Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

CPA Audit > A3- Risk, Evidence, and Sampling > Flashcards

A3- Risk, Evidence, and Sampling Flashcards

(71 cards)

Start Studying
1
Q

M1- Understanding the entity and its environment

What is the objective of performing analytical procedures in the planning phase?

A

To identify unusual transactions and events

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

M1- Understanding the entity and its environment

What are the typical substantive analytical procedures an auditor should perform at the planning phase?

A
  1. Compare current year balances to budgeted balances.
  2. Review unaudited quarterly financial information
  3. Analyze company’s financial ratios and compare to industry averages.
  4. Compare actual sales vs budgeted and forecast numbers.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

M1- Understanding the entity and its environment

Under PCAOB standards what are the procedures and auditor should perform to obtain an understanding of the nature of the company?

A
  1. Read public financial information from the Company
  2. Read transcript or attend meeting from earning calls.
  3. Obtain information from SEC filing reports.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

M1- Understanding the entity and its environment

What are the type of business cycles (Economy) phases?

A
  1. Contractionary phase (Decrease in the economy)
  2. Peak phase (Highest point of the economy)
  3. Trough phase (Lowest point of the economy)
  4. Expansionary phase (Growth on the economy)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

M1- Understanding the entity and its environment

What would indicate that the economy is in the expansionary phase?

A

1.Increase in capital investments
2. Increase in GDP
3. Increase in the Company’s profits
4. Increase in demand for goods and services
5. Expansion on workforce

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

M1- Understanding the entity and its environment

What is the sequence of a typical business cycle

A
  1. Expansionary
  2. Peak
  3. Contractionary
  4. trough
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

M1- Understanding the entity and its environment

Define lagging economic indicators and provide examples?

A

Indicators that change after giving economic trend has already started.

  1. Average duration of unemployment
  2. Prime rate charged by banks and bank loans outstanding
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

M1- Understanding the entity and its environment

What are leading indicators and provide examples of economic leading indicators?

A

Indicators that predict economic activity and change before the economy starts to follow a certain trend.

  1. Price changes of material
  2. Building permits for new residences
  3. Change in orders of goods.
  4. Average new unemployment claims
  5. Average length of the workweek
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

M2- Understanding the control environment and business process

In understanding the entity and its environment an auditor is required to obtain knowledge on?

A

The design of relevant controls related to financial reporting in each of the 5 internal control components.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

M2- Understanding the control environment and business process

Who is responsible to establish, maintain and monitor controls in the Company?

A

Management

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

M2- Understanding the control environment and business process

In which circumstances would automated controls be more suitable than manual controls?

A
  1. High volume transactions
  2. Transactions that would require a high degree of accuracy.
  3. Transaction with routine errors that can be predicted and corrected.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

M2- Understanding the control environment and business process

What type of controls exist?

A
  1. Preventive controls
  2. Detective controls
  3. Corrective controls
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

M2- Understanding the control environment and business process

What is the objective of data security controls

A

To ensure that storage media is subject to authorization prior to access, change, or destruction.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

M2- Understanding the control environment and business process

What are the ongoing activities that an auditor must perform throughout the audit?

A
  1. Continue with the risk assessment process
  2. Continue assessing the risk of material misstatement
  3. Continue to assess whether to continue with the client as event may occur in the audit that may change the auditor opinion.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

M2- Understanding the control environment and business process

What procedures are performed during a walkthrough of controls for an integrated audit?

A
  1. Inquiry
  2. Observation
  3. Inspection of relevant documentation
  4. Reperformance of controls.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

M2- Understanding the control environment and business process

What are the inherent limitations of internal controls

A
  1. Collusion
  2. Human error
  3. Management override
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

M3- Identifying, Assessing, and Responding to Risk

Responding to risk at the relevant assertion level and response to significant risk is what type of response?

A

An overall response (i.e Adding more supervision during an audit, communicating with the team the need of professional skepticism)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

M3- Identifying, Assessing, and Responding to Risk

What would be an appropriate response by the auditor when there is an increased level of risk of material misstatement?

A

Increase the emphasis on professional skepticism when gathering and evaluating audit evidence.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

M3- Identifying, Assessing, and Responding to Risk

What would happen with sample size when the ROMM is high as a result of high Controls Risk and high Inherent Risk?

A

The sample size will increase

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

M3- Identifying, Assessing, and Responding to Risk

How can an auditor obtain reasonable assurance on a specific assertion when testing of operating effectiveness control is not efficient ?

A

By Performing substantive procedures.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

M3- Identifying, Assessing, and Responding to Risk

Dual testing refers to ?

A

Performing test of controls and test of details.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

M3- Identifying, Assessing, and Responding to Risk

What would an auditor do to assess control risk as low?

A

Perform test of controls to assess control risk as low. If after testing of controls the auditor determines the controls are ineffective the control risk will be assess as high>

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

M3- Identifying, Assessing, and Responding to Risk

What are techniques used by the auditors to test the operating effectiveness of controls?

A
  1. Inquiry (This alone is not sufficient to obtain audit evidence)
  2. Observation
  3. Inspection of documentation
  4. Reperformance
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

M3- Identifying, Assessing, and Responding to Risk

As part of understanding the of the system control an auditor is not required to obtain an understanding or evaluate?

A
  1. Operating effectiveness of controls
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
M3- Identifying, Assessing, and Responding to Risk Knowledge about the design and implementation of relevant controls is used to identified?
Misstatements that could occur.
26
M3- Identifying, Assessing, and Responding to Risk What is the best evidence to test the operating effectiveness of controls in regards to segregation of duties?
Inquiry and observation testing procedures.
27
M3- Identifying, Assessing, and Responding to Risk Interim testing can be perform for which type of accounts?
Accounts that are reasonable predictable, budgeted and monitor, primarily P&L accounts such: as interest expense, travel and entertainment, payroll costs.
28
M3- Identifying, Assessing, and Responding to Risk What is the impact on timing of substantive testing when there is effective controls that reduce the ROMM?
More interim testing can be performed. IF ROMM is assessed as high the Year end testing will instead need to be performed.
29
M4 - Specific areas of Engagement risk and considerations When a there is a substantial doubt about an entity ability to continue as going concern and management plans do not alleviate the substantia doubt what should the auditor do?
Included in the auditors reports a separate sections named " Substantial doubt about the entity's ability to continue as going concern"
30
M4 - Specific areas of Engagement risk and considerations What is the auditors responsibility in regards to non compliance with laws and regulations?
1. Obtain a general understanding of the legal and regulatory framework applicable to the entity. The auditor is not responsible for: 1. Preventing or detecting non compliance 2. Ensuring that the entity's operations compliance with laws and regulations.
31
M4 - Specific areas of Engagement risk and considerations When an auditor evaluates an accounting estimate the auditor is responsible for?
To determine whether the estimates are reasonable under the circumstances and inconformity with GAAP.
32
M4 - Specific areas of Engagement risk and considerations What would be the mitigating factors that and auditors would consider for management to alleviate the substantial doubt of the entity's ability to continue as a going concern.
1. Plans to increase ownership equity 2. Plans to borrow money 3. Plans to restructure debt 4. Plans to sell assets or delay expenditures.
33
M4 - Specific areas of Engagement risk and considerations What are indicatives of an entity ability to continue as a going concern?
1. Negative cash flows 2. Recurring shortage of working capitals. 3. Denial of trade credit from suppliers.
34
M5 - Sufficient appropriate evidence What is the most reliable form of evidence an auditor can obtain in audit?
1.Auditor's direct personal knowledge obtained through examination, recalculation, inspection, and observation of evidence. 2.The second most reliable evidence is external evidence.
35
M5 - Sufficient appropriate evidence What does reliability refers to in audit evidence?
1. Reliability refers to the quality of audit evidence
36
M5 - Sufficient appropriate evidence Relevance (Importance) of audit evidence depends on?
1. Audit procedures are design to directly test an assertion. 2. Audit procedures are design to test for an understatement or overstatement. 3. Timing of the audit procedures
37
M5 - Sufficient appropriate evidence Sufficiency and appropriateness of audit evidence is determined by an auditor by using?
Professional judgment
38
M6 - Procedures to obtain evidence What is the objective of test of details?
To detect material (dollar amount) misstatements in the financial statements.
39
M6 - Procedures to obtain evidence To determine whether transactions have been adequately recorded (completeness assertion) in the financial statements the direction of the audit procedures should be from?
From the source document to the accounting records (1. General ledger and 2. Trial balance)
40
M6 - Procedures to obtain evidence What are the procedures that an auditor will use to obtain audit evidence.
1. Inquiry 2. Observation 3. Inspection/Examination of documents 4. Reperformance 5. Reconciliation 6. Confirmation 7. Analytical procedures
41
M6 - Procedures to obtain evidence In what phase of the audit analytical procedures are required?
Only at the planning phase and the final review stage of the audit.
42
M6 - Procedures to obtain evidence What are the steps an auditor should take when performing analytical procedures?
1. Develop an expectation 2. Compare the expectation vs actual amount recorded 3. Determine whether the difference between expectation and actual amount is reasonable. 3. Investigate and evaluate significant differences.
43
M6 - Procedures to obtain evidence To determine existence of transaction (existence assertion) in the financial statements the direction of the audit procedures should be from?
Accounting record to source documents
44
M6 - Procedures to obtain evidence In order to test for likely hood of overstatement of an account the auditors test which assertion?
1. The existence assertion which would involve vouching down to supporting source documentation. Direction of the procedure (Overstatement) Financial account to source document (Technique used is vouching)
45
M6 - Procedures to obtain evidence In order to test for likely hood of understatement of an account the auditors test which assertion?
1. The completeness assertion which would involve tracing up from source documentation to the accounting records Direction of the procedure (Understatement) Source document to Financial account (Technique used is tracing)
46
M6 - Procedures to obtain evidence What are the relevant assertions tested when performing audit procedures.
COVERUP 1. Completeness 2. Cutoff 3. Valuation, allocation, and accuracy 4. Existence and occurrence 5. Rights and obligations 5. Understandability of presentation and classification For balance sheet=CVERUP For Income statement = COVEUP
47
M6 - Procedures to obtain evidence According to the PCAOB what are financial statements assertion?
1. Existence an occurrence 2. Completeness 3. Valuation or allocation 4. Rights and obligations 5. Presentation and disclosure Cutoff testing is not a financial statement assertion recognized by the PCAOB. This assertion is tested within existence and occurrence and completeness.
48
M7 - Sampling Part 1 What are the 2 sampling methods that an auditor that uses "PROFESSIONAL JUDGEMENT" can use to determined a sample?
1. Statistical sampling 2. Non Statistical sampling
49
M7 - Sampling Part 1 What are the 6 steps in the determination of sample
1. Identify the populations and the sample unit 2. Select the appropriate sampling method 3. Evaluate the appropriateness of audit evidence 4. Evaluate the nature of deviations 5. Consider sampling risk 6. Evaluate the results obtained from the sample and project those results to the population.
50
M7 - Sampling Part 1 What are the 2 types of sampling test?
1. Attribute sampling (Use for test of controls) 2. Variable sampling or PPS
51
M7 - Sampling Part 1 What is the sample risk?
The possibility that the sample is not representative of the population and the auditor reaches a wrong conclusion
52
M7 - Sampling Part 1 What are the 2 sampling risk in substantive testing?
1. Risk of incorrect acceptance (Accepting of a balance that is materially misstated) 2. Risk of incorrect rejection (Rejection of a balance that is not materially misstated)
53
M7 - Sampling Part 1 What are the 2 sampling risk in test of controls?
1. Assessing control risk too high 2. Assessing control risk as too low
54
M7 - Sampling Part 1 What is the definition of deviation rate?
The auditors best estimate of the deviation rate
55
M7 - Sampling Part 1 What is the definition of Tolerable rate?
The maximum deviations an auditor is willing to tolerate.
56
M7 - Sampling Part 1 When is control risk assess as too low in sampling?
When deviation rate of the SAMPLE < tolerable deviation rate , but the deviation rate in the POPULATION > Tolerable rate
57
M7 - Sampling Part 1 When is control risk assess as too high in sampling?
When deviation rate of the SAMPLE > tolerable deviation rate, but the deviation rate in the POPULATION < Tolerable rate
58
M7 - Sampling Part 1 Sampling risk related to the EFFICIENCY of an audit are associated with assessing control risk?
Attribute sampling 1. Too low or too high
59
M7 - Sampling Part 1 Sampling risk related to the EFFECTIVENESS of an audit are associated with Incorrect?
Variable sampling or PPS 1. Acceptance or Rejection
60
M7 - Sampling Part 1 When planning a sample for a test of controls the auditor should consider?
The auditors allowable risk of assessing control risk too low which has an inverse relationship with sample size.
61
M7 - Sampling Part 1 When would an auditor reduce reliance on a control?
When the upper deviation > tolerable rate. Upper deviation rate = Deviation rate + allowance for sampling risk.
62
M7 - Sampling Part 1 How is the upper deviation rate calculated?
Upper deviation rate = Deviation rate + Allowance for sampling risk.
63
M8 - Sampling Part 1 Using the Probability to Proportional Size sampling how is the projected misstatement calculated?
A) Calculate the sample error Sample error = Book value - Audit value B) Calculate the % of sample error to Book value % of sample error = Sample error / Book value C) Calculate the projected misstatement Projected misstatement = % of sample error * sample interval
64
M8 - Sampling Part 1 What is appropriate method used in sampling for a population that has high value amounts?
Stratification
65
M8 - Sampling Part 1 What does Stratification involve in sampling?
Grouping of transactions that share similar characteristic.
66
M8 - Sampling Part 1 What is the the relationship that tolerable misstatements has with the sample size?
An inverse relationship The greater the tolerable misstatement the lower the sample size.
67
M8 - Sampling Part 1 How is the projected misstatement calculated for an entire population when method sampling is different than PPS?
1. % the sample size = Sample / total population 2. Projected misstatement = Misstatement / % of the sample size.
68
M8 - Sampling Part 1 What is the primary objective of PPS sampling?
To identify overstatement errors. PPS sampling emphasizes on larger items.
69
M9 - Audit Data Analytics What type of graph is best in showing relationship among variables using linear regression?
Scatter plot as it shows the direction and strength of correlation.
70
M9 - Audit Data Analytics Describe the type of data analytics
1. Descriptive analytics- Describes what happens with the data 2. Diagnostic analytics- Explains why something happen. 3. Predictive analytic- Predicts the outcome based on historical data 4. Prescriptive analytics- Recommends an action
71

CPA Audit (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions