Glossary Appendix C Accounting control. Plan of organization and the procedures and records that are concerned with the safeguarding of assets and the reliability of the financial records. See internal control. Accounting policy disclosures. Disclosures that relate to the significant accounting policies with respect to management s selection and application of generally accepted accounting principles in the preparation of the financial statements. The disclosure matters are governed by Accounting Principles Board Opinion No. 22, Disclosure of Accounting Policies. Accounting Principles Board (APB). AICPA s accounting rule-making body. It has been succeeded by the Financial Accounting Standards Board, which is separate and distinct from the AICPA. Administrative control. Plan of organization and the procedures and records that are concerned with the decision processes leading to management s authorization of transactions. See internal control. Adverse opinion. Statement made in the independent auditor s report indicating that the financial statements are not presented fairly in accordance with generally accepted accounting principles. Such a statement is rendered where the auditor s exceptions are so material that the statements as a whole are not fairly presented. Agreed-on procedures engagement. The CPA firm and the client company agree that certain procedures will be performed with respect to specified elements, accounts, or items of a financial statement, and the report of the engagement is distributed to designated parties. American Accounting Association. An association of accounting educators, although the membership is open to others. American Institute of Certified Public Accountants (AICPA). The national professional organization of certified public accountants. Analytical procedures. Procedures consisting of comparative financial information, financial ratios, nonfinancial information, and industry statistics. Independent auditors use these procedures in planning the audit and for the year-end review of the financial statements. 429
430 Appendix C Attest engagement. The independent auditors are engaged by the client to express a conclusion about the reliability of an assertion or of some subject matter based on suitable criteria that is the responsibility of another party (e.g., a report from the independent auditors on management s assertion about the effectiveness of the internal control system). Audit Committee s Internal Report. An informational report addressed to the full board of directors regarding their activities during the fiscal accounting period. Such a report also may be used in the preparation of the annual report in the proxy statement. Audit risk. The risk of independent auditors to modify their audit report with respect to financial statements that are materially misstated. Independent auditors attempt to minimize audit risk by assessing both inherent risk and control risk as well as determining the level of detection risk at the financial statement assertion level. Auditing cycle. The phases of an audit examination, which consist of the initial planning segment, preaudit planning segment, and postaudit review segment. Auditing Standards Board. The auditing rule-making body of the AICPA. Succeeded by the Public Company Accounting Oversight Board for SEC clients. Auditing Standards of Field Work. Plans for an overall strategy for the expected conduct and scope of the examination for a particular audit engagement. Business risk (of the client company). Composed of both internal and external risks that threaten the company s survival and profitability. Management s risk assessment process is designed to establish controls to help mitigate these risks. The term enterprise risk management (ERM) is associated with business risk. Business risk (of the independent auditor). Composed of risks that threaten the reputation of the CPA firm. This term is associated with the independent auditor s litigation risk. Certified Fraud Examiner. A person who has completed the necessary requisites of the program administered by the Association of Certified Fraud Examiners. Certified Internal Auditor Program. A professional development program administered by the Institute of Internal Auditors and designed to prepare individuals for the Certified Internal Auditor (CIA) certificate. Change in accounting estimate. Refers to a change owing to additional information or more experience on behalf of management whereby management s original estimates are revised to present a fair representation of the financial position and results of operating the business. Change in accounting principle. A change resulting from the adoption of a generally accepted accounting principle that is different from the one used previously.
Glossary 431 Change in reporting entity. A change occurring as a result of restructuring an entity, for example, through a corporate merger. Compliance audits. Type of audit oriented toward the employees compliance with management policies. It also refers to the entity s adherence to the rules and regulations of the various government agencies. Consistency. Concept related to the second generally accepted auditing standard of reporting regarding the consistent application of generally accepted accounting principles to maintain comparability in the current and prior periods financial statements. Cookie jar reserves. Increasing reserves in good times and decreasing them in poor times to smooth reporting earnings (e.g., allowance for doubtful accounts). Corporate accountability. Refers to corporate management s reporting responsibility of its stewardship for the economic resources of the enterprise to its outside constituencies. Corporate auditing independence. Reporting relationship of the internal auditing staff should be structured so that the auditors have an independent posture in the corporate framework. The audit staff should report to an executive whose authority is sufficient to maintain the audit staff s independence. Also, the chief audit executive should have free access to the audit committee. Corporate auditing philosophy. Refers to the internal auditing staff s approaches to the internal audit function. The current thought concerning such philosophies is espoused by the Institute of Internal Auditors. Corporate audit plan. Plan that comprises the scope of the overall audit plans, which is an amalgamation of internal and external auditing activities. Cost Accounting Standards Board. A five-member board established by Congress to develop and maintain cost accounting standards and monitor the cost accounting practices of corporations engaged in contracts with certain U.S. government agencies. Critical Accounting Policies. Refers to sensitive and subjective accounting disclosures regarding assumptions, judgments, and estimates in the company s Management Discussion and Analysis section of the annual report. Disclaimer of opinion. Statement made by independent auditors in their audit report that, as a result of insufficient information, they are unable to form an opinion regarding the financial statements. Disclosure. An accounting principle stating that management has a reporting responsibility to its constituencies to disclose financial information that is necessary for a proper understanding of the financial statements. Engagement letter. Document that sets forth the nature and scope of the audit engagement as well as other professional services of the CPA firm.
432 Appendix C Errors. Unintentional and acting-in-good-faith misrepresentations of financial statements or disclosures. Facilitating (grease) payments. Small payments covering ministerial activities, such as for customs documents or minor permits in countries other than the United States. Fairness. The fourth auditing standard of reporting requires that the independent auditors express their opinion on the fairness of management s representations in the financial statements. Federal Deposit Insurance Corporation Improvement Act (FDICIA). Legislation enacted December 19, 1991, providing for the establishment of audit committees of insured depository institutions with total assets of $150 million or more. Financial Accounting Standards Board (FASB). The current accounting rulemaking body, which succeeded the Accounting Principles Board on July 1, 1973. Financial audit. An examination of the entity s financial statements in accordance with generally accepted auditing standards. The examination is also made to determine whether the statements are fairly presented in conformity with generally accepted accounting principles. Such an examination may be conducted on an interim or quarterly basis and is known as an interim financial audit for internal managerial purposes. Financial control system. Refers to the internal accounting controls designed to safeguard the assets and establish sound methods of record keeping in compliance with the Foreign Corrupt Practices Act. See also accounting control. Financial Executives International. An association of financial and accounting officers, such as vice presidents of finance, treasurers, and controllers. Foreign Corrupt Practices Act. Legislation enacted December 19, 1977, providing for the establishment and maintenance of a sound system of internal accounting control and record-keeping requirements. The law states that any direct or indirect payment or offer that is intended to promote business constitutes foreign bribery. Fraud. In a financial statement audit context, an intentional and acting-in-badfaith misrepresentation of financial statements or disclosures and misstatements due to misappropriation of assets. Generally accepted accounting principles (GAAP). The conventions, rules, and methods of accounting that are widely accepted among accounting practitioners. Generally accepted auditing standards (GAAS). A framework for measuring the quality of an auditor s professional performance concerning the audit examination and the audit report.
Glossary 433 Governmental Accounting Standards Board. The current accounting rulemaking body that issues pronouncements for state and local governmental entities. Illegal acts. Acts that are a violation of laws and regulations. Independence Standards Board. A board established to deal with auditor independence questions governed by independence rules with a principles-based system. Succeeded by the Public Company Accounting Oversight Board. Initial Audit Planning Segment. The first phase of the auditing cycle regarding the preliminary audit planning activities. Institute of Internal Auditors (IIA). The international organization of internal auditors. Institute of Management Accountants. A professional association of management accountants who are employed in industry, government, and nonprofit organizations. Internal control. A process, effected by an entity s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in these categories: (1) effectiveness and efficiency of operations; (2) reliability of financial reporting; and (3) compliance with applicable laws and regulations. International Accounting Standards Board (IASB). A committee that promulgates international accounting standards which provide for uniformity in financial reporting. International Federation of Accountants. A global organization of national accounting groups. The International Auditing and Assurance Standards Board (IAASB) issues international standards on auditing. Introductory paragraph. First paragraph of the independent auditors standard audit report. It states that management is responsible for the financial statements and that the auditors objective is to express an opinion on such statements. Lawyers Letter. Legal opinion letter with respect to potential litigation (claims, assessments, including unasserted claims), such as a pending lawsuit. This document is submitted to the independent auditors. Letter of Management s Representations. A letter originated by the chief executive officer and chief financial officer to the independent accounting firm with respect to the entity s representations concerning the financial position and the results of operations. Logistical matters. Matters related to the audit reporting and coverage of a multinational corporation on a centralized and decentralized basis regarding the corporate and resident auditors. Long-form report. The independent auditor s report form used in the examination for the purpose of including details of the items in the financial statements as
434 Appendix C well as statistical data, explanatory comments, and a description of the scope in greater detail than in the short-form report. Management assertions. Representations of management contained in the financial statements. See Letter of Management s Representations. Management audit. Audit conducted by independent auditors. The nature of this audit is the same as that of the operational audit, which is conducted by internal auditors. Such an audit is conducted to determine the operating efficiency of the functions or departments within the organization. Management Letter. Letter containing independent auditors recommendations as a result of their evaluation of the system of internal accounting control. Management Report. An acknowledgment by management of its responsibility for the content of the corporate annual report. Materiality. An accounting principle stating that the financial statements should include only that information that is significant with respect to the entity s financial position and results of operations. This principle is based on the professional judgment of the independent auditors regarding the disclosure of the financial information. The independent auditor s judgment about materiality is based on both quantitative and qualitative criteria. Monitoring function. The responsibility of the audit directors to oversee the corporation s accounting and auditing activities and other matters as defined by the board of directors. Such activities include the system of internal control, the internal audit function, accounting policies, and certain business practices, such as questionable foreign payments. Operational audit. An audit conducted by the internal audit staff to review and appraise the activities of a certain function within the corporation. The objective is to determine the operational efficiency of the corporate function or department. Opinion paragraph. The third paragraph of the independent auditors standard short-form audit report. It contains the auditors expression of an opinion on the fairness of management s representations in the financial statements in accordance with generally accepted accounting principles. Peer review. See quality review standards. Planning function. The development of a coordinated plan of administration whereby the audit committee can fulfill its responsibility to oversee and monitor the financial accounting and auditing processes. Postaudit segment. Refers to the third phase of the auditing cycle whereby the audit committee should review the results of both the internal and external audit activities and recommend the selection or reappointment of the public accounting firm to the board of directors.
Glossary 435 Preaudit planning segment. Refers to the second phase of the auditing cycle whereby the audit committee should discuss the internal and external audit plans regarding matters such as audit coverage and assignment of audit personnel. Private Securities Litigation Reform Act of 1995. Legislation enacted December 22, 1995, providing reforms to curb the number of abusive securities class action suits. The law deals also with such matters as proportionate liability, safe harbor for forward-looking statements, and loss causation principle. Public Company Accounting Oversight Board (PCAOB). An independent oversight group of five individuals who are empowered to conduct investigations and discliplinary proceedings on both registered public accounting firms and professional employees. Public Oversight Board (POB). An independent oversight group of individuals other than public accountants who monitor the AICPA s SEC Practice Section. Superceded by the Public Company Accounting Oversight Board. Qualified opinion. An opinion used by the independent auditors when there are exceptions regarding management s representations in the financial statements. Quality control standards. A system of quality control for a CPA firm that consists of policies and procedures to ensure adherence with professional standards. Quality review standards. Standards for performing and reporting on quality reviews of a CPA firm by another CPA firm. Related-party transactions. Such transactions occur when one party is able to significantly influence another party that would render a non arm s-length negotiation (e.g., a director or officers may have a conflict of interest because of loans to the company or from the company that must be disclosed in the financial statements). Relative risk. Related not only to the financial accounts but also to corporate locations, such as subsidiaries or divisions that are subject to a high exposure of risk based on their susceptibility to irregularities. The elements of materiality and relative risk are correlated closely with respect to the scope of audit planning activities. Report on internal control. See management letter and attest engagement. Reportable conditions. Matters that represent a significant deficiency in the design or operations of the internal control system. Such matters must be communicated by the independent auditors to the audit committee. Reporting function. The responsibility of the audit committee to present a summary of its findings and recommendations to the board of directors based on its review of the audit planning and monitoring activities.
436 Appendix C Representation Letters of Compliance. Letters used to obtain acknowledgment from corporate managers regarding their compliance with the entity s policies and practices with respect to corporate conduct and responsibility. Sarbanes-Oxley Act of 2002. Legislation enacted July 25, 2002, providing for penalties for corporate fraud, strengthening auditor independence and audit committees, and establishing the Public Company Accounting Oversight Board. SEC Annual Report 10-K. Report containing additional information beyond the information in the corporate annual report in accordance with the federal securities disclosure laws. SEC Interim Report 10-Q. Report containing quarterly financial information reported in accordance with the federal securities laws. SEC Special Report 8-K. Interim report containing information regarding certain special events; must be filed on the occurrence of such events as a change in the independent accounting firm or a change in control of the registrant. Scope paragraph. Second paragraph of the independent auditors standard short-form audit report. It sets forth the statements to be examined and the nature of the audit work. Securities Act of 1933. Legislation that provides financial information regarding the public sale of securities. This act also provides for civil and criminal liability of the directors with respect to fraud in the registration statements. Securities and Exchange Commission (SEC). A regulatory government agency that requires public disclosure of the relevant facts in connection with the issuance of new securities and securities listed on the stock exchange. Securities Exchange Act of 1934. Legislation that regulates the public sales of securities through the securities exchanges or brokers after the original sale of the securities. Special Reports. The reports of the independent auditors regarding their review of certain activities as requested by management. Standard Short-Form Unqualified Report. See unqualified opinion. Unqualified opinion. An audit report used by the independent auditors when they find no exceptions concerning management s representations in the financial statements. Such an opinion is disclosed in the third paragraph of the standard short-form audit report. U.S. General Accounting Office. A federal agency that issues government auditing standards (the Yellow Book ). Working capital position. Represents the relationship between the cash and near-cash assets and the short-term liabilities. Such a position also is expressed as the relationship of the current assets to the current liabilities of the entity.