A3 - Risk, Evidence, and Sampling Flashcards
(29 cards)
Which assertion is typically associated with the word “valid?”
The Existence/Occurrence assertion.
What is the difference between inspection and observation?
An auditor can inspect a “thing” (ex. Document, physical item, etc.) and can observe a “person.”
When an auditor sends a management-approved letter to the client’s attorney, is it considered inquiry or confirmation?
A letter of inquiry is sent to the client’s legal counsel.
How do you determine the sampling interval in PPS sampling?
Depending on the figures you are given it can be either:
1) Tolerable mistatement DIVIDED BY reliability factor
2) total recorded $ amount of population DIVIDED BY sample size
How do you determine sample size?
BV of Population DIVIDED BY sampling interval
How do you select items in a PPS sample?
Randomized starting point + sampling interval + sampling interval etc.
Then you compare these numbers to the cumulative total of all items in the population.
What is the formula for mean per unit estimation?
Avg (audited) $ per unit (in sample) x total # of items in population
What is the formula for Ratio Estimation?
(Audited value of sample DIVIDED BY BV of sample) x BV of population = estimated misstatement of population
This basically gives you a correct “percentage” based on the sample that is applied to the population.
What is the formulae for difference estimation?
Step 1: projected error = (BV of sample LESS audited value of sample) DIVIDED BY # of items audited x # of items in population
This basically gives you the misstatement per unit of the sample which is then applied to the population.
Step 2: Total BV of population LESS projected error
(These will be added if it is an understatement)
How do you stratify a population manually (without PPS)?
Step 1: Automatically include the items that are greater than the sampling interval.
Step 2: Determine the remaining amount to sample. This is done as follows:
Total BV of population LESS the sum of items greater than the sampling interval.
This remaining amount is then divided by the sampling interval to determine the number of items to be sampled (in addition to the items that have a value greater than the sampling interval).
List some examples of procedures that would likely result in the discovery of possible noncompliance with laws & regulations.
- Reading the minutes of the board of directors’ meetings
- Performing tests of details of transactions
- Making inquiries of management or legal counsel
Is an auditor’s examination expected to detect ALL acts of noncompliance with laws and regulations?
No. A main reason is because an auditor is only required to evaluate whether noncompliance has an effect on the client’s financial statements.
Why does the auditor perform analytical procedures in the planning stage of the audit?
Analytical procedures performed during planning of the audit are primarily about understanding the client and its environment, identifying potential risks (including fraud), and guiding the audit approach.
So, not about SETTING materiality, but possibly about IDENTIFYING RISK of material misstatement.
How is analysis of square footage of selling space relevant to the planning of the audit.
Certain non-financial information might be related to financial information. In this case, selling space might be relevant to the level of sales.
Are substantive analytical procedures efficient and effective when misstatements are apparent from examination of the detailed evidence?
No. Substantive analytical procedures are efficient and effective when misstatements are NOT apparent from examination of the detailed evidence or if insufficient details are available.
When a client’s IT system is extensively integrated throughout the company’s accounting system, what is the effect on an auditor’s ability to rely on substantive tests & tests of controls?
When a client’s IT system is extensively integrated throughout the company’s accounting system, evidence for a substantive test may not be available, so the auditor will have to rely on tests of controls related to the IT system.
Would an auditor verify assertions of accuracy and occurrence for material transactions when concluding and audit?
No. These assertions are generally verified through substantive procedures during the fieldwork stage of the audit.
In PPS sampling, If the difference between the recorded amount and the audited amount is greater than the sampling interval, what would be the projected error?
The projected error would just be the difference between the recorded amount and the audited amount.
Note: The tainting percentage is not used in this instance. The tainting percentage is only used if the difference is less than the sampling interval (in which case, the sampling interval would be multiplied by the tainting percentage to determine the projected error).
How does an auditor achieve audit objectives related to particular assertions?
By performing $ubstantive tests (including analytical procedures & tests of details)
Of the following, which fails to meet the definition of an external confirmation:
- customer’s oral response
- customer’s electronic response
- customer’s written response
An oral response fails to meet the definition of “confirmation.”
What is upper deviation rate?
Upper deviation rate = sample deviation rate + allowance for sampling risk
The upper deviation rate is compared to the tolerable deviation rate to determine whether the control is effective.
When an auditor considers significant risks during an audit, do the client’s controls related to the perceived risk affect its significance?
No. The auditor determines whether a risk is significant by inherent risk alone.
When auditing statement of cash flows, is the auditor likely to reconcile the amounts included on the statement of cash flows to the other financial statements’ accounts?
Yes.
Can an auditor use subsequent events to determine whether an accounting estimate was reasonable?
Yes. The auditor may review subsequent events and transactions occurring prior to the completion of fieldwork for corroborative purposes.
