| Analytical procedures | Tests that involve comparisons of financial data for the current year to that of prior years, budgets, nonfinancial data, or industry averages. From a planning standpoint, analytical procedures help the auditors obtain an understanding of the client's business, identify financial statement amounts that appear to be affected by errors or fraud, or identify other potential problems.
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| Audit committee | A committee composed of outside directors (members of the board of directors who are neither officers nor employees) charged with responsibility for appointing, compensating, and overseeing the auditors.
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| Audit plan | A broad overview of an audit engagement prepared in the planning stage of the engagement. Audit plans usually include such matters as the objectives of the engagement, the nature of the work to be performed, significant audit and fraud risks, a time schedule for major audit work and completion of the engagement, and staffing requirements.
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| Audit program | A detailed listing of the specific audit procedures to be performed in the course of an audit engagement. Audit programs provide a basis for assigning and scheduling audit work and for determining what work remains to be done. Audit programs are specially tailored to the risks and internal controls of each engagement.
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| Audit risk | At the overall engagement level, this is the risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated. At the financial statement assertion level, it is the risk that a particular assertion about an account balance is materially misstated.
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| Business risks | Risks that threaten management's ability to achieve the organization's objectives.
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| Control risk | The risk that a material misstatement that could occur in an account will not be prevented or detected on a timely basis by internal control.
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| Dual-purpose procedure (test) | An audit procedure that serves as a test of controls and as a substantive test. For example, a test of controls over equipment acquisitions may address authorization (providing evidence on control effectiveness) and whether the transaction tested has been properly recorded in the year's acquisitions (providing substantive evidence on the dollar amounts). As another example, a substantive test may reveal a misstatement and be extended to determine the nature of the control that did not operate effectively, thereby providing evidence on operating effectiveness.
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| Engagement letter | A formal letter sent by the auditors to the client at the beginning of an engagement summarizing the nature of the engagement, any limitations on the scope of audit work, work to be done by the client's staff, and the basis for the audit fee. The purpose of engagement letters is to avoid misunderstandings; they are essential on nonaudit engagements as well as audits.
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| Engagement risk | The risk of loss or injury to the auditors' reputation by association with a client that goes bankrupt or one whose management lacks integrity.
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| Fraudulent financial reporting (management fraud) | Material misstatement of financial statements by management with the intent to mislead financial statement users.
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| Inherent risk | The risk of material misstatement of an assertion about an account without considering internal control.
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| Interim period | The time interval from the beginning of audit work to the balance sheet date. Many audit procedures can be performed during the interim period to facilitate early issuance of the audit report.
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| Internet | An international network of independently owned computers that operates as a giant computing network. Data on the Internet are stored on "Web servers," which are computers scattered throughout the world.
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| Management assertions | Representations of management that are communicated, explicitly or implicitly, by the financial statements.
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| Misappropriation of assets (defalcations) | Theft of client assets by an employee or officer of the organization.
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| Predecessor auditors | A CPA firm that formerly served as auditor but has resigned from the engagement or has been notified that its services have been terminated.
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| Shopping for accounting principles | Conduct by some enterprises that discharge one independent auditing firm after seeking out another firm that will sanction a disputed accounting principle or financial statement presentation.
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| Substantive tests | Tests of account balances and transactions designed to detect any material misstatements in the financial statements. The nature, timing, and extent of substantive testing are determined by the auditors' assessment of risks and their consideration of the client's internal control.
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| Successor auditors | The auditors who have accepted an engagement or who have been invited to make a proposal for an engagement to replace the CPA firm that formerly served as auditors.
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| Time budget | An estimate of the time required to perform each step in the audit.
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| Transaction cycle | The sequence of procedures applied by the client in processing a particular type of recurring transaction. The term cycle reflects the idea that the same sequence of procedures is applied to each similar transaction. The auditors' consideration of internal control often is organized around the client's major transaction cycles.
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