Access controls Procedures designed to restrict access to online terminal devices, programs and data. Access controls consist of ‘user authentication’ and ‘user authorisation’. ‘User authentication’ typically attempts to identify a user through unique log-on identifications, passwords, access cards or biometric data. ‘User authorisation’ consists of access rules to determine the computer resources each user may access.

 

 

Accountability matter  A matter for which the governing body of an entity: is responsible and is obliged to report on, and/or be subject to an examination on, pursuant to an accountability relationship between two or more parties internal or external to the entity.

 

Accounting estimate  An approximation of the amount of an item in the absence of a precise means of measurement.

 

Accounting system  See Information system.

 

Accrual accountingThe method of making an economically meaningful and comprehensive measurement of performance and position by recognising economic events regardless of when cash transactions happen, as opposed to the simpler cash basis of accounting. Under this method, revenues and expenses (and related assets and liabilities) are reflected in the accounts in the period to which they relate.

 

Actual independenceThe achievement of actual freedom from bias, personal interest, prior commitment to an interest, or susceptibility to undue influence or pressure.

 

Adverse opinion  The subject matter taken as a whole is misleading or of little use to the addressee of the audit report. This type of opinion will be expressed when the effects of a disagreement with management or conflict with an accepted framework are of great magnitude or pervasive or fundamental to the subject matter.

 

Agency theory Investors, as principals in a relationship, entrust their resources to managers, who act as their agents or stewards of the resources. This gives rise to a demand for assurance to ensure that the agents have acted in the interests of the principals. This theory is also known as the ‘stewardship hypothesis’.

 

Agreed-upon procedures engagement  A service where the auditor’s objective is to issue a report of factual findings to those parties that have agreed to the procedures to be performed, in which no conclusion is communicated and therefore no assurance is expressed, but which provides the user with information to meet a particular need, and from which the user can draw conclusions and derive assurance as a result of the auditor’s procedures.

 

Allowable risk of over-reliance Therisk the auditor is willing to accept that a sample supports a planned level of reliance when the true deviation rate does not justify such a low level.

 

Analytical procedures The investigation and analysis of fluctuations and relationships to determine whether there are inconsistencies with other relevant information or deviations from predicted amounts.

 

Analytical procedures risk The risk that analytical procedures will not detect the misstatements in an assertion.
Another auditor (using the work of)This occurs in the audit of group accounts where another auditor is appointed to audit part of that group.

 

Application controls Controls over the processing of transactions within a specific accounting application, such as invoicing customers, paying suppliers and preparing payroll.

 

Appropriateness of audit evidence The measure of the quality of audit evidence, its relevance to particular assertions, and its reliability.

 

Assertions  Statements made by a responsible party in an accountability arrangement that pertains to economic actions and events. See also Financial report assertions.

 

Assessing control risk The process of evaluating the effectiveness of the design and operation of an entity’s internal controls in preventing or detecting material misstatements in the financial report.

 

Assistants  Personnel involved in an individual audit other than the auditor signing the audit report; includes an expert employed by the auditor.

 

Assurance  The satisfaction as to the reliability of information provided. The degree of satisfaction achieved is determined by the nature, extent and timing of procedures performed by the auditor, the results of the procedures and the objectivity of the evidence obtained.

 

Assurance services  Engagements where the assurance provider expresses an opinion designed to enhance the degree of confidence an intended user can have about a subject matter.

 

Attest engagement The issue of a positive expression of an opinion that enhances the credibility of a written assertion(s) about an accountability matter (‘attest audit’).

 

Attribute sampling  A statistical sampling technique involving examining documents for particular attributes and providing a given level of confidence on these attributes.

 

Attribute standards  Set of standards issued by the Institute of Internal Auditors, outlining the personal standards and qualities to be maintained by internal auditors.

 

Audit  A service where the auditor’s objective is to provide a high level of assurance through the issue of a positive expression of opinion that enhances the credibility of an assertion about an accountability matter.

 

حسابرسی

Audit and Assurance Alerts Notifications issued by the AuASB to bring matters considered to be of significant and immediate concern to the attention of members of the profession.

 

Audit committee A committee of directors (usually predominantly non-executive) responsible for overseeing external financial reporting and liaising with the external and internal audit functions.

 

کمیته حسابرسی

Audit evidence The information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence will comprise source documents and accounting records underlying the financial report, and corroborating information from other sources. Audit evidence is gathered through all stages of an audit.

 

Audit hooks Exit points provided in computer application programs that allow the auditor to insert commands for special processing.

 

Audit mandate An authority to undertake an audit and provide a report. The mandate may prescribe the nature of the audit and the type of report expected.

 

Audit opinion  A positive written expression within a specified framework, indicating the auditor’s overall conclusion based upon audit evidence obtained that provides a reasonable level of assurance (high but not absolute assurance)

.

Audit plan  A description of the expected scope and conduct of the audit with sufficient detail to guide the audit and aid the development of the audit program.

 

Audit procedures Methods and techniques used by the auditor to gather and evaluate audit evidence.

 

Audit program  Sets out the nature, timing and extent of planned audit procedures required to implement the overall audit plan. The audit program serves as a set of instructions to assistants involved in the audit, and as a means to control and record the proper execution of the work.

 

Audit-related services The range of engagements that:
(a)     involve a systematic examination for which audit-based skills, which includes such skills as analysis of financial information, knowledge of internal control structures, problem solving, risk assessment, sample selection, knowledge of accounting standards and other aspects of reporting, are required;
(b)     can be applied to an accountability matter that is capable of evaluation against reasonable criteria; and
(c)     result in an independent, written report that provides assurance or information from which the user can derive assurance.
These services comprise audit, review and agreed-upon procedures.

 

Audit report  A report issued by the auditor that expresses a high level of assurance about an accountability matter that is capable of evaluation against an identified framework.

 

گزارش حسابرسی

Audit risk  The risk that the auditor gives an inappropriate audit opinion when the financial report is materially misstated. Audit risk has three components; inherent risk, control risk and detection risk.

 

ریسک حسابرسی

Audit sampling involves the application of audit procedures to less than 100 per cent of items within an account balance or class of transactions such that all sampling units have a chance of selection.

 

Audit software Use of computer programs to aid the audit in interrogating the audit client’s data and files.

 

نرم افزار حسابرسی

 

Audit strategy The planning process to develop an efficient and effective audit which includes making decisions in relation to the scope of the audit, the general evidence requirements for the forming of an opinion, and the initial choice as to the nature, timing and extent of audit procedures to make efficient use of resources.

 

استراتژی حسابرسی

Audit trail A chain of evidence provided by coding, cross-references and documentation that connects account balances and other summary results with original transaction data.

 

Auditing Guidance Statements Statements approved and issued by theAuASB that provide guidance on procedural matters or on entity- or industry-specific issues, or clarify and explain principles in an AUS but do not establish new principles and do not amend existing standards.

 

Auditing standards Standards issued by professional accounting organisations. These standards prescribe the basic principles and essential procedures, together with the related guidance, which govern the professional conduct of an auditor.

 

استاندارد های حسابرسی

 

 

حسابرس

 

 

Back-up  Plans made by the entity to obtain access to comparable hardware, software and data in the event of their system’s failure, loss or destruction.

 

Balance sheet approach  An audit approach which concen­trates on verifying the assets and liabilities of the entity.

 

Balanced scorecard A report that provides a balance of financial and non-financial measures that focus on both short-term and long-term performance and support the entity’s competitive strategy.

 

Bank confirmation requests Requests to banks to provide independent confirmation of audit client’s account balances and other information held by the bank on behalf of the client.

 

Bank transfer schedule A schedule of all transfers between the audit client’s bank accounts (usually around balance dates) and the dates of recording on the books and bank statements.

 

Basic bound Maximum monetary misstatement that would exist in a population when no monetary misstatements are found in a sample.

 

Batch entry/batch processing  An input and processing method whereby data are accumulated by classes of transactions and are entered and processed in batches.

 

Black lettering Bold words used in the auditing standard to highlight basic principles and essential procedures.

 

Block selection Sample selection method where the auditor selects all items of a specified type processed on a particular day or week or otherwise stored in a block.

 

Business performance measurement Assurance service which evaluates whether a client’s performance measurement system contains relevant or reliable measures for assessing the degree to which the client’s objectives are achieved, or how its performance compares to competitors.

 

Business-to-business e-commerce (B2B)  Electronic commercial transactions between businesses.

 

Business-to-consumer e-commerce (B2C)  Electronic com­mercial transactions between businesses and consumers.

 

 

 

Check digit A redundant digit added to a computer code to check accuracy of other characters in the code.

 

CIS controls Controls in the computer information systems (CIS)maintained in the location of the computer. They may be ‘General controls’ that relate to all or many computerised accounting applications or ‘Application controls’ that relate to specific individual computerised accounting applications.

 

Classic disbursements fraud The preparation of fraudulent supporting documents that are used to obtain an authorised cheque.

 

Code of ethics A formal and systematic statement of rules, principles, regulations or laws, developed by a community to promote its well-being and to exclude or punish any undermining behaviour.

 

Common-size statement method A technique of analysing financial statements in which statement of financial performance figures are expressed in percentages of revenue and statement of financial position accounts are expressed in percentages of total assets.

 

Compilation engagement In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise to collect, classify and/or summarise financial information.

 

Complete inventory count  A process by which operating activity largely stops and all inventory on hand is counted at one time.

 

Completeness  An assertion that all transactions and accounts have been presented in the financial report.

 

Compliance audit An audit that involves obtaining and examining evidence to determine whether certain financial and operating activities of an entity conform to specified conditions, rules or regulations.

 

Comfort letter A letter issued by a parent entity to support a subsidiary that is in financial difficulty.

 

Comprehensive audit Audit that involves a range of audit and audit-related services within an audit mandate for a client. It encompasses the elements of a financial report audit, a compliance audit and a performance audit.

 

Computation  Checking the arithmetical accuracy of source documents and accounting records, or performing independent calculations.

 

Computer-assisted audit techniques (CAATs) Techniques that involve the auditor using the computer in the performance of the audit. It can involve the use of either audit software or test data techniques.

 

Computer information systems environment (CIS)  Exists when a computer of any type or size is involved in the processing by an entity of financial information of significance to the audit, whether that computer is operated by the entity or a third party.

 

Computer service bureau An external service centre wherecomputerised accounting applications are processed.

 

Conclusive evidence Decisive, convincing evidence.

 

Concurring partner A partner, other than the audit engagement partner, who reviews the audit files as part of an audit firm’s quality control procedures.

 

Confidentiality Information relating to an entity or party is not made available or disclosed to unauthorised individuals, entities, or processes.

 

Confirmation  The response to an inquiry to corroborate information contained in the accounting record.

 

Continuing professional development A quality control requirement that involves all members of the professional accounting bodies undertaking a minimum number of hours of education each year.

 

Continuous assurance An assurance service provided in an ongoing manner so that any new information collected and stored within a system is validated continuously.

 

Contributory negligence The failure of the plaintiff to meet certain required standards of care.

 

Control environment  The overall attitude, awareness and actions of management regarding internal control and its importance in the entity.

 

Control procedures  Those policies and procedures in addition to the control environment that management has established to ensure, as far as possible, that specific entity objectives will be achieved.

 

Control risk  The risk that misstatements that could occur in an account balance or class of transactions and that could be material, individually or when aggregated with the misstatements in other balances or classes, will not be prevented or detected on a timely basis by the internal control structure.

 

Control totals The adding of a set of transactions or account balances, to provide reasonable assurance of the occurrence, completeness and measurement of data processed by the computer.

 

Corporate governance The framework of how directors and management perform their respective duties to add and create shareholder value.

 

Corroborating evidence  Evidence obtained by an auditor that supports the conclusions reached from other evidence-gathering procedures.

 

Criminal liability  The possibility of being found guilty under criminal law; auditors may be convicted of a criminal offence if they are found to have defrauded a person through knowing involvement with false financial reports.

 

Current ratio  Current assets divided by current liabilities.

 

 

Current working paper file  A file that contains corroborating information pertaining to the execution of the current year’s audit program.

 

Cut-off tests  Tests performed on transactions each side of year-end, designed to ensure that transactions are recorded in the correct period.

 

Cycle count (of inventory)  Periodic counts of selected inventory items are made during the year, with all items counted at least once each year.

 

 

 

 

Database  A collection of data that is shared and used by many users for different purposes. Each user may not necessarily be aware of all the data stored in the database or of the ways that the data may be used for multiple purposes. Generally, individual users are aware only of the data that they use and may view the data as computer files utilised by their applications.

 

Database management system (DBMS)  The software that is used to create, maintain and operate the database. Together with the operating system, the DBMS facilitates the physical storage of the data, maintains the interrelationships among the data, and makes the data available to application programs.

 

Database systems  Principally comprised of two components: the database and the database management system (DBMS).

 

Date of audit report The date on which the audit is completed.  It should not be a date earlier than that of the directors’ declaration, and must be included on the audit report.

 

Days in inventory How long inventory is held on average, in days. This is calculated by dividing 365 by the inventory turnover, which is the cost of goods sold/inventory assets.

 

Days in receivables This indicates how many days it takes, on average, to collect a day’s sales revenue.

 

Debt to equity ratio Total liabilities divided by total equity.

 

Deontological theories State that actions and motivations are inspired by a sense of moral obligations. They are based on duties and rights which are set down in rules which must be followed regardless of the consequences. Also called non-consequential theories.

 

Detection risk  The risk that an auditor’s substantive procedures will not detect a material misstatement that exists in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes.

 

Difference estimation  A sampling approach involving the calculation of the difference between the audited value and book value of each item in the population.

 

Direct reporting engagements The provision of relevant and reliable information and a positive expression of opinion about an accountability matter where the party respon­sible for the matter does not make a written assertion(s).

 

Directors’ assurance Assurance service which gives assurance on whether the information considered by directors at their regular meetings is appropriate and reliable for their consideration.

 

Disciplinary provisions Provisions forimposing penalties for substandard performance, to regulate the auditing profession.

 

Disclaimer  See Inability to form an opinion.

 

Disclosure  An assertion that the account balances and classes of transactions are properly described and identified in the correct section of the financial report.

 

افشاء

Discovery sampling An attribute sampling approach that is used to identify a specified probability of finding at least one example of a deviation in a population.

 

Documentation  The material (working papers) prepared by, and for, or obtained and retained by, the auditor in connection with the performance of the assurance service.

 

Dollar-unit sampling (DUS)  Sampling technique where sample units are individual dollars rather than physical units.

 

Dual-purpose tests  Audit tests that are specifically planned to provide direct evidence of both controls and substantive matters.

 

Due diligence  An assurance service commonly involved with an acquisition of a business; aimed at identifying significant issues concerned with valuing the business and determining the purchase price.

 

Due professional care Planning and performing an assurance service and issuing an opinion with the skill and competence expected of a reasonably competent and cautious auditor, having regard to the needs of users.

 

 

 

 

E-commerce Commercial transactions conducted by electronic means, including through the Internet.

 

Earnings management Earnings management occurs when judgment in financial reporting and in structuring transactions is used to alter financial reports to influence the perceptions of stakeholders about the underlying economic performance of the entity and/or to influence outcomes that depend on reported accounting numbers.

 

Economy With regard to economy audits, assurance about the acquisition of the appropriate quantity and quality of resources at the appropriate time and at the lowest cost.

 

Effectiveness With regard to effectiveness audits, assurance about the achievement of the objectives of the activities.

 

Efficiency With regard to efficiency audits, assurance about the use of resources such that output is maximised for any given set of resource inputs.

 

Egoism The habit of valuing everything only in reference to one’s personal interest.

 

ElderCare An assurance service designed to ensure that the medical, financial and household needs of the elderly are being met.

 

Electronic Data Interchange (EDI)  The electronic transmission of documents between or within organisations.

 

Embedded audit modules Procedures written directly into the program of specific computer applications enabling auditor intervention to capture or process data for audit purposes.

 

‘Emphasis of matter’ section  A paragraph at the end of an auditor’s report that draws attention to or highlights a matter that is relevant to the users of the audit report but it is not of such a nature that it affects the audit opinion. An emphasis of matter section may only be used in certain limited circumstances.

 

Encryption (cryptography)  The process of transforming programs and information into a form that cannot be understood without access to specific decoding algorithms (cryptographic keys). Encryption can provide an effective control for protecting confidential or sensitive programs and information from unauthorised access or modification.

 

Engagement letter  A letter that documents and confirms the auditor’s acceptance of the appointment, the objec­tive and scope of the audit, the extent of the auditor’s responsibilities to the entity and the form of any reports.

 

Engagement risk Auditor’s exposure to loss or injury to the professional practice from litigation, adverse publicity or other events arising in connection with an assurance engagement. This risk is increased when the client entity is in a weak financial position.

 

Enterprise Resource Planning (ERP) software Software that integrates business operations and financial report.

 

Environmental and sustainability reports (assurance on)  Providing assurance on reports relating to the environmental and social aspects of operations.

 

Error  An unintentional misstatement in financial reports, including the omission of an amount or a disclosure. For example: a mistake in gathering or processing data from which the financial report is prepared; an incorrect accounting estimate arising from oversight or misinterpretation of facts; or a mistake in the application of accounting principles relating to measurement, recognition, classification, presentation, or disclosure.

 

خطا

Estimation sampling Sampling method where the auditor creates an estimate of the amount and compares it to the amount recorded by the client.

 

Ethical decision models Models that have been developed to assist in sound ethical decision making.

 

Ethical pronouncements  Series of ethical statements set out by the auditing profession. In Australia, ethical pronouncements are contained in the Joint Code of Professional Conduct (CPC).

 

‘Except for’ opinion  An ‘except for’ opinion indicates that certain circumstances exist, which in the auditor’s opinion are material or are likely to be material; how­ever, they are not of such magnitude or so pervasive or fundamental as to affect the subject matter as a whole.

 

Executive management  See Operational management.

 

Existence An assertion pertaining to a financial report that assets or liabilities exist at a given date.

 

Expectation gap The gap that exists between what users expect of an auditor and the actual service that auditors pro­vide. This gap may be due to unreasonable expec­ta­tions of users or to the inadequate performance of auditors.

 

Expected error The error the auditor expects to find in the population.

 

Expert systems Computer systems that incorporate the knowledge of human experts to assist decision-making processes.

 

External auditor  An auditor independent from the entity, appointed to express an opinion on an accountability matter.

 

External confirmation The process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a request for information about a particular item affecting assertions made by management in the financial report.

 

External file labels Printed or handwritten adhesive labels on diskettes or magnetic tape reels.

 

eXtensible Business Reporting Language (XBRL) XML-based language that uses accepted financial reporting standards and practices in order to encourage the stan­dardisation and exchange of financial information across all software and technologies, including the Internet.

 

eXtensible Markup Language (EML) Grammatical rules for describing data on the web, which provide a standard language for data exchange.

 

 

 

 

Field test A logic test based on the characteristics that data in particular fields should exhibit. For example, characters should be alphabetic or numeric (alpha­numeric test); the field should have a specified size (for example, a field contains 5 characters, not 4 or 6).

 

File controls Control procedures thatensure that the proper versions of files are used in processing.

 

Financial modelling  A complex analytical procedure whichinvolves the identification of a key input variable (such as sales revenues) from which values of other accounts (such as expenses and profits) can be calculated.

 

Financial report  The financial statements, notes, supplementary schedules and explanatory material that are intended to be read with the financial statements.

 

Financial report assertions  Assertions made by manage­ment, explicit or otherwise, that are embodied in the financial report. These are (see also the entries for these terms): Existence; Rights and obligations; Occurrence; Completeness; Valuation; Measurement; and Disclosure.

 

Financial risk analysis approach An audit approach where an auditoradopts a risk analysis approach to determine the audit program for the operating cycles of a business.

 

Financial totals The totals of field amounts (in dollars) for all the records in a batch or group of transactions that are normally computed as a result of processing.

 

Flowcharts Schematic diagrams using standardised symbols, interconnecting flow lines and annotations that portray the steps involved in processing infor­ma­tion through the information system.

 

Footing Adding up a sequence of numbers such as journal entries.

 

Forecast  Prospective financial information prepared on the basis of assumptions as to future events which manage­ment expects to take place and the actions management expects to take as of the date the information is prepared (best-estimate assumptions).

 

Forensic audit Audit assurance services to establish the validity of forensic evidences related to fraud and white-collar crimes.

 

Fraud An intentional act by one or more individuals among management, those charged with governance, employ­ees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosures in the financial report to deceive financial report users. Misappropriation of assets involves the theft of an entity’s assets.

 

 

 

 

General controls in computer information systems  Manual and computer controls affecting the overall computer information system, to provide a reasonable level of assur­ance that the overall objectives of internal control are achieved.

 

General-purpose financial report  A financial report intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs.

 

Generalised audit software (GAS) Audit software that is capable of being used for a number of data organisation and processing methods.

 

Global Reporting Initiative (GRI)  Coalition of organisations interested in promoting the issue of environmental and sustainability reporting.

 

Globalisation  Process of increasing the connectivity and mobility of the world’s markets and businesses.

 

Going concern basis  The accounting basis whereby in the preparation of the financial report the reporting entity is viewed as a going concern. That is, the entity is expected to be able to pay its debts as and when they fall due; and continue in operation without any intention or necessity to liquidate or otherwise wind up its operations.

 

Governance The role of persons entrusted with the super­vi­sion, control and direction of an entity. Those charged with governance ordinarily are accountable for ensuring that the entity achieves its objectives. See also Governing body.

 

Governing body  An entity’s board of directors, trustees or governors, or other equivalent body or person. See also Governance; Management.

Grandfather–father–son concept Retaining three generations of a particular master file and the related transaction files, where the current version of the master file is the son file and the two previous versions are the father and grandfather.

 

Gross profit ratio Provides an indication of the company’s product pricing and product mix. Calculated as (sales  –  cost of goods sold) / sales.

 

 

 

 

Haphazard selection Auditor selects sample items without a conscious bias.

 

Hash total A control total that has no meaning in itself other than for control, e.g. total of customer numbers.

 

High (but not absolute) level of assurance Commonly referred to as reasonable level of assurance provided through an audit by issuing a positive expression of opin­ion that enhances the credibility of a written assertion(s) or by providing relevant and reliable information and a pos­itive expression of opinion about an accountability matter.

 

 

 

 

Illegal acts Acts that involve non-compliance with laws and regulations.

 

Imprest fund Petty cash fund maintained at a constant level via replenishment of the value of vouchers paid out of the fund.

 

Inability to form an opinion  The auditor is unable to express an opinion on the subject matter as a whole. This may occur if a scope limitation exists, where sufficient appropriate audit evidence cannot be reasonably obtained and the possible effects of any adjustments might be of great magnitude or pervasive or fundamental to the subject matter.

 

Independence Ability to withstand pressure from manage­ment influence when conducting an audit or providing audit-related services, so that one’s professional integrity is not compromised. To add true value to the assurance function, this requires both independence in appear­ance and independence of mind.

 

Independence in appearance Belief of financial report users thatindependence has been achieved by auditors. Also called perceived independence.

 

Independence of mind An auditor’s independent attitude of mind that actual independence has been achieved. Factors contributing to this independence are integrity, objectivity and strength of character. Also called independence of fact.

 

Industry specialisation Having extensive knowledge and experience of a particular industry in order to provide better service to clients in that industry.

 

Information hypothesis Posits that the demand for auditing is a result of investors wanting reliable information that can be used effectively in decision making. Unlike agency theory, the emphasis is not so much on the agent as on the reliability of information.

 

Information system  The methods and records established to identify, assemble, analyse, calculate, classify, record and report the transactions and other events that affect an entity, and to maintain accountability for assets, liabilities, revenues and expenditures.

 

Inherent limitations of internal control The reasons (such as cost versus benefit and management override) that an entity’s internal control structure can provide only reasonable assurance to management and the board of directors regarding the achievement of an entity’s objectives.

Inherent risk  A component of audit risk relating to the susceptibility of an account balance or class of transactions to misstatement that could be material, individually or when aggregated with misstatements in other balances or classes, assuming there were no related internal controls.

 

Inherent uncertainty  The potential for a matter to affect the financial report that is not so remote as to make its disclosure irrelevant; however, at the date of signing the audit report the outcome is contingent upon future events and cannot be reasonably measured.

 

Input controls Procedures that provide assurance that data received for processing have been properly authorised, that they are complete and that they have been correctly converted into machine-readable form.

 

Inquiry  Audit evidence-gathering technique that seeks appropriate information from knowledgeable persons inside or outside the entity. Inquiries range from written inquiries addressed to third parties, to informal oral inquiries addressed to persons inside the entity.

 

Inspection  Audit evidence-gathering technique that consists of examining records, documents, or tangible assets.

 

Insurance hypothesis A view that posits that managers and professional participants in financial activities seek to use an auditor as a means of insurance — that is, as a means of shifting financial responsibility if any losses are expected from litigation.

 

Integrated test facility (ITF) A type of test of control that requires using a fictitious entity and entering fictitious transactions for that entity with the regular trans­actions, and then comparing the result with the expected output.

 

Integrity Consistent adherence to an ethical code. If client management lacks integrity, the auditor must be more sceptical than usual.

 

Interim work Audit work performed prior to balance date. Typically this involves performing tests of control and tests of details of transactions.

 

Internal audit/auditing An independent appraisal function established within an organisation to examine and evaluate the activities of the entity as a service to the entity. From the perspective of the external auditor, internal auditing is a component of the control environment.

 

Internal control/Internal control structure  The dynamic, integrated processes, effected by the governing body, management and all other staff, that are designed to provide reasonable assurance regarding the achievement of the following general objectives:
effectiveness, efficiency and economy of operations;
reliability of management and financial reporting; and
compliance with applicable laws and regulations and internal policies.

 

Internal control questionnaires A series of questions about accounting and control policies and procedures that the auditor considers necessary to prevent material misstatements in the financial report.

 

Internal file labels Computer-readable data that are actually part of the file. They identify the data and content of the file.

 

Internal review In-house audit firm procedures to ensure quality of work. Auditors may have their engagements periodically reviewed by another auditor from within the same firm or office.

 

Irregularities Actions that comprise fraud and other illegal acts, acts that contravene the constitution of the entity, intentional (but not fraudulent) misstatements, and unintentional errors.

 

 

 

 

 

Joint and several liability An obligation of two or more persons. Each is liable severally and all are liable jointly.

 

Judgmental selection  Sample selection method where the auditor applies judgment in the selection of the sampling units to be tested.

 

 

 

 

Key entry validation A general term for tests to detect inaccurate or incomplete data. Computer equipment has logic capabilities that permit data validation, and exclude invalid responses.

 

Key verification A duplicate keying of data to detect errors of entry. As key verification is expensive, it is usually confined to critical data fields on source documents.

 

Kickbacks Illegal, secret payments made in return for a referral which resulted in a transaction or contract.

 

Kiting An irregularity overstating the cash balance by intentionally recording a bank transfer as a deposit in the receiving bank while failing to show a deduction from the bank account on which the transfer cheque is drawn.

 

Knowledge of the client’s business  The auditor’s level of knowledge for an engagement, including a general knowledge of the economy and the industry within which the entity operates, and a more particular knowledge of how the entity operates.

 

 

 

 

Lapping An irregularity concealing the misappropriation of cash by using subsequent cash receipts to conceal the original misappropriation.

 

Lead schedule A summary working sheet for each area of the audit that is supported by individual working papers.

 

Legal structure The way a company handles its taxes, constitution, contracts, by-laws andthe rights and duties of shareholders and provisions relating to the holding of meetings and election of directors.

 

Letter of subordination A form of comfort letter issued by a parent entity to support a subsidiary that is in financial difficulty. States that the parent entity agrees not to demand repayment of debts the subsidiary owes.

 

Letter of support A form of comfort letter issued by a parent entity to support a subsidiary that is in financial difficulty. States that the parent entity agrees to provide financial support to a subsidiary for a fixed period.

 

Limit or reasonableness test Computer program control designed to ensure that transactions or accounts balances do not exceed a particular limit (e.g. credit limit) or are not unreasonably large or small for the circumstances.

 

Limitation on scope  A limitation on scope of an auditor’s work exists when sufficient appropriate audit evidence on which to base an unqualified opinion does or did exist, or could reasonably be expected to have existed, but is not available to the auditor.

 

Local area networks (LANs) Networks that connect computer equipment, data files, software and peripheral equipment within a local area, such as a single building or small cluster of buildings for intra-company communications.

 

Low-balling A practice whereby a bid price of an audit service is quoted at an unreasonably low level so as to win the bid, with any ‘losses’ subsequently recovered through other means.

 

 

 

 

Management  The governing body, audit committee, individual member of the governing body, officer(s) and/or other person(s) having responsibility for planning and directing the activities of an entity. See also Governing body; Operational management.

 

Management controls Controls performed by one or more managers.

 

Management letter A letter written to the management of an entity by an auditor at the completion of the audit. It contains recommendations to management for improved control systems or efficiency and effectiveness of operations that were noticed during the audit. See also Report to management.

 

Management representation letter A letter signed by man­agement that contains representations made by manage­ment to an auditor during the course of an audit.

 

Management representations  Representations made by management to the auditor during the course of the audit, either solicited or unsolicited or in response to specific inquiries.

 

Material inconsistency  When other information contradicts information contained in the audited financial report. A material inconsistency may raise doubt about the audit conclusions drawn from audit evidence previously obtained and, possibly, about the basis for the auditor’s opinion on the financial report.

 

Material misstatement of fact  Misstatement of fact in other information exists when such information, not related to matters appearing in the audited financial report, is incorrectly stated or presented.

 

Materiality  Information which if omitted, misstated or not disclosed separately has the potential to adversely affect decisions about the allocation of scarce resources made by users of the financial report or the discharge of accountability by the management including the governing body of the entity.

 

Mean-per-unit estimation Sample technique involving calculation of the average value (mean) of the sample, multiplying by the number of items in the population and comparing to the recorded balance.

 

Measurement An assertion that a transaction or event is recorded in the proper amount and in the proper period.

 

Misstatement A mistake in financial information which would arise from fraud, error or non-compliance with laws and regulations.

 

Moderate level of assurance Provided in a review engagement by issuing a statement of negative assurance that enhances the credibility of a written assertion(s) or by providing relevant and reliable information and a statement of negative assurance about an accountability matter. It is a lower level of assurance than that provided by an Audit.

 

Modified audit report An audit report that contains a qualified opinion and/or an emphasis of matter.

 

Monetary-unit sampling  See Dollar-unit sampling.

 

 

 

 

Narrative memorandum  Written description of internal control policies and procedures.

 

Negative assurance A moderate level of assurance, being a lower level of assurance than that provided in an audit. The auditor states whether anything has come to the auditor’s attention that the information is not presented fairly in accordance with identified criteria.

 

Negative form of debtors’ confirmation A request to a debtor which outlines the amount owing, asking them to respond if there is disagreement with the amount owing.

 

Negligence Not exercising due professional care.

 

Net profit ratio The net profit ratio, net profit/net sales, (usually measured after interest and taxes) measures the entity’s profitability after all expenses are considered.

 

Non-routine transactions Transactions, such as the estimates of the doubtful debts provisions, that involve managerial discretion rather than rules (and thus can be more easily manipulated).

 

Non-sampling risk The component of audit risk that is not due to examining only a portion of the data, such as through the use of inappropriate procedures or the misinterpretation of evidence.

 

Non-statistical sampling  All sampling approaches that do not have all the characteristics of statistical sampling (being random sample selection and use of probability theory to evaluate sample results).

 

 

 

 

Objectivity The notion that the information in financial reports must be as free from bias as possible, in order that all user groups can have confidence in it. Objectivity from the perspective of the assurance provider involves maintaining an impartial approach.

 

Observation  An audit evidence-gathering technique that consists of looking at a process or procedure being performed by others. For example, the auditor may observe the counting of inventories by entity personnel or the performance of control procedures that leave no audit trail.

 

Occurrence An assertion, pertaining to financial information, that transactions did in fact take place.

 

Online computer systems  Enable users to access data and programs directly through terminal devices.

 

Operating cash flow ratio A short-term liquidity ratio that indicates the entity’s ability to meet its current obligations. It measures the entity’s ability to cover its current liabilities with cash generated from operations and is calculated as cash flow from operations/current liabilities.

 

Operation of internal control structure Design of the control environment, information system and control procedures maintained by management to assist in ensuring that the conduct of the business is orderly and efficient.

 

Operational audit/auditing A systematic process of evaluating an organisation’s effectiveness, efficiency and economy of operations under management’s control, and then reporting to appropriate persons the results of the evaluations.

 

Operational management  Those persons with responsibility for supervision of the day-to-day activities of the entity. See also Management.

 

Operational structure Includes types of products and services, locations, and methods of production, distribution and compensation.

 

Opinion shopping A practice whereby an audit client invites another firm of accountants to offer a second opin­ion on a disagreement the client’s management has with the auditor over a proposed accounting treatment. This action can pressure the auditor to issue an unqual­ified audit report so as not to lose the audit to the second firm.

 

Organisational structure Division of tasks between individual employees, groups or departments and locations. To control the work of an entity, procedural methods and measures are adopted which provide evidence that the tasks specified by the organisational structure have been carried out.

 

Other auditor  An auditor other than the principal auditor, who has responsibility for reporting on the financial information of part of an entity (such as a subsidiary) which is included in the financial report audited by the principal auditor. Other auditors include affiliated firms, whether using the same name or not, and correspondents, as well as unrelated auditors.

 

Other information  Other financial or non-financial information (such as the directors’ report) contained in a document which includes the audited financial report.

 

Output controls Controls over computer output that provide assurance that the processing result is correct and that only authorised personnel receive the output.

 

 

 

 

Package programs  Programs written by a software provider that is usually independent of the entity and the auditor.

 

Parallel simulation A computer-assisted audit technique for testing computer controls, where actual entity data are processed using auditor-controlled software.

 

Peer review Independent periodic reviews of the quality of an auditor’s audit procedures by other firms of public accountants.

 

Perceived independence See Independence in appearance.

 

Performance audit  An audit of all or part of an entity’s or entities’ activities to assess economy and/or efficiency and/or effectiveness. It includes any audit directed to the adequacy of an internal control structure or specific internal controls, including those intended to safeguard assets and to ensure due regard for economy, efficiency and effectiveness; the extent to which resources have been managed economically and efficiently; and the extent to which activities have been effective.

 

Performance review Management control procedures that independently check the performance of individuals or processes.

 

Performance standards  Set of standards issued by the Institute of Internal Auditors, outlining the work and performance standards and qualities to be maintained by internal auditors.

 

Periodic rotation of auditors Rotating partners and staff on audit engagements to bring fresh views to the audits, aid professional scepticism and promote independence.

 

Permanent file Contains information useful in an audit of a particular client, such as a client’s history.  It is carried forward and updated for each audit.

 

Persuasive evidence Evidence that has the power to influence. Most audit evidence is persuasive, but not conclusive.

 

PEST analysis  Management and audit tool used to define the impact of political, economic, social and technological forces on an entity.

 

Physical inventory count (stocktake)  Inventory items are counted, listed and the results are compared to accounting records.

 

Planning  The development of a general strategy and a detailed approach for the expected nature, timing and extent of the audit engagement.

 

Population  In relation to sampling, the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions.

 

Positive assurance  See Reasonable assurance.

 

Positive form of debtors’ confirmation  Confirmation of amount owing by debtor, asking debtor whether or not they agree with the information on the request.

 

Presentation and disclosure An assertion that the components of a financial report are properly classified and described, and disclosed in accordance with the financial reporting framework.

 

‘Presents fairly’  Used in the audit opinion to express the auditor’s view that there is no material misstatement from the reporting framework, such as applicable accounting standards, and that this reporting framework has been consistently applied. See also ‘True and fair’.

 

Previous auditor  The auditor who was previously the auditor of an entity and who has been replaced by another auditor.

 

Principal auditor  The principal auditor is the auditor with responsibility for reporting on the financial report of an entity when that financial report includes financial information of one or more components audited by another auditor

 

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Privity letter  A letter addressed to an auditor by a third party in an attempt to establish a duty of care owed by the auditor to the third party.

 

Probability proportionate to size sampling (PPS)  See dollar-unit sampling.

 

Processing controls Controls that provide an assurance that computer processing has been performed as intended for a particular application.

 

Professional scepticism An attitude that includes a questioning mind and a critical assessment of evidence. Without an attitude of professional scepticism, the professional accountant may not be alert to circumstances that lead to a suspicion, and may draw inappropriate conclusions from the evidence obtained.

 

Program code review Where an auditor reviews the client’s program documentation and the source code and considers whether the processing steps and control procedures are properly coded and logically correct.

 

Program library management software Aspecialised systems software that protects application programs that are stored online.

 

Projection  Prospective financial information prepared on the basis of hypothetical assumptions about future events and management actions which are not necessarily expected to take place, such as when some entities are in a start-up phase or are considering a major change in the nature of operations; or a mixture of best-estimate and hypothetical assumptions.

 

Proportionate liability An arrangement whereby the plaintiff’s loss is divided among the defendants according to their share of responsibility.

 

Prospective financial information  Financial information based on assumptions about events that may occur in the future and on possible actions by an entity.

 

Proximity Closeness in space, time or relationships, where the occurrence of reliance on the auditor’s work is foreseeable.

 

Purpose-written programs  Computer programs written to achieve a specific audit purpose.

 

 

 

 

Qualified opinion  Indicates that an auditor is not satisfied in all material respects that the subject matter is in accordance with an identified framework. The following represent the types of qualified opinion that may be expressed by the auditor (see also the entries for these terms): ‘Except for’ opinion; Adverse opinion; Inability to form an opinion.

 

Quality assurance Quality checks and reporting mechanisms to ensure adherence to standards of quality.

 

Quality control  Those policies and procedures adopted by an audit firm to ensure that all audits and audit-related service engagements are conducted in accordance with professional standards.

 

Quick asset ratio This is also called the acid test and is calculated as (current assets  –  inventory)/current liabilities. This is a more demanding version of the current ratio and indicates whether current liabilities could be paid without having to sell the inventory.

 

 

 

 

Random selection A sampling method where every item in the population has a known chance of selection. The person selecting the sample cannot bias the selection of items either consciously or unconsciously.

 

Ratio analysis Numbers produced by dividing one figure by another figure; for example, the working capital ratio is the total current assets figure divided by the total current liabilities figure. Standard ratios are used to assess aspects of a firm, particularly profitability, solvency and liquidity.

 

Ratio estimation A sampling method where the auditor calculates a ratio by dividing the sum of the audited values by the sum of the sample book value. The ratio is multiplied by the recorded total book value for the account balance, to create the estimated audited value.

 

Reasonable assurance  A high but not absolute level of assurance on an accountability matter. It is expressed as reasonable assurance in recognition of the fact that absolute assurance is rarely attainable due to such factors as the need for judgment, the use of testing, the inherent limitations on internal control and the fact that much of the evidence available to the auditor is persuasive rather than conclusive in nature.

 

Reasonable care and skill Professionalism, or the due professional care and competence reasonably expected of a professional person (as opposed to a lay person) under the circumstances of the case. The professional is expected to have considered all facts (and their reliability) to arrive at a responsible and well-informed opinion of the matter.

 

Reasonable foreseeability A test used in third-party liability which requires evaluation of whether the auditors could reasonably foresee that the third party would rely on their work.

 

Reasonable person test Tests whether a reasonable person having access to all the facts would consider that the auditor was independent.

 

Receivables turnover ratio Calculated by dividing credit sales by trade debtors. It indicates how many times accounts receivable are turned over during a year. Also known as the debtors turnover.

 

Reconciliation A schedule establishing agreement between separate sources of information, such as account­ing records reconciled with the source documents.

 

Record totals The totals of the number of logical or physical records in a batch, or file.

 

Regression analysis Estimates the relationship between a dependent variable (for example, sales) and one or more independent variables (for example, cost of sales or ship­ping costs). Provides a line of best fit for the data points.

 

Regulatory audits Audits undertaken with the aim of ensuring regulations have been fulfilled.

 

Related services  See Audit-related services.

 

Reliability factor  Statistical factor extracted from supporting tables to aid in calculation of sample size and evaluation of sample results.

 

Report of factual findings The report issued by the auditor flowing from an agreed-upon procedures engagement.

 

Report to management  A communication, excluding the audit report, to management on matters arising from the audit of an entity’s financial report. See also Management letter.

 

Representation letter A letter from management to the auditor, representing that the financial report is fairly presented. The letter is addressed to the external auditor, and dated at the date of the auditor’s report. It is signed by members of management whom the auditor believes are responsible for, and knowledgeable about, matters covered (chief executive officer and chief financial officer). See also Management representation letter.

 

Retail inventory method Deducing inventory amounts by using ratios of cost to selling price.

 

Return on shareholders’ equity ratio Net profit divided by shareholders’ equity. The most frequently-used ratio for measuring the business’s return to owners.

 

Return on total assets ratio Net profit, before deducting interest expense and tax, divided by total assets. This measures the operating return before the cost of financing.

 

Review engagement  A service where the auditor’s objective is to provide a moderate level of assurance, being a lower level of assurance than that provided by an audit.

 

Review of job (batch) accounting data Auditor reviews the printed log produced for jobs (or batches of transactions) that are run and considers any excessive processing time, error conditions or abnormal halts to identify potential batches of transactions on which they should concentrate their audit attention.

 

Rights and obligations An assertion that assets are rights of the entity and liabilities are obligations of the entity.

 

Risk advisory  See Risk assessment.

 

Risk assessment An assurance service identifying the business risks that an organisation faces and the associated risk management policies.

 

Risk of fraud or error The riskthat material misstatements resulting from fraud or error will not be detected.

 

Risk management The minimisation of exposure to risks in businesses. This involves the techniques of identifying potential risks, estimating the probability of occurrence, minimising damages, and generally managing a business’s risk profile.

 

Routine transactions Common transactionssuch as sales and cash collections.

 

Run-to-run control total reconciliation Control totals accumulated during processing are compared to input totals and previous computer-run totals, to ensure that computer processing is complete and accurate.

 

 

 

 

Safeguarding Access to assets and computer records is restricted to authorised personnel by means of physical or computer safeguards, such as fences, vaults, locked doors and appropriate password controls.

 

Sampling  See Audit sampling.

 

Sampling risk The possibility that a properly drawn sample may, by chance, not be representative of the population.

 

Sampling unit Commonly each of the transactions, account balances or dollars making up the account balance.

 

Scheduling audit work Preparation of various schedules and analyses of accounts for the auditor’s use, usually done by client’s personnel.

 

Scope of an audit  The term refers to the audit procedures deemed necessary in the circumstances to achieve the objective of an audit.

 

Scope limitation  See Limitation on scope.

 

Scope paragraph  Paragraph in the audit report, identifying the financial report being audited, the responsibilities of the governing body and the auditor. It also indicates the level of assurance provided, and the basis for the opinion.

 

Service entity  An entity that provides services to the client to record, process, execute transactions and/or maintain related accountability for these transactions.

 

Service entity auditor  The auditor engaged to perform an audit on, or provide a written description about, aspects of a service entity and report to the user and/or user auditor.

 

Significance Related to the materiality of the financial report assertion affected.

 

Simple comparisons Simple analytical procedures used in preliminary planning. These help the auditor identify account balances that have changed significantly, simply by comparing the amounts for the current and previous year on the working trial balance in the working papers.

 

Snapshot An audit log generated by an application program which encounters a tagged transaction and writes the details—the transaction data, date and time of occurrence, the application program involved and the point in the program at which it was generated.

 

Solicitor’s representation letter A letter or audit enquiry to a solicitor as a means of obtaining corroborating information about management’s assertion concerning the status of litigation, claims and unrecorded or contingent liabilities.

 

Special relationship Relationshipin which a person occupying a position of skill and care professes or offers advice to another person and the advice is given at the direct request of the recipient, or the adviser knows or ought to have known that the advice being given would be relied on by a person such as that recipient in the relevant circumstances.

 

Standard costing system  A method of determining manufactured inventory costs that uses expected normal production costs rather than actual costs.

 

Statistical sampling  Any approach to sampling that uses random sample selection, and also uses probability theory to evaluate sample results, including measurement of sampling risk.

 

Stocktake  See Physical inventory count.

 

Strategic business risk Risk of adopting a business strategy that is inappropriate and incapable of achieving specific goals.

 

Strategic business risk approach A modification to the financial risk analysis approach to auditing. The auditor must understand the strategic business risks faced by the client in addition to understanding the risks that affect the traditional processing and recording of transactions.

 

Stratification  Process of dividing a population into discrete sub-populations, for example by monetary value, in order to reduce variation in the population and direct the auditor’s attention to sampling units of interest.

 

Subsequent events  For audit purposes, subsequent events refers to events occurring between reporting period end and the date of the audit report, and also to facts discovered after the date of the audit report.

 

Substantive procedures  Tests performed to obtain audit evidence to detect material misstatements in the financial report. These involve tests of details (transactions and balances) and analytical procedures.

 

Substantive tests of details risk The risk that detailed substantive tests of transactions and account balances will fail to detect a material misstatement.

 

Sufficiency  The measure of the quantity of audit evidence obtained from tests of controls and substantive procedures.

 

Sufficient appropriate audit evidence A measure of the quantity and quality of audit evidence. The independent auditor’s objective is to obtain sufficient competent evidence to provide a reasonable basis for forming an opinion. See also Sufficiency; Appropriateness of audit evidence.

 

Suitable criteria Standards or benchmarks considered appropriate for the evaluation and measurement of the subject matter of an assurance engagement.

 

Summarised financial report  An abridged report for the purpose of informing users interested in the highlights of the entity’s performance and financial position.

 

SWOT analysis A management tool that helps identify the internal strengths and weaknesses of an organisation and the external opportunities and threats.

 

Systematic selection  Sampling procedure where sampling units are selected from a population at regular intervals, the regular interval being determined by dividing the number of units in the population by the sample size.

 

Systems control audit review file (SCARF) An embedded audit facility that enables auditors to specify parameters of interest, such as transactions meeting specified criteria, which are then recorded on a special audit file for subsequent review by the auditors.

 

Systems management software Software that aids the running of the computer system and controls access to application programs and data files.

 

SysTrustTM  An assurance service aimed at establishing whether management has maintained effective controls over systems.

 

 

 

 

Teleological theories Deal with the consequences or outcomes of actions. They state that actions are right or wrong only in terms of their ability to bring about desired ends. Also called consequential theories.

 

Tendering The calling by audit clients for competitive bids for audit appointments.

 

Test data Simulated transactions that can be used to test processing logic, computations and controls actually programmed in computer applications.

 

Tests of controls  Tests performed to obtain audit evidence about the suitability of design and effective operation of the internal control structure.

 

Time budget The estimated amount of time required at each staff level (partner, manager, senior and staff) to complete each part of the assurance service.

 

Time of completion The date at which the auditor signs the audit report.

 

Time series analysis A simple analytical procedure which is apredictive technique involving the extrapolation of past values of an item of financial information into the current audit period. For example, the past values of sales are examined to identify some trend which can be used to predict the level of the current audit balances.

 

Time series models Complex analytical procedures which aim to forecast what the current level of various financial report items should be, based on the pattern of past amounts of different variables.

 

Times interest earned ratio Indicates the ability of current operations to pay the interest that is due on the entity’s debt obligations. Calculated by dividing net profit by interest expense. The more times that interest is earned, the better the entity’s ability to service the interest on long-term debt.

 

Tolerable error The total error the auditor is willing to accept in a population before concluding that the population is materially misstated.

 

Tracing Testing from supporting documents to recorded amounts.

 

Transaction logs  Reports that are designed to create an audit trail for each online transaction. Such reports often document the source of a transaction (terminal, time and user) as well as the transaction’s details.

 

Transactions cycle approach An audit approach that involves testing the controls operating within trans­ac­tions cycles. These transactions cycles include: sales– accounts receivable–cash receipts cycle, purchases– inven­tory– creditors–cash payments cycle, payroll–cash payments cycle, and other purchases–cash payments cycle.

 

Trend statements Statements that disclose trendsby com­par­ison of account balances by month, within the year and between years, and by year with those of previous years. Each number in a trend statement is expressed as a percentage of its own level calculated from some base year. The focus is on the trend rather than the absolute magnitude of dollar changes.

 

‘True and fair view’  Used in the audit opinion of Corporations Act audits to express the auditor’s view that there is no material misstatement from the reporting framework, such as applicable accounting standards, and that this reporting f