CPA Advanced Auditing key terms

The threshold amount below which a misstatement, individually or in aggregate, would not reasonably influence the economic decisions of users of the financial statements. It drives the nature, timing and extent of audit procedures and the evaluation of uncorrected misstatements.

An amount set lower than overall materiality to reduce to an appropriately low probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. It is applied when designing procedures and evaluating results.

The maximum misstatement in an account balance or class of transactions that would still permit the conclusion that the population is not materially misstated. It is often set at or below performance materiality and drives sample sizes.

The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated. It is modeled as the product of inherent risk, control risk and detection risk, and is reduced to an acceptably low level by the audit.

The susceptibility of an assertion to misstatement before considering any related controls. It is assessed from the nature of the account, estimates, complexity, transactions with related parties and other qualitative factors.

The risk that a misstatement that could occur in an assertion will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. It is assessed through understanding and testing controls.

The risk that procedures performed by the auditor will not detect a misstatement that exists in an assertion. It is inversely related to the assessed risks of material misstatement and is managed through the nature, timing and extent of procedures.

An identified risk of material misstatement that, in the auditor's judgment, requires special audit consideration. Examples include significant estimates, complex transactions, related party dealings and non-routine transactions near period end.

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

The risk that management uses its authority to manipulate accounting records or prepare fraudulent financial statements by circumventing controls. It is a presumed fraud risk that cannot be eliminated by controls and requires substantive journal entry testing.

An attitude of questioning and critical assessment of audit evidence, remaining alert to conditions indicating possible misstatement due to error or fraud. It requires corroboration rather than accepting management explanations at face value.

The application of relevant training, knowledge and experience within the context of auditing standards to make informed decisions about the courses of action appropriate in the audit engagement. It must be documented when significant.

Information used by the auditor in arriving at the conclusions on which the audit opinion is based. Its sufficiency and appropriateness depend on relevance, reliability, source and timeliness, with external evidence generally more reliable than internal.

The measure of the quantity of audit evidence needed to support a conclusion. It increases with higher assessed risk and lower evidence quality, and is affected by the effectiveness of controls and the size of the population.

The measure of the quality of audit evidence, covering its relevance and reliability in providing support for conclusions. Evidence from independent external sources, original documents and direct auditor observation is generally more reliable.

Direct written response from a third party to the auditor, obtained to corroborate information such as balances or terms. Positive confirmations request a reply in all cases; negative confirmations request a reply only when the recipient disagrees.

Evaluations of financial information through analysis of plausible relationships among financial and non-financial data. They are required in risk assessment and in the overall review near the end of the audit, and are optional substantive procedures.

Audit procedures designed to detect material misstatements at the assertion level, comprising tests of details and substantive analytical procedures. They are always required for each material class of transactions, regardless of assessed control risk.

Procedures performed to evaluate the operating effectiveness of controls in preventing or detecting and correcting material misstatements. They support a reduced assessment of control risk and determine whether reliance on controls is justified.

Tracing one or a few transactions through the entire process from origination to recording in the general ledger. It confirms the auditor's understanding of the flow of transactions and the design and implementation of relevant controls.

The process designed and effected by those charged with governance and management to provide reasonable assurance about reliable financial reporting, effectiveness and efficiency of operations, and compliance with laws. It includes the control environment, risk assessment, control activities, information and communication, and monitoring.

A shortcoming in the design, implementation or operating effectiveness of a control such that it cannot prevent, or detect and correct, misstatements on a timely basis. A significant deficiency is less severe than a material weakness but merits governance attention.

A deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement will not be prevented, or detected and corrected, on a timely basis.

An engagement that audits both the financial statements and internal control over financial reporting, expressing opinions on each. It requires understanding controls, testing their operating effectiveness and evaluating identified deficiencies.

Application of audit procedures to less than 100 percent of items in a population such that each sampling unit has a chance of selection. It allows conclusions about the whole population based on sample results.

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 through sample size and selection method, unlike non-sampling risk.

A statistical sampling method used in tests of controls that measures the rate of deviation from a prescribed control in a population. Results are compared to a tolerable deviation rate to conclude on operating effectiveness.

A statistical sampling technique that treats each monetary unit in a population as a sampling unit, giving larger balances a higher selection probability. It is often used for substantive tests of details on account balances.

An approximation of a monetary amount where measurement depends on uncertain future events, such as allowances and fair values. The auditor evaluates the method, assumptions and data, and may develop an independent estimate or review subsequent events.

The assumption that the entity will continue in operation for the foreseeable future without liquidation or ceasing trading. The auditor evaluates management's assessment and whether material uncertainty exists that requires disclosure.

Events occurring between the date of the financial statements and the date of the auditor's report, and facts discovered after that date before the report is issued. Adjusting events require changes to the statements; non-adjusting events may require disclosure.

An audit opinion that is qualified, adverse or a disclaimer, issued when the auditor concludes the financial statements are materially misstated or evidence cannot be obtained. The modification is described in a basis for opinion section.

The opinion expressed when the auditor concludes the financial statements give a true and fair view, or are presented fairly, in all material respects in accordance with the applicable financial reporting framework.

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

The date on which the auditor has obtained sufficient appropriate evidence to support the opinion and has signed the report. It cannot be earlier than the date management asserts the statements are complete and approved by governance.

An objective evaluation of the significant judgments and conclusions of the engagement team, performed before the report is issued. It is required for listed entities and other high-risk engagements, and is performed by an independent reviewer.

The record of procedures performed, evidence obtained and conclusions reached, sufficient for an experienced auditor with no prior connection to the engagement to understand the work. It supports the opinion and demonstrates compliance with standards.