A
Accrual Basis of Accounting: The method of accounting that recognizes revenue when earned and expenses when incurred, regardless of when cash transactions occur.
Assurance Services: Independent professional services that improve the quality of information for decision makers. Assurance can be provided for financial and non-financial data.
Attestation: The provision of an opinion or conclusion by an auditor on a subject matter or an assertion about the subject matter that is the responsibility of another party.
Audit Trail: A step-by-step record by which financial, operational, or other data can be traced to its source. Audit trails are used to verify and trace transactions from beginning to end.
Audit: An examination and verification of a company’s financial and operational activities, typically conducted by an independent third party to ensure statements are accurate and operations are in compliance with applicable standards.
Auditor’s Report: A written statement by the auditor expressing their opinion on the accuracy of a company’s financial statements.
B
Balance Sheet Audit: An in-depth evaluation of the accuracy and completeness of a company’s balance sheet, assessing assets, liabilities, and equity positions as of a specific date.
Benchmarking: The process of comparing one’s business processes and performance metrics to industry bests or best practices from other companies.
Bookkeeping: The process of recording and organizing all financial transactions in a company’s books or accounting software.
C
Carryforward: Accounting practice that allows a firm to apply current year’s unused credits or losses to reduce future taxes or improve future profits.
Collusion: A secret agreement between parties, often for fraudulent purposes, to deceive or defraud others.
Compilation: A type of service where an accountant prepares financial statements, but without providing an audit or review.
Compliance Audit: An audit conducted to ensure that an organization is following external laws, regulations, policies, and procedures.
Conformity Audit: An audit performed to determine whether a company’s practices conform to external standards or regulations.
Control Environment: The overall attitude, awareness, and actions of directors and management regarding the internal control system and its importance to the entity.
D
Debt Covenant Compliance Audit: An audit to ensure that a company is adhering to the covenants outlined in its debt agreements.
Detection Risk: The risk that an auditor fails to detect a material misstatement in the financial statements.
Disclosure Checklist: A tool used by auditors to ensure all necessary disclosures have been made in the financial statements.
Dual Purpose Test: An audit procedure that serves both as a test of controls and as a substantive test of transactions.
Due Diligence: An investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, it often refers to the audit done before entering into an agreement or a financial transaction with another party.
E
Efficiency Audit: An evaluation of whether an entity is using its resources (such as time, money, and personnel) efficiently.
Engagement Letter: A letter that serves as a contract between a client and an auditor, defining the scope of the audit work, the timeline, and the responsibilities of each party.
Engagement Risk: The risk associated with an auditor’s association with a particular client, especially in terms of the client’s financial viability and integrity.
Entity-Level Controls: Controls that help ensure management directives pertaining to the entire entity are carried out.
External Audit: An audit performed by an independent organization outside of the company being audited. These are usually done to provide external stakeholders with an opinion on the organization’s financial statements.
F
Financial Audit: An audit conducted to provide an opinion on whether financial statements are stated in accordance with specified criteria. Usually, the criteria are international financial reporting standards.
Fiscal Year: A one-year period that companies and governments use for financial reporting and budgeting, which does not necessarily align with the calendar year.
Forensic Audit: An examination and evaluation of a firm’s or individual’s financial information for use as evidence in court. A forensic audit can be conducted to prosecute a party for fraud, embezzlement, or other financial claims.
Fraud Audit: An examination specifically designed to identify fraudulent activities within an entity.
G
GAAP (Generally Accepted Accounting Principles): A collection of commonly-followed accounting rules and standards for financial reporting.
General Ledger: A complete record of all financial transactions over the life of a company.
Going Concern: The assumption that an entity will continue to operate in the foreseeable future, which is fundamental to financial reporting.
H
Horizontal Analysis: Financial analysis technique that shows changes in the amounts of corresponding financial statement items over a period of time.
Horizontal Audit: An audit conducted across several departments or locations of an organization to ensure consistent application of policies and procedures.
I
Impairment: A permanent reduction in the value of a company asset, generally when the asset’s fair market value has dropped below its book value.
Independence: A fundamental aspect of auditing that allows auditors to act with integrity and impartiality.
Internal Audit: An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
Inventory Audit: A physical verification of the quantities and condition of items in stock, and the examination of related accounting records.
J
Joint Audit: An audit conducted by two or more auditing firms.
Judgmental Sampling: A non-statistical sampling method used by auditors to select items based on their judgment.
K
Key Audit Matters: Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements.
Key Control Activity: An action or process that is a critical component in the execution of a control over significant financial processes.
L
Ledger: A book or collection of accounts in which account transactions are recorded.
Liquidity Audit: An examination aimed at verifying the organization’s ability to cover its short-term obligations.
M
Management Override: The intentional overriding of internal controls by management, which can lead to fraudulent financial reporting.
Management Representation Letter: A letter provided by company management to the auditor at the end of the fieldwork phase of an audit, confirming certain information or discussing matters that do not appear in the financial statements.
Materiality: The significance of financial information which could influence the decision-making of users. It is a key concept in auditing and financial reporting.
Misstatement: An error, intentional or unintentional, in the presentation of financial statements.
N
Narrative Description: A written explanation of a business’s financial processes and control environment as part of an internal audit.
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.
O
Observation: A method used by auditors to gather audit evidence through watching a process or procedure being performed by others.
Operational Audit: An examination of the effectiveness, efficiency, and economy of an organization’s operations. It’s a future-oriented, systematic, and independent evaluation of organizational activities.
Opinion Shopping: The practice of a company seeking out external auditors who will provide a favorable or desired financial report.
P
Peer Review: An evaluation of one professional’s work by another, typically of the same profession, to ensure it meets the industry standards and contributes to the quality assurance process.
Performance Audit: Evaluates the efficiency and effectiveness of any part of an organization’s procedures and methods.
Post-audit: A review after the completion of an audit to assess the adequacy of audit procedures, the appropriateness of audit conclusions or to learn from the audit process.
Pro Forma Financial Statement: Financial data summaries or projections that exclude usual amounts, representing what financial statements might have looked like if a particular event had not occurred.
Q
Qualified Opinion: An auditor’s opinion expressing certain reservations about the financial statements of a client.
Quality Control Review: An internal or external review performed to ensure that a professional service, such as auditing, complies with professional standards.
R
Reasonable Assurance: A high, but not absolute, level of assurance provided as the objective of a financial audit.
Related Party Transactions: Transactions that occur between parties where one has the ability to control or exercise significant influence over the other.
Risk Assessment: The identification and analysis of relevant risks to achieving the objectives of an organization, forming a basis for determining how the risks should be managed.
S
Sampling: The process of selecting a subset of data from within a larger set to estimate statistics or qualities of the whole population.
Scope Limitation: A restriction that prevents the auditor from completing an aspect of his or her audit procedures.
Segregation of Duties: A fundamental element of internal control in the workplace that prevents fraud and errors by ensuring that no single individual has control over all aspects of a financial transaction.
Statutory Audit: An audit required by statute or law, depending on the jurisdiction, it is generally required for public entities, banks, and industries regulated by the government.
Substantive Procedure: An audit procedure designed to detect material misstatements at the assertion level; substantive procedures include tests of details and substantive analytical procedures.
T
Test of Controls: An audit procedure designed to evaluate the effectiveness of an organization’s internal controls.
Third Party Confirmation: Obtaining an independent source’s verification of balances and transactions as a means of auditing a company’s accounts.
Trial Balance: A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal.
True and Fair View: A term used to denote that the financial statements are free from material misstatements and accurately reflect the financial performance and position of the entity.
U
Unadjusted Differences: Items that reflect discrepancies between the amounts of financial records and the amounts audited.
Unqualified Opinion: An auditor’s report that expresses that the financial statements present fairly, in all material respects, the financial position of the company in accordance with the applicable financial reporting framework.
V
Variable Interest Entity (VIE): An entity in which the investor holds a controlling interest that is not based on the majority of voting rights.
Variable Sampling: A method used by auditors to infer the characteristics of a population, such as dollar values, based on sample data.
Vouching: A fundamental auditing technique where auditors check the authenticity of the transactions recorded in the primary books of account with the documentary evidence available.
W
Walkthrough: An audit procedure used to trace a transaction from its initiation through the company’s processes until it is reflected in the company’s financial records, to assess the effectiveness of the internal control system.
Workpaper: Documentation that records the methods, procedures, and audit tests performed, as well as the results of such tests, used to support the auditor’s opinion.
X
XBRL (eXtensible Business Reporting Language): A language for the electronic communication of business and financial data which is revolutionizing business reporting around the world.
X-Efficiency: The effectiveness with which a given set of inputs are used to produce outputs. When auditing, it refers to the efficiency with which resources are allocated within the audited entity.
Y
Year-end Audit: An audit conducted at the close of the company’s fiscal year that focuses on financial statements and accounting records.
Year-end Procedures: Processes performed at or near the end of an accounting period to prepare the financial records for the closing of that period.
Z
Zero-Based Auditing: An auditing approach that starts from a “zero base” and justifies every element of financial data, working up from the zero base.
Z-Score Analysis: A statistical technique used in auditing to predict business failures based on financial data.
