Audit 3 Flashcards
(169 cards)
1
Q
M1 Fraud Risk
A
With respect to fraud, the auditor should perform the following procedures called DORE. this is a during the pre audit meeting -Discuss fraud risk with engagement personnel Auditors are required to have a discussion of the potential material misstatement that may result from fraud. the cpa engagment team have will a fraud brainwashing meeting related to upcoming audit of client. things discussed: auditors must have a professional skepticism, which means having a questioning mind and critically analyzing evidence. auditors must remember that fraud is possible in every client and that critical evaluation of evidence is necessary. -Obtain information to identify specific fraud risks. Auditors are required to inquire of entity personnel regarding their view of fraud risk. Ask question such as *does mnmgt have knowledge of fraud *aware of any fraud alledged * Id fraud risk or any specific fraud risk * does mangmt give its view on business practices and fraud to emplyees * program prevent,fraud governance *does governacet have knowledge of fraud *aware of any fraud alledged * Id fraud risk or any specific fraud risk * does govenr oversign * program prevent,fraud * high turnover *history violation *new revenue standards something new = high risk -Assess fraud Risk and develop an appropriate response There is a presumption in every audit that two risks exists: 1. Improper revenue recognition 2. Management override of controls Response with specific audit procedures: Accounts identified as potential fraud risks should have the , nature, extent and timing altered accordingly. *for example, even tough the new revenue standards was considered not to impair the financial stability of the entity, *it is still important to obtain more persuasive evidence (i.e. evaluate more selections) to determine whether the new standard has been implemented correctly. *implementation of new standard may provide an opportunity to committ and conceal fraudulent activities. Perfect environment for fraud risks 1.Pressure/incentives 2. rationalizaton/attitude 3. opportunity Reponse to improper revenue recognittion *required analytical procedures on revenue during the planning to help identify improper revenue recognition. *review accounting estimates for bias *review accounting JEs and other adjustments to the financials *request that client provide all je done throughout the year *review for unusual JEs. such as dr. FA anc cr. inventory of sales charges to RE noncash a/r credits near y-e that are reverse at beg ye. - Evaluate audit evidence regarding fraud *s/b aleart for fraud throughout the entire audit *analytical procedures will be performed at the end of the audit. be alert of any new indications of fraud risk that were not previously Id. these new risks s/s discussed with the entire engagement team and this may result in teh need to perform additional procedures.
2
Q
Who should a audit bring to the the attention immaterial fraud
A
upper level managment.
3
Q
If audit brings fraud matters to the attention of governance and governance refuse to take action due to the immateriality. auditor should reconsidered reliance placed on the
A
managment rep letter: should considered the act in noncompliance with laws and regulation to other aspects of the audit about the reliability of the rep letter.
4
Q
If a auditor gave an unmodified opinion on a audit that had material misstatement due to fraud is he correct
A
yes. as long as he met the responsibility of audit planning and performed the audit appropriately in specific risk assessment. of fraud.
5
Q
Is it the auditor responsibilty to disclose fraud to third partys
A
no
6
Q
what are the characteristics of heightening auditors concern for risk of material misstatement due to fraud
A
-management had frequent disputes with aduitors on accounting mattes. -over complex organization structure involving unusual lines of authority
7
Q
are fraud evaluation of accounting est.and application of accouting principles hard to detect
A
yes. because they involved a high degree of management judgement and subjectiveness.
8
Q
would lack of independent check be considered a way to missappropriate assests
A
yes.
9
Q
would managment interested n maintaining high earnings be considered a fraud risk factor
A
yes. due to pressure and bonuses
10
Q
what would be considered the highest risk of material missstatement arising from the missappropriation of assest
A
a larger number of bearer bonds on hand: not registered and no records kept on hand of owners or transactions. usually use in laundering, tax evasion, and concealed business transactions.
11
Q
what conversation should be discussed about material misstatement on fraud with the engagment team
A
audit documention. the risk of material misstatement should be an on going conversaton and not stop at planning.
12
Q
If an auditor is given a photo copy of an invoice that is not the invoice in question by the client staff due to it was lost. what should the auditor do
A
reevaluate the risk of fraud and design alternate testing for the related transaction because it was not reliable.
13
Q
If an auditor id. risk of material misstatement due to fraud of inventory, he will and will not
A
will: designing appropriate audit procedures: observe count and be unannounced; request inventory be counted at a date close to the end of reporting period; assigning more experience personnel to the engagement. will not: request managment observe inventory.
14
Q
If a client is growing and the admin staff is lean what is factor would the audit test
A
Opportunity: expansion of co.= more opportunties for fraud. Other risk factor rational. attitude incentive /presssure Not a risk factor: inadequate orgnization structure
15
Q
what are the 4 id. and attribution of risk
A
-types of risk: does it involve fradulent or missappropriation -significance- can it lead to material misstatement -likelihood- how likely is the risk to happen -Pervassive- does it effect f/s as a whole or specific amount, transaction or assertions.
16
Q
Is there a presumption that risk exist
A
yes. There is a presumption in every audit that two risks exists: 1. Improper revenue recognition 2. Management override of controls
17
Q
A3 M1 Sim 1 Type of fraud and fraud factors
A
Types of fraud Fraudulent financial reporting: misrepresenting or lying of the facts: 2-If management ignores competative market where company inventory is obsolete but management does not adjust sales inf financials. Misappropriation of assets: stealing/theft: 3- payroll manager cuts payroll check of ghost employees 4- If a Inventory manager is soley responsbile for purchase inventory and has oral agreement for a 8% sales commission and he purchase inventory above market. Fraud factors: Incentive/pressure: competition, achieve target 2- market competion would cause pressure to due obsolete inventory Attitudes/rationalization:an excuse why you deserve something 3- Payroll upset because his salary to lown 4- No segregation of duties. Inventory manager is sole authorizer of purchasing. Opportunity: try to find a way to committ fraud due to lack of i/c. management override Audit procedure to detect misstatement due to fraud: 2-use inventory turnover ratio to see how long to convert inventory to sales 3- observe distribution of payroll checks. 4- review prices of simular products
18
Q
A3 M1 Sim 2: Identify Fraud Risk Factors
A
- Significant bank account in tax-haven jurisdiction for which there are no clear business justification: Opportunity for fraudulent fin. Reporting. (not stealing) 5. Large amount of cash on hand or processed: opportunity and misappropriation of assets 6. ineffective BOD or audit committee over internal control: opportunity and fraudulent fin. Reporting. No specific asset discuss to believe misappropriation. 7. inadequate physical safeguard over cash, investment and inventory: opportunity and misappropriate 8. New account, statury or regulatory requirement: incentive/ pressure. Fraud fin. reporting 9. Excessive interest by management in maintaining or increasing the entity’s stock price: rationale/attitudes fraudulent fin. Reporting. Management is excessive on entitys stock price is a attitude and fraudulent fin. Reporting. 10.Management has significant financial interest in the entity: incentive/pressure fraudulent fin. Reporting 11. inadequate monitoring of controls, including automated controls and controls over interim financial reporting: opportunity and fraudulent financial rep. 12. Management failing to correct know significant defeciencies on a timely basis: rationale.attitude and fraudulent fin. Reporting.
19
Q
MCQs: A3 m2: an auditor assess control risk to
A
along with inherent risk to determine the level of detection risk need by auditor.
20
Q
inherent risk helps an auditor evaluate
A
the suscepbility of f/s assertions to a material misstatement assuming there are no related control
21
Q
When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective , what would the auditor most likely increase.
A
an auditor would increase control risk would be a decrease detection risk due to increasing extent of detail in control risk.
22
Q
As detection risk increase would have an audit changes it
A
timing (net) from y-e to interim date due to increase reduce control and inherent risk.
23
Q
if assess levels of fraud risk is high, than auditor should attempt to reduce detection risk. is that true
A
yes. because of control and inherent risks are high this mean high audit procedures on nature, extent and timing will then lead to lower detection because we have hiring risk procedures in place
24
Q
if substantive testing is done before balance sheet date this means
A
internal control were done in a period of interim date due to less risk of f/s. if more risk than y-e.
25
inherent and control risks different from detect risk due to
inherent and control and independent of f/s where as detection is related to audit procedures and can be change at auditor
26
When control risk is assessed at max level then
the assessment should be documented and auditor should make decision on perform more substantive procedures
27
Which of the following as RMM increase Detection descrease and Substantive procedures increase
correct
28
Audit risk is recognized on audit standard as
The auditor obtains reasonable assurance about whether the f/s are free of material misstatments
29
As the acceptable level of detection risk decrease substantive test increase
true
30
What is a definition of control risk
the risk that a material misstatement will not be prevented or detected on a timely basis by the clients i/c
31
engagement of control risk on mDA
risk that material misstateement in the mda presentation will not be prevented i a timely manner.
32
if audit team conclude high risk on inventory who should they do
review client control procedures over safegaurding assets and perform inventory count at the last day of the current year.
33
which of the follwing types of risk increase when auditor performs analytic audit procedures of financial statement accounts at interim date
high detection because interim suggest low inherent and control risk
34
which of the following matters relating to entitys ops would likely be considered a inherent risk
entering into derivitives because they would be considered hedges.
35
Detection risks differ from control and inherent due to
detection is part of audit procedure and can be changed at auditors descretion.
36
would a low level of control risk offset a high level of inherent risk
yes. because they are multiplied together to make up Rmm
37
A3 m3 Risks at the Assertion level
1. 12-31- y1: risk high= more work = less detection = more substance testing = net: more testing for year 1= nature when due to interim rollfwd was wrong. tested 25 a/r balance= extent - at year end = time. Year 2 12-31-y2: low risk = low work = more detection = more sustance testing on NET low interim test at 9/30/ y2 and will rollfwd the 12/31/y2 because tested at interim 9/30/y2. 2. If risks assertion levels are the same for yr 1 and yr 2 then do the same confirm testing 30, sames y-e 12/31 an same roll fwd or no rollfwd procedures. 3. 12/31/y1 low risk and high risk at 12/31/y2 confirm by sampling 15 yr1. for yr 2 sample 30 high risk = more work = low detection= more subtance testing of NET at 12/31/ year 2. no rollfwd because testing at year end 12/31/y2.
38
An audit client sells 15 to 20 units annually. and a large part of sales are done in the last month of fiscal year with no material change in 5 yrs. what approach would auditor use on audit proceduring concerning timing
audit should inspect sells in the last month of the fiscal year and review sales contracts to determine if sales posted the proper period.
39
After performing risk assessments procedures, auditor decides not to test controls. he most likely decide to
because it is ineffecient to perform test control. time spent in substance testing (risk assessment ) is greater than risk control.
40
in assessing control risk an auditor would use what techniques
-inquiry of appropriate entity personnel -inspection of documents and reports indicating performance of p&p -observation of applications of p&p -reperformance of appl. of p&p
41
when auditors risk assessment is based on effective ops, auditor is most likely involved
iD specific i/c relevant to specific assertion of account bal. specific transaction or disclosures
42
What must an auditor have understanding of i/c and what he should not have understanding
must have i/c understanding; -id types of potential misstatement that can occur -factors that can affect RMM -ascertain whether i/c have been implemented -test control effect i/c
not required i/c understanding; -operating effectiveness of i/c this is evaluated later for those controls on which auditors plan rely
43
What is a risk assessment on control and what is not
Risk assessment of control -test of control activities p&p -understanding of accounting system and control envornment -evaluate the effectiveness of i/c with test controls
not risk assessment of control; perform test on detail transactions to detect material misstatement;
44
would an auditor perform substantive tests on accounts that have very little activity from year to year
no. he perform test before b/s date or at interim date.
45
if there are numerous trans of equipment during the year that auditors plan to asses as control low risk. what is he usually performing
Test of control at low risk = low work = high detect = low subtance test. test controls and limited test of current year transactions.
46
evidence auditor would gather on i/c ops would be
clients records on documenting the use of EDP programs
47
example of substance NET testing
letters of representation of corroborating inventory pricing ,attorneys responses to auditor inquires, confirming and verifying a/r account balances
48
if performing substan test will take less time than performing contest would auditor do it
yes. want to be effecient and move to substan test.
49
if an environment that is highly automated but is impracticle and impossible to reduce detection ; high risk = more work what is the alternative to reach low detections
perform test controls to support lower level of assessed control risk.
50
what is not trues about performing test controls to support lower level control risk
inquiry alone will support conclusion of test control risk. not true
51
performing test of controls involves
auditors risk assessment is based on the effectiveness of operation of controls and seeing if they are highly effective
52
is the external auditors personnel with appropriate levels of capabilities and competence a factor in handling increase risk on clients audit
yes.
53
what is the objective of detail trans performed in a test of controls
to evaluate whether i/c operated effectively test controls= operated effectively
54
if client failed to maintain copies of procedure manual what should auditor do
Document the understanding of i/c to get an understanding of risk
55
what is and is not required as documentation under GAAS
what is; - written audit plan procedures -client engagement summarizing timing and detail of audit plan -indication that accounting record agree with reconcile f/s not required' =basis for auditors decision not to perform test of controls and obtaining understanding of i/c
56
Before applying principal substantive tests to the detail of accounts at an interim data prior to b/s date, auditor should;
consider whether the amounts of the y-e balances selected for interim testing are reasonably predictable.
57
if substantive test for acct id no exceptions, the auditor would not perform account y-e test on the
test of details for the entire year. less work less risk
58
which are necessary for f/s audit
analytical procedures risk assessment procedures nET not needed test of the ops effectivenet
59
if an auditor would use substantive testing to evaluate specific relevant assertion and find that operating test controls are not effective would just use substantive
yes.
60
auditor design of details to ensure sufficient audit evidence to support
the auditors plan level of assurance at the relevant assertation level.
61
providing more supervision of an audit to assess risks of material misstatement in f/s is example of
an overall response to assess material misstatement
62
what would effect an auditors consideration of clients i/c and what would not
would; nET -extent to which test provide evidence about assertion -expected deviation rate from control ; nature -how frequent the control is performed; time not : the amount of time to budget to complete in engagement.
63
what is the best way to obtain audit evidence of segregation of duties
to observe employee doing their jobs.
64
why would an auditor explain why is reducing test for detail
analytic procedures have revealed no ususal or unexpected results.
65
an auditor may decide not to test control related to cetrtain assertions because
he believe evaluating the effective on controls is inefficient
66
what would not represent a significant risks requiring special consideration
different accounting principles used than industry competitors
67
what is an inaccurate statement as it relates to significant risk
the impact of controls is a perceived risk i that is a deciding level of significance
68
id f/s level risks could also have a potential impact on manyh of the clients relevant assertions true
yes f/s are a whole and assertion are in f/s.
69
what are understanding i/c and not understanding i/c
what are; -considering what types of misstatements that occur in f/s -obtaining knowledge of previous audits -determining the extent to which i/c is computerized what is not determining ops effective of i/s control risk
70
A3- m4 Skills practice ; determining which audit procedure will help in iD related party transactions
1. Evaluate the reasonableness of managements accounting estimates that are subject to bias No would help. could be est. on third party trans 2. Inspect communications with law firms of evidence of unreported contingent liab. no. these are based on lawsuits 3. Retest ineffective i/c activities for evidence of management override no 4. Send second request for unanswered positive confirmation of a/r no. nothing to do with related parties but a great procedure. some one owes us money.
71
A3 m4 mcqs: what is the primary purpose of reviewing clients conflict of interest statement
to id. transactions of related party and what the procedures are and assist with the assess of control risk.
72
What is an auditors direct effect and indirect effect on noncompliance with laws and regs. made by client
Direct effect; it has a reasonalbe assurance that auditor assess during audit indirect effect; none. mangement responsibility
73
What is best and least likely procedures in discovering a possible noncompliance with laws and regulations
best; performing test of detail transactions, making inquiries of management and legal, reading bod minutes least ; reviewing internal control questionnaire. it gives information about p&p but not specific on detail transactions
74
what is a reason why auditor can not bring all acts of noncompliance by client
the noncompliance acts relate to operating aspects rather than accounting aspects on the f/s. they made do something different that is non compliance
75
if a client is forces to discontinue ops, would auditors likely to questions compliance
yes.
76
if an auditors become aware that there is a possible non compliance issue with client, he would get an understanding and obtain nature of non compliance to evaluate the
effect on the f/s (main pupose) secondary: determine reliabilty of managment consider whether other simular acts occured recommend remdial action by management or those charged with governance
77
is reviewing the lawyers letter for information about litigation away of making sure that all est. are in by management
yes
78
What is the auditors primary emphasis on related party transactions
the adequacy of the disclosure of the related party transaction
79
what information brought to an auditors attention would raise a question about the occurence of noncompliance
the discovery of unexplained payments made to government employees. -failure to have adequate procedures is an i/c weakness - transaction issues are an related party issues
80
if audits detected and bought to management attention that employees gave small bribes to local officials and management did not doing anything. Would this be an reason for auditors to withdraw from engagement
yes
81
if audit gave a modified opinion due to SEC noncompliance and management refuse to accept due to they think it is immaterial. what is auditors actions
to withdraw and notify BOD
82
A3 m4; sim 1 related party incr, decr or no effect on RMM
There is no decrease risk only increase risk or no risk Related party of 10% ownership in business is related party. Look for significant transaction at the end of the year from related parties. Also look at SEC form 4 which disclose related party transactionss
83
A3 m5 Skill path example What is the hierarchy of audit evidence for Inventory FA A/R
Evidence hierarchy: AEIo - Auditor direct personal knowledge - External evidence - Internal evidence - Oral evidence Inventory: 1. observe y-e physical count A 2. confirm of offsite inventory as an independent third party E 3. Analytical procedures on inventory; inventory turnover and comparison industry avg. I 4. Inquiring management on co's p&p for id. obsolete inventory O AR; 1. Recalculate allw for doubtful accts A 2. view negative confirmation from customers E 3. examine sales invoices form shortly after y-e cutoff testing of a/r I 4. inquire with management regardign large write off of a/r O FA 1. Physical inspection of FA additions by audit team A 2. Examine of invoices, deeds and titles of ownership of FA E 3. footing of schedule of additions and disposals and agreeing to fa sched by client. I 4. inquire of magmnt regarding co.s method of calc depr. O
84
A3-m5; is accounting data alone sufficient for audit evidence
no. it must also be corroborating.
85
if audit had vendor invoice or sales invoices, which would be the least reliable
Sales invoices; these are internal generated vendor invoices are external External higher on the evidence hierarchy.
86
What are and are not the pCAOB standards for audit evidence
audit procedures design to est an assertion timing of the audit procedure audit procedures design to test understatement or over statement not ; risk assessment: impact NET and not evidence or circumstances under which audit evidence is gathered. this is a reliability of evidence
87
are shipping and receiving report generated by client
yes and are internal documents.
88
is an effective i/c give more assurance than audit evidence
yes. entity has good systems in place for low risk of fraud and errors
89
does audit procedure and an indirect impact on detection
no. it has a direct impact.
90
True statement of audit evidence
the higher quality of audit evidence obtained will lead to a smaller quantity of audit evidence needed for audit procedures
91
in order to obtain reasonable basis for an audit opinion regarding the fairness of the client's f/s the auditor should usually obtain and rely on evidence that is
persuasive and not assured beyond a reasonable doubt (100% assurance). persuasive is subject and unique to each audit.
92
Would obtain confirmation from multiple sources a high audit evidence
yes. it is external
93
Are inspect and observe they same for audit personal knowledge
yes.
94
A3 M6 Skill Practice : analytical procedures
when total salaries in year 1 was $300,000 for 12 twelve employees and there was a 4% in on 4/1/yr and total employees were 15. year 2 salaries were $397,000. Anlylical procedure threshold is $25k. what is the difference. jan-Mar y2 no increase for 25% of the year 300,000\*1/4= 75,000 Apr -dec 75% of year 4% increase for 15 employees step 1 get per employee $300,000/12months = 25,000 per month \* 15 employees = 375,000 for year\*1.04 increase 390,000\* 75% = $292,500+ $75000 (1st 3 months) = $367,500 $397,000 total yr2 - $367,500 auditors analytical procedures = $29500 higher over threshold
95
A3-m6 mcqS: What is the overall reason for analytical procedures review stage
during planning analytical procedures are use to evaluate f/s including if business is at going concern status and assessing conclusion reached. not to get an understanding of clients business
96
If an auditor wants to identify predictable relationship using analytical procedures he would what acct. types
intersest exp. account which are not subject to management discretions.
97
when applying analytical proceduers during an audit what is the best developed approach
to id. reasonable explanations for unexpected differences before talking to management. this will give the auditor a better assesment of managment explanations.
98
what is the third standard fieldwork approach to obtain sufficient evidence by performing audit procedures to afford a reasonable basis for opinion on f/s
doing analytical procedures and substantive tests tht provide audit evidence used to assess reasonableness of account balance on the other hand , audit documentation describes procedures followed and results of test.
99
what would be a test controls an auditor would use on management assertions about the completeness of cash reciepts and cash sales
observe staff at cash register and tapes used for transactions
100
to test existence of an asset the auditor would form the
accounting records to the supporting evidence;aka source documents
101
in the final review stage of audit and auditor would use what type of analytical procedures
high level such as reading f/s to review if there are any unusual or unexpected balances not previously id. considering the adequacy of evidence gathered in response to unexpected balance id in planning
102
what is the advantage that regression analysis have over trend, ration, and nonstatical analysis
a quantitative measure of precision it is an advance statistical technique that often requires the use of software.
103
what is the first step is performing or applying analytical procedures
develop an expectation of a balance or ratio by using relationships that are expected to exist, then determine if the expectation and recorded amount is reasonable
104
how would an auditor perform analytical procedures on notes payabele
analytical procedures are based on preditable and plausible accounts that are not in management discrestion and develop a expectation of a balance or ratio by using relationships that are expected to exist . note payable analytical procedure would be to calculate note and see if interest ties to interest expe in books or management assertions.
105
when an auditor is examining, is he inspecting
yes. as opposed to observing is when he looks at the process or procedures performed by other
106
if an auditor is investigating rev and exp accounts and notice unrealize gains recorded in income statement he would detect
detected that unrealize gains for avail for sales were recorded in income for trade securities due this should be recorded in other comprehensive income
107
during an audit, when an auditor interviews and verify he is
inquiring = interview verify = inspecting
108
in the planning stage and not the review stage analytical procedures are used to
enhance the auditors understanding of the business.. Review stage; evaluation the adequacy of evidence gathere concerning unusual balances
109
what is a liab. disclaimer that an auditor can uses
one with information furnished as a matter of courtesy without a duty to do so and without responsibility, liab, or warranty, expressed or implied. these are bolier plate
110
what is a management assertion of account bal. at y-e
entity hold control or rights to assets and liab are obligations.
111
if a/r double but allw for doubtful account stayed the same what would satisfy the auditor as an explanation
that client open a second store during the current year with sales approximately the SAME as the first store
112
What is the relevant assertion performed for account balances
CVER Completeness Valuation, accuracy, allocation existance occurance or support rights and obligations
113
what does analytical procedures focus on
relationships between financial, ratio, and nonfinancial data. anything that is a relationship, comparing, and not test of details; determining year end cash iwith cash equivalents balance.
114
if a auditor sends out confirmation and recieve exception back in the confirmation he would be most concerned with
deficiency in a/r i/c resulted in client reporting errors.
115
auditor reconciles to supporting schedules would be doing what test of assertion to clients transactions.
valuating, allocation and accuracy of clients gl and transactions
116
audit are the audit procedures that test completeness assertions
observation, tracing, and performing analytical procedures
117
Assertion test of various transactions or assertions are
understanding and classifications, rights and obligation, and valuation, allocation and accuracy and completeness. inspecting, reviewing , performing inquiries, n not vouching
118
what is PCAOB assertion standard
CEO approve Completeness existence and occurance allocation presentation rights obilgations valuation e place holder and not EXISTENCE Disclosure
119
if audit redo client work as part of i/c
he is doing a reproformance
120
when an auditor is performing an inspection of documentation supporting clients account balances he is and is not
rights and obligations: primary audit procedurs valuation, allocation and accuracy; recalculating , footing, reconciling to support gl assertion understanding and classifications;; reviewing related disclosure and performing inquiries of management
121
what is a completeness assertion
observe processes and procedures trace transactions forward for source documents to accounting records perform analytical procedures.
122
determining treasury stock account had minimal acitivity is a
test of detail: or test of transactions
123
A3 - M6 Sim1 gross profit margin ratio analysi
year to year comparison: sale-cogs/sales review the analysis of decrease on sales and manufacturing (cogs) costs.
124
A3 - m7 skiil path question:
one decimal place; 4.27 = 4.3 accounts payable turnover higher in year 2 than in year 1. what is reason; pay it 15 times in year 1 to 31 times in years 2 lot faster. because paying ap faster.
125
A3 m7 mcq: would an a/p as a % of total current liability of 25% compared to 35% previous could possibly indicate of unrecorded liab in a analytical procedures
yes. decrease in a/p percentage to total c/ could indicate a possible unrecorded liab.
126
would an engagement partner chose COGS/inventory of inventory turnover as an overall review stage
yes. this could tell how quickly inventory is sold and could give indication of performance
127
if inventory turnover ratio has increased but no change in sales or and inventory amount would mean
in order for inventory turnover to increase, COGS must increase due it's the numerator or inventory avg must decrease it is the denominator. if that is not the case and sales are the same than GP margin decreased.
128
if a/r turnover is lower in the current year than in the previous year, than
since a/r turnover is sale/ ar ave. sales must increase for positive ar turnove and descrease would be negative turn and a/r avg increase. a sales cut off would add to this as well.
129
a3 m8 mcq: sample to test i/c are intended to provide a basis for an auditor to conclude whether
control activities are operating effectively
130
if auditor sampling procedures applied as a test of controls were incorrectly assess control risk higher than appropriate the most likely explanation for the wrong assessment
alpha audit thought material misstatement high on sample assessment but was wrong. his sample bases was the standard deviation rate sample exceeded the tolerable rate 6\>5. but the deviation rate in the population 4 is less the tolerable rate 5.
131
what is the answer when audit sample conclusion that higher test is needed but is not necessary
auditor thinks maximum deviation is higher the tolerable rate. when in fact, the deviation population is lower than tolerable.
132
what is an auditors evaluation of a stat. sample for attributes a test of 50 docs. results in 3 deviation. tolerable is 7%. expected population deviation is 5%. and allowance is 2%
The auditor would modify plan because result were the sample deviation 3 docs/50docs = 6% plus allow 2% = 8% (which is called the upper deviation) exceeds the 7% tolerable.
133
in determining the number of documents selected to test for assurance, an auditor should consider the tolerable rate of deviation from control activities and the likely rate of deviation and/or allowable risk of assessing risk too high
just the likely rate of deviation. there is a direct relationship with the higher the expected rate the higher the numbers selected. assessing whether risk is high or low, is the process of establishing the risk
134
does population have any impact on sample if it is large enough for sample size
no.
135
when doing attributed sampling. which is i/c error finding would you identify entries
yes. would not do substantive $ number testing.
136
if an auditor has a 2 risk assessing control risk too low. and tolerable rate of 5%. 100 selected one is found that did not have appropriate authorization and one was not founds what is auditors assese
no assess not enough evidence to determine control due to one invoice can not be found.
137
when planning audit sample test of controls what is considered
allowable risk of assessing control risk too low. It has in inverse relationship with sample size. Want less risk = more sample size Accept less risk = less sample size what is the expected deviation rate and what is the population size. Inverse relationship
138
What are examples of nonsampling and sampling by auditors
nonsampling: Auditor selects inappropriate audit procedures. sampling: i/c being more effective than auditor believes i/c is not being effective than auditor believe auditor concluding the account balance is not material misstated but is in fact misstated
139
is there a better chance that a auditor can fail in recognizing misstatement with nonsampling than with sampling
yes.
140
when using sample size in statistical sampling when testing internal controls
there is an inverse relationship with tolerable rate and determining sample size as the audit is willing to accept a greater deviation rate the smaller the sample size. Tolerable deviation rate Want less deviation = more sample Accept more deviation = less sample Could be errors Inverse relationship
141
when doing a test of control with tolerable rate of deviation does the auditor consider ; the allowable risk of assessing control to low and the average dollar value of the check request
yes to allowable risk of assessing control to low because this is attributable. no to dollar value of check request. substantive.
142
if the auditor assess control risk too low then he is saying
population deviation rate exceeds the auditor tolerable rate and the maximum deviation rate is less than tolerable rate.
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what is an advantage to statistical sampling over nonstatistical sample
-supports the measurement in sufficiency of the audit evidence because auditor can quantify the risk. - provide an objective basis for quantitative evaluating sample risk and limiting to a level of considered acceptable -deviation from specific control activities at a given rate ordinarily result in misstatements at a lower rate. not an advantage -audit risk can be reduce level of risk by nonstat and stat. -afford a greater assurance than nonstat
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if control risk is assess to be too low and then descreased substantive testing. this is based on the true deviation rate in the population was
population was more than the deviation rate i the auditors sample. population rate exceed the maximum deviation rate based on the sample control risk is understate and less effective then sample
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would the testing of the process for approval of credit to customers be a sampling example
yes. testing of items in account balances or class of transactions for evaluating characteristics such as approvals
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if the tolerable rate of 7% is less than the deviation rate of 8% you would increase the preliminary assessment of control risk because
the 7% tolerable rate was the maximum rate the auditor could withstand altering his planned reliance on the control was less than the 8% upper deviation.
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An audit will decrease the level of risk when
there is decreasing of acceptable level of risk in the results of a larger sample size. the auditor might not want to do unless the costs and efforts of selecting additional sample will be low.
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in a po test. auditor random selects 60 items out of population of 1200. auditor discovered $4000 in material misstatement in the sample. auditors materiality level for company was $65000. auditor tolerable misstatement level was $50,0000. What is the auditor fist move
The first thing the auditor does is project the detected error to the entire population. the auditor would consider expanding size of sample based on factors other than the actual material misstatement.
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Which objective is achieved by the auditor when employing classical variable sampling
determining the inventory on hand. gives a reasonable count of inventory. determining transaction from billing, voucher processing is sustantive testing efficiency of payroll system is attributed or test of controls
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what is the primary objective of probabilty proportional to sample size or pps.
a method designed to id. estimated overstatement errors. not use to find zero bal, negative bal, under bal, they are done with special design consideration.
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An advantage of using classical variable sampling and not pps is
the selection of zero bal, negative bal, under bal, require no special design consideration. auditor controls the risk of incorrect acceptancde by specifying that risk level for the sampling plan\> PPS= tolerable misstatement, risk of incorrect acceptance or incorrect rejections, the recorded amount of the population being sampled must consider preliminary judgment about materiality for substantive testing of balances.
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Stratification sampling would be best used in a situation where
there is a lot of variability within the population. stratification or separation of the population into relatively homogeneous groups which results in reduced sample size and increase efficiency
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during the test of bank recs, auditor detected dit that never posted. it was immaterial. what should the do in this situation
the first auditor should consider, the integrity of management and employees and the possible effects on other aspects of the audit. reporting management immediate is not true discuss first with audit team then management.
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in a pps with a sampling interval of $10,000 ( tolerable misstatement/ reliable factors) . auditor discovered that a random selected a/r with recorded amount $5000 per client records had an audit amount of $4000 per audit calculation. what is the projected misstatement
5000 per client - 4000 per audit = 1000. 1000/5000 = 20% called the tainting factor 10000 sample interval \* 20% = 2000 projected mistatement
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auditor established a $60,000 tolerable misstatement threshold. for asset with an account bal. of $1,000,000. the auditor randomly selected a sample of every twentieth (or 1/20) item form the population and discovered overstatement of $3700 and understatment of $200. what is the auditors actions in these circumstances
based on the projected misstatement calculation, this is a high and unacceptable bal. actual misstatement in the population exceeds the tolerable misstatement because the total projected misstatement is more than tolerable misstatement. 1/20 = 5% 3700 overstatement - 200 understatement = 3500 net overstatement. total population 70,000= 3500 net overstatement/ 5% projected material mistatement 70,000 exceeds the 60,000 tolerable .
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what is included in mean=per-unit estimation
mean -per unit comprised of sample size in a variable sample application including variability of dollar amounts, varibility in the populaiton which represents the standard deviation., the acceptable level of risk which would include incorrect acceptance or incorrect rejection. tolerable misstatement and the expected misstatement. include the variability of dollar amounts of inventory items and risk of incorrect acceptence
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would preliminary judgement about materiality be considered in a planning in sample testing
yes. such a planning a test of subsequent cash receipts
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when auditor is evaluating the frequency of deviation in test controls, he would look at qualitative aspects of the deviaition and give a broader consideration to implications of a deviation if it had implications of
initially concealed by a forged document. considered qualitative due to errors and fraud and quantitative on the implication of the f/s.
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what is the advantage of using stratified mean per unit that unstratified mean per unit.
stratified sample generally is more efficient with samples since the population is classified in a manner that emphasizes the higher dollar amount value items and reduce them to smaller sample size for effeciency.
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statistical sampling method used in substantive testing, and auditor would use stratifying of a population to
stratify and convert high variable records into lower sample size to better comprehend and be better efficient
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on of the advantages to ratio estimation compared to others is
the calculation amounts of audit est are approxiamately proportion to clients book amounts. so there is a correlation between audit number and client numbers.
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what action would an auditor take in planning a sample cash disbursement if auditor is aware of large cash disbursments
stratify and convert high variable records into lower sample size to better comprehend and be better efficient
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MCQ test A3 m1-9: what explanation would an auditor give for reducing test of detials for a particular audit objective
if analytica procedures have revealed no unusual or unexpected results
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which of the following reason would be a consideration in planning for test of controls
the auditors allowable risk of control risk too low it has an inverse relationship with sample size when planning for test of controls
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when an auditor becomes aware of a possible noncompliance with laws and regs by a client the auditor should obtain an understanding of the nature of noncompliance to
evaluate the effect on the f/s. then can recommend remidial action to governance considered whether other similar acts have occured determine the reliability of the management letter.
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in classical varialbles sampling for estimation, auditor would normally evaluate the sampling results by calculating the possible errors in either directions. this is done by using
Precision is used to calculate possible errors Reliability measures how frequent the procedures will yield differences between the estimate value and the populations Projected errors is the auditors best estimate of the error in the total population based on the error rate in the sample results Standard deviation is a measure of the varibility of a frequency distribution about the mean
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when results of test of control are assessed at control risk low this means
then the population deviation rate exceeds the tolerable rate and the maximum deviation rates was less the tolerable rate
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if the audit decides to perform substantive test on a clients property and equipment as of interim date and has not obtain test of controls. what additional work must be performed to extend the audit conclusion from the interim date to the b/s date
must continue substantive procedures in the period of interim and b/s to form a conclusion. Also auditor is not require to test control in order to conclude balance on PPE.
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