Self Made Evidence Cards Flashcards
(19 cards)
What is the risk of incorrect rejection?
- the risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not.
- relates to the efficiency, not the effectiveness, of the audit.
- Incorrect rejection ordinarily results in the application of additional procedures that finally lead the auditor to the proper conclusion.
- If the cost and effort of selecting additional sample items are low, a higher risk of incorrect rejection may be acceptable.
How does an increase in RMM affect sample size?
Increases sample size
What is the primary purpose of the Standard Form to Confirm Account Balance Information with Financial Institutions?
to confirm specifically listed deposit and loan balances. The form confirms the account name, account number, interest rate, and balance for deposits.
In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of the risk of material misstatement because
The sample results support the assessment of the risk of material misstatement only if the achieved upper deviation limit is equal to or less than the tolerable deviation rate
An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged to support management’s financial statement assertion of
Classification and understandability.Assertions about presentation and disclosure address whether particular components of the financial statements are properly classified, described, and disclosed.
The confirmation of customers’ accounts receivable rarely provides reliable evidence about the completeness assertion because
Confirmations do not address all assertions with equal effectiveness. For example, confirmations of accounts receivable do not necessarily provide reliable evidence about the completeness assertion because customers may not report understatements. Also, confirmations may not be designed to provide assurance about information not given in the request forms.
In auditing for unrecorded noncurrent bonds payable, an auditor most likely will
Compare interest expense with the bond payable amount for reasonableness. The recorded interest expense should reconcile with the outstanding bonds payable. If interest expense appears excessive relative to the recorded bonds payable, unrecorded noncurrent liabilities may exist.
An auditor is concerned with two aspects of sampling risk in performing substantive tests of details:
the risk of incorrect acceptance and the risk of incorrect rejection. The risk of incorrect acceptance is the risk that an auditor erroneously concludes that a material misstatement does not exist when, in fact, it does.
Audit procedures for evaluating a capital lease
Under U.S. GAAP, a capital lease is recorded by the lessee as an asset and a liability at the present value of the minimum lease payments. Thus, the interest rate used in the discounting process is an important consideration in determining whether the asset is fairly presented in the balance sheet. The interest rate is the lessee’s incremental borrowing rate, unless the lessor’s implicit rate in the lease is known and is less than the lessee’s incremental rate.
The blank form of A/R confirmation is preferred when
The recipients are likely to sign the confirmations without devoting proper attention to them.A positive confirmation request asks for a reply in all cases. It may ask the confirming parties to state whether they agree with the information given or to provide information. Thus, positive confirmation requests obtain evidence only when responses are received. Blank confirmation requests are used to reduce the risk that recipients will respond without verifying the information. They omit the amount or other information to be confirmed and ask the confirming parties to fill in the information. The disadvantage is a lower response rate because of the additional effort required.
When an auditor tests a client’s cost accounting system, the auditor’s tests are primarily designed to determine that
Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold. The cost accounting system must be tested if the risk of material misstatement is to be assessed at a low level for assertions about inventory and cost of goods sold. The elements of manufacturing costs, stated either in actual or standard amounts, are direct materials, direct labor, and manufacturing overhead. The purpose of the auditor’s tests of controls is to verify that these costs are appropriately assigned to finished goods, work-in-process, and cost of goods sold.
What is the difference estimation method?
Difference estimation approximates total misstatement in the population by calculating the mean difference between the audited and carrying amounts in the sample and then multiplying by the number of population items. The variability in both of this estimate is likely to be smaller than the variability within the population. Because the sample size varies directly with the variability of the population, the use of differences will usually allow for smaller sample sizes and greater efficiency in sampling.
What is the ratio estimation method?
Ratio estimation approximates the total population misstatement by multiplying the proportion of the sample misstatement times the population carrying amount. The variability in both of this estimate is likely to be smaller than the variability within the population. Because the sample size varies directly with the variability of the population, the use of ratios will usually allow for smaller sample sizes and greater efficiency in sampling.
What does the auditor consider when determining sample size?
(1) the tolerable rate of deviations, (2) the expected actual rate of deviations, and (3) the allowable risk of overreliance. An increase in the expected rate has the effect of increasing the degree of assurance to be provided by the sample and therefore increasing the planned sample size.
What does the management representation letter contain?
The CEO and the CFO usually sign the management representation letter. They state that they have no knowledge of any fraud or suspected fraud affecting the entity involving (1) management, (2) employees having significant roles in internal control, or (3) others if the fraud could materially affect the financial statements.
What is non-sampling risk?
Nonsampling risk is the risk that the auditor may draw an erroneous conclusion for any reason not related to sampling risk. Examples include the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation. Nonsampling risk may be reduced to an acceptable level through such factors as adequate planning and proper conduct of a firm’s audit practice in accordance with the quality control standards (AU-C 530)
In creating lead schedules for an audit engagement, a CPA often uses automated audit documentation software. What client information is needed to begin this process?
General ledger information, such as account numbers, prior-year account balances, and current-year unadjusted information.Lead schedules are summaries of detailed schedules. To create these summaries, general ledger information is needed. A lead schedule contains the detailed accounts from the general ledger making up the line item total.
What is an expert system used for?
Lead schedules are summaries of detailed schedules. To create these summaries, general ledger information is needed. A lead schedule contains the detailed accounts from the general ledger making up the line item total.
For an audit of a nonissuer, audit documentation does not
Provide the principal support for the financial statement assertions.Audit documentation should provide (1) a sufficient and appropriate record of the basis for the auditor’s report and (2) evidence that the audit was planned and performed in accordance with GAAS (AU-C 230). Management is responsible for the preparation and fair presentation of the assertions in the financial statements.
