Combined report on Financial Statements and Internal Control Over Financial reporting

- Audit report on the financial statements and the effectiveness of internal control over
financial reporting required for larger public companies under Section 404 of the
Sarbanes-Oxley Act.
Unmodified opinion audit report with emphasis-of-matter paragraph or nonstandard
report wording
- An unmodified opinion audit report in which the financial statements are fairly
presented, but the auditor believes it is important, or is required, to provide additional
information or the wording of other paragraphs of the report require revision.
Qualified Opinion
- A report issued when the auditor believes that the overall financial statements are
fairly stated but that either the scope of the audit was limited or the financial data
indicated a failure to follow GAAP.
Adverse Opinion
- A report issued when the auditor believes the financial statements are so materially
misstated or misleading as a whole that they do not present fairly the entity's financial
position or the results of its operations and cash flows in conformity with GAAP.
Disclaimer of Opinion
- A report issued when the auditor is not able to become satisfied that the overall
financial statements are fairly presented or the auditor is not independent.
Ethical Dilemma
- A situation in which a decision must be made about the appropriate behavior.
Independence of Mind (Fact)
- The auditor's state of mind that enables an unbiased viewpoint in the performance of
professional services; also described as "independdent in fact"
Independence in Appearance
- The auditor's ability to maintain an unbiased viewpoint in the eyes of others.
Independence Rule
- A member in public practice shall be independent in the performance of professional
services as required by standards promulgated by bodies designated by Council.
Direct Financial Interest
- The ownership of stock or other equity shares by members or their immediate family.
Indirect Financial Interest
- A close, but not direct, ownership relationship between the auditor and the client; an
example is the ownership of stock by a member's grandparent.
Audit Committee
- Selected members of client's board of directors whose responsibilities include helping
auditor to remain independent of management.
Integrity and Objectivity Rule
- In the performance of any professional service, a member shall maintain objectivity
and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent
facts or subordinate his or her judgment to others.
Confidential Client Information
- Client information that may not be disclosed without the specific consent of the client
except under authoritative professional or legal investigation.
Privileged Information
- Client information that the professional cannot be legally required to provide;
information that an accountant obtains from a client is confidential but not privileged.
Business Failure
- The situation when a business is unable to repay its lenders or meet the expectations
of its investors because of economic or business conditions.
Audit Failure
- A situation in which the auditor issues an incorrect audit opinion as the result of an
underlying failure to comply with the requirements of auditing standards.
Audit Risk
- The risk that the auditor will conclude after conducting an adequate audit that the
financial statements are fairly stated and an unmodified opinion can therefore be issued
when, in fact, they are materially misstated.
Prudent Person Concept
- the legal concept that a person has a duty to exercise reasonable care and diligence in
the performance of obligations to another
Legal Liability
- The professional's obligation under the law to provide a reasonable level of care while
performing work for those served.
Lack of Duty to Perform
- An auditor's legal defense under which the auditor claims that no contract existed with
the client; therefore, no duty existed to perform the disputed service.
Nonnegligent Performance
- An auditor's legal defense under which the auditor claims that the audit was performed
in accordance with auditing standards.
Contributory Negligence
- An auditor's legal defense under which the auditor claims that the client failed to
perform certain obligations and that it is the client's failure to perform those obligations
that brought about the claimed damages.
Absence of Causal Connection
- An auditor's legal defense under which the auditor contends that the damages claimed
by the client were not brought about by any act of the auditor.
Ultramares Doctrine
- A common-law approach to third-party liability, established in 1931 in the case of
ULTRAMARES CORPORATION V. TOUCHE, in which ordinary negligence is
insufficient for liability to third parties because of the lack of privity of contract between
the third party and the auditor, unless the third party is a primary beneficiary.
Foreseen Users
- Members of a limited class of users who the auditor is aware will rely on the financial
statements.
Foreseeable Users
- An unlimited class of users that the auditor should have reasonably been able to
foresee as being likely users of financial statements.
Securities Act of 1933
- A federal statute dealing with companies that register and sell securities to the public;
under the statute, third parties who are original purchasers of securities may recover
damages from teh auditor if the financial statements are misstaetd, unless the auditor
proves that the audit was adequate or that the third party's loss was caused by factors
other than misleading financial statements.
Securities Exchange Act of 1934
- A federal statute dealing with companies that trade securities on national and over-the-
counter exchanges; auditors are involved because the annual reporting requirements
include audited financial statements.
Scienter
- Commission of an act with knowledge or intent to deceive.
Foreign Corrupt Practices Act of 1977
- A federal statute that makes it illegal to offer a bribe to an official of a foreign country
for the purpose of exerting influence and obtaining or retaining business and that
requires U.S. companies to maintain reasonably complete and accurate records and an
adequate system of internal control.
Criminal Liability for Accountants
- Defrauding a person through knowing involvement with false financial statements.
Private Securities Litigation Reform Act of 1995
- A federal law passed in 1995 that significantly reduced potential damages in
securities-related litigation.
Negligence
- Failure to exercise a degree of care that ordinary PRUDENT PERSON would exercise
under similar circumstances.(follow GAAS)
Gross Negligence
- Lack of even slight care - RECKLESS DISREGARD for truth and professional
responsibilities.
Constructive Fraud
- Extreme or unusual negligence even though no intent to deceive.
Fraud
- Misrepresentation of material fact, known to be untrue with INTENTION OF DECEIT,
another party was injured based upon reliance.
Privity
- Individual or entity in which an auditor is IN CONTRACT (client and parties explicitly
identified in engagement letter)
Third Party Beneficiary
- Party OUTSIDE contracting party benefiting under contract (bank getting report)
Engagement Letter
- CONTRACT communicating relationship and services, time frames, fees,
responsibilities, etc. Establishes what the firm has a duty to perform (best defense)
Proximate Cause
- The REASON a loss was incurred.
Comparative Negligence
- ALLOCATE DAMAGES between contributory parties.
Common Law
- Unwritten based on HISTORICAL COURT DECISIONS. (Society's concept of fairness)
Statutory Law
- Adopted by GOVERNMENT (States/Congress)
Joint & Several Liability
- Assessment of full loss regardless of share of wrongdoing (deep pocket liability)
Separate & Proportionate Liability
- Assessment of portion of loss caused.