Study Unit 8 - Responses To Assesssed Risks Flashcards
What is the objective for assessing the risk of material misstatement?
The risk of material misstatement is assessed by the auditor to help determine the nature, extent and timing of the substantive procedures and test of controls appropriate to support the opinion.
Risk of material misstatement is assessed at which two levels?
- The financial statement level
- The relevant assertion level
Give examples of transactions or instances that may indicate a significant risk of material misstatement.
- A significant unusual transaction
- A complex transaction
- A related-party transaction
- A higher degree of subjectivity or uncertainty in a financial measure
- Risk of fraud
- Recent significant developments
What are the two audit approaches an auditor may use in audits of financial statements?
- A combined audit approach applies tests of controls and substantive procedures.
- A substantive audit approach is based only on substantive procedures.
Give examples of overall responses applied to the assessed risk of material misstatement at the financial statement level.
- An emphasis on professional skepticism
- Increased supervision
- Assignment of staff with greater experience or expertise
- Greater unpredictability in the choice of further audit procedures
- Changing the nature, extent, and timing of audit procedures
What are the two major categories of audit procedures?
- Tests if controls
- Substantive procedures
Describe and give examples of the (1) nature, (2) extent, and (3) timing of audit procedures?
Aspect Description Examples
Nature Types of procedures Inspection, observation, inquiry,
confirmation, recalculation,
reperformance, analytical procedures
Extent Quality of procedures Number of sampled items
Timing When a procedure is End of period, interim dates, other
performed unpredictable time
A test of contrails should be performed when
- The risk assessment is based on the expectation that controls are operating with some degree of effectiveness or
- Substantive procedures alone are inadequate to obtain sufficient appropriate evidence.
What is duel-purpose testing?
Dual-purpose testing involves performing a (1) test of details and (2) test of controls on the same transaction.
EXAMPLE: Examining an invoice tests (1) occurrence of a transaction (tests of details) and (2) approval by a supervisor (test of controls).
What are the two categories of substantive procedures?
- Test of Details
- Analytical procedures
What is the auditor’s documentation regarding responses to the assessed risk of material misstatement?
- Overall responses
- Nature, extent, and timing of further audit procedures
- Results of audit procedures
- Conclusions if not clear
- Conclusions about the use of prior-audit evidence
Compare (1) auditing around the computer and (2) auditing through the computer.
Auditing around the computer
* Manually processes transactions and compares the results with the client’s computer-processed results
Auditing through the computer
* Uses the computer to test the processing logic and controls within the system and the records produced
Define the test data approach of a test of controls.
In the test data approach, the auditor prepares a set of dummy transactions specifically designed to test control activities that management claims to have incorporated into the processing programs.
Describe a parallel simulation in a test of controls.
A parallel simulation uses a controlled program to reprocess sets of client transactions and compares the auditor-achieved results with those of the client.
Describe an integrated test facility (ITF) in a test of controls.
Using the integrated test facility (ITF) method, the auditor creates a dummy record within the client’s actual system (e.g., a fictitious employee in the personnel and payroll file). Dummy and actual transaction are processed.
