CPA Exam glossary

Long-term capital gains and qualified dividends are taxed at 0% to the extent they fall within the lowest bracket, taxable income up to $48,350 for single filers and $96,700 for joint filers in 2025.

S corporation shareholders who own more than 2% of the stock are treated like partners for fringe benefits, so many benefits that are tax-free to employees are taxable to them.

Since 2024, the beneficiary of a section 529 plan open for at least 15 years can roll up to $35,000 over their lifetime into their own Roth individual retirement account (IRA), tax- and penalty-free.

An Achieving a Better Life Experience (ABLE) account is a tax-advantaged savings account for a person whose disability began before age 26. Earnings are tax-free when used for qualified disability expenses.

An accord is an agreement to accept a different performance, often a smaller payment, in settlement of a disputed claim. Its performance (the satisfaction) discharges the original obligation.

Accounts payable turnover is purchases (or cost of goods sold) divided by average accounts payable. Dividing 365 by it gives days payables outstanding, the average time taken to pay suppliers.

Accrual basis accounting records revenues when they are earned and expenses when they are incurred, regardless of when cash is received or paid. US Generally Accepted Accounting Principles (GAAP) require it.

The accumulated adjustments account (AAA) tracks an S corporation's income that has been taxed to shareholders but not yet distributed. It decides how distributions are taxed when the corporation still has earnings and profits from its C corporation years.

The accumulated benefit obligation is the actuarial present value of pension benefits earned to date, based on employees' current salary levels.

The accumulated earnings tax is a 20% penalty tax on a C corporation's earnings retained beyond the reasonable needs of the business, to avoid shareholder-level tax on dividends.

The accuracy-related penalty is 20% of an underpayment of tax caused by negligence, a substantial understatement of income tax or a substantial valuation misstatement. It rises to 40% for gross valuation misstatements.

The acquisition method is how all business combinations are accounted for: identify the acquirer, set the acquisition date, measure the identifiable assets acquired, liabilities assumed and any noncontrolling interest at fair value, and recognize goodwill or a bargain purchase gain.

The American Institute of Certified Public Accountants' Code of Professional Conduct forbids members from committing acts discreditable to the profession, such as keeping client records after the client asks for them.

Adjusted basis is a property's original basis (usually cost) increased by capital improvements and reduced by depreciation, casualty losses and other recoveries of capital. Gain or loss on sale is the amount realized minus adjusted basis.

Adjusted gross income (AGI) is an individual's gross income minus specific 'above-the-line' adjustments, such as deductible individual retirement account contributions, student loan interest and half of self-employment tax.

The adoption credit covers qualified adoption expenses up to a per-child limit ($17,280 for 2025). Under the One Big Beautiful Bill Act, up to $5,000 of it is refundable starting in 2025.

An adverse opinion states that the financial statements are not presented fairly. It is expressed when misstatements are both material and pervasive.

When a not-for-profit receives assets as an agent, trustee or intermediary to pass on to a beneficiary specified by the donor, with little discretion, it records a liability to the beneficiary rather than contribution revenue.

Agile development builds software in short cycles (sprints) that each deliver working features, with continuous feedback from users. The traditional waterfall approach completes each phase in sequence before starting the next.

An aging schedule groups accounts receivable by how long they have been outstanding and applies a higher expected loss rate to older groups. The total is the required ending balance of the allowance for credit losses.

In an agreed-upon procedures engagement, a practitioner performs specific procedures agreed with the engaging party and reports the findings, without expressing an opinion or conclusion.

An alert in the report restricts its use to specified parties, typically when the subject matter is based on criteria suitable only for certain users, such as a contractual or regulatory basis of accounting, or for communications about internal control deficiencies.

Alimony is a payment to a spouse or former spouse under a divorce or separation agreement. For agreements made after 2018, alimony is neither deductible by the payer nor taxable to the recipient.

An accrual-method taxpayer deducts an expense when all events have occurred that fix the liability, the amount can be determined with reasonable accuracy, and economic performance has occurred.

The allowance for sampling risk is the margin added to a sample result to reflect the chance that the sample isn't representative of the population, such as the gap between the sample deviation rate and the upper deviation limit.

The allowance method estimates uncollectible receivables at each reporting date and records them in a contra-asset account (the allowance for doubtful accounts), so receivables are shown at the amount expected to be collected.

An executor can elect to value a decedent's gross estate as of 6 months after the date of death instead of the date of death, but only if the election reduces both the gross estate and the estate tax.

The alternative minimum tax (AMT) is a parallel tax system that recalculates income with fewer deductions and preferences. A taxpayer pays the AMT if the tentative minimum tax is higher than regular tax.

The American Opportunity Tax Credit is a credit of up to $2,500 per eligible student for qualified expenses in the first four years of postsecondary education: 100% of the first $2,000 and 25% of the next $2,000.

Not-for-profits must present an analysis of expenses showing both their function (program services, management and general, fundraising) and their nature (such as salaries, rent and depreciation), in one place.

Analytical procedures evaluate financial information by analyzing plausible relationships among financial and nonfinancial data, and investigate fluctuations that are inconsistent with other information or differ from expected values.

The annual comprehensive financial report is a government's full annual report, with an introductory section, a financial section containing the auditor's report, management's discussion and analysis and the basic financial statements, and a statistical section.

Anonymization changes personal data so it can no longer be linked to an individual by any reasonable means. Pseudonymization replaces identifiers with codes, but the data can still be re-identified using separately held information.

Anticipatory repudiation occurs when one party clearly indicates, before performance is due, that it won't perform. The other party can treat it as a breach immediately and sue, or wait for performance.

A potential common share is antidilutive if including it would increase earnings per share or reduce loss per share. Antidilutive securities are left out of diluted earnings per share.

Apparent authority exists when a principal's words or conduct lead a third party to reasonably believe that an agent has authority to act, even though the agent has no actual authority.

Application controls are controls within a particular application that relate to how individual transactions are processed, such as input edit checks, matching and batch totals, and that help ensure transactions are complete, accurate and valid.

An organization seeking charitable (section 501(c)(3)) status generally applies on Form 1023. Filing within 27 months of formation makes the exemption effective from the date it was formed.

An application programming interface (API) is a defined way for one software system to request data or services from another, such as a bank feed sending transactions to accounting software.

Apportionment divides a multistate business's income among the states where it has nexus, using a formula based on factors such as property, payroll and sales in each state.

An appropriation of retained earnings is a board action that sets aside part of retained earnings for a specific purpose, such as a plant expansion, to show that it isn't available for dividends.

Assertions are management's implicit or explicit representations about the recognition, measurement, presentation and disclosure of items in the financial statements. Auditors use them to consider the types of misstatement that could occur.

Buying a group of assets that isn't a business is an asset acquisition. The cost, including transaction costs, is allocated to the assets based on their relative fair values, and no goodwill is recognized.

An asset retirement obligation (ARO) is a legal obligation to retire a long-lived asset, such as dismantling an oil platform or restoring a mine site. It is recognized at fair value when incurred and added to the asset's carrying amount.

Buyers of a business usually prefer to buy its assets, for a stepped-up basis to depreciate and to avoid hidden liabilities. Sellers of a C corporation usually prefer to sell stock, to avoid a corporate-level tax and get capital gain.

An assignment transfers a party's rights under a contract; a delegation transfers its duties. Both are generally allowed unless the contract prohibits them, the duty involves personal services, or the change would materially alter the other party's position.

An assurance-type warranty only promises that a product works as agreed, and its expected cost is accrued as a liability. A service-type warranty gives an extra service, such as an extended warranty, and is a separate performance obligation.

Asymmetric encryption uses a pair of mathematically related keys: a public key that anyone can have and a private key that only its owner holds. Data encrypted with one key can only be decrypted with the other.

The at-risk rules limit a taxpayer's deductible losses from an activity to the amount the taxpayer could actually lose: generally cash and property contributed plus debt for which the taxpayer is personally liable.

A security interest attaches, becoming enforceable against the debtor, when the creditor gives value, the debtor has rights in the collateral, and there is a security agreement signed or authenticated by the debtor describing the collateral (or the creditor takes possession).

Attribute sampling is a statistical method that estimates the rate of occurrence of a characteristic in a population, used mainly in tests of controls to estimate the rate of deviation from a control.

The audit committee is a committee of the board of directors that oversees financial reporting, internal control and the external audit. In public companies it must consist of independent directors and is directly responsible for appointing and overseeing the auditor.

Audit data analytics is the analysis of patterns, anomalies and other information in the data behind an audit area, using modeling and visualization, to plan or perform the audit.

Audit documentation is the record of the procedures performed, the evidence obtained and the conclusions reached, detailed enough for an experienced auditor with no connection to the audit to understand it.

An auditor can be engaged to audit a single financial statement, such as a balance sheet, or a specific element, account or item, such as a schedule of royalties, and report on it.

Securities and Exchange Commission rules require the lead and concurring partners on a public company audit to rotate off after 5 years and stay off for 5 years.

The audit plan is more detailed than the overall audit strategy. It sets out the nature, timing and extent of the risk assessment procedures, the further audit procedures at the assertion level, and other planned procedures.

The auditor's report is dated no earlier than the date the auditor has obtained sufficient appropriate evidence, including evidence that the full statements and disclosures have been prepared and that management has taken responsibility for them.

Audit risk is the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated. It depends on the risk of material misstatement (inherent and control risk) and detection risk.

An audit trail is a chronological record of system activity, showing who did what and when, that lets transactions be traced from their source to the financial reports and back.

When auditing an accounting estimate, the auditor evaluates whether management's estimate and related disclosures are reasonable, considering estimation uncertainty, complexity, subjectivity and the risk of management bias.

An auditor's report on a public company under Public Company Accounting Oversight Board (PCAOB) standards states the year the firm began serving consecutively as the company's auditor.

To evaluate management's accounting estimate, the auditor can develop an independent point estimate or a range of reasonable amounts, narrowing the range to amounts supported by the audit evidence.

The auditor's responsibilities section of the report explains that the auditor's objective is reasonable assurance, describes the use of professional judgment and skepticism, and summarizes the work on risks, internal control, accounting estimates and going concern.

An auditor's specialist is a person or firm with expertise in a field other than accounting or auditing, such as an actuary or a valuation expert, whose work the auditor uses to obtain audit evidence. The specialist may be inside or outside the audit firm.

Authentication factors are categories of proof of identity: something you know (a password), something you have (a phone or token) and something you are (a fingerprint or face).

Filing a bankruptcy petition automatically stops most collection actions against the debtor and the debtor's property, including lawsuits, foreclosures, repossessions and collection calls.

Available-for-sale debt securities are debt investments not classified as trading or held-to-maturity. They are carried at fair value, with unrealized gains and losses reported in other comprehensive income.

A backdoor Roth individual retirement account (IRA) contribution is a nondeductible contribution to a traditional account that is then converted to a Roth account, a way around the income limit on direct Roth contributions.

A bank cutoff statement covers a short period after year-end, often 10 to 20 days, and is sent by the bank directly to the auditor. It lets the auditor check the items on the client's year-end bank reconciliation.

A bank reconciliation explains the difference between the cash balance on the bank statement and the balance in the company's records, so both can be adjusted to the true cash balance.

A bargain purchase is a business combination in which the fair value of the identifiable net assets acquired exceeds the consideration transferred (plus any noncontrolling interest and previously held interest).

A bargain sale to charity is a sale of property to a charity for less than its fair market value. It is treated as partly a sale and partly a gift, with the property's basis split between them in proportion to the sale price over the fair market value.

Basic earnings per share (EPS) is income available to common shareholders (net income less preferred dividends) divided by the weighted average number of common shares outstanding during the period.

The basis for opinion section comes right after the opinion in the auditor's report. It states that the audit was performed under generally accepted auditing standards, that the auditor is independent and met ethical requirements, and that the evidence is sufficient and appropriate.

A person who receives property as a gift generally takes the donor's adjusted basis (a carryover basis). If the property's fair market value at the date of the gift is below the donor's basis, a dual basis rule applies.

An automated application control that hasn't changed can be tested once and then relied on in later years by confirming it hasn't changed (a benchmark), instead of retesting it each year.

Benford's law describes the expected frequency of leading digits in many naturally occurring data sets: 1 appears first about 30% of the time, and 9 less than 5% of the time.

In a bill-and-hold arrangement, a seller bills a customer for a product but keeps physical possession of it until a later date. Revenue is recognized only when control has passed to the customer.

A bond is issued at a discount when its stated rate is below the market rate, and at a premium when its stated rate is above it. The discount or premium is amortized over the bond's life so its carrying amount reaches face value at maturity.

When bonds are sold between interest payment dates, the buyer pays the price of the bonds plus the interest accrued since the last interest date. The issuer then pays a full period's interest on the next payment date.

When bonds are issued with detachable stock warrants that can be traded separately, the proceeds are allocated between the bonds and the warrants, usually by their relative fair values. The warrants' share goes to equity (additional paid-in capital).

Bonus depreciation is an additional first-year deduction for qualified property. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for property acquired after January 19, 2025.

Boot is cash or other property received in an otherwise tax-deferred exchange, such as a like-kind exchange or a transfer to a corporation, that doesn't qualify for deferral. Gain is recognized up to the boot received.

Breach notification laws require organizations to notify affected individuals, and often regulators, when personal data has been accessed or disclosed without authorization.

The break-even point is the level of sales at which total revenue equals total costs, so operating income is zero. It equals fixed costs divided by the contribution margin per unit (in units) or by the contribution margin ratio (in dollars).

Breakage is the part of a customer's prepaid rights that is never used, such as the unspent balance on a gift card. A seller that expects breakage recognizes it as revenue in proportion to the rights the customer does use.

A bridge (gap) letter is a statement from a service organization's management covering the period between the end of its latest controls report and a customer's year-end, saying whether controls have changed.

A brute-force attack tries many possible passwords until one works. Credential stuffing tries username and password pairs stolen from other breaches, exploiting people who reuse passwords.

Governments present a budgetary comparison for the general fund and each major special revenue fund with a legally adopted budget, showing the original budget, the final budget and actual results on the budgetary basis.

The built-in gains tax is a corporate-level tax on an S corporation that was formerly a C corporation, imposed when it sells assets that had unrealized gains at the date it converted, within the recognition period.

Bunching is concentrating deductible payments, such as charitable gifts or elective medical costs, into alternate years so itemized deductions exceed the standard deduction in those years, with the standard deduction taken in the others.

A business continuity plan sets out how an organization will keep its critical operations running during and after a disruption, covering people, facilities, suppliers, communications and technology.

Business email compromise is a scam in which attackers use a hacked or spoofed email account of an executive or supplier to trick employees into wiring money or changing payment details.

A business's deduction for net business interest expense is limited to business interest income plus 30% of adjusted taxable income (plus floor plan financing interest). Disallowed interest carries forward indefinitely.

The business judgment rule protects corporate directors and officers from personal liability for decisions that turn out badly, as long as they acted in good faith, were reasonably informed and had no conflict of interest.

A calendar-year C corporation's return (Form 1120) is due April 15, the 15th day of the 4th month after year-end. Partnership (Form 1065) and S corporation (Form 1120-S) returns are due March 15, the 15th day of the 3rd month.

In the government-wide statements, business-type activities, financed mainly by fees charged to users such as water utilities and airports, are reported separately from governmental activities, which are financed mainly by taxes.

The California Consumer Privacy Act, as amended by the California Privacy Rights Act, gives California residents rights over personal information that businesses meeting certain size or data thresholds collect about them.

Long-term debt that the creditor can demand repayment of at the balance sheet date, for example because a covenant was violated, is classified as current.

When a lender forgives or cancels a debt, the amount canceled is generally gross income to the borrower, unless an exclusion applies, such as bankruptcy or insolvency.

A capital asset is most property a taxpayer holds, such as stocks, bonds and personal-use assets, except items the Internal Revenue Code excludes, such as inventory, business receivables and depreciable property or real estate used in a business.

Individuals can deduct a net capital loss against ordinary income only up to $3,000 a year ($1,500 if married filing separately). Corporations can deduct capital losses only against capital gains.

A capital projects fund is a governmental fund for resources restricted, committed or assigned to spending on capital outlays, such as building a new school, other than those financed through proprietary funds.

Capitalized interest is interest cost incurred while a qualifying asset, such as a building constructed for the company's own use, is being prepared for use. It is added to the asset's cost instead of being expensed.

For 2025 through 2028, individuals can deduct up to $10,000 a year of interest on a loan taken out after 2024 to buy a new vehicle for personal use whose final assembly took place in the United States.

Carried interest is a share of a fund's profits that a manager, such as a private equity general partner, receives for services. Gains on it are long-term only if the assets were held for more than 3 years, rather than the usual 1 year.

Under the carve-out method, a service organization's controls report excludes the controls of a subservice organization it uses, and instead describes the controls the subservice organization is expected to have.

The cash conversion cycle measures how long cash is tied up in operations: days of inventory outstanding plus days of sales outstanding minus days of payables outstanding.

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and so near maturity that interest rate changes pose little risk: generally those with an original maturity to the holder of three months or less.

A cash flow hedge protects against variability in future cash flows of a recognized asset or liability or a forecasted transaction. Changes in the hedging instrument's fair value go to other comprehensive income until the hedged item affects earnings.

People aged 50 or older can make extra catch-up contributions to 401(k) and similar plans and to individual retirement accounts, above the normal annual limits.

Under the centralized partnership audit regime, the Internal Revenue Service audits partnerships at the partnership level and generally assesses and collects any imputed underpayment from the partnership itself in the year the audit ends.

Chain of custody is the documented record of who collected, handled, transferred and stored evidence, such as a disk image or log files, from the moment it is gathered, so it can be shown not to have been altered.

A change in accounting estimate is a revision of an amount, such as an asset's useful life or a warranty accrual, because of new information. It is applied prospectively, in the current and future periods only.

A change in accounting principle is a change from one generally accepted principle to another, such as from first-in, first-out (FIFO) to weighted-average inventory. It is allowed only if required by a new standard or justified as preferable.

A client may ask an accountant to change an audit to a review or compilation, or a review to a compilation, before it is finished. The accountant considers whether there is a reasonable justification.

When a parent buys more shares of a subsidiary or sells some shares but keeps control, the change is an equity transaction. No gain or loss is recognized; the noncontrolling interest's carrying amount is adjusted, with the difference in additional paid-in capital.

A change in reporting entity occurs when financial statements present a different entity than before, such as presenting consolidated statements in place of individual company statements or changing which subsidiaries are consolidated.

Change management is the general control process that ensures changes to programs, systems and configurations are requested, approved, tested and documented before they reach production.

Channel stuffing is pushing distributors or retailers to buy more than they need near the end of a period, often with extra discounts, extended payment terms or generous return rights, to inflate revenue.

Chapter 11 bankruptcy lets a business, or an individual, keep operating while it restructures its debts under a plan of reorganization approved by creditors and confirmed by the court.

Chapter 13 lets an individual with regular income and debts below set limits keep their property and repay creditors under a court-approved plan lasting three to five years.

Chapter 7 bankruptcy is a liquidation: a trustee collects and sells the debtor's nonexempt assets, distributes the proceeds to creditors by priority, and most remaining debts of an individual debtor are discharged.

A financial instrument is a derivative if it has one or more underlyings and notional amounts (or payment provisions), requires little or no initial net investment, and can be settled net.

Individuals can deduct cash gifts to public charities up to 60% of adjusted gross income, and gifts of long-term capital gain property, usually at fair market value, up to 30%. Amounts over the limits carry forward for 5 years.

In a charitable gift annuity, a donor transfers assets to a charity in exchange for fixed payments for life. The donor deducts the excess of the assets' value over the present value of the annuity.

A charitable lead trust pays an annuity or a fixed percentage to a charity for a term, after which the remaining assets pass to noncharitable beneficiaries, usually family members.

A charitable remainder trust pays an annuity or a fixed percentage of its value to noncharitable beneficiaries, often the donor, for life or a term of years, and then the remainder goes to charity.

The check-the-box regulations let an eligible business entity that isn't a corporation under state law, such as a limited liability company, choose how it is taxed by filing Form 8832.

The chief operating decision maker is the function, a person or a group, that allocates resources to and assesses the performance of a public company's segments. Operating segments are identified from the information this function regularly reviews.

The child and dependent care credit is a nonrefundable credit for care costs that let the taxpayer (and spouse) work or look for work. For 2025 it is 20% to 35% of up to $3,000 of expenses for one qualifying person or $6,000 for two or more.

The child tax credit is $2,200 per qualifying child under 17, as set permanently by the One Big Beautiful Bill Act and indexed for inflation after 2025. Part of it is refundable as the additional child tax credit.

Circular 230 is the set of Treasury regulations governing practice before the Internal Revenue Service by attorneys, certified public accountants, enrolled agents and others.

The civil fraud penalty is 75% of the part of an underpayment caused by fraud. The Internal Revenue Service must prove fraud by clear and convincing evidence.

A claim for refund of overpaid tax, such as an amended individual return on Form 1040-X, must be filed within 3 years after the return was filed or 2 years after the tax was paid, whichever is later.

Classical variables sampling uses the normal distribution to estimate the dollar amount of an account or of misstatement in it. Methods include mean-per-unit, difference and ratio estimation.

Under US accounting standards, interest paid, interest received, dividends received and income taxes paid are operating cash flows, while dividends paid are financing cash flows.

A classified balance sheet groups assets and liabilities into current and noncurrent categories, usually based on whether they will be realized or settled within one year or the operating cycle, if longer.

The clean vehicle credit gave up to $7,500 for buying a new qualifying electric vehicle and up to $4,000 for a used one. The One Big Beautiful Bill Act ends it for vehicles acquired after September 30, 2025.

A customer in a cloud computing (hosting) arrangement that is a service contract capitalizes the implementation costs that would be capitalized for internal-use software, and expenses them over the term of the hosting arrangement.

The three main cloud service models are infrastructure as a service (IaaS), platform as a service (PaaS) and software as a service (SaaS). Each shifts more of the technology stack from the customer to the provider.

Control Objectives for Information and Related Technologies (COBIT) is a framework for the governance and management of enterprise information technology, aligning technology with business goals.

Long-term gain on collectibles, such as art, antiques, stamps, coins, gems and precious metals, is taxed at a maximum rate of 28%, rather than the usual 20% maximum for long-term capital gains.

Before the Internal Revenue Service levies on property, and after it files a federal tax lien, the taxpayer can request a collection due process hearing with the agency's independent appeals office within 30 days of the notice.

Works of art, historical treasures and similar items held for public exhibition, education or research, protected and preserved, need not be capitalized, provided proceeds from selling collection items are used to acquire new ones or for their direct care.

Combined financial statements present the statements of entities under common control, such as companies owned by the same individual, together as if they were one entity, without one being the parent of the others.

A comfort letter is a letter from an entity's auditor to the underwriters of a securities offering, covering matters such as the auditor's independence and procedures performed on financial information in the registration statement.

Common-size financial statements show each line as a percentage of a base: total assets on the balance sheet and net sales on the income statement. This is also called vertical analysis.

When an auditor finds evidence that fraud may exist, it is brought to the attention of an appropriate level of management, at least one level above those involved. Fraud involving senior management, or causing a material misstatement, is reported to those charged with governance.

Compensated absences are paid time off, such as vacation, that employees earn now and take later. A liability is accrued when the rights relate to services already rendered, vest or accumulate, payment is probable and the amount can be estimated.

A compensating control reduces the risk left by a deficiency in another control, such as an owner reviewing all bank statements and cancelled checks in a small business that can't fully segregate duties.

In a compilation, the accountant helps management present financial information as financial statements without obtaining or providing any assurance on them.

An accountant who isn't independent of the client can still perform a compilation, but must disclose the lack of independence in the last paragraph of the compilation report.

Complementary user entity controls are controls that a service organization assumes its customers have in place, and that are needed, together with the service organization's own controls, to achieve the control objectives in its report.

In a complete liquidation, a corporation distributes all its assets to its shareholders and goes out of existence. The corporation recognizes gain or loss as if it had sold its assets, and shareholders recognize gain or loss on their stock.

A compliance audit is an engagement to report on an entity's compliance with the requirements of laws, regulations, grants or contracts, typically government programs, often performed together with a financial statement audit.

A component auditor performs audit work on the financial information of a component, such as a subsidiary or division, for a group audit. The group engagement partner remains responsible for the group audit opinion.

In a group audit, the group auditor sets component performance materiality for work on each component lower than group materiality, to reduce the risk that misstatements across components add up to a material amount.

Computer-assisted audit techniques (CAATs) are tools and methods auditors use to test data and systems with technology, such as generalized audit software, test data, parallel simulation and embedded audit modules.

A conditional promise to give is a donor's promise that depends on a barrier the not-for-profit must overcome, together with a right of return or release if it isn't met. It isn't recognized as revenue until the condition is met.

Members in public practice must not disclose confidential client information without the client's specific consent, apart from listed exceptions.

When a positive confirmation isn't returned, the auditor performs alternative procedures, such as examining cash received after year-end and the shipping documents and invoices supporting the balance.

A practitioner may not represent a client before the Internal Revenue Service if there is a conflict of interest, unless they reasonably believe they can represent each client competently and diligently, the representation isn't prohibited by law, and each affected client gives informed written consent.

Consent management is obtaining, recording and honoring individuals' choices about how their personal data is used. Under European rules, consent must be freely given, specific, informed and unambiguous, and as easy to withdraw as to give.

Consideration is something of legal value that each party gives in exchange for the other's promise, such as money, goods, services or a promise to do or not do something. It is required for a contract to be enforceable.

Cash, credits, coupons or other amounts a seller pays or promises to its customer, such as slotting fees paid to a retailer, reduce the transaction price unless they pay for a distinct good or service from the customer at its fair value.

In a consignment, the owner of goods (the consignor) ships them to another party (the consignee) to sell on its behalf. The goods stay in the consignor's inventory until they are sold to an end customer.

An affiliated group of corporations, a parent and subsidiaries it owns at least 80% of by vote and value, can elect to file one consolidated federal income tax return.

Consolidation eliminations remove the effects of transactions and balances between a parent and its subsidiaries, so the consolidated statements show the group as if it were one entity.

A constructive dividend is a benefit a corporation gives a shareholder that is treated as a dividend even though it wasn't formally declared, such as unreasonable compensation, personal use of corporate property or a bargain sale.

A cash-basis taxpayer has income when an amount is credited to their account, set apart for them or otherwise made available without substantial restriction, even if they haven't actually taken it.

Contingent consideration is an acquirer's obligation to transfer more consideration to the former owners if specified future events occur, such as an earnout based on future profits. It is recognized at fair value on the acquisition date as part of the consideration.

A contingent fee is a fee charged only if a specified finding or result is attained, or whose amount depends on the result. Members may not charge one to an attest client or for preparing an original or amended tax return.

Contingently issuable shares are shares to be issued for little or no cash if conditions are met, such as reaching an earnings target. They are included in basic earnings per share only once the conditions are satisfied.

Continuous auditing uses automated tools to test transactions and controls frequently or in near real time, rather than periodically, and to flag exceptions for follow-up.

A contract asset is a company's right to consideration for goods or services it has already transferred, when that right is still conditional on something other than the passage of time, such as completing another part of the contract.

A contract liability is a company's obligation to transfer goods or services to a customer for which it has already received payment (or the payment is due). It is often called deferred or unearned revenue.

A contract modification is a change in the scope or price of a contract approved by the parties. How it is accounted for depends on whether it adds distinct goods or services and at what price.

A contract exists for revenue purposes when the parties have approved it and are committed, each party's rights and the payment terms can be identified, it has commercial substance, and collection of substantially all of the consideration is probable.

Not-for-profits present contributions of nonfinancial assets, such as donated food, equipment or use of facilities, as a separate line in the statement of activities, apart from contributions of cash and other financial assets.

A not-for-profit recognizes contributed (volunteer) services as revenue and expense only if they create or enhance a nonfinancial asset, or require specialized skills, are provided by people with those skills and would otherwise have to be purchased.

Contribution margin is sales minus variable costs: the amount available to cover fixed costs and then provide profit. The contribution margin ratio is contribution margin divided by sales.

The control environment is the set of standards, processes and structures that is the foundation of internal control, including management's integrity and ethical values, board oversight, organizational structure, competence and accountability.

Control risk is the risk that a material misstatement in an assertion won't be prevented, or detected and corrected on time, by the entity's internal control.

A controlled foreign corporation (CFC) is a foreign corporation more than 50% owned, by vote or value, by US shareholders, each of whom owns at least 10%.

A controlled group is a group of corporations under common control, either a parent and subsidiaries linked by at least 80% ownership, or brother-sister corporations owned more than 50% by the same five or fewer people.

Convertible bonds are debt that the holder can exchange for a set number of the issuer's common shares. Under current US Generally Accepted Accounting Principles (GAAP), most are recorded entirely as a liability, with no separate equity component.

Securities and Exchange Commission rules impair a firm's independence if a former member of the audit team takes a financial reporting oversight role at a public audit client, such as chief financial officer, within one year before the audit begins.

The corporate alternative minimum tax is a 15% minimum tax on adjusted financial statement income (book income with certain adjustments), applying to corporations whose average annual adjusted financial statement income over three years exceeds $1 billion.

A C corporation expecting to owe $500 or more of tax pays estimated tax in four installments, due on the 15th day of the 4th, 6th, 9th and 12th months of its tax year.

The correlation coefficient (r) measures the strength and direction of a linear relationship between two variables, from −1 (perfectly negative) through 0 (none) to +1 (perfectly positive).

Under the corridor approach, a pension plan's net actuarial gain or loss in accumulated other comprehensive income is amortized into pension cost only to the extent it exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets.

A cost segregation study reclassifies parts of a building, such as electrical systems for equipment, fixtures and land improvements, from long-lived real property into shorter-lived personal property and land improvements.

Costs incurred on property, plant and equipment after it is acquired are capitalized if they extend its useful life, increase its capacity or efficiency, or improve the quality of its output. Ordinary repairs and maintenance are expensed.

Counterbalancing errors are errors that reverse themselves over two periods, such as an overstatement of ending inventory, which overstates this year's income and understates next year's by the same amount.

A Coverdell education savings account allows nondeductible contributions of up to $2,000 a year per beneficiary. Earnings are tax-free if used for qualified education expenses, including elementary and secondary school costs.

Under the American Institute of Certified Public Accountants' independence rules, a covered member is someone whose interests can impair independence, such as an attest engagement team member or a person able to influence the engagement.

The credit for other dependents is a $500 nonrefundable credit for each dependent who doesn't qualify for the child tax credit, such as a child aged 17 or older or an elderly parent.

Critical audit matters (CAMs) are matters in a public company audit that were communicated, or required to be communicated, to the audit committee, relate to material accounts or disclosures, and involved especially challenging, subjective or complex auditor judgment.

Privacy laws restrict sending personal data to other countries. Under European Union rules, transfers need an adequacy decision for the destination, standard contractual clauses, binding corporate rules or another approved mechanism.

A Crummey power gives a trust beneficiary a temporary right to withdraw a contribution to the trust. It turns a gift of a future interest into a present interest, so it qualifies for the gift tax annual exclusion.

Key management covers generating, distributing, storing, rotating, revoking and destroying the keys used for encryption. Whoever holds a key can read the data it protects.

Cumulative preferred stock entitles its holders to receive any missed (in arrears) preferred dividends before common shareholders receive any dividends.

The cumulative translation adjustment is the accumulated amount, in other comprehensive income, that results from translating a foreign subsidiary's statements from its functional currency into the parent's reporting currency.

Corporate distributions are dividends first to the extent of current-year earnings and profits, shared pro rata among the year's distributions, then to the extent of accumulated earnings and profits, in date order.

The current expected credit loss (CECL) model requires companies to recognize an allowance for all credit losses they expect over the life of financial assets measured at amortized cost, such as trade receivables, loans and held-to-maturity debt securities.

The current rate method translates a foreign entity's statements from its functional currency into the reporting currency: assets and liabilities at the balance sheet date rate, and income and expenses at the rates when they occurred (or a weighted average).

The current ratio is current assets divided by current liabilities. It measures a company's ability to pay its short-term obligations.

Cutoff is the assertion that transactions and events have been recorded in the correct accounting period.

Data classification sorts data into categories by sensitivity and importance, such as public, internal, confidential and restricted, so the right protections can be applied to each.

Data cleansing is finding and fixing problems in data before analysis, such as duplicates, missing values, inconsistent formats, invalid entries and outliers.

A data dictionary describes each data element in a system or database: its name, definition, data type, format, allowed values, source and owner.

Data governance is the framework of policies, roles, standards and processes for managing an organization's data, so it is accurate, secure, consistent and used appropriately.

A data lake is a central repository that stores large volumes of raw data in its original format, whether structured, semi-structured or unstructured, until it is needed for analysis.

Data lineage records where data comes from and every transformation it goes through on the way to a report or analysis.

Data loss prevention tools monitor and control sensitive data as it is used, stored and sent, to stop it leaving the organization through email, uploads, removable drives or printing.

Data minimization is the privacy principle that an organization should collect, use and keep only the personal data that is adequate, relevant and necessary for its stated purposes.

Data owners are business leaders accountable for a set of data and decisions about its use. Data stewards manage its quality and definitions day to day, and data custodians, usually technology staff, store and protect it.

Data quality is commonly measured on dimensions such as accuracy, completeness, consistency, timeliness, validity and uniqueness.

A data retention policy sets how long each type of record is kept, based on legal, regulatory and business needs, and how it is securely destroyed when that period ends.

Data subject rights are individuals' rights over their personal data under privacy laws. Under the General Data Protection Regulation (GDPR) they include access, correction, erasure, restriction, portability and objection.

Data visualization presents data in charts and graphs so patterns and outliers are easy to see. The chart should fit the question: line charts for trends over time, bar charts for comparing categories, scatter plots for relationships and histograms for distributions.

A data warehouse is a central repository of cleaned, integrated historical data copied from operational systems and organized for reporting and analysis.

Days sales outstanding is the average number of days it takes to collect receivables: 365 divided by the receivables turnover (net credit sales ÷ average accounts receivable).

Debt issuance costs, such as underwriting, legal and registration fees for issuing bonds, are presented as a direct deduction from the carrying amount of the debt, like a discount, and amortized into interest expense over the term.

When a borrower and the same lender modify or exchange debt, it is treated as an extinguishment if the present value of the new cash flows differs by at least 10% from that of the remaining old cash flows. Otherwise it is a modification.

A debt service fund is a governmental fund for resources restricted, committed or assigned to paying the principal and interest on general long-term debt.

The debt-to-equity ratio is total liabilities divided by total stockholders' equity. It measures how much a company relies on creditors' money compared with owners' money.

Deferred inflows of resources are a government's acquisition of net position that applies to a future period, such as property taxes levied for next year. They are a separate element, reported after liabilities, not as liabilities.

In a deferred like-kind exchange, a taxpayer sells real property and buys replacement property later, through a qualified intermediary who holds the sale proceeds so the taxpayer never has access to them.

A deferred tax asset is the future tax benefit from deductible temporary differences and carryforwards: items that will reduce taxable income in later years.

A deferred tax liability is the future tax payable on taxable temporary differences: items that make taxable income lower now and higher later than book income.

In a defined contribution plan, such as a 401(k) plan, the employer contributes a specified amount to each employee's individual account, and the retirement benefit depends on the contributions and investment returns.

The degree of operating leverage measures how sensitive operating income is to changes in sales: the percentage change in operating income divided by the percentage change in sales, or contribution margin divided by operating income.

A demilitarized zone is a network segment between the internet and the internal network, separated by firewalls, that hosts public-facing servers such as web and email servers.

A denial-of-service attack floods a system or network with traffic or requests so legitimate users can't reach it. A distributed denial-of-service (DDoS) attack uses many compromised devices at once.

A dependent is a qualifying child or qualifying relative whom a taxpayer can claim on a tax return. Dependents affect filing status and eligibility for credits such as the child tax credit.

Employees can exclude from income up to $5,000 a year ($2,500 if married filing separately) of employer-provided dependent care assistance, often through a flexible spending account. The One Big Beautiful Bill Act raises the limit to $7,500 from 2026.

Depletion allocates the cost of natural resources, such as oil, gas, minerals or timber, to the units extracted, usually by the units-of-production method.

Depreciation recapture treats part of the gain on selling depreciated business property as ordinary income rather than capital gain, to reverse the benefit of earlier depreciation deductions.

A designated Roth account lets employees make after-tax Roth contributions within a 401(k), 403(b) or governmental 457(b) plan. Qualified distributions, including earnings, are tax-free.

Detection risk is the risk that the auditor's procedures will fail to detect a material misstatement that exists.

DevOps combines software development and operations to release changes frequently and reliably, using automated pipelines that build, test and deploy code, often called continuous integration and continuous delivery.

A digital signature is created with the signer's private key and verified with the signer's public key. It proves who signed a document (authentication and non-repudiation) and that it hasn't changed (integrity).

Diluted earnings per share (EPS) shows earnings per common share assuming all dilutive potential common shares, such as options, warrants and convertible securities, had been issued.

Any direct financial interest in an attest client, such as owning its shares, held by a covered member impairs independence, however small. An indirect interest, such as through a mutual fund, impairs independence only if material.

Internal auditors provide direct assistance when they perform audit procedures under the direction, supervision and review of the external auditor.

In a direct examination engagement, the practitioner measures or evaluates the subject matter against the criteria and reports on it, instead of reporting on an assertion made by the responsible party.

A direct financing lease is a lessor's lease that meets none of the sales-type criteria, but where the present value of the lease payments plus any residual value guaranteed by third parties equals substantially all of the asset's fair value and collection is probable.

The direct method presents operating cash flow as the major classes of gross cash receipts and payments, such as cash collected from customers, cash paid to suppliers and employees, and interest and taxes paid.

Under the direct write-off method, bad debt expense is recorded only when a specific account is determined to be uncollectible. It isn't acceptable under generally accepted accounting principles unless the effect is immaterial.

A disclaimer of opinion means the auditor does not express an opinion, because it could not obtain sufficient appropriate evidence and the possible effects of undetected misstatements could be both material and pervasive.

Tax return preparers may not use or disclose information from a taxpayer's return for any other purpose without the taxpayer's written consent, apart from listed exceptions, such as quality or peer reviews and court orders.

A discontinued operation is a component of an entity that has been disposed of, or is held for sale, and whose disposal is a strategic shift with a major effect on operations and financial results, such as a major line of business or geographic area.

A contribution of property to a partnership followed by a distribution of money or other property to the contributing partner can be treated as a disguised sale, making the partner recognize gain as if part of the property were sold.

Distributable net income (DNI) is a measure of a trust's or estate's income for the year that caps both the distribution deduction the trust or estate can take and the amount beneficiaries must include in their income.

Dividends in arrears are undeclared dividends on cumulative preferred stock from past periods. They aren't a liability until declared, but they are disclosed and must be paid before any common dividend.

The dividends received deduction (DRD) lets a C corporation deduct part or all of the dividends it receives from other US corporations, reducing multiple layers of corporate tax.

Dollar-value last-in, first-out (LIFO) applies LIFO to pools of inventory measured in dollars instead of units, using a price index to separate real increases in quantity from price changes.

A person's domicile is the state of their permanent home, where they intend to return. States tax residents on all their income and nonresidents only on income from sources in the state.

A business that receives an asset as a gift from a non-owner, such as land from a city to attract a plant, records the asset at fair value and recognizes a gain or revenue.

Giving long-term appreciated property, such as stock held over a year, directly to a public charity lets the donor deduct its full fair market value and avoid tax on the appreciation.

A donor-advised fund is an account held by a sponsoring public charity. The donor gets an immediate charitable deduction when contributing and can recommend grants to charities later.

A C corporation's income is taxed twice: at the corporate rate of 21% when earned, and again to shareholders when distributed as dividends. Pass-through entities, such as partnerships and S corporations, are taxed only once, at the owner level.

Double-declining-balance is an accelerated depreciation method that applies twice the straight-line rate to the asset's carrying amount at the start of each year.

Dual dating means dating the auditor's report with its original date for most of the statements and a later date for a specific subsequent event that was disclosed or adjusted after the original report date.

A dual-purpose test performs a test of controls and a test of details on the same transaction at the same time, such as examining an invoice both for evidence of approval and for the accuracy of its amount.

DuPont analysis breaks return on equity into net profit margin, asset turnover and the equity multiplier, showing whether a change in return comes from profitability, efficiency or leverage.

An agent owes the principal fiduciary duties: loyalty (no conflicts, secret profits or competition), obedience to lawful instructions, reasonable care, accounting for money and property, and passing on relevant information.

A dynasty trust is a long-term trust, often in a state that limits or has abolished the rule against perpetuities, designed to pass assets to several generations without estate, gift or generation-skipping transfer tax at each generation.

Retirement plan and individual retirement account distributions before age 59½ generally carry a 10% additional tax, but exceptions apply, such as death, disability and substantially equal periodic payments.

The earned income credit (EIC) is a refundable credit for low- and moderate-income workers, based on earned income, filing status and the number of qualifying children.

Earnings and profits (E&P) measure a corporation's economic ability to pay dividends. Distributions are dividends to the extent of current and then accumulated earnings and profits.

The effective interest method amortizes a bond discount or premium so that interest expense each period equals the bond's carrying amount multiplied by the market rate at issuance.

Electronic data interchange (EDI) is the computer-to-computer exchange of business documents, such as purchase orders and invoices, between companies in a standard format, without paper.

The Financial Accounting Standards Board's conceptual framework defines the elements of financial statements: assets, liabilities, equity, revenues, expenses, gains, losses, investments by owners, distributions to owners and comprehensive income.

An embedded derivative is a feature within a contract (the host) that changes some of the contract's cash flows like a derivative would, such as an equity-indexed return in a debt instrument.

An emphasis-of-matter paragraph is added to the auditor's report to draw users' attention to a matter that is appropriately presented or disclosed in the financial statements and is fundamental to their understanding.

An employee stock purchase plan lets employees buy company shares, usually at a discount through payroll deductions. It is noncompensatory, with no expense, only if the discount is 5% or less, substantially all employees can take part, and it has no option features beyond a short enrollment period.

Deferred tax assets and liabilities are measured using the tax rates enacted in law that are expected to apply when the temporary differences reverse. Expected future rate changes that aren't yet law are ignored.

Data in transit, moving across a network, is protected by encrypted connections such as secure web connections. Data at rest, stored on disks, databases or backups, is protected by encrypting the storage or the files.

An encumbrance is a commitment, such as a purchase order or contract, that reserves part of a governmental fund's budgeted appropriation until the goods or services are received.

End-user computing tools, such as spreadsheets used in financial reporting, often lack the controls of formal systems. Controls include restricting access, version control, reviewing formulas and reconciling results to source data.

An endowment is a fund of assets a not-for-profit invests to provide income over the long term. A donor-restricted endowment must be kept in perpetuity or for a stated term; a board-designated endowment is set aside by the board and has no donor restrictions.

Endpoint detection and response (EDR) software runs on laptops, servers and other devices, monitoring their behavior to detect threats that traditional antivirus misses and helping staff investigate and contain them.

An engagement letter documents the agreed terms of an audit, including its objective and scope, the responsibilities of the auditor and management, the financial reporting framework and the expected form of the report.

An engagement quality review is an objective evaluation of the significant judgments made by an engagement team, performed by a qualified reviewer who is not part of the team, before the report is released.

The engagement team discussion is a required meeting of key audit team members during planning to discuss how and where the entity's financial statements might be susceptible to material misstatement, including from fraud.

An enrolled agent is a tax practitioner licensed by the Internal Revenue Service, by passing an exam or through qualifying employment at the agency, with unlimited rights to represent taxpayers before the agency, as attorneys and certified public accountants have.

An enterprise resource planning (ERP) system integrates an organization's core processes, such as finance, purchasing, sales, inventory and payroll, in one system with a shared database.

Entity-level controls affect the organization as a whole: the control environment, risk assessment, controls over management override, the period-end financial reporting process and monitoring.

Environmental controls protect computer equipment from fire, water, heat, humidity and power problems, using fire suppression, climate control, water detection, uninterruptible power supplies and backup generators.

The equity method is used for investments that give significant influence (usually 20% to 50% of voting stock). The investor records its share of the investee's income as income and increases the investment; dividends received reduce the investment.

When an investor pays more for an equity-method investment than its share of the investee's book value, the excess is allocated to undervalued identifiable assets, with the rest treated as goodwill.

Equity securities are generally measured at fair value with changes in net income. For those without a readily determinable fair value, a company may instead use cost, less impairment, adjusted for observable price changes in orderly transactions for identical or similar investments.

If a closely held business interest makes up more than 35% of the adjusted gross estate, the estate tax on that interest can be paid in installments: interest only for up to 4 years, then up to 10 annual payments.

Interim income tax expense is figured by applying the estimated annual effective tax rate to year-to-date ordinary pretax income, then subtracting the tax already recognized in earlier interim periods.

Individuals whose tax isn't covered by withholding pay estimated tax in four installments, due April 15, June 15, September 15 and January 15. An underpayment penalty applies if too little is paid on time.

An examination is an attestation engagement in which the practitioner obtains reasonable assurance and expresses an opinion on whether a subject matter, or an assertion about it, is in accordance with suitable criteria.

An excess benefit transaction occurs when a public charity or social welfare organization gives an insider (a disqualified person) an economic benefit worth more than what it receives, such as excessive pay. Penalty excise taxes, called intermediate sanctions, apply.

Individuals and other noncorporate taxpayers can't deduct net business losses above an annual threshold ($313,000, or $626,000 on a joint return, for 2025). The disallowed excess becomes a net operating loss carryforward.

An S corporation with earnings and profits from its C corporation years pays corporate-level tax, at 21%, on excess net passive income when its passive investment income is more than 25% of gross receipts.

When the tax deduction for a share-based award, based on its value at exercise or vesting, exceeds the compensation cost recognized, the excess tax benefit is recognized in income tax expense. Shortfalls also go to tax expense.

Certain fringe benefits employers provide are excluded from employees' gross income, including no-additional-cost services, qualified employee discounts, working condition fringes, de minimis fringes, qualified transportation fringes and on-site athletic facilities.

Costs of an exit or disposal activity, such as closing a plant, are recognized as a liability at fair value when they are incurred, not when management commits to the plan.

In attribute sampling for tests of controls, the expected population deviation rate is the auditor's estimate of how often the control fails, based on prior years or a small preliminary sample.

The expected return on plan assets reduces net periodic pension cost. It is the expected long-term rate of return multiplied by the market-related value of plan assets.

Audit documentation must be detailed enough for an experienced auditor with no previous connection to the audit to understand the procedures performed, the evidence obtained, the conclusions reached and the significant judgments made.

An external confirmation is audit evidence obtained as a direct written response to the auditor from a third party, such as a customer, bank or lawyer, on paper or electronically.

Debt is extinguished when it is repaid or the debtor is legally released from it. On early extinguishment, the difference between the amount paid and the debt's net carrying amount is recognized as a gain or loss in income.

Extract, transform, load (ETL) is the process of pulling data from source systems, cleaning and restructuring it, and loading it into a destination such as a data warehouse for analysis.

Factoring is the transfer of accounts receivable to a third party (a factor) for cash. It is accounted for as a sale if the transferor surrenders control of the receivables; otherwise it is a secured borrowing.

The failure-to-file penalty is 5% of the unpaid tax for each month or part of a month a return is late, up to 25%. The failure-to-pay penalty is 0.5% a month, also up to 25%.

A fair value hedge protects against changes in the fair value of a recognized asset or liability, or a firm commitment, that are attributable to a particular risk.

The fair value hierarchy ranks the inputs used to measure fair value in three levels, from quoted prices in active markets (Level 1) to unobservable inputs based on the entity's own assumptions (Level 3).

The fair value option lets a company elect to measure eligible financial assets and liabilities at fair value, with changes in fair value reported in earnings, instead of using the measurement the guidance would otherwise require.

Fair value is estimated using one or more of three approaches: the market approach (prices of identical or comparable items), the income approach (discounted future amounts) and the cost approach (current replacement cost).

In a family limited partnership, parents contribute assets to a partnership, keep the general partner interest and give limited partner interests to their children, often at a discount to the underlying asset value.

Fault tolerance is a system's ability to keep operating when a component fails, achieved through redundancy such as spare power supplies, mirrored disks, duplicate servers and alternative network paths.

A Report of Foreign Bank and Financial Accounts (FBAR) must be filed by United States persons with a financial interest in, or signature authority over, foreign financial accounts whose combined value exceeds $10,000 at any time during the year.

Federal unemployment tax is paid only by employers, at 6.0% on the first $7,000 of each employee's wages a year, reported on Form 940. A credit of up to 5.4% for state unemployment taxes paid on time usually brings the net rate to 0.6%.

Federal Insurance Contributions Act (FICA) taxes fund Social Security and Medicare. Employers and employees each pay 6.2% Social Security tax on wages up to an annual wage base and 1.45% Medicare tax on all wages.

Fiduciary funds account for resources a government holds for others, such as employee pension plans or taxes collected for another government. They include pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds and custodial funds.

First-in, first-out (FIFO) is an inventory cost flow assumption that the oldest goods are sold first, so ending inventory reflects the most recent purchase costs.

Near the end of the audit, the auditor must perform analytical procedures to help form an overall conclusion on whether the financial statements are consistent with the auditor's understanding of the entity.

A finance lease is a lease that transfers control of the underlying asset to the lessee in substance. For lessees, a lease is a finance lease if it meets any one of five criteria; otherwise it is an operating lease.

A financial forecast presents an entity's expected financial results based on the conditions it expects to exist. A financial projection presents results under one or more hypothetical assumptions, such as building a new plant.

A finite-lived intangible asset, such as a patent or customer list, is amortized over its useful life, usually straight-line unless another pattern better reflects how its benefits are used up.

A firewall is a network security device or program that filters incoming and outgoing traffic according to rules, allowing approved traffic and blocking the rest.

Under the rules for sales of goods, a merchant's signed written offer that says it will be held open can't be revoked, even without consideration, for the stated time, or a reasonable time if none is stated, but no longer than 3 months.

A donor can contribute up to five times the gift tax annual exclusion to a section 529 plan in one year and elect to treat it as made evenly over five years, so it is covered by the annual exclusion.

The fixed-charge coverage ratio measures a company's ability to cover fixed financing obligations: earnings before interest and taxes plus fixed charges (such as lease payments), divided by fixed charges plus interest.

A forecasted transaction is an expected future transaction that isn't yet a firm commitment, such as planned purchases of raw materials next quarter. If it is probable, its cash flow risk can be hedged as a cash flow hedge.

A foreign currency transaction gain or loss arises when exchange rates change between the date of a transaction denominated in a foreign currency, such as a purchase on credit, and its settlement or the balance sheet date.

United States citizens and residents who live and work abroad can exclude foreign earned income up to an annual limit ($130,000 for 2025) if their tax home is abroad and they meet the bona fide residence or physical presence test.

The foreign tax credit lets US taxpayers reduce their US income tax by foreign income taxes paid, so the same income isn't taxed twice.

Form 10-K is the annual report a public company files with the Securities and Exchange Commission. It includes audited financial statements, management's discussion and analysis, risk factors and other required disclosures.

Form 990 is the annual information return that most tax-exempt organizations file with the Internal Revenue Service, reporting their finances, governance, activities and compensation.

For each public company audit report, the audit firm files Auditor Reporting of Certain Audit Participants (Form AP) with the Public Company Accounting Oversight Board. It discloses the engagement partner's name and other accounting firms that took part in the audit.

A forward contract is a private agreement to buy or sell an asset, such as a foreign currency, at a set price on a future date. It is customized and settled at the end of the term.

Fourth-party risk is the risk arising from a vendor's own vendors, such as the cloud provider used by a payroll service, which the organization has no direct contract with.

A franchisor usually grants a license to its symbolic intellectual property, its brand and system, so an upfront franchise fee is recognized over the franchise term. Ongoing royalties based on the franchisee's sales are recognized as those sales occur.

The fraud triangle describes three conditions usually present when fraud occurs: an incentive or pressure, an opportunity, and an attitude or rationalization that allows someone to commit it.

Free cash flow is commonly defined as cash flow from operations minus capital expenditures: the cash a business generates that is available to repay debt, pay dividends or buy back shares.

Free on board (FOB) shipping terms decide when ownership of goods in transit passes from seller to buyer. Under FOB shipping point it passes when the goods are shipped; under FOB destination, when they arrive.

A full backup copies all data. An incremental backup copies changes since the last backup of any kind, and a differential backup copies changes since the last full backup.

A company's functional currency is the currency of the primary economic environment in which it operates, normally the one in which it generates and spends cash.

Governmental funds classify fund balance as nonspendable, restricted, committed, assigned or unassigned, based on how strictly its use is constrained.

A defined benefit plan's funded status is the fair value of plan assets minus the projected benefit obligation. An overfunded plan is reported as an asset and an underfunded plan as a liability.

A gain contingency is a possible gain that depends on a future event, such as a pending lawsuit in which the company is the plaintiff. It isn't recognized until it is realized or realizable.

Gambling winnings are fully included in gross income. Losses are deductible only as an itemized deduction and only up to the amount of winnings.

The General Data Protection Regulation (GDPR) is the European Union law governing personal data. It applies to organizations in the European Union and to those elsewhere that offer goods or services to, or monitor, people in the European Union.

The general fund is a government's main operating fund. It accounts for all financial resources not required to be accounted for in another fund, such as police, fire and administration.

A general partnership is an association of two or more people carrying on a business for profit as co-owners. It can be formed without any filing, and each partner has unlimited personal liability for its debts.

The generation-skipping transfer tax is a separate flat tax, at the top estate tax rate, on transfers to people two or more generations below the transferor (skip persons), such as grandchildren, beyond an exemption equal to the basic exclusion amount.

Generative artificial intelligence is technology that creates new content, such as text, images or code, from prompts. Large language models are a common example.

Gift splitting lets a married couple treat a gift made by one spouse to a third party as made half by each spouse, so they can use both annual exclusions and both lifetime exemptions.

The gift tax annual exclusion lets a donor give up to a set amount per recipient each year without using any lifetime exemption or filing a gift tax return: $19,000 per donee for 2026.

A donor files Form 709 for gifts to anyone (other than a spouse) above the annual exclusion, gifts of future interests, gift splitting and the five-year election for section 529 contributions. It is due April 15 of the following year.

Management must evaluate whether conditions and events raise substantial doubt about the entity's ability to continue as a going concern: that is, whether it is probable the entity will be unable to meet its obligations as they become due within one year after the financial statements are issued (or available to be issued).

Under the Golsen rule, the Tax Court follows the decisions of the federal circuit court of appeals to which a case would be appealed, usually the taxpayer's home circuit, even if the Tax Court disagrees.

Goodwill is the excess of the consideration paid in a business combination (plus the fair value of any noncontrolling interest and previously held interest) over the fair value of the identifiable net assets acquired.

Goodwill is tested for impairment at least annually by comparing a reporting unit's fair value with its carrying amount, including goodwill. The impairment loss is the excess of carrying amount over fair value, limited to the goodwill allocated to the unit.

Government Auditing Standards, known as the Yellow Book, are issued by the US Government Accountability Office and apply to audits of government entities and of organizations that receive government funding when required by law, regulation or agreement.

Under graded vesting, a share-based award vests in installments, such as 25% a year over four years, rather than all at once at the end (cliff vesting).

Equity-classified share-based awards, such as stock options, are measured at their fair value on the grant date, estimated with an option-pricing model, and that cost is recognized over the employee's requisite service period.

A grantor retained annuity trust (GRAT) is an irrevocable trust that pays the grantor a fixed annuity for a set term, after which the remaining assets pass to beneficiaries. The taxable gift is only the present value of the remainder.

A grantor trust is a trust whose income is taxed to the person who created it (the grantor) because the grantor keeps certain powers or interests, such as the power to revoke the trust.

Under the gross method, purchases are recorded at the invoice price and discounts taken reduce inventory cost. Under the net method, purchases are recorded net of the available discount, and discounts missed are recorded separately as a financing expense.

The gross estate includes all property in which the decedent had an interest at death, at fair market value, plus items such as life insurance the decedent owned, half of property held jointly with a spouse, and property in a revocable trust.

Gross income is all income from whatever source derived, unless a specific provision excludes it. It includes wages, business income, interest, dividends, rents, gains and gambling winnings.

The gross margin ratio is gross profit (net sales minus cost of goods sold) divided by net sales. It shows how much of each sales dollar is left to cover operating expenses and profit.

The gross profit method estimates ending inventory by subtracting estimated cost of goods sold (sales × (1 − gross profit percentage)) from the cost of goods available for sale.

Group depreciation depreciates a pool of similar assets, and composite depreciation a pool of dissimilar assets, as a single unit using one average rate instead of depreciating each asset separately.

A group audit is an audit of financial statements that combine the financial information of more than one entity or business unit (components), such as consolidated statements.

Employees can exclude the cost of employer-provided group-term life insurance coverage up to $50,000. The cost of coverage above $50,000, based on an Internal Revenue Service table, is included in wages.

A guaranteed payment is a payment by a partnership to a partner for services or the use of capital that is determined without regard to the partnership's income.

A guaranteed residual value is an amount the lessee or a third party promises the leased asset will be worth at the end of the lease, making up any shortfall.

Hashing turns data of any size into a fixed-length value (a hash) using a one-way function. Any change to the data produces a different hash, so hashes are used to check integrity.

Head of household is a filing status for unmarried taxpayers who pay more than half the cost of keeping up a home that is the main home of a qualifying person for more than half the year.

A health flexible spending account lets employees set aside part of their salary before tax to pay medical expenses. The 2025 limit is $3,300.

The Health Insurance Portability and Accountability Act (HIPAA) privacy and security rules protect individuals' health information held by covered entities (health plans, health care clearinghouses and certain health care providers) and their business associates.

A health savings account (HSA) is a tax-advantaged account for people covered by a high-deductible health plan. Contributions are deductible (or excluded if made by an employer), growth is tax-free and withdrawals for qualified medical expenses are tax-free.

To use hedge accounting, a hedge must be expected to be highly effective, meaning changes in the hedging instrument's value offset about 80% to 125% of changes in the hedged item, both at inception and on an ongoing basis.

A firm commitment is a binding agreement with a fixed price, quantity and timing, such as an order to buy equipment for a set amount of euros. Its exposure to price or exchange rate changes can be hedged as a fair value hedge.

Held-to-maturity securities are debt securities the investor has the positive intent and ability to hold until maturity. They are carried at amortized cost, net of an allowance for expected credit losses.

A highly inflationary economy is one with cumulative inflation of about 100% or more over three years. A foreign subsidiary there is accounted for as if its functional currency were the parent's reporting currency.

The hire-to-retire process covers hiring employees, setting their pay, recording time, processing payroll and handling terminations.

Under the hobby loss rules, income from an activity not engaged in for profit is included in gross income, but the related expenses are not deductible, because miscellaneous itemized deductions are permanently eliminated.

The holding period is how long a taxpayer has owned property. Capital assets held for more than one year produce long-term gains and losses; those held for one year or less produce short-term ones.

A self-employed person can deduct expenses for part of a home used regularly and exclusively as the principal place of business, or to meet clients. Employees can't, because unreimbursed employee expenses are no longer deductible.

Section 121 lets taxpayers exclude up to $250,000 of gain ($500,000 for married couples filing jointly) on the sale of their principal residence if they owned and used it as their main home for at least two of the five years before the sale.

Hot assets are a partnership's unrealized receivables and inventory items. When a partner sells a partnership interest, the part of the gain attributable to them is ordinary income rather than capital gain.

A hot site is a fully equipped backup facility with current data that can take over operations within hours or less after a disaster.

The if-converted method measures the dilution from convertible securities for diluted earnings per share by assuming conversion at the start of the period (or at issuance, if later).

A long-lived asset held and used is impaired when its carrying amount is not recoverable from its undiscounted future cash flows. The loss is then measured as the carrying amount less fair value.

When a note has no stated interest or an unreasonably low rate, it is recorded at its present value using a market rate (the imputed rate). The difference from face value is a discount amortized as interest over the note's life.

In-process research and development acquired in a business combination is recognized at fair value as an indefinite-lived intangible asset until the project is completed, when amortization begins, or abandoned, when it is written off.

Incentive stock options create no regular tax when granted or exercised. If the shares are held more than 2 years from grant and 1 year from exercise, the whole gain on sale is long-term capital gain.

An incident response plan sets out how an organization handles a security incident, typically in phases: preparation, detection and analysis, containment, eradication, recovery, and lessons learned.

Under the inclusive method, a service organization's description of its system includes the relevant controls of a subservice organization it uses, and the service auditor's report covers them.

Income in respect of a decedent is income the decedent earned or was entitled to but hadn't received before death, such as a final paycheck, retirement account balances or remaining installment sale payments.

Income shifting moves income to family members in lower tax brackets, for example by giving them income-producing property or paying children reasonable wages in a family business.

Public business entities reconcile income tax at the statutory rate to reported income tax expense, in both percentages and amounts, using specified categories such as state taxes, foreign rate differences and tax credits.

A lessee discounts lease payments using the rate implicit in the lease if it is readily determinable. If not, it uses its incremental borrowing rate: the rate it would pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments.

An indefinite-lived intangible asset is one with no foreseeable limit on the period it will generate cash flows, such as a trademark that can be renewed indefinitely at little cost. It is not amortized but is tested for impairment at least annually.

Independence is freedom from relationships and influences that would compromise, or appear to compromise, an auditor's objectivity. It covers both independence of mind and independence in appearance.

Certain findings strongly suggest a material weakness in internal control: fraud by senior management of any size, a restatement to correct a material misstatement, a material misstatement the entity's controls wouldn't have caught, and ineffective audit committee oversight.

The indirect method presents operating cash flow by starting with net income and adjusting it for noncash items, gains and losses on investing and financing activities, and changes in operating working capital.

Information produced by the entity is data and reports the client generates, such as system reports or schedules, that the auditor uses as audit evidence. The auditor must evaluate whether it is reliable enough for the purpose.

Information technology general controls (ITGCs) are controls over the information technology (IT) environment that support the effective operation of application controls, covering access to programs and data, program changes, program development and computer operations.

Inherent risk is the susceptibility of an assertion to a material misstatement before considering any related controls.

Most non-spouse beneficiaries who inherit a retirement account from an owner who died after 2019 must withdraw the whole balance by the end of the 10th year after the year of death.

Spouses who file a joint return are each liable for the full tax. Innocent spouse relief lets one spouse escape tax on an understatement caused by the other spouse's erroneous items that the requesting spouse didn't know, and had no reason to know, about.

The input method measures progress on a performance obligation satisfied over time by the inputs used, most often costs incurred to date as a share of total expected costs (cost-to-cost).

Input validation controls are automated checks that test data as it is entered, rejecting or flagging entries that are incomplete, invalid or unreasonable.

Inside basis is a partnership's tax basis in its own assets. Property a partner contributes keeps the partner's adjusted basis, so the partnership's inside basis starts out equal to the partners' total outside basis, ignoring liabilities.

An insider threat is the risk that someone with legitimate access, such as an employee, contractor or partner, misuses it, whether on purpose or by mistake.

An installment agreement lets a taxpayer who can't pay in full pay a tax debt in monthly installments. Interest and the failure-to-pay penalty continue to build up until the balance is paid.

An installment sale is a sale of property in which at least one payment is received after the year of sale. The installment method spreads the gain over the years payments are received, using the gross profit percentage.

An integrated audit combines an audit of a public company's financial statements with an audit of its internal control over financial reporting, under Public Company Accounting Oversight Board (PCAOB) standards.

An intentionally defective grantor trust is an irrevocable trust drafted so its assets are outside the grantor's estate, while the grantor is still treated as the owner for income tax, for example by keeping a power to swap assets.

An interbank transfer schedule lists cash transfers between the entity's bank accounts around year-end, comparing the dates each transfer was recorded in the books with the dates the banks recorded it.

When one company in a consolidated group buys another member's bonds from outside investors, the consolidated statements treat the bonds as retired. The gain or loss on this constructive retirement is recognized in consolidated income in the year of purchase.

When one member of a consolidated group sells equipment to another at a gain, the gain is eliminated in consolidation and the asset restored to its original cost and accumulated depreciation.

An interest rate swap is a derivative in which two parties exchange interest payments, typically fixed for variable, on a notional amount. The principal itself isn't exchanged.

Interfund transfers are flows of assets between a government's funds without equivalent value in return and without a requirement to repay, such as the general fund sending money to a debt service fund.

Interim reporting is financial reporting for periods shorter than a year, usually quarters. Under US Generally Accepted Accounting Principles (GAAP), each interim period is treated as an integral part of the annual period.

The internal audit function is the part of an entity that performs assurance and consulting activities to evaluate and improve its governance, risk management and internal control.

Internal control is a process designed to provide reasonable assurance about achieving objectives in operations, reporting and compliance. The Committee of Sponsoring Organizations (COSO) framework divides it into five components.

The internal rate of return is the discount rate at which a project's net present value equals zero. A project is acceptable if its internal rate of return exceeds the required rate of return.

An internal service fund is a proprietary fund that provides goods or services, such as a motor pool or computer support, to other departments of the government on a cost-reimbursement basis.

Costs of internally developing, maintaining or restoring intangible assets that aren't specifically identifiable, or that are inherent in a continuing business, such as internally generated goodwill, are expensed as incurred.

The internet of things is the network of physical devices, such as sensors, cameras, smart meters and industrial equipment, that connect to the internet and exchange data.

Intraperiod tax allocation divides a period's total income tax expense among continuing operations, discontinued operations, other comprehensive income and items charged directly to equity, so each is shown net of its own tax effect.

An intrusion detection system (IDS) monitors network traffic or computer activity for signs of attacks or policy violations and alerts security staff.

When inventory is material, the auditor attends the physical inventory count, unless that is impracticable, to evaluate management's counting instructions and procedures, observe the count and make test counts.

Inventory turnover is cost of goods sold divided by average inventory. It measures how many times a company sells and replaces its inventory in a period.

Creditors can file an involuntary petition to put a debtor into Chapter 7 or Chapter 11. With 12 or more creditors, at least 3 with unsecured claims totaling at least a set dollar amount must join; with fewer than 12, one can file.

An involuntary conversion occurs when property is destroyed, stolen or condemned and the owner receives insurance or other compensation. Gain can be deferred under Section 1033 by reinvesting in similar property within the replacement period.

An irrevocable life insurance trust (ILIT) owns a life insurance policy on the grantor's life so the death benefit is kept out of the grantor's taxable estate.

International Organization for Standardization (ISO) 27001 is the international standard for an information security management system: a risk-based set of policies, processes and controls to protect information.

An information technology (IT) steering committee is a group of senior business and technology leaders that sets technology priorities, approves major projects and budgets, and oversees technology risk.

An information technology (IT) dependent manual control is a control performed by a person that relies on system-generated information, such as a manager reviewing an exception report.

From 2026, the One Big Beautiful Bill Act reduces itemized deductions for taxpayers in the 37% bracket by 2/37 of the smaller of their itemized deductions and their income above the start of that bracket, capping each deduction's value at about 35 cents per dollar.

Itemized deductions are specific personal expenses that individuals can deduct instead of the standard deduction, such as medical expenses above a floor, state and local taxes up to a cap, home mortgage interest and charitable contributions.

A joint venture is an entity jointly controlled by two or more venturers, none of whom controls it alone. The venturers usually account for their investments using the equity method.

Because management override of controls is a risk in every audit, auditors test the appropriateness of journal entries and other adjustments, particularly those made at the end of the period.

Key audit matters are the matters that, in the auditor's professional judgment, were of most significance in the audit. In a private-company audit, the auditor communicates them in the report only when engaged to do so.

The kiddie tax taxes a child's unearned income above a threshold at the parents' marginal rate, to stop families shifting investment income to children in lower brackets.

When a change in accounting principle, or the correction of a material misstatement, has a material effect on the financial statements, the auditor adds a paragraph to the report drawing attention to it.

Lapping is a fraud in which an employee steals a customer's payment and hides the theft by applying a later customer's payment to the first customer's account, and so on.

Last-in, first-out (LIFO) is an inventory cost-flow assumption under which the most recently purchased goods are treated as sold first, so ending inventory consists of the oldest costs.

Governments use a single lease model: a lessee recognizes a lease liability and an intangible right-to-use asset, and a lessor recognizes a lease receivable and a deferred inflow of resources while keeping the asset.

A lessee classifies a lease as a finance lease if any one of five criteria is met: ownership transfers, a purchase option is reasonably certain to be exercised, the term is a major part of the asset's remaining life, payments are substantially all of its fair value, or the asset is so specialized it has no other use.

Lease incentives are payments a lessor makes to or on behalf of a lessee, such as cash for moving costs or reimbursement of improvements. The lessee deducts them from the lease payments, reducing the right-of-use asset.

The lease term is the noncancelable period of a lease plus periods covered by an option to extend that the lessee is reasonably certain to exercise, an option to terminate it is reasonably certain not to exercise, and any option controlled by the lessor.

Initial direct costs are incremental costs of getting a lease that wouldn't have been incurred if it hadn't been signed, such as commissions. Their treatment by a lessor depends on the type of lease.

A letter of inquiry to legal counsel (a 'lawyer's letter') is sent by management, at the auditor's request, asking the entity's lawyers to confirm information about litigation, claims and assessments directly to the auditor.

When a corporation takes over a shareholder's liabilities in a tax-free section 351 transfer, the liabilities generally aren't treated as boot. Two exceptions can make the shareholder recognize gain.

A license of functional intellectual property, such as software, a film or a drug formula, gives a right to use it and is recognized at a point in time. A license of symbolic intellectual property, such as a brand or logo, gives a right to access it and is recognized over time.

Death benefits from life insurance are generally excluded from the beneficiary's gross income, and growth in a policy's cash value is tax-deferred. If a policy is sold for value, though, proceeds above the buyer's cost become taxable.

The lifetime learning credit is a nonrefundable education credit equal to 20% of up to $10,000 of qualified tuition and related expenses, a maximum of $2,000 per return, for any year of postsecondary education.

A like-kind exchange under Section 1031 defers gain or loss when real property held for business or investment is exchanged for other real property held for business or investment.

Limited assurance is the level of assurance in a review engagement: the accountant concludes that they are not aware of any material modifications needed for the financial statements to conform with the framework.

A limited liability company (LLC) is a business entity formed under state law whose owners (members) are generally not personally liable for its debts, and which can choose how it is taxed.

A limited partnership has at least one general partner, who manages the business and has unlimited personal liability, and at least one limited partner, whose liability is limited to their investment. It is formed by filing a certificate with the state.

A liquidated damages clause sets in advance the damages payable for a breach. It is enforceable if actual damages were hard to estimate when the contract was made and the amount is reasonable.

Not-for-profits disclose qualitative information about how they manage liquid resources to meet cash needs for general expenditures within one year, and quantitative information about financial assets available for those needs.

A loan between a covered member and an attest client generally impairs independence, but certain loans from client financial institutions are allowed if made under normal lending terms.

A long-lived asset is classified as held for sale when management commits to a plan to sell it, it is available for immediate sale, an active search for a buyer has begun and the sale is probable within one year, among other criteria.

A loss contingency is an existing condition, such as a lawsuit or a guarantee, whose outcome depends on a future event. It is accrued if a loss is probable and can be reasonably estimated, and disclosed if a loss is reasonably possible.

When the total estimated costs of a long-term contract, such as a construction contract, exceed its total revenue, the entire expected loss is recognized immediately, not spread over the remaining work.

When a company has a firm, noncancelable commitment to buy goods at a fixed price and the market price falls below that price, it recognizes the loss and a liability at the balance sheet date, before the goods are received.

Inventory measured using first-in, first-out (FIFO) or average cost is carried at the lower of its cost and its net realizable value: the estimated selling price less the costs to complete and sell it.

Inventory measured using last-in, first-out (LIFO) or the retail inventory method is reported at the lower of cost or market. Market is replacement cost, but no higher than net realizable value (the ceiling) and no lower than net realizable value minus a normal profit margin (the floor).

Machine learning is a branch of artificial intelligence in which models learn patterns from data to make predictions or decisions, without being explicitly programmed with rules.

Under the mailbox rule, an acceptance sent by an authorized means is effective when it is sent, even if it is delayed or lost. Revocations of offers and rejections take effect only when received.

In a single audit, major programs are the federal programs the auditor selects for a compliance audit, using a risk-based approach that starts by grouping programs into larger (Type A) and smaller (Type B) programs by expenditures.

A group auditor may refer in its report to the audit of a component performed by another auditor, indicating a division of responsibility for the group's financial statements.

Malware is malicious software, including viruses, which attach to files and spread when they run, worms, which spread on their own across networks, and trojans, which pose as legitimate software.

In a man-in-the-middle attack, an attacker secretly intercepts, and may alter, communications between two parties who believe they are talking directly to each other, for example on an unsecured public network.

Management override of controls is management's ability to manipulate records and produce fraudulent financial statements by bypassing controls that otherwise seem to work. Auditors treat it as a fraud risk in every audit.

A management representation letter contains written statements from management confirming matters such as its responsibilities for the financial statements and that it has given the auditor all relevant information.

In a System and Organization Controls (SOC) engagement, service organization management gives a written assertion that its system description is fairly presented and its controls were suitably designed, and for a Type 2 report, operated effectively.

Management's discussion and analysis is required supplementary information placed before a government's basic financial statements. It gives an objective, easy-to-read analysis of the government's financial activities and condition.

A management's specialist is a person or firm with expertise in a field other than accounting or auditing, such as an actuary or appraiser, whose work the entity uses to prepare its financial statements.

Mandatorily redeemable shares are shares, usually preferred stock, that the issuer must redeem for cash on a fixed date or on an event certain to occur. They are classified as liabilities, not equity.

The marital deduction allows unlimited transfers, during life or at death, to a spouse who is a United States citizen, free of gift and estate tax. It defers the tax until the surviving spouse's death.

A market condition makes a share-based award depend on the company's share price, such as vesting only if the stock reaches $50. It is reflected in the award's grant-date fair value.

Under market-based sourcing, a state assigns receipts from services and intangibles to the state where the customer receives the benefit, rather than where the seller performs the work.

Married taxpayers who file separate returns each report their own income and deductions. This usually costs more tax than filing jointly, but may limit one spouse's exposure to the other's tax liability.

Master data is the core reference data an organization's systems share, such as customer, vendor, product and employee records. Master data management keeps it accurate, consistent and controlled.

A material right is an option, such as a discount on future purchases or loyalty points, that a customer receives only because it entered into the contract. It is a separate performance obligation.

A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement won't be prevented, or detected and corrected, on a timely basis.

Materiality is the size of a misstatement, alone or with others, that could reasonably be expected to influence the economic decisions of users of the financial statements. Auditors set it during planning as a matter of professional judgment.

Business meals are 50% deductible if they aren't lavish and the taxpayer or an employee is present. Entertainment, such as sports tickets or golf, isn't deductible at all.

Under the modified accrual basis, governmental funds recognize revenue when it is measurable and available: collectible within the period or soon enough after it to pay the period's liabilities.

The measurement period is the time after a business combination, up to one year from the acquisition date, during which the acquirer adjusts provisional amounts for new information about facts that existed at the acquisition date.

Individuals who itemize can deduct unreimbursed medical and dental expenses for themselves, their spouse and dependents to the extent the total exceeds 7.5% of adjusted gross income.

Misappropriation of assets is theft of an entity's assets, such as skimming cash, stealing inventory, paying fictitious vendors or adding ghost employees to the payroll. It is one of the two types of fraud auditors consider, alongside fraudulent financial reporting.

A mutual mistake about a material fact lets either party cancel (rescind) the contract. A unilateral mistake generally doesn't, unless the other party knew or should have known of it, or it was an obvious clerical or arithmetic error.

Mobile device management software lets an organization enforce security policies on phones, tablets and laptops, such as requiring passcodes and encryption, controlling apps, and remotely wiping lost devices.

When a company changes the terms of a share-based award, such as repricing options, the incremental cost is the fair value of the modified award minus the fair value of the original award immediately before the change.

The Modified Accelerated Cost Recovery System (MACRS) is the federal tax depreciation system. It assigns property to recovery classes with set lives, methods and conventions, and ignores salvage value.

The modified accrual basis is used by governmental funds. Revenues are recognized when measurable and available to pay current-period liabilities; expenditures are generally recognized when the related liability is incurred.

The modified approach lets a government skip depreciating eligible infrastructure assets, such as roads and bridges, if it manages them with an asset management system and documents that they are preserved at or above a condition level it has set.

Monetary unit sampling (MUS) is a statistical sampling method for substantive tests in which each dollar in the population has an equal chance of selection, so larger items are more likely to be chosen.

Individuals who itemize can deduct qualified residence interest on up to $750,000 ($375,000 if married filing separately) of acquisition debt on a main home and one second home, a limit the One Big Beautiful Bill Act made permanent.

The One Big Beautiful Bill Act permanently eliminates the deduction for moving expenses and the exclusion for employer reimbursements of them, except for active-duty military members moving under orders.

Multi-factor authentication (MFA) requires a user to present factors from at least two different categories: something they know, something they have and something they are.

A multiemployer plan is a pension or other benefit plan to which two or more unrelated employers contribute, usually under collective bargaining agreements. Each employer accounts for it like a defined contribution plan.

Net assets with donor restrictions are the part of a not-for-profit organization's net assets subject to donor-imposed limits on when or how they may be used, including amounts to be held in perpetuity.

A net investment hedge protects against the foreign currency risk of a net investment in a foreign operation, using a derivative or foreign-currency debt as the hedging instrument.

The net investment income tax is a 3.8% tax on the lesser of an individual's net investment income or the amount by which modified adjusted gross income exceeds $200,000 ($250,000 for married couples filing jointly).

A net operating loss (NOL) arises when allowable business deductions exceed income for the year. Losses from tax years after 2017 are generally carried forward indefinitely and can offset up to 80% of taxable income in a later year.

Net periodic pension cost for a defined benefit plan is made up of service cost, interest cost, the expected return on plan assets (a reduction), amortization of prior service cost, and amortization of net gains or losses.

Net position is the residual of a government's assets and deferred outflows less its liabilities and deferred inflows, reported in the government-wide statement of net position.

Net present value is the present value of a project's future cash flows, discounted at the required rate of return, minus the initial investment. A project with a positive net present value adds value.

When employer stock is taken out of a qualified retirement plan in a lump-sum distribution, only the plan's cost basis in the shares is taxed as ordinary income. The net unrealized appreciation is taxed as long-term capital gain when the shares are sold.

Network segmentation divides a network into separate zones, controlled by firewalls and access rules, so an attacker who gets into one part can't move freely to the rest.

Nexus is the connection between a business and a state that is enough for the state to impose a tax on it, or to require it to collect sales tax.

The National Institute of Standards and Technology (NIST) Cybersecurity Framework is a voluntary framework for managing cybersecurity risk. Version 2.0 organizes activities into six functions: Govern, Identify, Protect, Detect, Respond and Recover.

A measure of performance or financial position that excludes or includes amounts in a way that differs from the most directly comparable measure under US Generally Accepted Accounting Principles (GAAP) is a non-GAAP financial measure. Adjusted earnings is a common example.

Nonattest services are services other than attest engagements, such as tax preparation, bookkeeping or consulting, that a firm provides to an attest client. They are allowed only if the firm doesn't take on management responsibilities.

Noncash investing and financing activities are significant transactions that affect assets, liabilities or equity but involve no cash, such as acquiring land by issuing stock. They are disclosed separately rather than shown in the statement's sections.

An auditor's responsibility for an entity's compliance with laws depends on the law. For laws with a direct effect on financial statement amounts, such as tax laws, the auditor obtains evidence of compliance; for other laws, procedures are limited to inquiry and inspecting correspondence.

A noncontrolling interest (NCI) is the equity in a subsidiary that is not owned by the parent. It is reported in consolidated equity, separately from the parent's equity.

Some debts survive an individual's bankruptcy discharge, including recent taxes, child support and alimony, most student loans, and debts from fraud or willful and malicious injury.

In a nonliquidating (current) distribution, a partner generally recognizes no gain or loss. Gain arises only if money distributed, including a reduction in the partner's share of liabilities, exceeds the partner's outside basis.

A nonmonetary exchange is an exchange of assets, such as equipment for equipment, with little or no cash. It is generally measured at fair value, with a gain or loss recognized, unless the exchange lacks commercial substance.

Nonqualified deferred compensation lets an employee defer pay to a later year under an unfunded promise from the employer. If section 409A's rules are followed, it is taxed only when paid.

Nonsampling risk is the risk that the auditor reaches a wrong conclusion for reasons unrelated to sampling, such as using an inappropriate procedure or misinterpreting evidence.

An offer in compromise is an agreement with the Internal Revenue Service to settle a tax debt for less than the full amount, based on doubt as to collectibility, doubt as to liability or effective tax administration.

Omitted procedures are audit procedures the auditor finds, after the report has been released, were considered necessary but weren't performed. The auditor assesses whether the omission impairs the ability to support the opinion.

An S corporation may have only one class of stock, meaning all outstanding shares give identical rights to distributions and liquidation proceeds. Differences in voting rights are allowed.

In an initial audit engagement, the auditor obtains sufficient appropriate evidence that the opening balances don't contain misstatements that materially affect the current period, and that accounting policies have been applied consistently.

The operating cash flow ratio is cash flow from operations divided by current liabilities. It shows whether a company generates enough cash from its business to pay its short-term obligations.

The operating cycle is the average time from paying cash for inventory or services to collecting cash from customers. Current assets are those expected to be realized within one year or the operating cycle, whichever is longer.

For a lessee, an operating lease is any lease that doesn't meet a finance lease criterion. The lessee still recognizes a right-of-use asset and a lease liability, but reports a single straight-line lease cost in the income statement.

In an operating lease, the lessor keeps the leased asset on its balance sheet and keeps depreciating it, and recognizes lease income on a straight-line basis over the lease term.

In an integrated audit, the auditor gives an opinion on whether the company maintained effective internal control over financial reporting as of year-end. One or more material weaknesses lead to an adverse opinion.

An option gives its holder the right, but not the obligation, to buy (a call) or sell (a put) an asset at a set strike price on or before a set date. The buyer pays a premium for the option.

The order-to-cash process runs from receiving a customer order through credit approval, shipping, billing, recording the receivable and collecting payment.

A new business can deduct up to $5,000 of organizational costs and $5,000 of start-up costs in its first year, each reduced dollar for dollar by the amount by which that type of cost exceeds $50,000. The rest is amortized over 180 months.

Other comprehensive income (OCI) is a category of gains and losses that are excluded from net income but included in comprehensive income, and accumulated in a separate component of equity.

Other information is financial and nonfinancial information, other than the financial statements and the auditor's report, included in the entity's annual report, such as a letter to shareholders.

Other postretirement benefits are benefits other than pensions, mainly retiree health care, that employees earn during service. They are accounted for much like defined benefit pensions.

An other-matter paragraph in the auditor's report refers to a matter that is not presented or disclosed in the financial statements but is relevant to users' understanding of the audit, the auditor's responsibilities or the report.

Outlier detection identifies observations far from the rest of the data, for example values more than 3 standard deviations from the mean, or more than 1.5 times the interquartile range beyond the quartiles.

An output method measures progress on a performance obligation satisfied over time by the value to the customer of goods or services transferred to date, using measures such as units delivered, milestones reached or surveys of work performed.

Outside basis is a partner's tax basis in a partnership interest. It starts with money and the adjusted basis of property contributed, rises with the partner's share of income and liabilities, and falls with distributions, losses and decreases in liabilities.

The overall audit strategy sets the scope, timing and direction of the audit and guides the development of the more detailed audit plan.

Under the parol evidence rule, when parties intend a written contract to be their final and complete agreement, evidence of earlier or simultaneous oral agreements can't be used to change or contradict its terms.

A distribution in partial liquidation, judged by whether the corporation is genuinely contracting, such as ending a business it has actively run for 5 years, is treated as a sale of stock by noncorporate shareholders, giving capital gain rather than a dividend.

Participating preferred stock receives its stated dividend and then shares in further dividends with common stock once common shareholders have received a matching rate. Fully participating shares share without limit; partially participating shares up to a cap.

Partners generally recognize no gain or loss when they contribute property to a partnership in exchange for a partnership interest. A partner's outside basis is the money plus the adjusted basis of property contributed.

An increase in a partner's share of partnership liabilities is treated as a cash contribution that increases outside basis, and a decrease is treated as a cash distribution that reduces it.

In a liquidating distribution, which ends a partner's interest, the partner recognizes gain only if money received exceeds outside basis, and recognizes a loss only if they receive nothing but money, receivables and inventory.

A partnership must generally use the tax year of its partners who together own more than 50% of its profits and capital. If there is no such majority, it uses the tax year of all its principal partners (5% or more), and otherwise the year that gives the least aggregate deferral.

A pass-through entity tax (PTET) is a state income tax that a partnership or S corporation elects to pay at the entity level. The entity deducts it federally, which works around the cap on individuals' state and local tax deductions.

A passive activity loss is a loss from a trade or business in which the taxpayer doesn't materially participate, or (generally) from rental activities. It can offset only passive income; the excess is suspended and carried forward.

Patch management is the process of identifying, testing, approving and installing software updates that fix security vulnerabilities and defects, across all of an organization's systems.

The payback period is the time it takes for a project's cash inflows to recover the initial investment. Shorter payback means less exposure to risk and faster return of cash.

Penetration testing is an authorized simulated attack in which testers try to exploit weaknesses in systems, networks or people to show what a real attacker could achieve.

A settlement irrevocably relieves an employer of a pension obligation, for example by lump-sum payments or buying annuities. A curtailment significantly reduces employees' expected years of future service or eliminates benefits for future service.

Perfection is the step that makes a creditor's security interest in collateral effective against other creditors and a bankruptcy trustee. It is usually achieved by filing a financing statement, taking possession of the collateral, or control.

A performance audit under Government Auditing Standards gives findings and conclusions on a government program's effectiveness, economy and efficiency, internal control or compliance, based on evaluating evidence against criteria.

A performance condition makes vesting of a share-based award depend on the company's own operations, such as reaching an earnings per share or revenue target, as well as on the employee's service.

Performance materiality is an amount set below overall materiality to reduce, to an appropriately low level, the risk that uncorrected and undetected misstatements together exceed materiality for the financial statements as a whole.

A performance obligation is a promise in a contract with a customer to transfer a distinct good or service (or a series of substantially the same distinct goods or services). Revenue is recognized when, or as, each one is satisfied.

A permanent difference is an item included in book income but never in taxable income, or the reverse. Examples are tax-exempt municipal bond interest, fines and penalties, and the nondeductible half of business meals.

A permanent fund is a governmental fund for resources legally restricted so that only the earnings, not the principal, may be used to support the government's own programs, such as a gift whose income maintains a public cemetery.

Individuals can deduct personal casualty and theft losses, such as damage from a storm, only if the loss comes from a federally declared disaster. Each loss is reduced by $100, and the total by 10% of adjusted gross income.

The personal holding company tax is a 20% penalty tax on the undistributed income of a closely held corporation that earns mainly passive income, discouraging owners from sheltering investment income in a corporation.

Personally identifiable information (PII) is any information that can identify a specific individual, alone or combined with other data, such as a name, government identification number, email address or biometric record.

A misstatement or possible misstatement is pervasive if its effects aren't confined to specific elements of the financial statements, are confined but are a substantial part of them, or relate to disclosures fundamental to users' understanding.

Petty cash is a small imprest fund kept on hand for minor payments. A custodian keeps receipts, and when the fund is replenished, the expenses are recorded and cash is restored to the fixed amount.

Phishing is a social engineering attack that uses fraudulent messages, often emails, to trick people into revealing credentials, opening malware or making payments.

Physical access controls restrict entry to facilities and sensitive areas, such as data centers, using locks, badges, guards, cameras, visitor logs and secure entry vestibules.

Piercing the corporate veil is when a court disregards a corporation's separate existence and holds its owners personally liable for its debts, usually because the corporation was used to commit fraud or was operated as the owners' alter ego.

Portability lets a surviving spouse use the unused part of a deceased spouse's estate and gift tax exclusion (the deceased spousal unused exclusion amount), in addition to their own.

A positive confirmation asks the recipient to reply in every case, either agreeing with stated information or filling in a blank. A negative confirmation asks for a reply only if the recipient disagrees.

After an S election ends, a post-termination transition period, generally one year, lets shareholders receive cash distributions tax-free out of the accumulated adjustments account and deduct suspended losses, both limited to their stock basis.

Before accepting an audit, the auditor determines that management uses an acceptable financial reporting framework and agrees it is responsible for the financial statements, for internal control and for giving the auditor access to information.

The predecessor auditor is the auditor who audited the most recent financial statements, or was engaged to, and has resigned, declined to stand for reappointment or been notified that its services are ended.

A bankruptcy trustee can recover a preferential transfer: a payment to a creditor for an existing debt, made while the debtor was insolvent and within 90 days before the petition (1 year for insiders), that gives the creditor more than it would get in a liquidation.

The premium tax credit is a refundable credit that helps eligible individuals pay for health insurance bought through a government health insurance marketplace. It is often paid in advance to the insurer and reconciled on the tax return.

In a preparation engagement, an accountant prepares financial statements for a client but provides no assurance and issues no report. It is a nonattest service.

Auditing standards require the auditor to presume that there is a risk of material misstatement due to fraud in revenue recognition, and to treat it as a significant risk, unless the presumption is rebutted.

The price-earnings ratio is a company's market price per share divided by its earnings per share. It shows how much investors pay for each dollar of earnings.

Fair value is measured using prices in the principal market for the asset or liability, the market with the greatest volume and level of activity. If there is no principal market, the most advantageous market is used.

When another party is involved in providing goods or services to a customer, a company is a principal (reporting revenue gross) if it controls them before transfer, and an agent (reporting only its fee or commission, net) if it doesn't.

The principle of least privilege means each user, system or process is given only the access it needs to perform its role, and no more.

A prior period adjustment corrects an error in previously issued financial statements by adjusting the beginning balance of retained earnings, net of tax, for the earliest period presented, and restating the prior periods shown.

Prior service cost is the increase in a pension obligation that results when a plan is amended to give employees credit for service already performed.

Between competing perfected security interests in the same collateral, the first to file or perfect generally wins. A perfected interest beats an unperfected one; between unperfected interests, the first to attach wins.

Privacy by design means building privacy protections into systems and processes from the start, with the most privacy-protective settings as the default, instead of adding them afterward.

Private companies and not-for-profits can elect to amortize goodwill on a straight-line basis over 10 years, or less if a shorter life is more appropriate, instead of only testing it for impairment.

A private foundation is a charitable organization that isn't a public charity, usually because its support comes from one family or company rather than the public. It pays an excise tax on net investment income and files Form 990-PF.

A private letter ruling is a written statement from the Internal Revenue Service, issued at a taxpayer's request, applying the tax law to that taxpayer's specific facts.

Prizes and awards, such as contest winnings or a car won in a raffle, are included in gross income at their fair market value.

Pro forma financial information shows how historical financial statements might have looked if a significant transaction, such as an acquisition, had occurred earlier. A practitioner can examine or review it under the attestation standards.

The procure-to-pay process runs from a purchase requisition through the purchase order, receiving goods, recording the vendor invoice and paying it.

Professional skepticism is an attitude that includes a questioning mind, alertness to conditions that may indicate misstatement, and a critical assessment of audit evidence.

The profitability index is the present value of a project's future cash flows divided by the initial investment. A value above 1 means the project has a positive net present value.

Securities and Exchange Commission and Public Company Accounting Oversight Board rules bar a public company's auditor from providing certain services to the client, including bookkeeping, financial information systems design, valuations, actuarial services, internal audit outsourcing, management functions and legal services.

The projected benefit obligation (PBO) is the actuarial present value of pension benefits earned by employees to date, measured using expected future salary levels.

In substantive sampling, misstatements found in the sample are projected to the whole population. The projected misstatement, plus an allowance for sampling risk, is compared with tolerable misstatement.

Promissory estoppel makes a promise enforceable without consideration when the promisor should reasonably expect the promisee to rely on it, the promisee does rely on it to their detriment, and injustice can be avoided only by enforcing it.

A proof of cash is a four-column reconciliation of a bank account that reconciles the beginning balance, receipts, disbursements and ending balance per the bank with those per the books.

When personal-use property, such as a home, is converted to business or rental use, its basis for depreciation and for measuring a loss is the lower of its adjusted basis and its fair market value at the date of conversion.

When a corporation distributes appreciated property to shareholders, it recognizes gain as if it had sold the property at fair market value. It recognizes no loss on property that has declined in value.

A property dividend distributes noncash assets, such as investments in another company, to shareholders. The asset is first remeasured to fair value at the declaration date, with a gain or loss recognized, and the dividend is recorded at that fair value.

Proprietary funds account for a government's business-type activities that charge fees for goods or services. There are two kinds: enterprise funds (serving the public) and internal service funds (serving other departments).

Prospective financial information is financial information about the future: forecasts, based on expected conditions, and projections, based on one or more hypothetical assumptions. Accountants can examine, compile or apply agreed-upon procedures to it.

The Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act and overseen by the Securities and Exchange Commission, sets auditing, quality control, ethics and independence standards for audits of public companies and broker-dealers.

A public key infrastructure (PKI) is the system of certificate authorities, digital certificates and policies that links public keys to verified identities, so people can trust whose key they are using.

Public Law 86-272 bars a state from imposing a net income tax on an out-of-state business whose only activity in the state is soliciting orders for tangible personal property that are approved and shipped from outside the state.

A purchase-money security interest is taken by a seller, or a lender who finances the purchase, in the goods being bought. It gets special priority and, for consumer goods, is perfected automatically when it attaches.

Push-down accounting means an acquired company uses the acquirer's new basis (fair values at acquisition, including goodwill) in its own separate financial statements.

The Public Company Accounting Oversight Board (PCAOB) quality control (QC) standard QC 1000, A Firm's System of Quality Control, sets requirements for registered firms' quality control systems. It takes effect on December 15, 2026, and is testable on the exam from January 1, 2027.

Besides grantor trusts, two kinds of trusts can hold S corporation stock: a qualified subchapter S trust (QSST) and an electing small business trust (ESBT).

A qualified terminable interest property (QTIP) trust gives a surviving spouse all its income for life, at least annually, and qualifies for the marital deduction if the executor elects it, while the first spouse decides who receives what is left.

The qualified business income (QBI) deduction under Section 199A lets eligible individuals deduct up to 20% of qualified business income from sole proprietorships, partnerships and S corporations. The One Big Beautiful Bill Act made it permanent.

A qualified charitable distribution is a transfer made directly from an individual retirement account to a qualifying charity by an owner aged 70½ or older, up to an annual inflation-indexed limit. It is excluded from the owner's income.

A qualified disclaimer is a beneficiary's refusal of an inheritance or gift. The property passes as if the person who disclaimed had died first, and the refusal isn't treated as a gift by them.

Qualified dividends are dividends from US corporations (and qualified foreign corporations) that are taxed at the lower long-term capital gain rates of 0%, 15% or 20%, rather than as ordinary income.

Qualified improvement property is an improvement to the interior of a nonresidential building made after the building was first placed in service. It is depreciated over 15 years and qualifies for bonus depreciation and section 179 expensing.

A qualified ('except for') opinion is expressed when misstatements, or a lack of sufficient appropriate evidence, are material but not pervasive to the financial statements.

A qualified opportunity zone is a designated low-income area. Investors who reinvest capital gains in a qualified opportunity fund within 180 days can defer the gain, and appreciation on investments held at least 10 years can be excluded.

For 2025 through 2028, individuals can deduct up to $12,500 ($25,000 on a joint return) of qualified overtime compensation: the premium part of overtime pay required by federal labor law, such as the extra half in time-and-a-half.

With a qualified personal residence trust, the owner transfers a home to a trust but keeps the right to live in it for a set term. The taxable gift is only the value of the remainder, reduced by the retained interest.

A scholarship received by a degree candidate is excluded from gross income to the extent it is used for tuition, fees, and books, supplies and equipment required for courses.

Qualified small business stock under Section 1202 is stock in a domestic C corporation, acquired at original issue, that lets non-corporate shareholders exclude some or all of the gain on sale if holding period and other requirements are met.

An S corporation that owns 100% of another corporation can elect to treat it as a qualified subchapter S subsidiary. The subsidiary is then disregarded, and its assets, income and deductions are treated as the parent's.

The One Big Beautiful Bill Act lets workers in occupations that customarily receive tips deduct up to $25,000 of qualified tips a year for 2025 through 2028, whether or not they itemize.

A qualifying surviving spouse can use the joint return tax rates and standard deduction for the two years after the year their spouse died, if they don't remarry and maintain a home for a dependent child.

The qualitative characteristics are the attributes that make financial information useful. The two fundamental ones are relevance and faithful representation; comparability, verifiability, timeliness and understandability enhance them.

The quick ratio measures a company's ability to pay current liabilities with its most liquid assets: cash, marketable securities and net receivables, divided by current liabilities.

Ransomware is malicious software that encrypts an organization's data or systems and demands payment for the key, often also threatening to publish stolen data.

Ratification is a principal's later approval of an act an agent performed without authority. It binds the principal as if the act had been authorized from the start.

Reasonable assurance is a high, but not absolute, level of assurance that the financial statements as a whole are free from material misstatement. It is the level an audit provides.

S corporation shareholder-employees must be paid reasonable compensation for their services before taking distributions. Wages are subject to payroll taxes, while distributions are not.

A reasonableness test is a substantive analytical procedure that builds an expectation for an account from operating or financial data, such as rental units × occupancy × average rent for rental income.

A reclassification adjustment moves an amount out of accumulated other comprehensive income into net income when it is realized, such as on the sale of an available-for-sale debt security, so it isn't counted twice in comprehensive income.

Governments reconcile their governmental fund statements, prepared on the modified accrual basis, to the governmental activities column of the government-wide statements, prepared on the full accrual basis.

The record-to-report process covers closing the books and producing financial statements: recording journal entries, reconciling accounts, consolidating entities and preparing reports.

The recovery point objective (RPO) is the maximum amount of data loss an organization can accept, measured as a period of time before a disruption.

The recovery time objective (RTO) is the maximum acceptable time to restore a system or process after a disruption.

A refundable tax credit can reduce tax below zero, so any excess is paid to the taxpayer as a refund. A nonrefundable credit can only reduce tax to zero.

Regression analysis estimates how a dependent variable, such as total cost, changes with one or more independent variables, such as machine hours, by fitting an equation like y = a + bx to past data.

A related party is a person or entity that can control or significantly influence another, or is under common control with it, such as affiliates, principal owners (over 10%), management and their immediate families, and equity-method investees.

When a like-kind exchange is made with a related party, the deferred gain becomes taxable if either party disposes of the property it received within 2 years after the exchange.

A loss on a sale or exchange of property between related parties is disallowed. Related parties include family members (spouse, siblings, ancestors and lineal descendants) and a corporation more than 50% owned, directly or indirectly, by the seller.

A relational database stores data in tables of rows (records) and columns (fields). Tables are linked by keys: a primary key identifies each row, and a foreign key refers to the primary key of another table.

Audit evidence is generally more reliable when it comes from independent sources outside the entity, is produced under effective controls, is obtained directly by the auditor, is documentary and is an original rather than a copy.

A reportable segment is an operating segment that a public company must report separately because it meets one of the 10% quantitative thresholds for revenue, profit or loss, or assets.

When comparative financial statements are presented, the continuing auditor updates the opinion on the prior period. If the updated opinion differs from the one first issued, an other-matter paragraph explains why.

The auditor must communicate certain matters to those charged with governance, including the auditor's responsibilities, the planned scope and timing of the audit, and significant findings from the audit.

A required minimum distribution (RMD) is the minimum amount that must be withdrawn each year from a traditional individual retirement account or employer plan once the owner reaches the required beginning age.

Required supplementary information is information a standard-setter requires to accompany the basic financial statements, such as management's discussion and analysis for governments, but that isn't part of them.

Research and development costs, such as salaries, materials and overhead for discovering new knowledge or turning it into products, are expensed as incurred under US Generally Accepted Accounting Principles (GAAP).

Under the One Big Beautiful Bill Act, domestic research and experimental expenditures paid in tax years beginning after 2024 can be deducted immediately again. Foreign research costs must still be amortized over 15 years.

The residential clean energy credit gave homeowners a 30% credit for installing solar panels, solar water heaters, small wind turbines, geothermal heat pumps and battery storage. The One Big Beautiful Bill Act ends it for expenditures made after December 31, 2025.

Residual income is an investment center's operating income minus a required return on its invested capital (the minimum rate of return × invested capital). It measures the income earned above the cost of the capital used.

Under respondeat superior, an employer is liable for torts its employees commit within the scope of their employment, even if the employer did nothing wrong.

A restatement corrects a material error in previously issued financial statements by revising them, with the cumulative effect on earlier periods adjusted in opening retained earnings (a prior period adjustment).

Restricted cash is cash whose withdrawal or use is legally or contractually limited, such as cash held in escrow or a bond sinking fund. It is reported separately from cash available for operations.

A restricted stock unit (RSU) is a promise to deliver company shares to an employee once vesting conditions, usually continued service, are met. For equity-classified units, compensation cost is the grant-date fair value of the shares, recognized over the service period.

The retail inventory method estimates ending inventory at cost by converting ending inventory at retail prices to cost, using the ratio of cost to retail for the goods available for sale.

A rollover moves retirement savings from one plan or account to another without tax. A direct (trustee-to-trustee) rollover avoids withholding; an indirect rollover must be completed within 60 days.

Retrospective application means applying a new accounting principle to all prior periods presented as if it had always been used, with the cumulative effect on earlier periods adjusted in the opening balance of retained earnings.

Return on investment for a division or investment center is operating income divided by average invested capital (operating assets). It equals profit margin multiplied by asset turnover.

A revenue ruling is the Internal Revenue Service's official interpretation of how the tax law applies to a specific set of facts. It is published in the Internal Revenue Bulletin and can be relied on by any taxpayer with substantially the same facts.

In a reverse acquisition, the company that legally issues shares is the acquiree for accounting purposes, because the owners of the other company end up controlling the combined entity, as when a private company merges into a public shell.

In a reverse like-kind exchange, the replacement property is acquired before the old property is sold. An exchange accommodation titleholder holds title to one of the properties until the exchange is completed.

In a review of financial statements, the accountant obtains limited assurance, mainly through inquiry and analytical procedures, that no material modifications are needed for the statements to conform with the applicable framework.

An auditor who audits an entity's annual financial statements can review its interim (for example, quarterly) financial information, mainly through inquiry and analytical procedures, to give limited assurance.

A right-of-use asset is a lessee's right to use a leased asset for the lease term. It is recognized at lease commencement together with a lease liability, for both finance and operating leases.

A right-to-audit clause in a vendor contract gives the customer, and often its auditors and regulators, the right to inspect the vendor's records, controls and facilities.

Risk assessment procedures are the procedures the auditor performs to understand the entity, its environment, its financial reporting framework and its system of internal control, in order to identify and assess the risks of material misstatement.

The risk of material misstatement is the risk that the financial statements are materially misstated before the audit. At the assertion level it combines inherent risk and control risk.

Robotic process automation (RPA) uses software 'bots' to perform repetitive, rule-based tasks that people would otherwise do through the same screens, such as entering invoices or reconciling accounts.

Role-based access control grants system permissions to roles, such as accounts payable clerk, rather than to individuals, and users get access by being assigned to a role.

When substantive procedures are performed at an interim date, the auditor performs further procedures for the remaining period to year-end, so the conclusions extend to the balance sheet date.

A Roth conversion moves money from a traditional individual retirement account (or eligible plan) into a Roth account. The pretax amount converted is taxable now, in exchange for tax-free qualified withdrawals later.

A Roth individual retirement account (IRA) takes after-tax contributions; qualified distributions, including earnings, are tax-free.

An S corporation election, made on Form 2553 with all shareholders' consent, lets an eligible domestic corporation pass its income, losses, deductions and credits through to its shareholders instead of paying corporate tax.

An S election must generally be filed within 2 months and 15 days after the start of the tax year it is to take effect. Simplified relief allows a late election within 3 years and 75 days of the intended date if there was reasonable cause.

An S corporation shareholder's stock basis increases with contributions and their share of income, and decreases with distributions, nondeductible expenses and losses. Losses are deductible only up to stock basis plus debt basis.

An S election ends if shareholders owning more than half the shares revoke it, if the corporation stops qualifying (for example, it gets an ineligible shareholder or a second class of stock), or after excess passive income for three years in a row.

Gain or loss on selling a partnership interest is generally capital, but the part attributable to the partnership's unrealized receivables and inventory (hot assets) is ordinary income.

In a sale-leaseback, an owner sells an asset and leases it back from the buyer. If the transfer qualifies as a sale under the revenue guidance, the seller-lessee derecognizes the asset, recognizes any gain or loss and accounts for the leaseback as a lease.

When customers can return products, the seller recognizes revenue only for the products it expects to keep sold. It records a refund liability for expected returns and an asset for its right to recover the returned products.

A sales-type lease is a lessor's lease that meets any of the five lease classification criteria. The lessor derecognizes the underlying asset, recognizes a net investment in the lease and recognizes any selling profit or loss at commencement.

Salting adds a random value to each password before it is hashed and stored, so identical passwords produce different hashes and precomputed tables of hashes are useless to attackers.

Common sample selection methods are random selection, where every item has an equal chance, systematic selection, every nth item after a random start, and haphazard selection, picking without conscious bias.

Sampling risk is the risk that the auditor's conclusion based on a sample differs from the conclusion it would reach if it tested the whole population.

The saver's credit is a nonrefundable credit of 10%, 20% or 50% of up to $2,000 ($4,000 on a joint return) of contributions to retirement plans and individual retirement accounts by low- and moderate-income taxpayers.

Schedule K-1 reports each owner's share of a pass-through entity's income, deductions and credits: from a partnership's Form 1065, an S corporation's Form 1120-S, or a trust's or estate's Form 1041.

Schedule M-1 of a corporate tax return (Form 1120) reconciles net income per books to taxable income. Corporations with total assets of $10 million or more file the more detailed Schedule M-3 instead.

In a single audit, the auditee prepares a schedule of expenditures of federal awards listing its spending under each federal program. The auditor reports on it in relation to the financial statements as a whole.

A scope limitation is the auditor's inability to obtain sufficient appropriate audit evidence, because of circumstances such as destroyed records or because management restricts the work.

The search for unrecorded liabilities is a set of procedures that test the completeness of liabilities, chiefly by examining cash payments and unpaid invoices after year-end to find obligations that existed at the balance sheet date.

Securities and Exchange Commission (SEC) filers are classified by public float, the market value of shares held by non-affiliates: large accelerated filers ($700 million or more), accelerated filers ($75 million to $700 million) and non-accelerated filers.

Gain on qualified small business stock held more than 6 months can be deferred if the proceeds are reinvested in other qualified small business stock within 60 days.

Section 1231 property is depreciable property and real property used in a trade or business and held for more than one year. A net Section 1231 gain is treated as long-term capital gain; a net loss is ordinary.

Gain on a sale of property that is depreciable to the buyer, between related parties such as a shareholder and a corporation they own more than 50% of, is ordinary income to the seller.

A loss on section 1244 stock, stock of a small business corporation issued to an individual, is an ordinary loss up to $50,000 a year ($100,000 on a joint return) rather than a capital loss.

Section 179 lets a business elect to deduct the cost of qualifying property, mainly tangible personal property, in the year it is placed in service instead of depreciating it. The One Big Beautiful Bill Act raised the limit to $2.5 million for 2025 ($2,560,000 for 2026).

When a parent corporation owning at least 80% of a subsidiary's voting power and value liquidates the subsidiary, neither the parent nor the subsidiary recognizes gain or loss on the distributions to the parent.

When a corporation buys at least 80% of a target's stock from a consolidated group or from S corporation shareholders, a joint section 338(h)(10) election treats the deal for tax as a sale of the target's assets followed by a liquidation.

Section 351 allows property to be transferred to a corporation in exchange for its stock without recognizing gain or loss, if the transferors control at least 80% of the corporation immediately after the exchange.

A corporation can distribute the stock of a subsidiary it controls (at least 80%) to its shareholders tax-free if both companies carry on an active business, the distribution has a business purpose and isn't a device to distribute earnings.

A Section 529 plan is a tax-advantaged education savings plan. Earnings grow tax-free, and withdrawals are tax-free when used for qualified education expenses.

Section 704(c) requires that built-in gain or loss on property a partner contributes to a partnership be allocated to that partner when the property is sold or depreciated, so the gain or loss isn't shifted to other partners.

When a partnership interest is sold or inherited and the partnership has a section 754 election in effect, the partnership adjusts the basis of its assets for the new partner only, by the difference between that partner's outside basis and their share of inside basis.

A Section 754 election lets a partnership adjust the basis of its assets when a partnership interest is sold or inherited, or when certain distributions are made, so inside basis better reflects what was paid.

A transfer of financial assets, such as receivables, is a sale only if the assets are isolated from the transferor, the transferee can pledge or exchange them, and the transferor doesn't keep effective control. Otherwise it is a secured borrowing.

Security awareness training teaches employees to recognize and respond to threats such as phishing and social engineering, handle data safely and report incidents promptly.

A security information and event management (SIEM) system collects and correlates logs from servers, network devices and applications across an organization to detect suspicious activity and alert security staff.

Segregation of duties means dividing authorization, custody of assets and recording of transactions among different people, so that no one person can both commit and conceal an error or fraud.

An asset a company builds for its own use is recorded at the cost of materials, labor and overhead, plus interest capitalized during construction.

Self-employed individuals, and S corporation shareholders who own more than 2%, can deduct 100% of health insurance premiums for themselves, their spouse and dependents in arriving at adjusted gross income.

Self-employment tax is the Social Security and Medicare tax paid by self-employed people on their net earnings, equivalent to both the employer's and employee's share of payroll taxes: 15.3% on 92.35% of net earnings, with the Social Security part capped at the annual wage base.

General partners pay self-employment tax on their share of a partnership's trade or business income plus guaranteed payments. Limited partners pay it only on guaranteed payments for services they perform.

For 2025 through 2028, each taxpayer aged 65 or older can take an extra $6,000 deduction ($12,000 for a married couple who both qualify), on top of the existing additional standard deduction for age.

Sensitivity analysis shows how a result, such as projected profit or net present value, changes when one assumption changes while the others stay the same. It shows which assumptions matter most.

A simplified employee pension (SEP) plan lets an employer, including a self-employed person, contribute up to 25% of each employee's compensation to their individual retirement accounts, up to an annual dollar limit.

Organizations keep separate environments for developing, testing and running (production) systems, so changes are tested before they affect live data and developers can't change production directly.

Serial bonds mature in installments over a series of years rather than all on one date. Each maturity is effectively a separate bond, with its own price and discount or premium.

A service auditor reports on the controls at a service organization, such as a payroll processor, for use by its customers' auditors. The report covers management's description of its system and its written assertion.

A service level agreement sets measurable service standards a provider commits to, such as availability, response and resolution times, along with how performance is measured and reported and the remedies if standards are missed.

The shared responsibility model divides security duties between a cloud provider and its customer. The provider secures the underlying cloud; the customer secures what it puts in it.

A shareholder derivative suit is a lawsuit a shareholder brings on behalf of the corporation to enforce a right the corporation itself has failed to enforce, such as a claim against directors for breaching their duties.

A lessee can elect, by class of asset, not to recognize a right-of-use asset and lease liability for short-term leases: those with a term of 12 months or less and no purchase option the lessee is reasonably certain to exercise.

A short-term obligation can be classified as noncurrent if the company intends to refinance it on a long-term basis and demonstrates that it can, for example by refinancing it after the balance sheet date but before the statements are issued.

A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit the attention of those charged with governance.

When the timing of payment gives the customer or the seller a significant benefit of financing, for example payment two years after delivery, the transaction price is adjusted for the time value of money.

Significant influence is the ability to influence an investee's operating and financial policies without controlling it. It is presumed when an investor holds 20% to 50% of the voting stock, and leads to the equity method.

A significant risk is an identified risk of material misstatement close to the upper end of the spectrum of inherent risk, or one the auditing standards require to be treated as significant, such as fraud risks.

A simple trust must distribute all its income each year, makes no charitable contributions and distributes no principal. Any trust that doesn't meet those conditions in a year is a complex trust for that year.

A Savings Incentive Match Plan for Employees (SIMPLE) lets employers with 100 or fewer employees and no other plan offer employee salary deferrals, with an employer match of up to 3% of pay or a 2% contribution for all eligible employees.

A single audit is an audit of a nonfederal entity, such as a state or local government or a not-for-profit, that spends $1,000,000 or more of federal awards in a year (for fiscal years beginning on or after October 1, 2024). It covers the financial statements and compliance with the requirements of major federal programs.

Single sign-on lets a user sign in once with a central identity provider and then access many applications without signing in to each separately.

Businesses with average annual gross receipts of $31,000,000 or less over the prior three years (for 2025) can use the cash method, even as C corporations, and are exempt from several complex rules.

Taxpayers can choose the Tax Court's small tax case procedure for disputes of $50,000 or less for each year. Hearings are informal, but decisions can't be appealed and aren't precedent for other cases.

A System and Organization Controls (SOC) 3 report covers the same trust services criteria as a SOC 2 report, but is a short, general-use report without the detailed system description or the tests performed and their results.

A System and Organization Controls (SOC) for Cybersecurity examination reports on the description of an organization's cybersecurity risk management program and whether its controls were effective in meeting its cybersecurity objectives.

Social engineering manipulates people, rather than technology, into revealing information or giving access. Techniques include phishing, pretexting (inventing a believable story), baiting and tailgating into secure areas.

Costs of software to be sold are research and development expense until technological feasibility is reached, then capitalized until the product is available for release. For internal-use software, costs in the application development stage are capitalized.

A solo 401(k) is a 401(k) plan for a self-employed person with no employees other than a spouse. The owner contributes as an employee (elective deferrals) and as the employer (a profit-sharing contribution), up to a combined annual limit.

A partnership agreement can allocate income, gain, loss or deductions among partners differently from their ownership shares. The allocation is respected only if it has substantial economic effect.

A special purpose framework is a basis of accounting other than generally accepted accounting principles, such as the cash basis, the tax basis, a regulatory basis or a contractual basis.

A special revenue fund is a governmental fund for the proceeds of specific revenue sources that are restricted or committed to a specified purpose other than debt service or capital projects, such as a fuel tax used for road maintenance.

Special use valuation lets an estate value farm or closely held business real estate at its value in its current use rather than its highest and best use, reducing the estate's value up to an inflation-adjusted limit.

Specific identification tracks the actual cost of each inventory item, so cost of goods sold is the cost of the exact items sold. It is used for unique, high-value items such as cars, jewelry and real estate.

A specified service trade or business is one in fields such as health, law, accounting, actuarial science, consulting, athletics, financial services and brokerage, or one whose main asset is the skill or reputation of its owners or employees.

In a split-interest agreement, a donor gives assets to a not-for-profit, or a trust, and the benefits are shared between the not-for-profit and other beneficiaries. Examples are charitable remainder trusts, charitable lead trusts and gift annuities.

The spot rate is the exchange rate for immediate delivery of a currency. Foreign currency transactions are recorded at the spot rate on the transaction date; the current rate is the spot rate at the balance sheet date.

A spousal lifetime access trust is an irrevocable trust one spouse creates for the other spouse (and often their descendants), using the creator's lifetime gift tax exemption to move assets out of both spouses' estates.

A Structured Query Language (SQL) injection attack enters database commands into an input field, such as a login form, that an application passes to its database without proper checking, letting the attacker read, change or delete data.

The standalone selling price is the price at which a company would sell a promised good or service separately to a customer. It is the basis for allocating a contract's transaction price among its performance obligations.

The standard deduction is a fixed amount, based on filing status, that individuals can deduct instead of itemizing. For 2026 it is $16,100 for single filers, $32,200 for married couples filing jointly and $24,150 for heads of household.

The state and local tax (SALT) deduction cap limits an individual's itemized deduction for state and local income (or sales) taxes and property taxes. The One Big Beautiful Bill Act raised it from $10,000 to $40,000 for 2025 ($20,000 for married filing separately).

Most states start their income tax calculation from federal taxable income, but they differ in how they follow the federal code: rolling conformity follows it as amended, while static conformity follows it as of a fixed date.

The government-wide statement of activities shows each function's expenses, less the program revenues it generates, to give its net expense, and then shows the general revenues, such as taxes, that finance it.

This is the operating statement for governmental funds. It reports revenues, expenditures, other financing sources and uses, and special items, giving the net change in fund balance for the period.

The Statements on Standards for Tax Services are the American Institute of Certified Public Accountants' enforceable standards for members' tax practice, covering tax return positions, answers to return questions, use of estimates, knowledge of errors and giving advice.

The statute of frauds requires certain contracts to be evidenced by a signed writing to be enforceable, including contracts for interests in land, contracts that can't be performed within one year, promises to pay another's debt, and sales of goods for $500 or more.

The statute of limitations limits how long the Internal Revenue Service has to assess additional tax: generally three years from the later of the return's due date or the date it was filed.

A statutory notice of deficiency (the 90-day letter) is the Internal Revenue Service's formal notice that it intends to assess additional tax. The taxpayer has 90 days (150 if the notice is addressed outside the United States) to petition the Tax Court.

A step acquisition is a business combination achieved in stages, where the acquirer already held an equity interest in the acquiree before obtaining control.

A step-up in basis gives property inherited from a decedent a tax basis equal to its fair market value at the date of death (or the alternate valuation date), so appreciation during the decedent's life is never taxed as income.

Stock appreciation rights give an employee the increase in a company's share price over a set price, paid in cash or in shares, without the employee buying any stock.

Stock attribution rules treat a person as owning stock actually owned by certain family members, partnerships, estates, trusts and corporations, so ownership tests can't be avoided by spreading shares around.

A stock dividend is a pro rata distribution of a company's own shares to its shareholders. It moves an amount from retained earnings to paid-in capital without changing total equity.

A stock redemption is a corporation buying back its own shares from a shareholder. It is treated as a sale (capital gain or loss) if it meets one of the tests in Section 302; otherwise it is a distribution, taxed as a dividend to the extent of earnings and profits.

A stock split increases the number of shares outstanding and reduces the par value per share proportionately, without changing total equity or any equity account balance.

Stratification divides a population into subgroups (strata) of items with similar characteristics, often by dollar size, so each stratum can be sampled separately.

Structured data fits a fixed format of rows and columns, such as general ledger tables. Unstructured data has no predefined format, such as emails, contracts, images and audio; semi-structured data, such as tagged files, falls in between.

Individuals can deduct up to $2,500 a year of interest on qualified education loans as an adjustment in arriving at adjusted gross income, so it is available without itemizing.

Subpart F income is certain income of a controlled foreign corporation, mainly passive income such as dividends, interest, rents and royalties, plus some related-party sales and services income, that United States shareholders must include in income currently, even if it isn't distributed.

Subsequent events are events after the balance sheet date but before the financial statements are issued (or available to be issued). Recognized events adjust the statements; nonrecognized events may only need disclosure.

The auditor performs procedures covering the period from the financial statement date to the audit report date to identify events that require adjustment of, or disclosure in, the financial statements.

Subsequently discovered facts are facts that become known to the auditor after the report date that, had they been known then, might have caused the auditor to revise the report.

A tax position has substantial authority when the weight of authorities supporting it is substantial compared with those against it, often described as roughly a 40% chance of being upheld. It avoids the substantial understatement penalty without disclosure.

The auditor evaluates whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period, which under American Institute of Certified Public Accountants standards matches the accounting framework, usually one year after the statements are issued.

Substantive analytical procedures are analytical procedures used as substantive evidence: the auditor develops an expectation precise enough to detect a material misstatement, compares it with the recorded amount, and investigates significant differences.

Substantive procedures are audit procedures designed to detect material misstatements at the assertion level. They are either tests of details or substantive analytical procedures.

Sufficient appropriate audit evidence is evidence that is enough in quantity (sufficiency) and good enough in quality, meaning relevant and reliable (appropriateness), to support the auditor's opinion.

In an attestation engagement, criteria are the benchmarks used to measure or evaluate the subject matter. They must be suitable, meaning relevant, objective, measurable and complete, and available to the intended users.

Sum-of-the-years'-digits is an accelerated depreciation method: each year's depreciation is the depreciable base (cost minus salvage value) multiplied by the remaining years of life divided by the sum of the years' digits.

An auditor engaged to audit an entity's full financial statements can also report on summary financial statements derived from them, giving an opinion on whether they are consistent in all material respects with the audited statements.

The auditor accumulates misstatements found during the audit, other than clearly trivial ones, asks management to correct them, and evaluates whether those left uncorrected are material, alone or together.

When supplementary information, such as consolidating schedules or a schedule of expenditures of federal awards, accompanies audited statements, the auditor can report on whether it is fairly stated in all material respects in relation to the financial statements as a whole.

A supply chain attack compromises a trusted supplier's software, hardware or services, for example by inserting malicious code into a software update, to reach the supplier's customers.

In a suretyship, a surety promises a creditor to pay a debtor's obligation. A surety is primarily liable, so the creditor can demand payment from the surety without first pursuing the debtor.

Symmetric encryption uses the same secret key to encrypt and decrypt data. It is fast, so it is used to protect large volumes of data, but the key must be shared securely between the parties.

A System and Organization Controls (SOC) 1 report is a service auditor's report on a service organization's controls that are relevant to its customers' internal control over financial reporting.

A System and Organization Controls (SOC) 2 report is a service auditor's report on a service organization's controls relevant to the trust services criteria: security, availability, processing integrity, confidentiality and privacy.

System conversion methods are ways to switch from an old system to a new one: direct (cutover) conversion all at once, parallel running of both systems, pilot conversion at one location first, and phased conversion module by module.

Under the American Institute of Certified Public Accountants' Statement on Quality Management Standards (SQMS) No. 1, a firm designs a risk-based system of quality management: it sets quality objectives, identifies and assesses quality risks, and designs responses to them.

The systems development life cycle (SDLC) is the structured process for building or acquiring systems: planning, analysis, design, development, testing, implementation and maintenance.

Partnerships must report each partner's capital account on Schedule K-1 using the tax basis method, which tracks contributions, allocated taxable income and losses, and distributions at tax basis.

Under the tax benefit rule, recovering an amount deducted in an earlier year, such as a state income tax refund, is income in the year recovered, but only to the extent the earlier deduction reduced tax.

A taxpayer can litigate a federal tax dispute in the Tax Court without paying first, or pay the tax and sue for a refund in a federal district court or the Court of Federal Claims.

Tax research generally follows these steps: establish the facts, identify the issues, find the relevant authority, evaluate it, reach a conclusion and communicate it, usually in a memo to the file and a letter to the client.

Tax return preparers can be penalized under Section 6694 for understatements on returns they prepare: for an unreasonable position, the greater of $1,000 or 50% of the fee; for willful or reckless conduct, the greater of $5,000 or 75% of the fee.

Corporate reorganizations that meet the tax code's definitions, such as statutory mergers (Type A), stock-for-stock acquisitions (Type B) and stock-for-assets acquisitions (Type C), let corporations and shareholders defer gain.

Tax-loss harvesting means selling investments at a loss to offset capital gains, and up to $3,000 a year of ordinary income, while staying invested in similar assets.

Up to 85% of Social Security benefits are included in gross income, depending on provisional income: modified adjusted gross income plus tax-exempt interest plus half of the benefits.

A pro rata stock dividend on common stock is generally not taxable. The shareholder spreads the basis of the original shares over the old and new shares, and the holding period of the new shares includes that of the old.

The temporal method remeasures a foreign entity's records into its functional currency: monetary items at current exchange rates, and nonmonetary items such as inventory and equipment at historical rates.

A temporary difference is a difference between an asset's or liability's tax basis and its carrying amount in the financial statements that will reverse in future years, creating taxable or deductible amounts then.

An agency ends by act of the parties, such as fulfillment of its purpose, expiry, mutual agreement, revocation by the principal or renunciation by the agent, or by operation of law, such as death, insanity or bankruptcy of either party.

Tests of controls are audit procedures that evaluate whether controls operated effectively throughout the period. They are performed when the auditor plans to rely on controls or when substantive procedures alone can't give enough evidence.

Tests of details are substantive procedures that examine individual transactions, balances or disclosures, such as vouching, confirming, recalculating and inspecting documents.

A third-party beneficiary is someone not party to a contract who benefits from it. An intended beneficiary, such as a creditor or donee beneficiary, can enforce the contract; an incidental beneficiary can't.

Those charged with governance are the people responsible for overseeing the entity's strategic direction and accountability, including its financial reporting, such as the board of directors or the audit committee.

Under the conceptual framework in the American Institute of Certified Public Accountants' Code of Professional Conduct, members identify threats to compliance with the rules, evaluate their significance and apply safeguards to eliminate or reduce them to an acceptable level.

A three-way match compares the purchase order, the receiving report and the vendor's invoice before an invoice is approved for payment.

Under a throwback rule, some states add to their own sales factor the sales of goods shipped to a state where the seller isn't taxable, so the income doesn't escape state tax altogether.

Time series forecasting predicts future values from a variable's own past values, separating trend, seasonal, cyclical and irregular components.

The times interest earned ratio is earnings before interest and taxes divided by interest expense. It shows how comfortably operating earnings cover interest costs.

Tokenization replaces sensitive data, such as a card number, with a random token that has no value if stolen. The link between token and original value is kept in a secure token vault.

Tolerable misstatement is the amount of misstatement in a population that the auditor will accept while still concluding the population is fairly stated. It is set at or below performance materiality.

In an integrated audit of a public company, the auditor uses a top-down approach to select controls to test: start at the financial statement level, consider entity-level controls, then focus on significant accounts, disclosures and their relevant assertions.

Trading securities are debt securities bought and held mainly to sell in the near term. They are carried at fair value, with unrealized gains and losses in net income.

A traditional individual retirement account (IRA) is a tax-deferred retirement account. Contributions may be deductible, earnings grow tax-deferred and withdrawals are taxed as ordinary income.

The transaction price is the amount of consideration a company expects to be entitled to in exchange for transferring promised goods or services to a customer, excluding amounts collected for third parties such as sales tax.

Transfer pricing is the pricing of transactions between related entities, such as a parent and its foreign subsidiary. Tax law requires arm's-length prices, and the Internal Revenue Service can reallocate income when prices aren't.

Treasury regulations are the Treasury Department's official interpretations of the Internal Revenue Code. Final and temporary regulations are binding on taxpayers; proposed regulations aren't.

Treasury stock is a company's own shares that it has issued and later bought back but not retired. It is shown as a reduction of stockholders' equity, not as an asset.

The treasury stock method measures the dilution from options and warrants for diluted earnings per share: it assumes they are exercised and the proceeds are used to buy back shares at the average market price for the period.

A troubled debt restructuring occurs when a creditor grants a concession to a debtor in financial difficulty. If the debt is settled with assets or equity, the debtor recognizes a gain equal to the debt's carrying amount minus the fair value given.

The One Big Beautiful Bill Act creates Trump accounts, savings accounts for children under 18 that work like individual retirement accounts. Contributions of up to $5,000 a year can be made starting July 4, 2026.

Trusts and estates pay income tax on income they keep, using compressed rate brackets: they reach the top 37% rate at just $15,650 of taxable income for 2025, far sooner than individuals.

The trust services criteria are the criteria used in System and Organization Controls (SOC) 2 and SOC 3 engagements, organized into five categories: security, availability, processing integrity, confidentiality and privacy.

A Type 1 System and Organization Controls (SOC) report covers the description of a service organization's system and the suitability of its control design at a point in time. A Type 2 report adds the operating effectiveness of the controls over a period.

Auditors gather evidence through inspection of records and assets, observation, inquiry, external confirmation, recalculation, reperformance and analytical procedures.

Data analytics is commonly grouped into four types: descriptive (what happened), diagnostic (why it happened), predictive (what is likely to happen) and prescriptive (what should be done).

The Internal Revenue Service examines returns by correspondence (by mail, usually on a few items), in an office audit at an agency office, or in a field audit at the taxpayer's business.

For an uncertain tax position, a company recognizes the tax benefit only if it is more likely than not (over 50%) to be sustained on examination on its technical merits, and measures it at the largest amount that is more than 50% likely to be realized on settlement.

A principal is undisclosed when the third party doesn't know the agent is acting for anyone else. The agent is personally liable on the contract, and the principal is also liable once discovered.

Unguaranteed residual value is the part of a leased asset's expected value at the end of the lease that the lessor expects to recover but that isn't guaranteed by the lessee or a third party.

Gift and estate taxes share a single lifetime exemption, the basic exclusion amount, sheltered by the unified credit. It is $13,990,000 for 2025, and the One Big Beautiful Bill Act raises it to $15,000,000 for 2026, indexed for inflation after that.

The uniform capitalization rules require producers and many resellers to include in inventory or other property not only direct costs but also an allocable share of indirect costs, including some administrative costs.

The United States Tax Court is a federal court where taxpayers can dispute a proposed deficiency without paying the tax first. It hears cases without a jury.

An unmodified (clean) opinion states that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

Profit on sales between members of a consolidated group is unrealized while the goods are still held within the group. It is eliminated from consolidated inventory and income until the goods are sold to outsiders.

Unrecaptured section 1250 gain is the part of an individual's gain on selling depreciable real property that comes from straight-line depreciation already taken. It is taxed at a maximum rate of 25%.

Unrelated business income is income an exempt organization earns from a trade or business it regularly carries on that isn't substantially related to its exempt purpose. It is taxed even though the organization is otherwise exempt.

Items that are unusual in nature or infrequent in occurrence are reported as a separate line within income from continuing operations, or disclosed in the notes. Extraordinary items no longer exist.

In attribute sampling for tests of controls, the upper deviation limit is the highest rate of deviation in the population that the sample results support at the chosen confidence level.

Use tax is owed by a buyer on taxable purchases on which the seller didn't collect sales tax, usually purchases from out-of-state sellers. The rate generally equals the sales tax rate.

User acceptance testing is the final testing stage before a system goes live, in which the business users test it against their requirements and formally sign off.

A user access review is a periodic check, usually by the business owners of a system, that every user's access is still needed and appropriate for their role.

A user auditor audits the financial statements of a user entity that relies on a service organization, such as a payroll processor. The user auditor needs to understand the services and the related controls.

A valuation allowance reduces a deferred tax asset when it is more likely than not (a likelihood of more than 50%) that some or all of the asset won't be realized.

Variable consideration is any part of a contract's price that can change, such as discounts, rebates, refunds, performance bonuses and penalties. It is estimated and included in the transaction price, subject to a constraint.

A variable interest entity (VIE) is an entity whose equity investors lack enough equity at risk or the usual characteristics of a controlling financial interest. It is consolidated by its primary beneficiary rather than by voting control.

Variable lease payments are lease payments that change because of facts or circumstances after commencement. Those that depend on an index or rate are included in the lease liability; those based on performance or usage are expensed as incurred.

Vendor due diligence assesses a potential vendor before signing, covering its financial strength, security and privacy controls, compliance, reputation and the data or systems it will access.

A virtual private network (VPN) creates an encrypted tunnel over a public network, such as the internet, so remote users can connect securely to an organization's internal network.

Virtualization uses software called a hypervisor to run several virtual machines, each with its own operating system, on one physical server. It is a foundation of cloud computing.

A void contract has no legal effect, such as one for an illegal purpose. A voidable contract is valid, but one party can choose to cancel it, for example because of being a minor, fraud, duress or undue influence.

Under the voting interest model, a company consolidates another entity when it has a controlling financial interest, usually by owning more than 50% of its voting shares.

Vouching selects items from the accounting records and examines the supporting documents; tracing selects source documents and follows them into the records. The direction decides which assertion is tested.

Vulnerability scanning uses automated tools to check systems for known weaknesses, such as missing patches, outdated software and insecure settings.

A walkthrough follows a transaction from origination through the entity's processes and systems until it is reflected in the financial records, using the same documents and technology the entity uses.

Recovery sites differ in readiness. A cold site provides space and power but no equipment, so recovery takes days or weeks; a warm site has some equipment and connections, so recovery is faster.

A warranty liability is the estimated cost of honoring warranties on products already sold. For an assurance-type warranty, which promises the product works as specified, the cost is accrued as an expense in the year of sale.

A wash sale occurs when a taxpayer sells securities at a loss and buys substantially identical securities within 30 days before or after the sale. The loss is disallowed and added to the basis of the new shares.

The weighted average cost method values inventory and cost of goods sold at the average cost of all units available for sale. A periodic system uses one average for the period; a perpetual system recalculates a moving average after each purchase.

The weighted-average cost of capital is the average return required by a company's lenders and shareholders: the after-tax cost of debt and the cost of equity, weighted by their proportions in the capital structure, usually at market values.

The denominator of basic earnings per share is the weighted-average number of common shares outstanding, with each change weighted by the fraction of the period the shares were outstanding.

Wireless network security protects Wi-Fi networks with strong encryption, strong passphrases, separate guest networks and monitoring for unauthorized access points.

Worker classification decides whether a worker is an employee, for whom the business withholds income tax and pays payroll taxes, or an independent contractor, who pays self-employment tax. The test is how much control the business has over the work.

Working capital is current assets minus current liabilities. It measures the resources available to fund day-to-day operations and meet short-term obligations.

A security that becomes completely worthless is treated as sold on the last day of the tax year in which it became worthless, usually producing a capital loss.

Circular 230 requires practitioners giving written advice on federal tax matters to base it on reasonable factual and legal assumptions, consider all relevant facts, avoid unreasonable reliance on others' statements, and relate the law to the facts.

Zero trust is a security model that grants no automatic trust based on network location. Every access request is authenticated, authorized and limited to the minimum needed.

A zero-day vulnerability is a software flaw unknown to the vendor or without an available fix, so attackers can exploit it before a patch exists.