SOCPA Auditing flashcards

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

Audit risk model

The product of inherent risk, control risk, and detection risk. Detection risk is the only component the auditor can control by varying the nature, timing, and extent of audit procedures.

Performance materiality

An amount set below overall materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Typically 50%–75% of overall materiality.

Qualified opinion

An audit opinion stating that, except for the effects of the matter described, the financial statements give a true and fair view. Used when misstatements are material but not pervasive.

Disclaimer of opinion

An audit opinion issued when the auditor is unable to obtain sufficient appropriate audit evidence, and the possible effects are both material and pervasive to the financial statements.

Sufficiency of evidence

The measure of the quantity of audit evidence. It is affected by the auditor's assessment of risk of material misstatement and the quality of the evidence obtained.

Appropriateness of evidence

The measure of the quality of audit evidence, i.e., its relevance and reliability in providing support for the auditor's conclusions. External evidence is generally more reliable than internal evidence.

Non-sampling risk

The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling, such as using inappropriate procedures or misinterpreting evidence.

Going concern

The assumption that the entity will continue in operation for the foreseeable future. If there is a material uncertainty, the auditor includes an emphasis of matter or a qualified opinion as appropriate.

Accounting equation

Assets = Liabilities + Equity. Every transaction is recorded so that the equation remains in balance, forming the basis of double-entry bookkeeping.

Revenue recognition five steps

Identify the contract; identify performance obligations; determine the transaction price; allocate the price to obligations; recognize revenue when or as each obligation is satisfied.

Net realizable value

The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Inventory is measured at the lower of cost and NRV.

Impairment loss

The amount by which the carrying amount of an asset exceeds its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use.

Right-of-use asset

An asset recognized by a lessee under IFRS 16 representing the right to use an underlying asset for the lease term, initially measured at the present value of lease payments.

Provision

A liability of uncertain timing or amount, recognized when there is a present obligation from a past event, a probable outflow of resources, and a reliable estimate can be made.

Straight-line depreciation

A depreciation method that allocates the depreciable amount (cost less residual value) evenly over the asset's useful life. Annual charge = (Cost − Residual value) / Useful life.

Consolidation control

Under IFRS 10, control exists when the parent has power over the investee, exposure to variable returns, and the ability to use its power to affect those returns.

Contribution margin

Sales revenue minus variable costs. It measures the amount available to cover fixed costs and contribute to profit. Contribution per unit = Selling price − Variable cost per unit.

Break-even point

The level of activity at which total revenue equals total costs, yielding zero profit. In units: Fixed costs / Contribution per unit. In sales value: Fixed costs / Contribution margin ratio.

Margin of safety

The excess of actual or budgeted sales over break-even sales, expressed as a percentage: (Actual sales − Break-even sales) / Actual sales. Indicates how much sales can fall before a loss occurs.

High-low method

A technique to separate fixed and variable costs: variable cost per unit = (Cost at high activity − Cost at low activity) / (High activity − Low activity); fixed cost = total cost − variable cost × activity.

Overhead absorption rate

The rate used to allocate budgeted overhead to units of production, calculated as budgeted overhead / budgeted activity level (e.g., direct labor hours or machine hours).

Material price variance

The difference between the standard price and actual price of materials, multiplied by the actual quantity purchased or used: (Standard price − Actual price) × Actual quantity.

Relevant cost

A future, incremental cash flow that differs between alternatives and is therefore relevant to a decision. Sunk costs and allocated fixed costs are not relevant.

Equivalent units

A measure of the work done during a period, expressed in terms of fully completed units. Equivalent units = Units completed + (Ending WIP × Percentage completion).

Zakat base

The base on which Zakat is calculated for Saudi and GCC-owned entities. It generally comprises adjusted profit plus certain equity items less deductions such as fixed assets and investments.

Saudi corporate income tax

A 20% tax on the tax-adjusted net income of entities owned by non-Saudi and non-GCC shareholders. Saudi and GCC shareholders are subject to Zakat instead.

Saudi withholding tax

Tax withheld on cross-border payments: 5% on dividends, interest, rent, and technical service fees; 15% on royalties, subject to relief under double tax treaties.

Saudi VAT standard rate

The standard Value Added Tax rate in Saudi Arabia is 15%. Mandatory registration applies when annual taxable turnover exceeds SAR 375,000; optional registration above SAR 187,500.

Real Estate Transaction Tax

A 5% tax on the value of real estate disposals in Saudi Arabia, generally payable by the seller, with limited exemptions such as certain inheritances and gifts.

Companies Law capital

Under the Saudi Companies Law, a joint stock company requires at least two shareholders and minimum capital of SAR 500,000; a limited liability company requires at least one shareholder.

Fundamental ethical principles

Integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. These principles underpin the IESBA and SOCPA codes of ethics.

Independence in appearance

The avoidance of facts and circumstances that a reasonable and informed third party would perceive as compromising the auditor's independence. Required in addition to independence of mind.