Unit 3

Question 1

What are two types of fraud

Answer 1

Fraudulent Financial Reporting

Misappropriation of assets or defalcation

Question 2

what are the 3 fraud risk factors which may cause a person to commit fraud?

Answer 2

There is an incentive, opportunity, and/or rationalization

Question 3

When you are analyzing fraud risk, which four attributes should be considered by the auditor

Answer 3

Type of Risk
Significance of the Risk
Likelihood of the risk
pervasiveness of the risk

Question 4

What are the three types of material misstatements

Answer 4

Factual misstatement
Judgmental misstatement
Projected misstatement

Question 5

What is factual misstatement

Answer 5

misstatements about which there is no doubt

Question 6

What is judgmental misstatements

Answer 6

management and the auditor have material judgement differences on accounting estimates or the application of accounting policies

Question 7

What are projected misstatements

Answer 7

You basically project out the amount of misstatements in a population based on the amount shown in a sample

Question 8

What is audit risk? List and define the two elements of audit risk?

Answer 8

Audit risk is the risk that the auditor may unknowingly fail to modify an opinion on the FS that are materially misstated. It is comprised of Risk of material misstatement, and detection risk (that we wont detect a misstatement).

Question 9

What are the two components of the risk of material misstatement

Answer 9

Inherent Risk and Control Risk

Question 10

What is the audit risk model? This is an equation

Answer 10

AR = RMM x DR

Where: RMM = Risk of Material Misstatement
DR = Detection Risk
There is an inverse relationship between RMM and DR

Question 11

What are the 3 ways in which an auditor should respond to assessed risk

Answer 11

give an overall response to address the risk at the FS level, response at the relevant assertion level, a response to significant risks

Question 12

What is a significant risk

Answer 12

one that requires specific/special audit consideration like improper revenue recognition and fraud risk

Question 13

What should be included in each step of the audit plan? This same thing should be varied or altered for the various risks you encounter on an engagement

Answer 13

THE NET
Nature
Extent
Timing

Question 14

What are the 2 approaches an auditor may use to respond to identified risks at the relevant assertion level

Answer 14

Substantive approach-using only substantive tests

Combined approach-tests of the operating effectiveness of control and tests of substantive procedures are both used

Question 15

When are tests of controls performed in a FS Audit

Answer 15

When the auditors risk assessment is based on the assumption that controls are operating effectively

OR

When substantive procedures alone are insufficient (the control has tons of electronic processing)

Question 16

What steps should the auditor perform in assessing and responding to risk

Answer 16

1. obtain an understanding of the entity and its environment
2. assess the risk of material misstatement
3. respond to the assessed level of risk by designing further audit procedures
4. test internal controls to evaluate their operating effectiveness
5. perform substantive testing
6. evaluate the sufficiency of the obtained evidence

Question 17

What is the auditors main concern regarding related partys

Answer 17

that they are properly disclosed in accordance with GAAP

Question 18

What are the three types of audit procedures

Answer 18

Risk assessment procedures
tests of controls
Substantive procedures

Question 19

What are Risk assessment procedures

Answer 19

where you obtain an understanding of the entity and its environment

Question 20

What are the tests of controls

Answer 20

they evaluate the operating effectiveness of internal control in preventing or detecting material misstatements

Question 21

What are Substantive procedures

Answer 21

they detect material misstatements in the financial statements

Question 22

List some of the standard auditing procedures used in most audits

C the FIVE CARROT WARS

Answer 22

Confirmation

(the)

Footing,cross footing, and recalc
Inquiry
Vouching
Examination

Cutoff review
Analytical procedures
Re-performance
Reconciliation
Observation
Tracing

Walk-through
Auditing related accounts simultaneously
Representation letter
Subsequent events review

Question 23

Can you give me a description of analytical procedures

Answer 23

evaluations of financial information made by a study of plausible relationships between both financial and nonfinancial data.

Question 24

When are analytical procedures required? When are they not?

Answer 24

They are required during the planning and final stages but are not required in substantive testing

Question 25

What are the steps of analytical procedures used during substantive testing

Answer 25

1. determine the appropriate procedures 2. evaluate the reliability of data 3. develop an expectation of the recorded amount 4. compare actual to expected amounts 5. investigate differences

Question 26

If you are worried about the existence or occurrence of a control, which way do you work?

Answer 26

you work backwards from the account records (FS or JE's) to the source documents to see if evidence exists supporting the existence or occurrence

Question 27

If you are worried about the completeness of a control, which way do you work?

Answer 27

You trace forward from the source documents to the accounting records (FS or JES's) to find evidence of completeness

Question 28

What is the risk of incorrect acceptance

Answer 28

this is a sampling risk where you think the balance is correct, but its actually misstated. This impacts effectiveness of the audit

Question 29

What is the risk of incorrect rejection

Answer 29

This is a sampling risk where you think the balance is wrong, but it is really correct. This impacts the audit efficiency

Question 30

What happens if your risk of assessing control risk is too low?

Answer 30

deciding that the control is more effective/reliable than it really is; this impacts audit effectiveness

Question 31

What happens if your risk of assessing control risk is too high?

Answer 31

deciding that the control is less effective/reliable than it really is; this impacts audit efficiency

Question 32

What is the equation which outlines the relationship between sampling risk and confidence level

Answer 32

Sampling risk + confidence level = 100%

Question 33

What is attribute sampling?

Answer 33

it is a sampling method which estimates the rate of occurrence in a sample...it is used in tests of controls

Question 34

What is discovery sampling

Answer 34

it is a type of attribute sampling where the expected deviation rate is zero or near zero where the auditor is looking for a very specific and critical characteristic (ex. fraud)

Question 35

What is variable sampling?

Answer 35

a statistical sampling method used to estimate the numerical amount of a population, used in substantive testing

Question 36

What is stratification in terms of sampling

Answer 36

stratification is where you separate the sample into homogeneous groups and each group is treated as a separate population

Question 37

How is the sampling interval determined in a Probability-proportional-to-size (PPS) Sampling application...equation

Answer 37

sampling interval = tolerable misstatement / reliability factor

Question 38

How is the sample size determined in a Probability-proportional-to-size (PPS) Sampling application...equation

Answer 38

Sample size = Recorded amount of the population / sampling interval

Question 39

Quick ratio formula

Answer 39

(Cash and cash equiv +short term marketables+receivables [net]) / CL *everything but inventory*

Question 40

How do you calculate AR Turnover

Answer 40

Sales (net) / Avg. AR (Net)

Question 41

How do you calculate Inventory Turnover

Answer 41

COGS / Avg. Inventory

Question 42

How do you calculate Profit Margin

Answer 42

NI / Sales (net)

Question 43

How do you calculate Return on Asset

Answer 43

NI / Avg. total assets

Question 44

How do you calculate EPS

Answer 44

Income available to common shareholders / Weighted averages of common shares outstanding

Question 45

How do you calculate P/E ratio

Answer 45

Price per share / Basic Earnings per share

Question 46

How do you calculate debt to equity ratio

Answer 46

Total Liabilities / Total Equity

Question 47

How do you calculate total debt ratio

Answer 47

TL / TA

Question 48

How do you calculate Times Interest Earned

Answer 48

Earnings before interest exp and taxes / Interest expense

Question 49

What is the relationship between the Risk of Material Misstatement and the Detection Risk

Answer 49

An inverse relationship exists between the RMM (independent of the FS audit) And the DR (can be controlled by auditor)

Question 50

What is the equation for the Upper Deviation Rate

Answer 50

Sample Deviation Rate + Allowance for Sample Risk

Question 51

As the assessed level of control risk increases, the acceptable level of what increases

Answer 51

Increasing the extent of tests will provide greater assurance. In this scenario, Detection Risk would be decreasing. To attain a decreased level of detection risk, greater assurance is needed from substantive tests.

Question 52

An auditor would consider a judgmental misstatement to be one involving an...

Answer 52

A misstatement that involves an estimate

Question 53

What is the point of performing a test of details as a substantive test

Answer 53

to detect material (dollar) misstatements in the financial statements. substantive tests are concerned with dollar amounts and consist of tests of details of transactions and balances and analytical procedures.

Question 54

Bearer Bonds are apparently really bad, i've never heard of them. But what are they?

Answer 54

Bearer bonds represent the highest risk of misappropriation of assets by an entity because they are unregistered with no records kept of the owner(s) or transactions involving ownership. Historically, bearer bonds have been used to facilitate money laundering, tax evasion, and to conceal business transactions.