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78 Cards in this Set
- Front
- Back
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Allowance for sampling risk (or Precision)
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Also referred to as precision, an interval around the sample results in which the true population characteristic is expected to lie.
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Attributes sampling
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A sampling plan enabling the auditors to estimate the rate of deviation (occurrence) in a population.
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Confidence level
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In attributes sampling, the complement of the risk of assessing control risk too low. In variables sampling, the complement of the risk of incorrect acceptance. Thus, if the risk of assessing control risk too low (or of incorrect acceptance) is .05, the confidence level is .95.
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Deviation rate
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A defined rate of departure from prescribed controls. Also referred to as occurrence rate or exception rate.
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Difference estimation
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A sampling plan that uses the difference between the audited (correct) values and book values of items in a sample to calculate the estimated total audited value of the population. Used when the differences are not nearly proportional to book values.
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Discovery sampling
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A sampling plan for locating at least 1 deviation, providing that the deviation occurs in the population with a specified frequency.
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Expected population deviation rate
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An advance estimate of a deviation rate. This estimate is necessary for determining the required sample size in an attributes sampling plan.
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Mean
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The average item value, computed by dividing total value by the number of items composing total value.
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Nonsampling risk
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The aspects of audit risk not due to sampling. This risk normally relates to “human” rather than “statistical” errors.
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Physical representation of the population
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The population from which the auditors sample. It differs from the actual population when it does not include items that exist in the actual population (e.g., the auditors sample from a trial balance of receivables which may or may not include all actual receivables).
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Population
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The entire field of items from which a sample might be drawn.
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Projected misstatement
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An estimate of the most likely amount of monetary misstatement in a population.
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Random selection
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Selecting items from a population in a manner in which every item has an equal chance of being included in the sample.
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Ratio estimation
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A sampling plan that uses the ratio of audited (correct) values to book values of items in the sample to calculate the estimated total audited value of the population. Used when the differences are nearly proportional to book values.
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Reliability
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The complement of the risk of incorrect acceptance.
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Representative sample
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A sample possessing essentially the same characteristics as the population from which it was drawn.
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Risk of assessing control risk too high
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This risk is the possibility that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control.
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Risk of assessing control risk too low
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This most important risk is the possibility that the assessed level of control risk based on the sample is less than the true operating effectiveness of the controls.
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Risk of incorrect acceptance
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The risk that sample results will indicate that a population is not materially misstated when, in fact, it is materially misstated.
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Risk of incorrect rejection
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The risk that sample results will indicate that a population is materially misstated when, in fact, it is not.
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Sampling error
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The difference between the actual rate or amount in the population and that of the sample. For example, if an actual (but unknown) deviation rate of 3 percent exists in the population, and the sample’s deviation rate is 2 percent, the sampling error is 1 percent.
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Sampling risk
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The risk that the auditors’ conclusion based on a sample might be different from the conclusion they would reach if the test were applied to the entire population. For tests of controls, they include the risks of assessing control risk too high and too low; for substantive testing, they include the risks of incorrect acceptance and rejection.
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Standard deviation
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A measure of the variability or dispersion of item values within a population; in a normal distribution, 68.3 percent of all item values fall within ±1 standard deviation of the mean, 95.4 percent fall within ±2 standard deviations, and 99.7 percent fall within ±3 standard deviations.
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Stratification
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Dividing a population into two or more relatively homogeneous subgroups (strata). Stratification increases the efficiency of most sampling plans by reducing the variability of items in each stratum. The sample size necessary to evaluate the strata separately is smaller than would be needed to evaluate the total population.
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Systematic selection
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The technique of selecting a sample by drawing every nth item in the population, following one or more random starting points.
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Tolerable deviation rate
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The maximum population rate of deviations from a prescribed control that the auditor will tolerate without modifying the planned assessment of control risk.
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Tolerable misstatement
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An estimate of materiality for the particular audit test.
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Variables sampling
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Sampling plans designed to estimate a numerical measurement of a population, such as a dollar value.
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Voucher
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A document authorizing a cash disbursement. It usually provides space for the initials of employees performing various approval functions. The term may also be applied to the group of supporting documents used as a basis for recording liabilities or for making cash disbursements.
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Canceled checks
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A check the amount of which has been subtracted from the depositor’s account and has been marked as “canceled” by a financial institution. It has been endorsed by the payee and paid by the drawee financial institution. It is in contrast to a voided check , a check which has not been processed and will not be.
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Cutoff bank statement
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A bank statement covering a specified number of business days (usually 7 to 10) after the client’s balance sheet date. Auditors use this statement to determine that checks issued on or before the balance sheet date and paid during the cutoff period were listed as outstanding on the year-end bank reconciliation. Another use is to determine that reconciling items shown on the year-end bank reconciliation have cleared the bank within a reasonable amount of time.
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Derivatives
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Financial instruments that “derive” their value from other financial instruments, underlying assets, or indexes. Examples are options, forward contracts, and futures contracts.
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Dividend record book
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A reference book published monthly by investment advisory services reporting detailed information concerning all listed and many unlisted securities; includes dividend dates and amounts, current prices of securities, and other condensed financial data.
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Kiting
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Manipulations causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. Kiting schemes are based on the float period—the time necessary for a check deposited in one bank to clear the bank on which it was drawn.
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Lockbox
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A post office box controlled by a company’s bank at which cash remittances from customers are received. The bank picks up the remittances, immediately credits the cash to the company’s bank account, and forwards the remittance advices to the company.
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Proof of cash
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An audit procedure that reconciles the bank’s record of cash activity with the client’s accounting records for a test period. The working paper used for the proof of cash is a four-column bank reconciliation.
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Standard confirmation form
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A confirmation form, agreed to by the AICPA, the American Bankers Association, and the Bank Administration Institute, that is designed to provide corroborating evidence about the client’s account balances and outstanding loans.
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Voided check
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A check that is not negotiable (null and void). A voided check usually results from an error in preparing the check. In contrast a canceled check is one that has been paid by the bank.
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Voucher
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A document authorizing a cash disbursement. A voucher usually provides space for employees to initial after they have performed approval functions. (The term voucher may also be applied to the group of documents supporting a cash disbursement.)
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Voucher register
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A special journal used to record the liabilities for payment originating in a voucher system. The debit entries are the cost distribution of the transaction, and the credits are Vouchers Payable. Every transaction recorded in a voucher register corresponds to a voucher authorizing future payment of cash.
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Window dressing
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Action taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements.
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Aged trial balance
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A listing of individual customers’ accounts classified by the number of days subsequent to billing, that is, by age. A preliminary step in estimating the collectibility of accounts receivable.
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Bill and hold transactions
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Transactions in which sales of merchandise are billed to customers prior to delivery, with the goods being held by the seller. These transactions may overstate revenues and net income if they do not meet specific requirements for recognition as sales.
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Channel stuffing
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A marketing practice that suppliers sometimes use to boost sales by inducing customers to buy substantially more inventory than they can promptly resell. Channel stuffing without appropriate provision for sales returns is an example of booking tomorrow’s revenue today in order to window dress the financial statements.
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Confirmation request
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A request sent to a confirming party requesting that the confirming party consider the accuracy of information included in that request. A confirmation request may take one of two forms: positive confirmation request and negative confirmation request.
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Confirming party
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The individual who responds to the confirmation request. Responses to confirmation requests provide more relevant and reliable audit evidence when the confirmation requests are sent to confirming parties who the auditors believe are knowledgeable about the information to be confirmed. For example, an individual in accounts payable may provide more relevant and reliable audit evidence with respect to a client’s receivable balance than an individual who has no direct access to accounts payable records.
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External confirmation
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Audit evidence obtained by the auditors as a direct written response to the auditors from a third party (the confirming party ) in paper form or by electronic or other medium (e.g., the auditors’ direct access to information held by a third party).
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Interim audit work
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Those audit procedures that are performed before the balance sheet date. The purpose is to facilitate earlier issuance of the audit report and to spread the auditors’ work more uniformly over the year.
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Negative confirmation request
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A request that the confirming party respond directly to the auditors indicating where the confirming party disagrees with the information in the request.
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Pledging of receivables
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To assign to a bank, factor, finance company, or other lender an exclusive claim against accounts receivable as security for a debt.
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Positive confirmation request
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A request that the confirming party respond directly to the auditor providing the requested information or indicating whether the confirming party agrees or disagrees with the information in the request.
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Side agreements
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Formal or informal modifications of normal terms and conditions of sales transactions to entice customers to accept delivery of goods or services.
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Window dressing
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Action taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements.
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Bill and hold transactions
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Transactions in which sales of merchandise are billed to customers prior to delivery, with the goods being held by the seller. These transactions may overstate revenues and net income if they do not meet specific requirements for recognition as sales.
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Bill of lading
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A document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement.
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Consignment
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A transfer of goods from the owner to another person who acts as the sales agent of the owner.
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Cost Accounting Standards Board
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A five-member board established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles. Companies having significant supply contracts with certain U.S. government agencies are subject to the cost accounting standards established by the board.
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Job time tickets
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A document designed to accumulate the labor and machine time devoted to a particular production order.
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Master production schedule
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A schedule that is used to plan overall production for a period of time. The schedule illustrates the gross production of each of the company’s products.
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Observation
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The auditors’ evidence-gathering technique of viewing a client activity to obtain physical evidence of performance.
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Periodic inventory system
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A method of accounting in which inventories are determined solely by means of a physical inventory at the end of the accounting period.
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Perpetual inventory system
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A method of accounting for inventories in which controlling accounts and subsidiary ledgers are maintained to record receipts and issuances of goods, both in quantities and in dollar amounts. The accuracy of perpetual inventory records is tested periodically by physical inventories.
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Production order
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A document that authorizes the production of a specific quantity of a product.
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Purchase commitment
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A contractual obligation to purchase goods at fixed prices, entered into well in advance of scheduled delivery dates.
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Sales commitment
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A contractual obligation to sell goods at fixed prices, entered into well in advance of scheduled delivery dates.
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Specialist
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A person possessing special skill or knowledge in a field other than accounting or auditing, such as a real estate appraiser.
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Capital expenditure
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An expenditure for property, plant, and equipment that is properly charged to an asset account.
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Cruising
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The inspection of a tract of forestland for the purpose of estimating the total lumber yield.
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Revenue expenditure
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An expenditure for property, plant, and equipment that is properly charged to an expense account.
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Work order
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A serially numbered accounting document authorizing the acquisition of plant assets. A separate series of retirement work orders may be used to authorize the retirement or disposal of plant assets, and a third variety consists of documents authorizing repair or maintenance of plant assets.
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Probability-proportional-to-size (PPS) sampling
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A variables estimation procedure that uses attributes theory to express a conclusion in monetary (dollar) amounts.
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Sequential (stop-or-go) sampling
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A sampling plan in which the sample is selected in stages, with the need for each subsequent stage being conditional on the results of the previous stage.
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Brokers’ advice
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A notification sent by a stockbrokerage firm to a customer reporting the terms of a purchase or sale of securities.
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Check Clearing for the 21st Century Act (“Check 21 Act”)
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This act allows financial institutions to create and process electronic “substitute checks” in place of customer written hard-copy checks. The purpose of this act is to decrease the time for check clearing.
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Electronic funds transfer (EFT) system
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A computer system that transmits and processes funds-related cash disbursement and receipt transactions. Increasingly, companies are electronically transferring funds between bank accounts rather than issuing checks. See also electronic data interchange.
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Electronic data interchange (EDI)
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A system in which data are exchanged electronically between the computers of different companies. In an EDI system, source documents are replaced with electronic transactions created in a standard format.
A computer network between companies that allows the interchange of data from one company’s computer to the other’s (e.g., allows purchases and sales between two firms to be processed electronically). |
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Dual-purpose test
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A test designed to test a control and to substantiate the dollar amount of an account using the same sample.
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Mean-per-unit estimation
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A classical variables sampling plan enabling the auditors to estimate the average dollar value (or other variable) of items in a population by determining the average value of items in a sample
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