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CHAPTER 14 Activities Required in Completing a Quality Audit

Altman Z-score
A series of ratios that have predictive power in indicating the likelihood
of bankruptcy. This score is named for the person that first introduced
the concept and associated measurement.
Client acceptance decision
The process by which a new client is evaluated by the audit firm and
individual engagement partner prior to being accepted into the audit
firms portfolio of clients.
Client continuance decision
The process by which existing clients for which the audit firm provided
services in the preceding period are evaluated by the audit firm and
individual engagement partner at the completion of the audit to
determine whether the audit firm should continue to provide services
again in the next period.
Concurring partner review
See engagement quality review.
Cooling off period
The number of years after which the individual auditor or audit firm
may resume its prior role with the audit client.
Engagement quality review
A review at the end of each audit conducted by an experienced
auditor, usually a partner, who was not a part of the audit team, but
who has appropriate competence, independence, integrity, and
objectivity. The purposes are to help make sure that the audit and audit
documentation are complete and support the audit opinion on the
financial statements and, for public companies, on the clients internal
Factual misstatement
See known misstatement; misstatements about which there is no
Judgmental misstatement
A misstatement that arises from differences in judgments of
management concerning accounting estimates that the auditor
considers unreasonable, or the selection or application of accounting
policies that the auditor considers inappropriate.
Known misstatement
A misstatement that has been specifically identified;
misstatements are also referred to as factual misstatements.
Letter of audit inquiry


CHAPTER 14 Activities Required in Completing a Quality Audit

A letter that the auditor asks the client to send to its legal counsel to
gather corroborative evidence concerning litigation, claims, and

Management letter
A letter from the auditor to the client identifying any problems and
suggested solutions that may help management improve its
effectiveness or efficiency.
Management representation letter
A letter to the auditors that the clients chief executive and chief
financial officers are required to sign that specifies managements
responsibility for the financial statements and confirms oral responses
given to the auditor during the audit.
This involves acts of omission or commission by the entity, either
intentional or unintentional, which are contrary to the prevailing laws
or regulations.
Omitted procedures
After the audit report has been issued, the auditor may discover that
an important audit procedure was not performed; these are called
omitted procedures.
Projected misstatement
A misstatement that is the auditors best estimate of the misstatement
in a given population, and that is a projection ofthe misstatement
identified in an audit sample to the entire population from which the
sample was drawn.
Reasonable period of time
A period of time not to exceed one year beyond the date of the
financial statements being audited.
Report release date
The date the auditor grants the entity permission to use the auditors
report in connection with the financial statements.
Subsequent events
Events occurring between the date of the financial statements and the
date of the auditors report.
Subsequent events review
A review of events occurring in the period between the balance sheet
date and the audit report date to determine their possible effect on the
financial statements.

CHAPTER 14 Activities Required in Completing a Quality Audit

Type I subsequent events
Events that existed at the balance sheet date.
Type II subsequent events
Events that did not exist at the balance sheet date, but that may
require disclosure.