Chapter 8 Flashcards
(16 cards)
What are the goal of substantive procedures?
The goal is to obtain direct evidence that the financial statements are complete, accurate, and reasonable
What would the audit approach, acceptable detection risk, and extent of substantive procedures be if the inherent risk and control risk were HIGH?
Acceptable detection risk: low
Audit approach: Substantive approach
Extent of substantive procedures: considerable procedures required
What would the audit approach, acceptable detection risk, and extent of substantive procedures be if the inherent risk and control risk were LOW?
Acceptable detection risk: High
Audit approach: Combined approach
Extent of substantive procedures: fewer procedures required
When are substantive procedures typically performed vs. testing controls?
Substantive procedures are typically performed near the year-end
Testing controls is usually performed during the year
What are roll-forward procedures?
If an auditor does a check of an account in November, they will do a small check at the end of the year to ensure that nothing has changed
Do work earlier in the year so at year end the turn around to prepare FS is a lot quicker since the audit work has been largely done, just small checks to make sure nothing changed
What are the two tests of details called?
Vouching and tracing
What is vouching?
start at books –> check documents –> check for overstatements (existence / occurrence)
What is tracing?
Start with the documents –> check the books –> check for understatements (completeness)
When control risk is assessed as high, how does that affect the sample size?
Likely be larger and subject to greater level of confidence in the test results (90% or higher)
When control risk is assessed as low, how does that affect the sample size?
The sample size will likely be smaller and subject to a lower confidence level in the tests (as low as 70%)
What are the 3 levels of assurance from analytical procedures?
Persuasive - can be the main test, strong enough to stand alone, gives auditor high confidence
Corroborative - supports other audit findings, helps confirm what is already known, medium confidence
Minimal - basic comparisons, not strong enough to be alone, used for red flags but more testing needs
What is a misstatement?
When the FS are wrong either by error or fraud
What are the 3 types of errors in FS?
Factual errors
Projected errors
Judgemental errors
What are factual errors?
Known and clear
Wrong number, formula error
What are projected errors?
Estimated from audit sampling, used to predict errors in the full population
What are judgmental errors
Comes from estimates or accounting choices that the auditor disagrees with
