tax-deferred exchange of real property held for productive use in a trade or business or for investment, where gain is recognized only to the extent of boot received.

A rule that disallows a loss on the sale of securities if substantially identical securities are bought within 30 days before or after the sale. The disallowed loss is added to the new basis.

A corporation that elects pass-through taxation, with income, deductions, and credits flowing to shareholders. Eligibility limits include no more than 100 shareholders and one class of stock.

Treasury Department regulations that govern practice before the Internal Revenue Service, including standards for written advice, competence, and sanctions for violations by practitioners.

A tax return position standard requiring that the weight of authorities supporting the position is greater than the weight opposing it. It is relevant to preparer penalties.

The period during which the IRS may assess additional tax. It is generally three years from the filing date, six years for substantial omissions, and unlimited for fraud.

Rules that limit deductions for an activity not engaged in for profit to the income generated by the activity. Profit motive is determined from all facts and circumstances.

A report by a service auditor on controls at a service organization that are relevant to user entities' internal control over financial reporting. It helps user auditors assess controls.

Controls over the information technology environment, such as access security, change management, and operations, that support the reliable functioning of application controls and financial reporting.

Techniques that examine large data sets to identify patterns, anomalies, or relationships. In audits, they can support risk assessment and substantive testing.

Disclosure of financial information by operating segments of a public entity, including segment profit or loss, assets, and revenue, to help users understand business performance.

Arranging business and personal affairs in a manner that minimizes tax liability within the law, considering timing, entity choice, deductions, credits, and income recognition.