SOCPA Auditing key terms

All the information an auditor gathers, from records, observations, confirmations or calculations, that supports the conclusions written in the audit report. It must be sufficient and appropriate to reduce audit risk to an acceptably low level.

The chance that an auditor gives an inappropriate opinion on financial statements that are materially misstated. It combines inherent risk, control risk and detection risk, and drives how much work the auditor plans to do.

The threshold above which an omission or misstatement could influence the economic decisions of users of the financial statements. It is a matter of professional judgement and shapes the nature, timing and extent of audit procedures.

An attitude of questioning and alertness to conditions that may indicate misstatement, whether caused by error or fraud. The auditor does not assume management is dishonest but does not accept claims without corroborating evidence.

The policies and procedures a company uses to safeguard assets, keep records accurate and support reliable financial reporting. Auditors evaluate these controls to decide how much substantive testing is still needed.

The risk that a material misstatement will not be prevented or detected on a timely basis by the entity's internal control. It exists independently of the audit and is assessed by the auditor before designing further procedures.

Procedures that look directly for material misstatements in account balances, transactions or disclosures. Examples include detailed vouching, analytical review and confirmations, and they are performed regardless of how strong controls appear.

Audit evidence obtained directly from a third party, such as a bank or customer, in response to a request from the auditor. It is generally more reliable than evidence generated inside the client's own systems.

Techniques that compare financial information with expectations, such as prior periods, budgets or industry ratios, to identify unusual fluctuations. They are used in planning, as substantive tests and in the final review of the financial statements.

The assumption that an entity will continue operating for the foreseeable future without being forced to liquidate or cease trading. Auditors must assess whether this assumption remains appropriate and disclose any material uncertainty.

An opinion that departs from an unmodified conclusion because of a material misstatement, a scope limitation or an inability to obtain sufficient evidence. It may be qualified, adverse or a disclaimer, depending on severity and pervasiveness.

The state of being free from relationships or interests that could compromise an auditor's objectivity, in fact and in appearance. It is a core ethical requirement for assurance engagements and underpins public trust in audit reports.

The ethical duty not to disclose information acquired through professional work without proper authority or a legal obligation to do so. It continues even after the relationship with the client ends.

The obligation to maintain the knowledge, skills and technical standards needed to perform work properly for a client. It includes keeping up with changes in accounting, auditing and legal requirements.

A situation where a professional's personal, financial or other interests could improperly influence their judgement on a client matter. It must be identified and managed, or the engagement declined.

An accounting method that records revenue when earned and expenses when incurred, regardless of when cash changes hands. It is required for financial statements prepared under IFRS and gives a more faithful picture of performance.

The process of deciding when and how much revenue to record, generally when control of a good or service passes to the customer. Under IFRS 15 this involves identifying performance obligations and allocating the transaction price.

A promise in a contract to transfer a distinct good or service to a customer. Revenue is recognised as each obligation is satisfied, which may happen at a point in time or over time.

Cash received from a customer before the related good or service has been delivered. It is reported as a liability until the performance obligation is satisfied and the amount can be recognised as revenue.

The idea that expenses should be recognised in the same period as the revenues they helped generate. It supports the accrual basis and explains why costs are carried as assets until the related benefit is consumed.

A liability of uncertain timing or amount, recognised when a present obligation exists, an outflow is probable and the amount can be reliably estimated. If those conditions are not met, no provision is recorded.

A possible obligation whose existence depends on uncertain future events, or a present obligation that cannot be reliably measured or is not probable. It is disclosed rather than recognised on the statement of financial position.

A reduction in the carrying amount of an asset when its recoverable amount falls below the value shown in the books. The loss is recognised immediately in profit or loss unless a standard requires otherwise.

The amount at which an asset or liability is reported on the statement of financial position, after deducting accumulated depreciation, amortisation or impairment. It is the figure compared with recoverable amount in impairment testing.

The systematic allocation of the depreciable amount of a tangible asset over its useful life. It reflects consumption of economic benefits and is not a measure of the asset's market value.

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, not entity-specific, measure.

Sales revenue minus variable costs, showing how much each unit or product line contributes toward covering fixed costs and then generating profit. It is central to break-even and short-term decision analysis.

The level of sales at which total revenue equals total costs, so the business makes neither profit nor loss. It can be expressed in units or in sales value and is derived from fixed costs divided by contribution per unit.

A future cash cost that differs between the alternatives being considered. Costs that are sunk, committed or identical across options are ignored because they cannot change the decision.

The benefit given up by choosing one course of action over the next best alternative. It is a relevant cost in decision-making even though it never appears in the accounting records as a cash payment.

A system that sets predetermined costs for materials, labour and overhead, then compares them with actual results. The differences, called variances, help managers investigate performance and control spending.

The process of breaking down the gap between budgeted or standard results and actual results into its causes, such as price and quantity effects. Favourable and adverse variances guide corrective management action.

A budget adjusted to the actual level of activity achieved, so that comparisons with actual costs are meaningful. It separates variable cost behaviour from fixed costs and improves performance evaluation.

The amount on which income tax is calculated after adjusting accounting profit for items that are exempt, non-deductible or treated differently by tax law. It is the base to which the applicable tax rate is applied.

A tax asset or liability arising from temporary differences between the carrying amount of items in the financial statements and their tax base. It reflects tax that will be payable or recoverable in future periods.

An indirect tax charged on the supply of goods and services at each stage of the production chain, with businesses recovering tax paid on their inputs. The final burden falls on the end consumer.

Tax deducted at source by the payer from certain payments, such as royalties, dividends or fees to non-residents, and remitted to the tax authority. It secures collection before the money leaves the payer.

A relationship in which one party acts on behalf of another with authority to create legal relations with third parties. The principal is generally bound by acts done within the agent's actual or apparent authority.

A legal obligation to act in the best interests of another party, avoiding conflicts and not making secret profits from the position of trust. Directors, agents and auditors can all owe duties of this kind.

A legally enforceable agreement formed by offer, acceptance, consideration and an intention to create legal relations. Breach may entitle the innocent party to damages or other remedies.

Failure to exercise the degree of care a reasonable professional would show in the same circumstances, causing loss to a party owed a duty of care. Auditors can face liability where such a duty exists and is breached.