Audit Risk

A misstatement is considered inconsequential if, after considering the possibility of additional undetected misstatements, a reasonable person would conclude that the misstatement, either individually or when aggregated with other misstatements, would clearly be immaterial to the financial statements.

American Depositary Receipt (ADR) is a certificate issued by a U.S. bank representing a specified number of shares in a foreign stock traded on a U.S. exchange.

The American Institute of Certified Public Accountants (AICPA) is a national professional organization that represents Certified Public Accountants (CPAs) in the United States. The AICPA sets ethical and auditing standards, as well as standards for other services performed by its members. It also collaborates with the Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB) in establishing accounting principles and provides specialized industry guidance through its committees.

The Alternative Minimum Tax (AMT) is a supplemental income tax imposed to ensure that individuals and corporations with high economic income pay a minimum level of tax, regardless of deductions, credits, or exemptions.

APB, or Accounting Principles Board, was a senior technical committee of the American Institute of Certified Public Accountants (AICPA) that issued pronouncements on accounting principles from 1959 to 1973, before being replaced by the Financial Accounting Standards Board (FASB).

The complete removal or reduction of an amount due, often applied to tax, penalty, or interest abatements within a governing agency.

A product costing method that includes all manufacturing costs--direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead--in the cost of a product.

A method of depreciation that allows for greater depreciation expense in the early years of an asset's life and less in the later years, compared to straight-line depreciation.

A formal record in bookkeeping that represents various assets, liabilities, income, and expenses, and reflects all transactions or events that cause changes to these financial elements.

Amounts owed by a company to creditors for goods or services that have been delivered or completed but not yet paid for.

A financial record representing the amount owed to a business, typically from sales or services rendered, that has not yet been collected from the debtor.

An accountable plan is a reimbursement or expense allowance arrangement set by an employer that meets specific IRS criteria to exclude payments from an employee's gross income. These criteria include: providing reimbursements for job-related expenses, requiring employees to substantiate these expenses, and mandating the return of any excess payments.

A professional skilled in the recording, analyzing, and reporting of financial transactions, ensuring the accuracy of financial statements and compliance with applicable laws and regulations.

A formal document issued by an independent accountant that includes various types of evaluations such as limited assurance on financial statements (review report), results of specific procedures agreed upon (agreed-upon procedures report), a compilation of financial statements without assurance (compilation report), or an opinion on management's assertion following attestation standards (attestation report). An accountants' report is distinct from an audit report as it does not involve the comprehensive examination associated with an audit.

The systematic process of recording, reporting, and analyzing financial transactions of a business to ensure accurate financial statements and compliance with financial reporting standards.

A modification in an accounting principle, an accounting estimate, or the reporting entity that requires full disclosure and explanation in published financial reports to ensure transparency and consistency in financial reporting.

The sequence of steps followed in the accounting process to measure business transactions and transform these measurements into financial statements for a specific period.

A senior technical committee of the American Institute of Certified Public Accountants (AICPA) that issued pronouncements on accounting principles from 1959 to 1973, before being replaced by the Financial Accounting Standards Board (FASB).

A detailed financial record within the general ledger that tracks individual accounts payable transactions. This ledger allows for the daily entry and tracking of amounts owed to creditors, facilitating detailed financial management and reconciliation.

A financial metric used to measure a company's efficiency in collecting cash from credit customers, calculated by dividing net sales by the average accounts receivable.

The recognition of revenue or expenses that have been earned or incurred but not yet recorded in the accounts.

Accrual accounting is an accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash transactions occur. This approach aligns with the matching principle, which aims to match revenues with related expenses in the period in which the economic activity occurs.

A method of accounting that recognizes revenue when it is earned and expenses when they are incurred, regardless of when the cash transactions occur.

An expense that has been incurred but not yet paid or recorded in the financial statements.

Interest that has accumulated on a bond or other fixed-income security between the most recent payment and the sale or current date.

The total depreciation recorded for an asset or group of assets from the time they were placed in service until the date of the financial statement or tax return. This amount is recorded as a contra account to the related asset account, reducing the asset's book value on the balance sheet.

In finance and corporate settings, accumulation refers to the process of reinvesting earnings, dividends, or capital gains back into the company or investment vehicle instead of distributing them as dividends. This can also refer to the strategic purchase of shares over time by an institutional broker to avoid influencing the share price.

A financial metric that measures a company's ability to meet its short-term obligations using its most liquid assets, excluding inventory. It is calculated by dividing the sum of cash, cash equivalents, short-term investments, and current receivables by the total current liabilities.

The process by which one company takes over controlling interest in another company, typically through the purchase of its shares or assets.

A professional mathematician, typically employed in the insurance industry, responsible for calculating premiums, reserves, dividends, and rates for insurance, pensions, and annuities based on risk factors derived from experience tables.

Amounts paid by shareholders for stock in excess of its par value or stated value, which are credited to equity accounts other than capital stock.

The adjusted basis of a property is the original cost basis after being adjusted for additions, improvements, and other capital expenditures, as well as deductions for depreciation, depletion, and other returns of capital. This adjusted figure is used to calculate capital gains or losses upon the sale or disposition of the property.

Adjusted Gross Income (AGI) is the gross income of an individual reduced by specific deductions allowable by the IRS. AGI is used to determine the taxable income and is crucial for calculating permissible deductions and credits.

A trial balance that is prepared after all adjusting entries have been made and posted to the ledger accounts, ensuring that the total debits equal the total credits.

An accounting entry made in the general journal to account for changes, corrections, or updates to financial data that were not captured in the regular accounting periods. These entries are essential for ensuring that the financial statements reflect accurate and up-to-date information at the end of an accounting period.

An expression of opinion in an auditor's report which states that financial statements do not fairly present the financial position, results of operations, and cash flows in conformity with Generally Accepted Accounting Principles (GAAP).

A company or organization related to another through common ownership, control of management, or other control mechanisms such as a long-term lease.

An Agency Fund is a type of fund consisting of assets held by an entity that acts as an agent on behalf of a specified beneficiary. The entity agrees to remit the assets, income from the assets, or both, to the beneficiary either at a specified time or upon the occurrence of a designated event.

To distribute resources or assign duties for a specific purpose or to particular persons or things.

A contra-asset account used to reduce the total accounts receivable on a company's balance sheet to the amount that is realistically expected to be collected in cash.

A range of dispute resolution methods outside of formal litigation, including arbitration, mediation, and non-binding summary jury trials, used to resolve conflicts more efficiently and with potentially less cost.

A federal tax designed to ensure that individuals, estates, trusts, and corporations with significant economic income pay a minimum level of income tax, regardless of deductions, exemptions, or other tax breaks they may otherwise be able to claim.

A certificate issued by a U.S. bank representing a specified number of shares in a foreign stock traded on a U.S. exchange. ADRs make it easier for Americans to invest in foreign companies, as the receipts are traded on U.S. markets as domestic shares.

A national professional organization that represents Certified Public Accountants (CPAs) in the United States. The AICPA sets ethical and auditing standards, as well as standards for other services performed by its members. It also collaborates with the Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB) in developing accounting principles and provides specialized industry guidance through its committees.

The process of gradually reducing the value of an intangible asset or the balance of a loan through periodic payments, which may include principal and interest components, over a specified period of time.

An employee in a financial institution such as a brokerage house, bank trust department, or mutual fund group who evaluates companies and industry sectors to make investment recommendations, often specializing in a specific industry.

Analytical procedures are substantive tests of financial information which involve examining relationships among data to obtain evidence. These procedures include comparing financial information with previous periods, anticipated results, industry norms, and studying relationships between financial elements that should follow predictable patterns based on historical experience.

A comprehensive report issued annually by a company to its shareholders, encompassing the company's annual, audited financial statements including the balance sheet, statements of earnings, stockholders' equity, cash flows, and other pertinent financial and business information.

A financial product typically issued by an insurance company, which provides a series of payments to the holder at specified intervals for a fixed period or for the lifetime of the holder.

Provisions used to protect shareholders from the dilution of their ownership percentage in a company, typically triggered by the issuance of new shares in the company at a price lower than what current shareholders paid. These provisions adjust the conversion rates or prices of existing convertible securities like stock options, warrants, convertible debt, or convertible preferred stock.

An increase in the value of an asset, such as a stock, bond, commodity, or real estate, over a period of time.

The process in which an accountant provides various accounting or data-processing services to compile financial statements, primarily intended for internal management purposes.

Explicit or implicit representations by an entity's management that are embodied in financial statement components, which are evaluated by an auditor to form an opinion on the financial statements.

An economic resource owned by an individual or entity, tangible or intangible, that is expected to provide future economic benefits as a result of past transactions or events.

A financial ratio that measures how efficiently a company uses its assets to generate sales, calculated by dividing net sales by average total assets.

A term used when a security is issued or traded at its face or nominal value.

A systematic and independent examination of a company's financial statements, records, and operations by a qualified professional, such as a CPA, to ensure accuracy, adherence to generally accepted accounting principles (GAAP), and to provide an accountant's opinion.

The written record of the basis for the auditor's conclusions, providing support for the auditor's representations, whether contained in the auditor's report or otherwise. These records are commonly referred to as work papers or working papers.

An agreement between a CPA firm and its client to conduct an audit, where the CPA firm is engaged to examine the financial statements and records of the client and to produce a report that reflects the findings.

The application of audit procedures to a subset of items within an account balance or class of transactions to evaluate some characteristic of the balance or class, without examining all items.

Guidelines that outline the professional qualities and judgment required of auditors when conducting an audit and preparing the auditors' report. These standards ensure the accuracy, consistency, and verifiability of auditors' actions and reports, and are typically in accordance with Generally Accepted Auditing Standards (GAAS) as approved by the American Institute of Certified Public Accountants (AICPA).

A professional who conducts an official inspection of an organization's accounts, typically by an independent body, to ensure accuracy, adherence to regulatory guidelines, and to verify that financial records are fair and correct.

A written communication issued by an independent certified public accountant (CPA) that describes the nature of the audit work and the level of responsibility assumed. The report states that the audit was conducted according to Generally Accepted Auditing Standards (GAAS), which aim to provide reasonable assurance that the financial statements are free from material misstatement. It also includes the auditor's opinion on the accuracy of the financial statements.

The maximum number of shares of any class that a company is legally allowed to issue as specified in its articles of incorporation.

The average number of days required to sell the current inventory of products available for sale, calculated by dividing the number of days in a year by the inventory turnover rate.

A financial metric that indicates the average number of days it takes for a company to collect payments after a sale has been made on credit.

A method used in accounting to calculate the cost of inventory by determining the average cost of all goods available for sale during a specified period, which is then used to value the ending inventory and cost of goods sold.