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Glossary of terms audit and ethics 2014

GLOSSARY OF TERMS

(February 2014)

This Glossary defines terms used in the ISAs (UK and Ireland), the ISQC (UK and Ireland) and APB Ethical Standards for Auditors issued by the FRC. It is based on the IAASB glossary of terms, with supplemental definitions used in the FRC standards shown in grey highlighted text.

Separate glossaries are used in connection with the Standards for Investment Reporting (SIRs) and the Ethical Standard for Reporting Accountants (ESRA). These are included in SIR 1000 at Appendix 4 and in the ESRA at Appendix 1.

Access controls

Procedures designed to restrict access to on-line terminal devices, programs and data. Access controls consist of "user authentication" and "user authorization." "User authentication" typically attempts to identify a user through unique logon identifications, passwords, access cards or biometric data. "User authorization" consists of access rules to determine the computer resources each user may access. Specifically, such procedures are designed to prevent or detect:

  1. Unauthorized access to on-line terminal devices, programs and data;
  2. Entry of unauthorized transactions;
  3. Unauthorized changes to data files;
  4. The use of computer programs by unauthorized personnel; and
  5. The use of computer programs that have not been authorized.

Accounting estimate

An approximation of a monetary amount in the absence of a precise means of measurement. This term is used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts that require estimation. Where ISA (UK and Ireland) 540 2 addresses only accounting estimates involving measurement at fair value, the term “fair value accounting estimates” is used.

Accounting records

The records of initial accounting entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures.

Accounting services

The provision of services that involve the maintenance of accounting records or the preparation of financial statements that are then subject to audit.

Affiliate

An entity that has any of the following relationships with the audited entity:

  1. An entity that has direct or indirect control over the audited entity if the audited entity is material, quantitatively or qualitatively, to such entity;
  2. An entity with a direct financial interest in the audited entity if that entity has significant influence over the audited entity and the interest in the audited entity is material, quantitatively or qualitatively, to such entity;
  3. An entity over which the audited entity has direct or indirect control;
  4. An entity in which the audited entity, or an affiliate of the audited entity under (c) above, has a direct financial interest that gives it significant influence over such entity and the interest is material, quantitatively or qualitatively, to the audited entity and its affiliate in (c); and
  5. An entity which is under common control with the audited entity client (a “sister entity") if the sister entity and the audited entity are both material, quantitatively or qualitatively, to the entity that controls both the audited entity and sister entity.

Factors that may be relevant in determining whether an entity or an interest in an entity is material to another entity include:

  • the extent and nature of the relationships between the audited entity and the other entity and the impact these have on the relationships of either entity with the auditor of the audited entity, and
  • the extent and nature of the relationship(s) between the auditor of the audited entity and the other entity and the impact that this has on their independence as auditor of the audited entity.

Agreed-upon procedures engagement

An engagement in which an auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. The recipients of the report form their own conclusions from the report by the auditor. The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures may misinterpret the results.

Analytical procedures

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.

Annual report

A document issued by an entity, ordinarily on an annual basis, which includes its financial statements together with the auditor's report thereon.

Anomaly

A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population.

Applicable financial reporting framework

The financial reporting framework adopted by management and, where appropriate, those charged with governance in the preparation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation.

The term "fair presentation framework" is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and:

  1. Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or
  2. Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances.

The term "compliance framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (a) or (b) above.

Application controls in information technology

Manual or automated procedures that typically operate at a business process level. Application controls can be preventative or detective in nature and are designed to ensure the integrity of the accounting records. Accordingly, application controls relate to procedures used to initiate, record, process and report transactions or other financial data.

Appropriateness (of audit evidence)

The measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor's opinion is based.

Arm's length transaction

A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.

Assertions

Representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur.

Assess

Analyze identified risks of to conclude on their significance. “Assess,” by convention, is used only in relation to risk. (also see Evaluate)

Association

(see Auditor association with financial information)

Assurance

(see Reasonable assurance)

Assurance engagement

An engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. The outcome of the evaluation or measurement of a subject matter is the information that results from applying the criteria (also see Subject matter information). Under the “International Framework for Assurance Engagements” there are two types of assurance engagement a practitioner is permitted to perform: a reasonable assurance engagement and a limited assurance engagement.

Reasonable assurance engagement

The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement 3 as the basis for a positive form of expression of the practitioner's conclusion.

Limited assurance engagement

The objective of a limited assurance engagement is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner's conclusion.

Assurance engagement risk

The risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated.

Audit documentation

The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers" or “workpapers” are sometimes used).

Audit evidence

Information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. (See Sufficiency of audit evidence and Appropriateness of audit evidence.)

Audit file

One or more folders or other storage media, in physical or electronic form, containing the records that comprise the audit documentation for a specific engagement.

Audit firm

(see Firm)

Audit opinion

(see Modified opinion and Unmodified opinion)

Audit risk

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.

Audit sampling (sampling)

The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.

Audit team

For the purposes of APB Ethical Standards this is all audit professionals who, regardless of their legal relationship with the auditor or audit firm, are assigned to a particular audit engagement in order to perform the audit task (e.g. audit partner(s), audit manager(s) and audit staff).

Audited entity

The entity whose financial statements are subject to audit by the audit firm.

Auditor

"Auditor” is used to refer to the person or persons conducting the audit, usually the engagement partner or other members of the engagement team, or, as applicable, the firm. Where an ISA (UK and Ireland) expressly intends that a requirement or responsibility be fulfilled by the engagement partner, the term “engagement partner" rather than “auditor” is used. “Engagement partner” and “firm” are to be read as referring to their public sector equivalents where relevant. 4

Auditor association with financial information

An auditor is associated with financial information when the auditor attaches a report to that information or consents to the use of the auditor's name in a professional connection.

Auditor's expert

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor's expert may be either an auditor's internal expert (who is a partner or staff, including temporary staff, of the auditor's firm or a network firm), or an auditor's external expert.

Auditor's point estimate or auditor's range

The amount, or range of amounts, respectively, derived from audit evidence for use in evaluating management's point estimate.

Auditor's range

(see Auditor's point estimate)

Business risk

A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity's ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies.

Chain of command

All persons who have a direct supervisory, management or other oversight responsibility over either any audit partner of the audit team or over the conduct of audit work in the audit firm. This includes all partners, principals and shareholders who may prepare, review or directly influence the performance appraisal of any audit partner of the audit team as a result of that partner's involvement with the audit engagement. It does not include any non-executive individuals on a supervisory or equivalent board.

Close family

A non-dependent parent, child or sibling.

Comparative financial statements

Comparative information where amounts and other disclosures for the prior period are included for comparison with the financial statements of the current period but, if audited, are referred to in the auditor's opinion. The level of information included in those comparative financial statements is comparable with that of the financial statements of the current period.

Comparative information

The amounts and disclosures included in the financial statements in respect of one or more prior periods in accordance with the applicable financial reporting framework.

Compilation engagement

An engagement in which accounting expertise, as opposed to auditing expertise, is used to collect, classify and summarize financial information.

Complementary user entity controls

Controls that the service organization assumes, in the design of its service, will be implemented by user entities, and which, if necessary to achieve control objectives, are identified in the description of its system.

Compliance framework

(see Applicable financial reporting framework and General purpose framework)

Component

An entity or business activity for which group or component management prepares financial information that should be included in the group financial statements.

Component auditor

An auditor who, at the request of the group engagement team, performs work on financial information related to a component for the group audit.

Component management

Management responsible for the preparation of the financial information of a component.

Component materiality

The materiality for a component determined by the group engagement team.

Computer-assisted audit techniques

Applications of auditing procedures using the computer as an audit tool (also known as CAATs).

Connected parties

An audited entity's connected parties are:

  1. its affiliates;
  2. key members of management (including but not limited to directors and those charged with governance) of the audited entity and its significant affiliates, individually or collectively; and
  3. any person or entity with an ability to influence (other than in the capacity of professional advisors), whether directly or indirectly, key members of management or those charged with governance of the audited entity and its significant affiliates, individually or collectively, in relation to their responsibility for or approach to any matter or judgment that is material to the entity's financial statements.

Contingent fee basis

Any arrangement made under which a fee is calculated on a pre-determined basis relating to the outcome or result of a transaction, or other event, or the result of the work performed. A fee that is established by a court or other public authority is not a contingent fee.

Control activities

Those policies and procedures that help ensure that management directives are carried out. Control activities are a component of internal control.

Control environment

Includes the governance and management functions and the attitudes, awareness and actions of those charged with governance and management concerning the entity's internal control and its importance in the entity. The control environment is a component of internal control.

Control risk

(see Risk of material misstatement)

Corporate governance

(see Governance)

Corresponding figures

Comparative information where amounts and other disclosures for the prior period are included as an integral part of the current period financial statements, and are intended to be read only in relation to the amounts and other disclosures relating to the current period (referred to as “current period figures"). The level of detail presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the current period figures.

Date of approval of the financial statements

The date on which all the statements that comprise the financial statements, including the related notes, have been prepared and those with the recognized authority have asserted that they have taken responsibility for those financial statements.

Date of report (in relation to ISQC (UK and Ireland) 1)

The date selected by the practitioner to date the report.

Date of the auditor's report

The date the auditor dates the report on the financial statements in accordance with ISA (UK and Ireland) 700 5.

Date of the financial statements

The date of the end of the latest period covered by the financial statements.

Date the financial statements are issued

The date that the auditor's report and audited financial statements are made available to third parties.

Deficiency in internal control

This exists when:

  1. A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the financial statements on a timely basis; or
  2. A control necessary to prevent, or detect and correct, misstatements in the financial statements on a timely basis is missing.

Detection risk

The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

Emphasis of Matter paragraph

A paragraph included in the auditor's report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements.

Engagement documentation

The record of work performed, results obtained, and conclusions the practitioner reached (terms such as “working papers” or “workpapers" are sometimes used).

Engagement letter

Written terms of an engagement in the form of a letter.

Engagement partner

The partner or other person in the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body. 6

Engagement quality control review

A process designed to provide an objective evaluation, on or before the date of the report, of the significant judgments the engagement team made and the conclusions it reached in formulating the report. The engagement quality control review process is for audits of financial statements of listed entities and those other engagements, if any, for which the firm has determined an engagement quality control review is required.

Engagement quality control reviewer

A partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, none of whom is part of the engagement team, with sufficient and appropriate experience and authority to objectively evaluate the significant judgments the engagement team made and the conclusions it reached in formulating the report.

Engagement team

All partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform procedures on the engagement. This excludes external experts engaged by the firm or a network firm. 7

For the purposes of APB Ethical Standards, engagement team comprises all persons who are directly involved in the acceptance and performance of a particular audit. This includes the audit team, professional personnel from other disciplines involved in the audit engagement and those who provide quality control (other than the engagement quality control reviewer) or direct oversight of the audit engagement, but it does not include any auditor's external experts contracted by the firm.

Entity in distress

An entity with actual or anticipated financial or operational difficulties that threaten the survival of that entity as a going concern.

Entity's risk assessment process

A component of internal control that is the entity's process for identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks, and the results thereof.

Error

An unintentional misstatement in financial statements, including the omission of an amount or a disclosure.

Estimation uncertainty

The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement.

Ethics Partner

The partner or other person in the audit firm having responsibility for the adequacy of the firm's policies and procedures relating to integrity, objectivity and independence, their compliance with APB Ethical Standards and the effectiveness of their communication to partners and staff within the firm and providing related guidance to individual partners.

Evaluate

Identify and analyze the relevant issues, including performing further procedures as necessary, to come to a specific conclusion on a matter. “Evaluation,” by convention, is used only in relation to a range of matters, including evidence, the results of procedures and the effectiveness of management's response to a risk. (also see Assess)

Exception

A response that indicates a difference between information requested to be confirmed, or contained in the entity's records, and information provided by the confirming party.

Experienced auditor

An individual (whether internal or external to the firm) who has practical audit experience, and a reasonable understanding of:

  1. Audit processes;
  2. ISAs (UK and Ireland) and applicable legal and regulatory requirements;
  3. The business environment in which the entity operates; and
  4. Auditing and financial reporting issues relevant to the entity's industry.

Expert

(see Auditor's expert and Management's expert)

Expertise

Skills, knowledge and experience in a particular field.

External confirmation

Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.

Fair presentation framework

(see Applicable financial reporting framework and General purpose framework)

Financial interest

An equity or other security, debenture, loan or other debt instrument of an entity, including rights and obligations to acquire such an interest and derivatives directly related to such an interest.

Financial statements

A structured representation of historical financial information, including related notes, intended to communicate an entity's economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The term “financial statements” ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework, but it can also refer to a single financial statement.

Firm

A sole practitioner, partnership or corporation or other entity of professional accountants.

For the purpose of APB Ethical Standards, audit firm includes network firms in the UK and Ireland which are controlled by the audit firm or its partners.

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).

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.

Fraud risk factors

Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud.

Fraudulent financial reporting

Involves intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive financial statement users.

General IT-controls

Policies and procedures that relate to many applications and support the effective functioning of application controls by helping to ensure the continued proper operation of information systems. General IT-controls commonly include controls over data center and network operations; system software acquisition, change and maintenance; access security; and application system acquisition, development, and maintenance.

General purpose financial statements

Financial statements prepared in accordance with a general purpose framework.

General purpose framework

A financial reporting framework designed to meet the common financial information needs of a wide range of users. The financial reporting framework may be a fair presentation framework or a compliance framework.

The term "fair presentation framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and:

  1. Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or
  2. Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances.

The term "compliance framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (a) or (b) above. 8

Governance

Describes the role of person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity.

Group

All the components whose financial information is included in the group financial statements. A group always has more than one component.

Group audit

The audit of group financial statements.

Group audit opinion

The audit opinion on the group financial statements.

Group engagement partner

The partner or other person in the firm who is responsible for the group audit engagement and its performance, and for the auditor's report on the group financial statements that is issued on behalf of the firm. Where joint auditors conduct the group audit, the joint engagement partners and their engagement teams collectively constitute the group engagement partner and the group engagement team.

Group engagement team

Partners, including the group engagement partner, and staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements.

Group financial statements

Financial statements that include the financial information of more than one component. The term “group financial statements” also refers to combined financial statements aggregating the financial information prepared by components that have no parent but are under common control.

Group management

Management responsible for the preparation of the group financial statements.

Group-wide controls

Controls designed, implemented and maintained by group management over group financial reporting.

Historical financial information

Information expressed in financial terms in relation to a particular entity, derived primarily from that entity's accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time in the past.

Immediate family

A spouse (or equivalent) or dependent.

Inconsistency

Other information that contradicts information contained in the audited financial statements. 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 statements.

Independence

APB Ethical Standard 1 defines independence as freedom from situations and relationships which make it probable that a reasonable and informed third party would conclude that objectivity either is impaired or could be impaired. Independence is related to and underpins objectivity. However, whereas objectivity is a personal behavioural characteristic concerning the auditor's state of mind, independence relates to the circumstances surrounding the audit, including the financial, employment, business and personal relationships between the auditor and the audited entity.

Information system relevant to financial reporting

A component of internal control that includes the financial reporting system, and consists of the procedures and records established to initiate, record, process and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities and equity.

Informed management

Member of management (or senior employee) of the audited entity who has the authority and capability to make independent management judgments and decisions in relation to non-audit services on the basis of information provided by the audit firm.

Inherent risk

(see Risk of material misstatement)

Initial audit engagement

An engagement in which either:

  1. The financial statements for the prior period were not audited; or
  2. The financial statements for the prior period were audited by a predecessor auditor.

Inquiry

Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or outside the entity.

Inspection (as an audit procedure)

Examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset.

Inspection (in relation to quality control)

In relation to completed engagements, procedures designed to provide evidence of compliance by engagement teams with the firm's quality control policies and procedures.

Interim financial information or statements

Financial information (which may be less than a complete set of financial statements as defined above) issued at interim dates (usually half-yearly or quarterly) in respect of a financial period.

Internal audit function

A function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entity's governance, risk management and internal control processes.

Internal auditors

Those individuals who perform the activities of the internal audit function. Internal auditors may belong to an internal audit department or equivalent function.

Internal control

The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. The term “controls" refers to any aspects of one or more of the components of internal control.

International Financial Reporting Standards

The International Financial Reporting Standards issued by the International Accounting Standards Board.

Investigate

Inquire into matters arising from other procedures to resolve them.

IT environment

The policies and procedures that the entity implements and the IT infrastructure (hardware, operating systems, etc.) and application software that it uses to support business operations and achieve business strategies.

Key management position

Any position at the audited entity which involves the responsibility for fundamental management decisions at the audited entity (e.g. as a CEO or CFO), including an ability to influence the accounting policies and the preparation of the financial statements of the audited entity. A key management position also arises where there are contractual and factual arrangements which in substance allow an individual to participate in exercising such a management function in a different way (e.g. via a consulting contract).

Key partner involved in the audit

A partner, or other person in the engagement team (other than the audit engagement partner or engagement quality control reviewer) who either:

  • is involved at the group level and is responsible for key decisions or judgments on significant matters or risk factors that relate to the audit of that audited entity, or
  • is primarily responsible for the audit of a ‘significant affiliate or division’ (see separate definition) of the audited entity.

Limited assurance engagement

(see Assurance engagement)

Listed entity

An entity whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body.

For the purpose of APB Ethical Standards, listed company includes any company in which the public can trade shares on the open market, such as those listed on the London Stock Exchange (including those admitted to trade on the Alternative Investments Market), PLUS Markets and the Irish Stock Exchange (including those admitted to trade on the Irish Enterprise Exchange).

Management

The person(s) with executive responsibility for the conduct of the entity's operations. For some entities in some jurisdictions, management includes some or all of those charged with governance, for example, executive members of a governance board, or an owner-manager.

In the UK and Ireland, management will not normally include non-executive directors.

Management bias

A lack of neutrality by management in the preparation of information.

Management's expert

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements.

Management's point estimate

The amount selected by management for recognition or disclosure in the financial statements as an accounting estimate.

Misappropriation of assets

Involves the theft of an entity's assets and is often perpetrated by employees in relatively small and immaterial amounts. However, it can also involve management who are usually more capable of disguising or concealing misappropriations in ways that are difficult to detect.

Misstatement

A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud. Where the auditor expresses an opinion on whether the financial statements are presented fairly, in all material respects, or give a true and fair view, misstatements also include those adjustments of amounts, classifications, presentation, or disclosures that, in the auditor's judgment, are necessary for the financial statements to be presented fairly, in all material respects, or to give a true and fair view.

Misstatement of fact

Other information that is unrelated to matters appearing in the audited financial statements that is incorrectly stated or presented. A material misstatement of fact may undermine the credibility of the document containing audited financial statements.

Modified opinion

A qualified opinion, an adverse opinion or a disclaimer of opinion.

Monitoring (in relation to quality control)

A process comprising an ongoing consideration and evaluation of the firm's system of quality control, including a periodic inspection of a selection of completed engagements, designed to provide the firm with reasonable assurance that its system of quality control is operating effectively.

Monitoring of controls

A process to assess the effectiveness of internal control performance over time. It includes assessing the design and operation of controls on a timely basis and taking necessary corrective actions modified for changes in conditions. Monitoring of controls is a component of internal control.

Negative confirmation request

A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request.

Network

A larger structure:

  1. That is aimed at cooperation, and
  2. That is clearly aimed at profit or cost-sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources.

Network firm

A firm or entity that belongs to a network.

For the purpose of APB Ethical Standards, a network firm is any entity which is part of a larger structure that is aimed at co-operation and which is:

  1. controlled by the audit firm; or
  2. under common control, ownership or management; or
  3. part of a larger structure that is clearly aimed at profit or cost sharing; or
  4. otherwise affiliated or associated with the audit firm through common quality control policies and procedures, common business strategy, the use of a common name or through the sharing of significant common professional resources.

Non-audit services

Any engagement in which an audit firm provides professional services to an audited entity, its affiliates or another entity in respect of the audited entity other than the audit of financial statements.

Non-compliance (in the context of ISA (UK and Ireland) 250) 9

Acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations. Such acts include transactions entered into by, or in the name of, the entity, or on its behalf, by those charged with governance, management or employees. Noncompliance does not include personal misconduct (unrelated to the business activities of the entity) by those charged with governance, management or employees of the entity.

Non-response

A failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered.

Non-sampling risk

The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

Observation

Consists of looking at a process or procedure being performed by others, for example, the auditor's observation of inventory counting by the entity's personnel, or of the performance of control activities.

Opening balances

Those account balances that exist at the beginning of the period. Opening balances are based upon the closing balances of the prior period and reflect the effects of transactions and events of prior periods and accounting policies applied in the prior period. Opening balances also include matters requiring disclosure that existed at the beginning of the period, such as contingencies and commitments.

Other information

Financial and non-financial information (other than the financial statements and the auditor's report thereon) which is included, either by law, regulation, or custom, in a document containing audited financial statements and the auditor's report thereon.

Other Matter paragraph

A paragraph included in the auditor's report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's judgment, is relevant to users' understanding of the audit, the auditor's responsibilities or the auditor's report.

Outcome of an accounting estimate

The actual monetary amount which results from the resolution of the underlying transaction(s), event(s) or condition(s) addressed by the accounting estimate.

Overall audit strategy

Sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan.

Partner

Any individual with authority to bind the firm with respect to the performance of a professional services engagement.

Performance materiality

The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures.

Person in a position to influence the conduct and outcome of the audit

This is:

  1. Any person who is directly involved in the audit (the engagement team), including:
    1. the audit partners, audit managers and audit staff (the audit team);
    2. professional personnel from other disciplines involved in the audit (for example, lawyers, actuaries, taxation specialists, IT specialists, treasury management specialists);
    3. those who provide quality control or direct oversight of the audit;
  2. Any person, who forms part of the chain of command for the audit within the audit firm;
  3. Any person within the audit firm who, due to any other circumstances, may be in a position to exert such influence.

Personnel

Partners and staff.

Pervasive

A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditor's judgment:

  1. Are not confined to specific elements, accounts or items of the financial statements;
  2. If so confined, represent or could represent a substantial proportion of the financial statements; or
  3. In relation to disclosures, are fundamental to users' understanding of the financial statements.

Population

The entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions.

Positive confirmation request

A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information.

Practitioner

A professional accountant in public practice.

Preconditions for an audit

The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise 10 on which an audit is conducted.

Predecessor auditor

The auditor from a different audit firm, who audited the financial statements of an entity in the prior period and who has been replaced by the current auditor.

Premise, relating to the responsibilities of management and, where appropriate, those charged with governance, on which an audit is conducted

That management and, where appropriate, those charged with governance have acknowledged and understand that they have the following responsibilities that are fundamental to the conduct of an audit in accordance with ISAs (UK and Ireland). That is, responsibility:

  1. For the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation;
  2. For such internal control as management and, where appropriate, those charged with governance determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and
  3. To provide the auditor with:
    1. Access to all information of which management and, where appropriate, those charged with governance are aware that is relevant to the preparation of the financial statements such as records, documentation and other matters;
    2. Additional information that the auditor may request from management and, where appropriate, those charged with governance for the purpose of the audit; and
    3. Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

In the case of a fair presentation framework, (a) above may be restated as "for the preparation and fair presentation of the financial statements in accordance with the financial reporting framework,” or “for the preparation of financial statements that give a true and fair view in accordance with the financial reporting framework."

The "premise, relating to the responsibilities of management and, where appropriate, those charged with governance, on which an audit is conducted” may also be referred to as the “premise."

Professional accountant

For the purpose of the ISAs (UK and Ireland) and APB Ethical Standards, Professional accountants are those persons who are members of a professional accountancy body, whether in public practice (including a sole practitioner, partnership or corporate body), industry, commerce, the public sector or education.

Professional accountant in public practice

A professional accountant, irrespective of functional classification (for example, audit, tax or consulting) in a firm that provides professional services. This term is also used to refer to a firm of professional accountants in public practice.

Professional judgment

The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.

Professional skepticism

An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.

Professional standards

International Standards on Auditing (ISAs) (UK and Ireland) and relevant ethical requirements.

In the UK and Ireland, professional standards in the context of ISQC (UK and Ireland) 1 are the APB Ethical and Engagement Standards as described in the Statement “The Auditing Practices Board – Scope and Authority of Pronouncements."

Projection

Prospective financial information prepared on the basis of:

  1. Hypothetical assumptions about future events and management actions which are not necessarily expected to take place, such as when some entities are in a startup phase or are considering a major change in the nature of operations; or
  2. A mixture of best-estimate and hypothetical assumptions.

Prospective financial information

Financial information based on assumptions about events that may occur in the future and possible actions by an entity. Prospective financial information can be in the form of a forecast, a projection or a combination of both. (see Forecast and Projection)

Public sector

National governments, regional (for example, state, provincial, territorial) governments, local (for example, city, town) governments and related governmental entities (for example, agencies, boards, commissions and enterprises).

Reasonable assurance (in the context of assurance engagements, including audit engagements, and quality control)

A high, but not absolute, level of assurance.

Reasonable assurance engagement

(see Assurance engagement)

Recalculation

Consists of checking the mathematical accuracy of documents or records.

A party that is either:

  1. A related party as defined in the applicable financial reporting framework; or
  2. Where the applicable financial reporting framework establishes minimal or no related party requirements:
    1. A person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity;
    2. Another entity over which the reporting entity has control or significant influence, directly or indirectly through one or more intermediaries; or
    3. Another entity that is under common control with the reporting entity through having:
      1. Common controlling ownership;
      2. Owners who are close family members; or
      3. Common key management.

However, entities that are under common control by a state (that is, a national, regional or local government) are not considered related unless they engage in significant transactions or share resources to a significant extent with one another.

In the UK and Ireland relevant definitions of “related party” are set out in the applicable financial reporting frameworks (for example, the definitions in International Accounting Standard 24, “Related Party Disclosures,” Financial Reporting Standard 8, “Related Party Disclosures” or the Financial Reporting Standard for Smaller Entities).

Comprise agreed-upon procedures and compilations.

Relevant ethical requirements

In the UK and Ireland the relevant ethical pronouncements with which the auditor complies are the APB's Ethical Standards for Auditors and the ethical pronouncements relating to the work of auditors issued by the auditor's relevant professional body - see the Statement “The Auditing Practices Board – Scope and Authority of Pronouncements”.

Reperformance

The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal controls.

Report on the description and design of controls at a service organization (referred to in ISA (UK and Ireland) 402 11 as a type 1 report)

A report that comprises:

  1. A description, prepared by management of the service organization, of the service organization's system, control objectives and related controls that have been designed and implemented as at a specified date; and
  2. A report by the service auditor with the objective of conveying reasonable assurance that includes the service auditor's opinion on the description of the service organization's system, control objectives and related controls and the suitability of the design of the controls to achieve the specified control objectives.

Report on the description, design, and operating effectiveness of controls at a service organization (referred to in ISA (UK and Ireland) 402 as a type 2 report)

A report that comprises:

  1. A description, prepared by management of the service organization, of the service organization's system, control objectives and related controls, their design and implementation as at a specified date or throughout a specified period and, in some cases, their operating effectiveness throughout a specified period; and
  2. A report by the service auditor with the objective of conveying reasonable assurance that includes:
    1. The service auditor's opinion on the description of the service organization's system, control objectives and related controls, the suitability of the design of the controls to achieve the specified control objectives, and the operating effectiveness of the controls; and
    2. A description of the service auditor's tests of the controls and the results thereof.

Review (in relation to quality control)

Appraising the quality of the work performed and conclusions reached by others.

Review engagement

The objective of a review engagement is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor's attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an applicable financial reporting framework.

Review procedures

The procedures deemed necessary to meet the objective of a review engagement, primarily inquiries of entity personnel and analytical procedures applied to financial data.

Risk assessment procedures

The audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels.

Risk of material misstatement

The risk that the financial statements are materially misstated prior to audit. This consists of two components, described as follows at the assertion level:

  1. Inherent risk—The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.
  2. Control risk—The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

Sampling

(see Audit sampling)

Sampling risk

The risk that the auditor's conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. Sampling risk can lead to two types of erroneous conclusions:

  1. In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a material misstatement does not exist when in fact it does. The auditor is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.
  2. In the case of a test of controls, that controls are less effective than they actually are, or in the case of a test of details, that a material misstatement exists when in fact it does. This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.

Sampling unit

The individual items constituting a population.

Scope of a review

The review procedures deemed necessary in the circumstances to achieve the objective of the review.

Service auditor

An auditor who, at the request of the service organization, provides an assurance report on the controls of a service organization.

Service organization

A third-party organization (or segment of a third-party organization) that provides services to user entities that are part of those entities' information systems relevant to financial reporting.

Service organization's system

The policies and procedures designed, implemented and maintained by the service organization to provide user entities with the services covered by the service auditor's report.

Significance

The relative importance of a matter, taken in context. The significance of a matter is judged by the practitioner in the context in which it is being considered. This might include, for example, the reasonable prospect of its changing or influencing the decisions of intended users of the practitioner's report; or, as an example, where the context is a judgment about whether to report a matter to those charged with governance, whether the matter would be regarded as important by them in relation to their duties. Significance can be considered in the context of quantitative and qualitative factors, such as relative magnitude, the nature and effect on the subject matter and the expressed interests of intended users or recipients.

Significant affiliate

For the purposes of the APB Ethical Standards, an affiliate identified by the group audit team (i) that is of individual financial significance to the group, or (ii) that, due to its specific nature or circumstances, is likely to include significant risks of material misstatement of the group financial statements.

Significant component

A component identified by the group engagement team (i) that is of individual financial significance to the group, or (ii) that, due to its specific nature or circumstances, is likely to include significant risks of material misstatement of the group financial statements.

Significant deficiency in internal control

A deficiency or combination of deficiencies in internal control that, in the auditor's professional judgment, is of sufficient importance to merit the attention of those charged with governance.

Significant risk

An identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration.

Smaller entity

An entity which typically possesses qualitative characteristics such as:

  1. Concentration of ownership and management in a small number of individuals (often a single individual – either a natural person or another enterprise that owns the entity provided the owner exhibits the relevant qualitative characteristics); and
  2. One or more of the following:
    1. Straightforward or uncomplicated transactions;
    2. Simple record-keeping;
    3. Few lines of business and few products within business lines;
    4. Few internal controls;
    5. Few levels of management with responsibility for a broad range of controls; or
    6. Few personnel, many having a wide range of duties.

These qualitative characteristics are not exhaustive, they are not exclusive to smaller entities, and smaller entities do not necessarily display all of these characteristics.

In the UK and Ireland, company law provides a lighter reporting regime for companies that are defined, by legislation, as small. A company qualifies as “small" if it meets particular thresholds in respect of turnover, balance sheet total/gross assets and number of employees and certain other criteria. The thresholds and other criteria are subject to change and reference to the relevant legislation should be made to determine what they are in respect of a particular accounting period.

For the purpose of APB Ethical Standards, a small entity is defined in “APB Ethical Standard – Provisions Available for Small Entities".

Special purpose financial statements

Financial statements prepared in accordance with a special purpose framework.

Special purpose framework

A financial reporting framework designed to meet the financial information needs of specific users. The financial reporting framework may be a fair presentation framework or a compliance framework. 12

Staff

Professionals, other than partners, including any experts the firm employs.

Statistical sampling

An approach to sampling that has the following characteristics:

  1. Random selection of the sample items; and
  2. The use of probability theory to evaluate sample results, including measurement of sampling risk.

A sampling approach that does not have characteristics (a) and (b) is considered non-statistical sampling.

Stratification

The process of dividing a population into sub-populations, each of which is a group of sampling units which have similar characteristics (often monetary value).

Subsequent events

Events occurring between the date of the financial statements and the date of the auditor's report, and facts that become known to the auditor after the date of the auditor's report.

Subservice organization

A service organization used by another service organization to perform some of the services provided to user entities that are part of those user entities' information systems relevant to financial reporting.

Substantive procedure

An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise:

  1. Tests of details (of classes of transactions, account balances, and disclosures); and
  2. Substantive analytical procedures.

Sufficiency (of audit evidence)

The measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditor's assessment of the risks of material misstatement and also by the quality of such audit evidence.

Suitably qualified external person

An individual outside the firm with the competence and capabilities to act as an engagement partner, for example a partner of another firm, or an employee (with appropriate experience) of either a professional accountancy body whose members may perform audits and reviews of historical financial information, or other assurance or related services engagements, or of an organization that provides relevant quality control services.

Supplementary information

Information that is presented together with the financial statements that is not required by the applicable financial reporting framework used to prepare the financial statements, normally presented in either supplementary schedules or as additional notes.

Test

The application of procedures to some or all items in a population.

Tests of controls

An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.

Those charged with governance

The person(s) or organization(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. For some entities in some jurisdictions, those charged with governance may include management personnel, for example, executive members of a governance board of a private or public sector entity, or an owner-manager. 13

In the UK and Ireland, those charged with governance include the directors (executive and non-executive) of a company and the members of an audit committee where one exists. For other types of entity it usually includes equivalent persons such as the partners, proprietors, committee of management or trustees.

Tolerable misstatement

A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population.

Tolerable rate of deviation

A rate of deviation from prescribed internal control procedures set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population.

Uncertainty

A matter whose outcome depends on future actions or events not under the direct control of the entity but that may affect the financial statements.

Uncorrected misstatements

Misstatements that the auditor has accumulated during the audit and that have not been corrected.

Unmodified opinion

The opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

User auditor

An auditor who audits and reports on the financial statements of a user entity.

User entity

An entity that uses a service organization and whose financial statements are being audited.

Walk-through test

Involves tracing a few transactions through the financial reporting system.

Written representation

A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations in this context do not include financial statements, the assertions therein, or supporting books and records.

Footnotes

  1. In the case of public sector engagements, the terms in this glossary should be read as referring to their public sector equivalents. Where accounting terms have not been defined in the pronouncements of the International Auditing and Assurance Standards Board, reference should be made to the Glossary of Terms published by the International Accounting Standards Board. ↩

  2. ISA (UK and Ireland) 540, "Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures." ↩

  3. Engagement circumstances include the terms of the engagement, including whether it is a reasonable assurance engagement or a limited assurance engagement, the characteristics of the subject matter, the criteria to be used, the needs of the intended users, relevant characteristics of the responsible party and its environment, and other matters, for example events, transactions, conditions and practices, that may have a significant effect on the engagement. ↩

  4. "Partner” and “firm” should be read as referring to their public sector equivalents where relevant. ↩

  5. ISA (UK and Ireland) 700, “The Independent Auditor's Report on Financial Statements.” ↩

  6. "Engagement partner," "partner," and "firm" should be read as referring to their public sector equivalents where relevant. ↩

  7. ISA (UK and Ireland) 620, “Using the Work of an Auditor's Expert," paragraph 6(a), defines the term "auditor's expert." ↩

  8. ISA (UK and Ireland) 200, "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing,” paragraph 13(a). ↩

  9. ISA (UK and Ireland) 250 Section A, “Consideration of Laws and Regulations in an Audit of Financial Statements," and ISA (UK and Ireland) 250 Section B, "The Auditor's Right and Duty to Report to Regulators in the Financial Sector.” ↩

  10. ISA (UK and Ireland) 200, paragraph 13. ↩

  11. ISA (UK and Ireland) 402, “Audit Considerations Relating to an Entity Using a Service Organization." ↩

  12. ISA (UK and Ireland) 200, paragraph 13(a). ↩

  13. For discussion of the diversity of governance structures, see paragraphs A1-A8 of ISA (UK and Ireland) 260, “Communication with Those Charged with Governance." ↩

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Name Glossary of terms audit and ethics 2014
Publication date 27 September 2023
Type Guidance
Format PDF, 281.9 KB
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