CHAPTER 16 ∙ Advanced Topics Concerning Complex Auditing Judgments

Assurance activity
Objective professional services that improve the quality of information
about processes; effectiveness of controls; reliability of information; or
compliance with company, regulatory, or governmental procedures;
and the effectiveness and efficiency with which the organization carries
out its operations.
Consulting activity
Advisory or partnering activity that adds value and improve an
organization’s operations, in which the nature and scope of services
are agreed upon with the client. Examples include counsel, advice,
facilitation, process design, and training.
Dual approach
A method of misstatement correction that requires use of both the iron
curtain and rollover methods to determine whether a misstatement is
Fair value estimate
The price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date.
Financial instruments
A broad class of instruments—usually debt securities, but also equity
or hedges—that represents financial agreements between a party
(usually an issuer) and a counterparty (usually an investor) based on
either underlying assets or agreements to incur financial obligations or
make payments; instruments range in complexity from a simple bond
to complicated agreements containing puts or options.
The excess of the purchase price over the FMV of the acquired
company’s tangible assets, identifiable intangible assets, and liabilities.
Goodwill impairment
The decrease in the value of goodwill. Measured by comparing the fair
value of the reporting entity with the carrying value of entity. If fair
value is less than carrying value (including goodwill), the presumption
is that goodwill has been impaired. Goodwill should be written down to
an amount that would cause fair value to be no more than carrying
This occurs when events or changed circumstances cause the
estimated future cash flows (future benefits) of an asset to fall below
the asset’s book value.
Iron curtain method

other than pensions. Summary of unadjusted audit differences A summary of uncorrected errors that is communicated to the audit committee. Other postemployment benefits All postretirement benefits. authority. Must be identified and measured by the company.CHAPTER 16 ∙ Advanced Topics Concerning Complex Auditing Judgments 34 A method of misstatement correction that focuses on assuring that the year-end balance sheet is correct. Reporting unit For accounting purposes. The accounting treatment is conceptually the same as pensions. and responsibilities of the internal audit function within the organization. and whose results are reviewed regularly for purposes of performance assessment and resource allocation. Rollover method A method of misstatement correction that focuses on the materiality of the current-year misstatements and the reversing effect of prior-year misstatements on the income statement. that has discrete financial information. Internal audit charter A formal. thereby allowing misstatements to accumulate on the balance sheet. written document that defines the purpose. it is the acquired segment or operating segment to which the goodwill from the acquisition is assigned. is described in the management representation letter. Operating segment A component of an organization that is a profit center. and that is evaluated individually and in the aggregate for determining whether the financial statements are materially correct. Tests for goodwill impairment Are performed at the reporting unit level. this method does not consider the impact of prior-year uncorrected misstatements reversing in later years. .