2.A cost allocation method used to record the reduction in the value of an asset over time. See *amortization.
depression A severe or prolonged economic *recession in a *market or territory.
Depressions often result in high *unemployment levels. The Great Depression in the United States, Germany, and other countries started in the late 1920s and stretched through to the late 1930s, and the experience of massive unem- ployment contributed to the conditions that led to World War II.
deregulation The reduction or elimination of *regulations, government con- trols, and other restrictions over a *market. The aims of deregulation include the following: (i) the stimulation of *competition, (ii) the encouragement of
*price reductions, and (iii) the removal of *barriers to entry to a market.
derivative A *security whose value derives from uncertain or variable under- lying conditions. Examples of derivatives include *futures contracts and *options.
The underlying conditions that give rise to uncertainty include fluctuations in the *prices of *commodities, *currencies, and *securities. Derivatives are often customized to the requirements of individual investors. The complexity and high *risk of some forms of derivatives require extreme caution from an auditing perspective. Specialist expertise in understanding and assessing the impact of derivatives is often necessary to reach a reliable *audit opinion.
detailed audit An audit characterized by extensive *substantive testing of a large number of *transactions. In a detailed audit there is only a limited reliance on *compliance testing.
detection risk The *risk that the *misstatement of items in *financial state- ments may not be found through an auditor’s *substantive and *compliance tests. Detection risk is considered alongside *inherent risk and *control risk as one of three components of external *audit risk. Unlike inherent risk and control risk, detection risk can be considered as directly controllable by the auditor, who can perform *audit tests devised expressly to minimize it.
detective control An *internal control designed to identify the occurrence of an unwanted event. Compare *corrective control and *preventative control.
dilution • 93
devaluation A reduction in the value of a *currency in relation to other cur- rencies. Contrast *revaluation (definition 2).
developed country A country of advanced economic standing. A collective term for developed nations is the *North. Contrast *developing country, the
*South, and the *Third World.
developing country A country of modest economic standing. The economies of developing countries tend to be dominated by agricultural sectors and the supply of *raw materials, and are therefore vulnerable to fluctuations in
*commodity *prices. Alternative terms for developing country include less developed country (LDC), *Third World country, and (collectively) the *South.
There are many international institutions that work to assist the economic progress of developing countries. Examples include the *African Development Bank Group, *Asian Development Bank, the International Development Association of the *World Bank, and several other agencies of the *United Nations. Contrast *developed country.
Dicksee, Lawrence Robert (1864–1932) A British *external auditing pio- neer. Dicksee was a prolific writer on the practice and theory of external audit- ing and, almost self-handed, he produced most of the important English-lan- guage auditing literature of his generation. A *chartered accountant who qual- ified at the *Institute of Chartered Accountants in England and Wales in 1886, Dicksee spent several years in public practice. His first book, Auditing: A Practical Manual for Auditors, was published in 1893. The book was aimed at auditing practitioners and students, and it placed heavy emphasis on the role of the auditor in *fraud detection. The book was not the first on external audit- ing (e.g., Pixley, 1888), but it is now regarded as an early auditing classic. The book was a huge success and ran to 15 editions over the following decades. The success of Auditingalso spread across the Atlantic, and its U.S. edition edited by *Robert Hiester Montgomery also went through several editions. With the passage of time, Dicksee’s Auditinghas understandably lost most of its rele- vance to current auditing issues: It stands today as a text of historical interest only. However, it is a significant milestone in the development of auditing the- ory. Dicksee is also remembered for his pioneering academic teaching on audit- ing and accounting, and for a number of other important books, including a study of *window dressing.
Further reading: Brief (1980); Dicksee (1893); Dicksee (1927); Kitchen and Parker (1994)
dilution A reduction in *value. In the case of *common stock, dilution refers to a reduction in the value of a *stockholder’s share of *equity, or a reduction in
94• diminishing returns
the proportion of shares held by a stockholder. This can occur when a corpora- tion issues additional common stock, or *investors exercise their rights to *con- vertible securities, without a corresponding increase in the corporation’s underlying assets.
diminishing returns 1.The notion that the incremental satisfaction derived from the consumption of a good or the use of a service decreases with each additional unit. For example, a smoker may derive a great deal of satisfaction, or *utility, from the first cigarette of the day. The amount of satisfaction obtained from subsequent cigarettes decreases progressively. 2. The theory that the use of an incremental unit of one *factor of production, with all the other factors held constant, will result in a reduced level of incremental out- put.
direct cost 1.An alternative term for *variable cost. 2.Costs directly attrib- utable to the manufacture of a specific product.
director An individual with formal responsibility for the *stewardship of an organization. Directors usually exercise their responsibilities through the structure of a *board of directors. Directors employed by organizations are known as *inside directors, while those who are based externally are referred to as *outside directors.
directors’ report An annual report from a *board of directors to an organiza- tion’s *stockholders and other *stakeholders. Directors’ reports normally accompany annual *financial statements, which they are intended to amplify and interpret. Under most systems of *Generally Accepted Auditing Standards, external auditors are required to report any *material discrepancies between a directors’ report and related financial statements.
direct taxation A tax deducted from the income or wealth of an individual or organization. Contrast *indirect taxation.
disaster recovery planning An alternative term for *business continuity planning.
disbursement A payment of *money. Disbursements can be made in the form of (i) *cash payments, (ii) *checks, and (iii) *wire transfers.
disclaimer An external auditor’s judgment that it is impossible to give an
*audit opinion on an entity’s *financial statements. Disclaimers are issued when an auditor is faced with the following types of problems: (i) insufficient
*audit evidence, (ii) *scope limitations, or (iii) *material uncertainties sur- rounding an organization’s financial health. Under most systems of *Generally
distress price • 95
Accepted Auditing Standards, external auditors are obliged to explain the reasons for a disclaimer. Compare *adverse opinion, *qualified opinion, and *unquali- fied opinion.
disclosure Information given in the narrative notes to *financial statements.
Disclosure of items is either (i) required by *Generally Accepted Accounting Principles or (ii) offered as a means of amplifying and explaining financial statement items. The legal writer L. C. B. Gower stated in 1969 that “as the fundamental principle of investor protection, [disclosure] only works if the information disclosed can be safely taken as accurate. Unless checked by some independent authority this cannot be relied on; so as far as the accounts are concerned the auditors are this *independent (and usually reliable) authority”
(quoted in Chambers, R. J., 1995, 73).
discontinued operation The sale or closure of an activity or operation with- in an organization. Most systems of *Generally Accepted Accounting Principles require separate analysis of *continuing and discontinued operations in pub- lished *financial statements.
discount, to 1.To deduct an amount from the standard sales *price or *cost of a good, service, or *security. In a trading context, discounts can be offered to customers for several reasons: (i) as an inducement to purchase an item, (ii) to encourage prompt payment, and (iii) to generate customer *goodwill (defini- tion 3). 2.To recalculate future cash flows in *present value terms. See *dis- counted cash flow analysis.
discounted cash flow (DCF) analysis An investment appraisal method that assesses the *net present value of future incremental *cash flows that would arise from the implementation of a decision. In acknowledgment of the
*time value of money, future cash flows are *discounted to *present values by the use of an appropriate *cost of capital rate. Discounted cash flow (DCF) analysis is frequently used to assess *capital expenditure proposals. See also the *internal rate of return.
discretionary cost An alternative term for *controllable cost.
diseconomies of scale Increases in the *unit costs of manufactured items in line with increases in *production levels. Contrast *economies of scale.
disinflation A reduction in the rate of *inflation. Compare *deflation.
distress price A low sales price offered by a seller in financial or operational difficulty. A distress price is often established in relation to a seller’s *fixed costs, which must be covered if a seller is to continue as a *going concern.
96• distribution
distribution 1.The mechanisms of *supplying goods and services to consumers.
Distribution covers the storage, delivery, and also (under some definitions) the
*wholesaling and *retailing of items for sale. 2.Payments of a corporation’s
*income to *stockholders in the form of *dividends. 3.The pattern of items in a population of data. See *normal distribution.
diversification 1.The holding of a *portfolio of varied *investments to spread and thereby reduce *risk. See *portfolio theory. 2.An increase in the range and variety of operations undertaken by an organization or an individual.
*Multinational corporations tend to reduce their *risks by geographical diver- sification, as well as by entering different sectors of activity—these moves are typically intended to reduce overreliance on a small number of markets.
However, although diversification generally leads to a spreading of (and there- fore reduction of) risk, overdiversification can be counterproductive. A corpora- tion that takes on an excessively wide range of operations may find that it loses strategic focus, and the range and variety of extensive activities may absorb an excessive amount of management time. In such cases, the negative effects of overdiversification can be mitigated by the *divestment of some operations.
divestment 1.The sale or liquidation of assets or investments. Contrast *invest- ment. 2. The sale or liquidation of a subsidiary organization. Contrast
*acquisition and *merger.
dividend The distribution of a corporation’s *net income to its *stockholders.
Dividends are normally paid in cash, in proportion to the sizes of stockholdings.
Dividend payments to holders of *preferred stock take priority over those to holders of *common stock. For investors in a corporation’s *common stock, div- idends are a major form of investment return. The other major source of invest- ment income is *appreciation of the common stock’s market value.
division A unit of an organization that is responsible for two or more *branches.
Divisions may be organized by (i) type of activity, (ii) geographical distribution, or (iii) a combination of the two. Divisions are used to control activities in large organ- izations and *multinationals, as the direct control of dispersed operations may be beyond the capability of a *board of directors or *head office management.
division of duties An alternative term for *segregation of duties.
division of responsibilities An alternative term for *segregation of duties.
dottore commercialista An Italian term that approximates to *Certified Public Accountant. In Italy the *Consiglio Nazionale dei Dottori Commercialisti is the professional association for *public accountants.
duty •97
double entry bookkeeping A system of recording accounting *transactions with corresponding *debit entries and *credit entries of equal value. The mathe- matical integrity of the dualistic aspects of double entry bookkeeping can be established, through preparation of a *trail balance, by reference to the accuracy of the *accounting equation. The efficiency of the mechanics of double entry book- keeping has long been recognized: It has been described as “simple, symmetrical, logical and beautiful” (Sawyer and Vinten, 1996, 204). The origins of double entry bookkeeping are widely attributed to the Italian mathematician and monk *Luca Pacioli, though Pacioli only summarized and synthesized pre-existing practices.
doubtful debt See *bad debt.
downloading The transmission of a file from a central location in a computer- ized information system to an individual or remote user.
downsizing 1.A reduction in the scale of an organization’s operations, through the sale or closure of activities, assets, or *subsidiary organizations. 2. A reduction in the numbers of employees in an organization.
down time A period of time in a manufacturing environment when a machine is not working as a result of mechanical failure.
draft 1.An interim version of a document. 2.An alternative term for *bill of exchange.
due date A specific date at which there is a promise of *payment, delivery of a good, or performance of a service. See also *cut-off date.
due diligence The appraisal and assessment of an investment. The term is normally used in the context of corporate *acquisitions and *flotations, and it covers financial, legal, and operational considerations. In many organizations, internal and external auditors (the latter in their capacity as *consultants) perform financial due diligence procedures.
dumping The offloading in an overseas *market of *commodities or goods that are difficult to sell in a domestic market. The effects of dumping can be devas- tating on a local market, and many countries have antidumping *legislation.
duty 1.Money collected through tax and *tariff mechanisms. 2.The existence of a responsibility, need, or obligation.
99
E
earnings 1.An alternative term for *net income. 2.*Sales revenues accruing to an organization or individual. 3.Employee *remuneration.
earnings per share (EPS) *Net income accruing to a corporation’s stock- holders, expressed in terms of individual shares of ownership. The earnings per share (EPS) is calculated by dividing net income by *common stock. In practice, this basic calculation can require adjustments to the net income figure for the *dividends of *preferred stock, which have preference over *common stock in the distribution of *earnings. The basic calculation may also require adjustments to the common stock figure, to take account of the potential dilu- tion of stockholdings from *convertible securities and *stock options. The EPS is a highly sensitive figure for corporations, and investment analysts place great emphasis on the evolution of EPS over time. Pressures to meet market expectations of EPS were a prominent factor in the earnings manipulation scandals at *Enron and *WorldCom: One commentator mused that the acronym stood for the “eventual prison sentence” of individuals tempted to manipulate EPS (quoted in Jeter, 2003, 179).
Eastern, Central and Southern African Federation of Accountants (ECSAFA) A regional accounting organization, based in Kenya. Formed in 1989, ECSAFA’s membership consists of national accounting organizations in the African regions of its title. In addition, it has a number of “observer” members, including the *Institute of Chartered Accountants in England and Wales and the *World Bank. The ECSAFA Web site describes its mission as follows: To “build and promote the accountancy profession in the Eastern, Central and Southern regions of Africa in order that it is, and is perceived by accountants, businesses, financiers and governments, to be an important factor in the economic devel- opment of the region.” Its activities include publications and conferences.
Web site: www.ecsafa.org
e-commerce The conducting of business *transactions through the *Internet.
It is an abbreviation of the term electronic commerce.
Further reading: Debreceny et al. (2003); Marcella (1998); Murphy and Bruce (2003)
100• economic life
economic life See *useful economic life.
economic order quantity (EOQ) A volume of *inventory intended to mini- mize *inventory-related administrative, holding, and transport costs. An opti- mal EOQ can be calculated through either differential calculus or subjective estimation.
economies of scale Reductions in the *unit costs of manufactured items with increases in *production levels. Contrast *diseconomies of scale.
economy 1.As one of the *Three E’s of *operational auditing, economy refers to the obtaining of resources at the lowest possible cost. Chambers and Rand (1997, 12) define economy in this context as “the ratio between planned inputs and actual inputs in terms of unit costs.” 2.The administration and manage- ment of a nation’s resources, and of the production and distribution of a nation’s wealth.
effectiveness The degree of success in undertaking activities in order to fulfill objectives. As one of the *Three E’s of *operational auditing, Flint (1988, 175, n.6) defines effectiveness as “[s]uccess in achieving the objective of a policy or course of action as a consequence of the input of resources.” Chambers and Rand (1997, 12) define effectiveness in this context as “the ratio of actual out- puts to planned outputs.”
efficiency The performance of an activity with an optimal use of resources and minimal waste. As one of the *Three E’s of *operational auditing, Flint (1988, 175, n.5) defines efficiency as “[o]btaining maximum useful output from the resources devoted to an activity; utilising minimum resources necessary to achieve a required output or objective; or adopting the policy or course of action to achieve a required objective which requires least input of resources.”
Chambers and Rand (1997, 12) define efficiency in this context as “the ratio of actual inputs to actual outputs.”
Further reading: Radcliffe (1999)
efficient markets hypothesis (EMH) The theory that abnormal profit cannot be made by investing in *securities in a *market in which information is shared by all participants. There are three forms of efficient markets: (i) a strong form, in which the prices of *securities fully reflect all available infor- mation (as all information is known publicly); (ii) a semi-strong form, in which the value of a security reflects all publicly held information, but there may be some privately held information which is withheld and which can lead to investors making abnormal profits; and (iii) a weak form, in which the use of secret information makes movements in the prices of securities difficult to
Emerging Issues Task Force • 101
estimate. The existence of profits through *arbitrage and *speculation sug- gests that the strong form of market exists only rarely—if at all—in practice.
elasticity The sensitivity or responsiveness of *demand for a good or service to changes in its sales *price.
Electronic Accountant, The The former title of *WebCPA.
electronic data interchange (EDI) The transfer of *transactions and other information between the computers of a buyer and seller. Electronic data inter- change (EDI) practices are common in large commercial corporations, and in banks.
electronic mail The full term for *e-mail.
electronic office An alternative term for *paperless office.
e-mail An abbreviated term for electronic mail, which consists of documents transferred between geographically dispersed computers. Files can be attached to e-mail documents, which are normally channeled through individually iden- tifiable e-mail accounts. See also *spam.
embargo The prohibition of economic activity between one country and another.
Embargoes tend to be introduced for political reasons: A classic example is the United States’ trade embargo on Fidel Castro’s Cuba, declared in 1961. See also *boycott and *sanction.
embedded Incorporated within (or intrinsic to) an activity or procedure.
*Internal controls are often embedded in organizations by means of integration into standard operating procedures. Some forms of *audit test are embedded in an organization’s computer programs (see *computer assisted auditing tech- niques).
embezzlement The criminal misappropriation of *money placed under one’s custody and control.
Emerging Issues Task Force (EITF) A committee of the *Financial Accounting Standards Board (FASB). The EITF was established in 1984 and was charged with reviewing the implications of urgent accounting issues: The FASB’s processes for setting and interpreting accounting standards is consid- ered too slow to deal with urgent issues on a timely basis. The EITF’s members include both accountants and nonaccountants, and its model has been imitated elsewhere—for example, in the United Kingdom’s *Urgent Issues Task Force.
Web link: www.fasb.org/eitf