Audit Glossary: Comprehensive Terms Reference Guide
Published: April 11, 2026 | Category: Reference | Read Time: 10 minutes | Author: CORAA Team
How to Use This Glossary
This glossary defines 100+ audit terms commonly used in Indian audits. Use as reference during audit planning, execution, and reporting.
Sections:
- A-Z Terms (alphabetical)
- ISA Definitions
- Ind AS Concepts
- SQM1 & Quality Management
- Common Abbreviations
Audit Glossary: A-Z Terms
A
Acceptance & Continuance
The process by which audit firms evaluate whether to accept new clients or continue existing ones. Per SQM1, firms must assess client acceptability based on management integrity, independence conflicts, and fraud risk indicators. See also: Client Continuance Assessment.
Account-Level Materiality
Materiality threshold applied to individual balance sheet accounts. Calculated as: Overall Materiality ÷ Number of Accounts (typically 8). Example: Overall materiality ₹100 lakh ÷ 8 = ₹12.5 lakh account-level materiality.
Anomaly Detection
Automated process of identifying unusual patterns or outliers in data. In auditing, anomaly detection flags entries that deviate significantly from normal patterns (e.g., round numbers, unusual times, statistical outliers). Part of continuous audit procedures.
Analytical Procedures
Audit technique evaluating financial statement items by studying relationships between data. Example: Comparing current year rent expense to prior year ratio of rent/revenue. If significantly different, investigate.
Arm's Length
Business transaction priced as if between unrelated parties at market rates. Critical for related party transaction testing per Ind AS 24 and ISA 550. Non-arm's length transactions suggest potential abuse.
Attestation Engagement
Engagement where auditor provides opinion on subject matter (e.g., effectiveness of internal controls). Different from audit opinion on financial statements.
Audit Committee
For listed companies, independent committee that oversees financial reporting, internal controls, and audit. Must approve related party transactions and review EQCM findings per SQM1.
Audit Evidence
Information auditor obtains to support conclusions. Must be sufficient (adequate quantity) and appropriate (relevant quality). Examples: Confirmations, invoices, bank statements, management confirmations.
Audit Hypothesis
Proposed explanation for a financial statement assertion. Auditor designs procedures to test hypothesis. Example: "This revenue transaction is fictitious" (null hypothesis to be tested).
Audit Opinion
Auditor's professional judgment on whether financial statements are fairly stated. Options: Unmodified, Qualified, Disclaimer, Adverse (per ISA 700).
Audit Planning
Process of determining audit strategy and timing. Includes: Risk assessment, materiality calculation, resource allocation, audit procedures scheduling.
Audit Risk
Risk that auditor expresses inappropriate opinion when financial statements are materially misstated. Formula: Audit Risk = Inherent Risk × Control Risk × Detection Risk.
Audit Sample
Subset of transactions selected for testing. Under ISA 530 (Sampling), can be statistical or non-statistical. Alternative: 100% testing per ISA 530.
Audit Sampling
Statistical or non-statistical selection of items from population for testing. See also: Sampling Risk.
B
Bank Reconciliation
Process of reconciling company's GL cash balance to bank statement. Must be completed within 3 days of month-end per internal control best practices. Variance >₹5,000 typically triggers investigation.
Board Approval
Formal authorization from Board of Directors for material transactions (typically >₹1 crore for RP transactions per Companies Act 2013). Evidence: Board minutes with approval date and authorized person signature.
Burdens
Overhead costs allocated to audit engagement (e.g., partner time, office rent). Affects audit fee and profitability analysis.
C
Compensating Controls
Alternative control that reduces risk when primary control is ineffective. Example: If approval control fails, bank reconciliation catches unauthorized payments.
Competence
Team member's ability to perform audit work. Per SQM1 Quality Objective 1, all team members must have necessary training, experience, and continuing education (40 hours/year for partners).
Compliance Audit
Engagement to test whether entity complied with specified laws/regulations. Different from financial statement audit.
Continuous Audit
Year-round monitoring of business processes and controls (vs. traditional year-end audit). Detects issues in real-time. 40% more efficient than periodic audit (134 hours vs. 225 hours).
Continuous Monitoring
Real-time surveillance of controls using automated rules. Example: "Flag all payments >₹50 lakh without CFO approval." Rules deployed once; monitor continuously.
Control Deficiency
Weakness in internal control design or operation. If material, may require audit emphasis or qualified opinion. Per ISA 265, must communicate to management/audit committee.
Control Objective
Intended result of control. Example: "Ensure only authorized purchases are processed." Auditor tests control to verify objective is achieved.
Control Risk
Risk that internal controls will not prevent or detect material misstatement. Part of audit risk formula. Assessed in audit planning per ISA 315.
COSO Framework
Committee of Sponsoring Organizations framework for internal controls. Widely recognized in Indian audits. Defines 5 components: Governance, Risk Assessment, Control Activities, Information, Monitoring.
Critical Audit Matters (CAM)
For certain listed companies, auditor highlights significant matters in audit report. Separate from opinion on FS. Per ISA 701.
Cross-Functional Testing
Testing procedures that span multiple departments/systems. Example: Testing revenue end-to-end (sales → GL → AR → cash collection).
Cutoff Error
Transaction recorded in wrong accounting period. Example: Revenue on 12/31 but shipped 1/2. Classic audit risk area (ISA 330). Tested via cutoff procedures.
D
Detection Risk
Risk auditor's procedures fail to detect material misstatement. Only factor auditor can control. Inverse relationship: If inherent/control risk high, detection risk must be low (100% testing).
Deviation
Exception in sample testing when control was not performed. Example: Payment >₹50 lakh without CFO approval = deviation. Too many deviations = control unreliable.
Disclosure
Information presented in financial statement notes. Per Ind AS 24, all RP transactions must be disclosed. Per Ind AS 116, lease disclosures must include maturity analysis.
Discount Rate
Interest rate used to calculate present value of future cash flows. Critical for lease ROU calculation per Ind AS 116. Two sources: (1) Lessor's implicit rate; (2) Lessee's incremental borrowing rate.
Dual Transactions
Auditor tests both direction of transaction. Example: Testing "purchases include receipts" (completeness) AND "receipts include purchases" (accuracy). Reduces sampling risk.
E
EQCM (Engagement Quality Control Review)
Independent partner review of audit file before report signing. Mandatory per SQM1 (mandatory pre-completion). Reviews significant judgments, independence, disclosures. Pre-engagement in ISA 220 (optional, post-engagement).
Equity
Company's net assets (Assets - Liabilities). Includes retained earnings and issued capital.
Estimates
Management's judgment-based accounting amounts. Examples: Depreciation, provisions, bad debt allowance. Per ISA 540, auditor evaluates reasonableness of estimates.
F
Factual Misstatement
Error identified during audit testing. Example: Journal entry recorded twice = factual misstatement of ₹5 lakh. Auditor proposes adjustment.
Fraud
Intentional misrepresentation by management or employees. Per ISA 240, auditor must assess fraud risk and test fraud risk areas (revenue, cash, management override).
Fraud Risk Factors
Indicators suggesting fraud may be present. Examples: Weak internal controls, management override, pressure to meet targets. Per ISA 240 appendix.
G
GAAP (Generally Accepted Accounting Principles)
In India = Indian Accounting Standards (Ind AS). Alternative: IFRS. Auditor evaluates FS compliance with applicable GAAP.
General Ledger (GL)
Master accounting record of all transactions. Per ISA 330, GL testing is core substantive procedure. Modern audits: 100% GL testing via anomaly detection.
Going Concern
Assumption that company will continue operations for foreseeable future. Per ISA 570, auditor evaluates management's assessment. If concern exists, may require emphasis or qualified opinion.
Group Audit
Audit of consolidated financial statements with multiple entities. Per ISA 600, group auditor responsible for audit scope, risk assessment, and coordination.
H
Historical Misstatements
Errors from prior year audits. If pattern detected, may indicate systemic control weakness (per ISA 330).
I
Impairment
Permanent reduction in asset value. Example: Fixed asset impaired if fair value <carrying value. Per Ind AS 36, impairment must be tested. Auditor evaluates for reasonableness.
Inherent Risk
Risk that account contains material misstatement due to nature (independent of controls). Example: Revenue = high inherent risk (complex, estimates, fraud risk). Cash = medium inherent risk.
Independence
Fundamental requirement for auditors. Per ICAI Code of Ethics and ISA 200: Auditor must be independent in mind and appearance. Impairments = related parties, financial interests, long association.
Ind AS (Indian Accounting Standards)
India's GAAP framework. Key standards: Ind AS 1 (FS presentation), Ind AS 24 (RP), Ind AS 115 (Revenue), Ind AS 116 (Leases), Ind AS 37 (Provisions).
Information Systems
Company's accounting systems and data processing. Per ISA 315, auditor evaluates system controls and IT-related risks.
Inherent Risk Assessment
Auditor's evaluation of how likely inherent risk is present. Per ISA 315, assessed based on transaction complexity, judgment requirements, fraud risk.
Internal Control
Processes designed to provide reasonable assurance financial statements are fairly stated. Per COSO and ISA 315: Governance, Risk Assessment, Control Activities, Information, Monitoring.
ISA (International Standards on Auditing)
Global audit standards. Adopted by India via ICAI. Core ISAs: 200 (Overall Objectives), 315 (Risk Assessment), 330 (Responses to Risks), 550 (Related Parties), 570 (Going Concern).
J
Judgment
Auditor's professional evaluation of evidence. Per ISA 200, auditor applies professional judgment throughout audit. Significant judgments documented and reviewed per SQM1.
Journal Entry
Manual GL entry recording transaction. High-risk area (ISA 240). Monitoring rule: "JE >₹20 lakh requires approval."
K
Key Audit Matters (KAM)
Per ISA 701 (for certain audits), auditor communicates KAMs in audit report. Most challenging or significant audit areas. Same as CAM (Critical Audit Matters) in some contexts.
Key Management Personnel (KMP)
Directors, CFO, Audit Committee members. Per Ind AS 24 and ISA 550, KMP are related parties and require specific disclosure and testing.
KPI (Key Performance Indicator)
Financial or operational metric monitored by management. Auditor reviews KPIs for analytical procedures (e.g., margin %, ROA %, DSO days).
L
Lease (Ind AS 116)
Contract for use of asset. Under Ind AS 116: (1) Identified asset, (2) Right of control, (3) Consideration. If all 3 met: Capitalize as ROU asset + lease liability.
Ledger Testing
Audit procedure examining GL entries for accuracy, authorization, completeness. Modern approach: 100% GL scan via anomaly detection. Traditional: Sampling 2-5%.
Liability
Obligation to pay cash/transfer assets. Examples: Accounts payable, loans, lease liabilities, provisions.
M
Materiality
Threshold for audit procedures and conclusions. Per ISA 320: Information material if its omission/misstatement could influence user decisions. Formula: 0.5-5% Revenue OR 5-10% Net Income OR 1-5% Assets.
Materiality - Quantitative
Numeric threshold calculated as % of benchmark. Example: ₹100 lakh = overall materiality (0.5% × ₹20 crore revenue).
Materiality - Qualitative
Non-numeric considerations. Example: RP transaction at arm's length threshold (qualitatively important regardless of amount) due to NFRA focus.
Misstatement
Error or irregularity in FS. Types: Factual (identified errors), Likely (result of audit samples), Projected (extrapolated from samples).
Monitoring
Per SQM1 Quality Objective 5: Real-time quality monitoring of engagements. Issues escalated immediately. Monthly exception tracking. NOT post-engagement review (ISA 220 model).
N
NFRA (National Financial Reporting Authority)
India's regulator for audit quality. Conducts inspections; identifies audit deficiencies. Key areas: RP testing, lease identification, GL testing, disclosure completeness.
Null Hypothesis
Initial assumption in audit testing (e.g., "Revenue is accurate"). Auditor tests to reject or fail to reject hypothesis.
O
Objectives - Five Quality (SQM1)
Per SQM1: (1) Competence, (2) Independence & Integrity, (3) Engagement Performance, (4) Acceptance & Continuance, (5) Monitoring.
Occurrence
Financial statement assertion that recorded transactions actually occurred. Example: Revenue transaction occurred (vs. fictitious). Per ISA 330, auditor tests occurrence.
P
Performance Materiality
Threshold set lower than overall materiality for audit procedures. Example: Overall materiality ₹100 lakh; Performance materiality ₹70 lakh (70% of overall). Provides cushion for undetected errors.
Period-End Cutoff
Critical audit area. Transactions must be recorded in correct accounting period. Example: Revenue on 12/31 included; revenue on 1/2 excluded. Per ISA 330.
Physical Observation
Audit procedure where auditor observes activity. Example: Inventory count observation; fixed asset verification.
Preliminary Analytical Procedures
Analytical procedures performed during audit planning to understand entity and identify potential risks. Per ISA 315.
Procedures of Further Substantive Nature
Testing procedures performed near balance sheet date to gather audit evidence. Examples: Confirmations, GL testing, substantive sampling.
Professional Skepticism
Per SQM1: Questioning mindset when evaluating evidence. Auditor doesn't assume good faith; challenges assertions; seeks corroborating evidence.
Projection of Results
Extrapolation of sample results to population. Example: If 2% error rate in 5% sample, project 2% error to entire population. Sampling risk inherent.
Provisions (Ind AS 37)
Liabilities for uncertain obligations. Examples: Warranty provisions, litigation provisions. Per Ind AS 37 and ISA 330, auditor evaluates for reasonableness.
Publicly Available Information
Information obtained from public sources (e.g., GL analysis, company website, regulatory filings). Per ISA 330, can substitute for confirmations in some cases.
Q
Quality Control
Firm-level procedures to ensure audit quality. Per SQM1 (mandatory July 1, 2026), replaced ISA 220. Includes: EQCM, monitoring, training, independence checks.
Quality Objectives
Five overarching goals per SQM1. See: Objectives - Five Quality.
R
Related Party (RP)
Per Ind AS 24 and ISA 550: (1) KMP, (2) Family of KMP, (3) Entities with common control. All RP transactions must be tested for arm's length and fully disclosed.
Related Party Transaction
Business transaction between company and RP. Examples: Sale to director's company, rent from director's family, loan to management. Must be at arm's length per Ind AS 24.
Reliance on Internal Auditors
In some audits, external auditor may rely on internal audit findings. Per ISA 610, external auditor evaluates internal audit competence and objectivity.
Relevant Assertion
Specific FS assertion being tested. Example: "Receivables existence" for AR confirmations. Per ISA 330, auditor identifies assertions and designs procedures.
Rent-Seeking
Fraudulent arrangement where benefits flow to management/directors unfairly. Example: Company purchases from director's company at premium price. Test for arm's length.
Revenue Recognition (Ind AS 115)
Accounting for revenue from contracts with customers. Per Ind AS 115: Recognize when control of goods/services transfers to customer. Complex area requiring significant audit procedures.
Risk Assessment Procedures
Auditor's procedures to understand entity, environment, and assess risks. Per ISA 315: Inquiries, observations, review of prior year audit files, analytical procedures.
Risk of Material Misstatement (RMM)
Per ISA 330: Combination of inherent risk and control risk. Auditor assesses RMM to determine detection risk (inverse relationship).
ROU Asset (Right-of-Use)
Per Ind AS 116: Asset recognized on balance sheet for lease rights. Formula: PV of lease payments + Initial direct costs. Depreciated over lease term.
S
Sampling Risk
Inherent risk in sample-based testing that sample doesn't represent population. Example: 2% error in sample could mean 20% error in population. Per ISA 530, 100% testing eliminates sampling risk.
Segment Reporting
Financial information by business segment. Per Ind AS 108, listed companies must provide segment data. Auditor evaluates reasonableness of segment allocation.
Significant Risk
Risk assessed as higher than inherability risk (i.e., requires enhanced procedures). Examples: Revenue recognition, management override, related party transactions. Per ISA 330.
Significant Judgment
Auditor's decision on complex/uncertain matter. Examples: Revenue cutoff (when control transfers?), lease term (will renewal be exercised?). Per SQM1, EQCM reviews significant judgments.
SOD (Segregation of Duties)
Internal control requiring different people for authorization, recording, and reconciliation. Example: One person records payment, different person approves. Per ISA 315.
Substantive Procedure
Audit procedure testing for misstatements in FS. Types: Substantive analytical procedures, tests of details. Per ISA 330: Auditor performs substantive procedures for all significant accounts.
SQM1 (Service Quality Management 1)
ICAI's mandatory quality management standard effective July 1, 2026. Replaces ISA 220. Applies to all services (audits, reviews, compilations, agreed-upon procedures).
T
Tests of Control
Procedures testing whether control operated effectively. Example: Sample 30 payments >₹50 lakh; verify CFO approval documented. Per ISA 330.
Tests of Details
Substantive procedures examining specific GL entries or account balances. Example: Confirm 100% of receivables >₹50 lakh; 20% of remainder.
Timing Difference
Outstanding items in bank reconciliation (e.g., checks issued but not cleared). Not an error; timing issue. Example: Check written 12/31 cleared 1/2.
Trail Balance
List of GL accounts and balances. Auditor traces FS balances back to trial balance; trial balance back to GL.
Transaction Cutoff
Critical audit area. Transactions recorded in correct period. Per ISA 330: "Revenue >10% above customer average flagged for cutoff review."
U
Unmodified Audit Opinion
Auditor's conclusion that FS fairly present financial position, performance, cash flows in all material respects. Standard clean opinion per ISA 700.
Unusual Transaction
Transaction outside normal business pattern. Example: Round number payment, weekend entry, post-close entry. Flagged per continuous audit rules.
V
Valuation
Accounting process determining fair value of asset/liability. Audit area: Estimating provisions (Ind AS 37), lease ROU (Ind AS 116), impairments (Ind AS 36).
Verification Procedures
Procedures confirming accuracy of recorded amounts. Examples: Confirmation process, inspection, recalculation. Per ISA 330.
W
Walkthrough
Tracing transaction from origination through GL to financial statements. Example: Sales walkthrough = order → shipment → invoice → GL → AR. Tests system design per ISA 315.
Working Paper
Documentation of audit procedure and results. Per SQM1: Must show objective, procedure, results, conclusion. Indexed and cross-referenced.
Y
Year-End Audit
Traditional periodic audit performed at balance sheet date. Tests point-in-time FS. Alternative: Continuous audit throughout year.
Common Abbreviations
AR - Accounts Receivable
AP - Accounts Payable
COSO - Committee of Sponsoring Organizations
DSO - Days Sales Outstanding
EQCM - Engagement Quality Control Review
FS - Financial Statements
GAAP - Generally Accepted Accounting Principles (Ind AS in India)
GL - General Ledger
ICAI - Institute of Chartered Accountants of India
Ind AS - Indian Accounting Standards
ISA - International Standards on Auditing
IT - Information Technology
KMP - Key Management Personnel
NFRA - National Financial Reporting Authority
RP - Related Party
ROU - Right-of-Use
SOD - Segregation of Duties
SQM1 - Service Quality Management 1
VC - Venture Capital
VC - Vertical Contracts
Related Resources
- Audit Risk Scorer: Assessment Framework
- ISA 220 vs. SQM1: Transition Guide
- Audit Checklist Generator: Engagement Customization
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