A3 Flashcards
What are the three factors that affect the relevance of audit evidence?
Nature, extent, and timing of audit procedures
How does the auditor assess control risk at less than maximum?
If the test of controls supporting operating effectiveness
What is a line chart used for?
Best way to demonstrate trends because they appropriately address the forward-moving concept
How do you calculate the projected misstatement for a population (i.e, population=1,000, sample = 50, error = $3,000)
Population / sample size = sample factor -> 1000/50 = 20
Sample factor * error –> 20 * $3,000 = 60,000
What is the result of decreasing the acceptable level of risk?
result in a larger sample size
What is the relationship between risk of incorrect acceptance and sample size?
Inverse relationship (if risk of incorrect acceptance increases -> sample size decreases)
What is the relationship between Tolerable misstatement and sample size?
Inverse relationship (if tolerable misstatement increases the sample decreases)
When is the use of ratio estimation sampling most effective?
Most effective if there is a correlation between book values and audit amounts
Define a diagnostic analytic?
Explain why something happened
Define a descriptive analytic
describe what happend
Define a Predictive analytic
provide expected or predicted outcomes based on historical data
Define Prescriptive analytics
Prescribe or recommend actions to be taken based on advanced analytics to reach desired goal
Define the statistical concept of Precision
The statistical concept of precision is used to describe the auditor’s evaluation of sampling results by calculating the possible error in either direction
What is the primary objective of Probability proportional to sample size (PPS)
designed to estimate overstatement errors - zero balances, negative balance, and understated balances require special design considerations
Define audit risk
risk that the auditor may unknowingly fail to appropriately modify the opinion on FS that are materially misstated
Define inherent risk
Susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls
What is the ultimate purpose of assessing control risk?
To evaluate the risk that material misstatements may exist in the financial statements
If control risk is assessed at the maximum level - what should the auditor do?
Document the assessment –> should potentially perform more substantive procedures
What is the result of a high Risk of Material misstatement?
RMM = Inherent risk and control risk… RMM increase –> detection risk decreases –> substantive controls increase (might perform confirmations)
What is the relationship between control risk and substantive testing?
Direct relationship (i.e control risk decreases -> detection risk increase –> decreases substantive testing)
What is the relationship between the Expected population deviation rate and sample size for Test of controls?
Direct relationship (if auditor expects more errors -> increase sample size)
What is the relationship between Tolerable rate and samples size in TOC?
inversely (tolerable rate increases –> not as many items need to be selected)
What is the advantage of statistical sampling over nonstatistical sampling?
Statistical sampling helps the auditor measure evidence (bc auditor can quantify audit risk
What is the risk of assessing control risk too high?
Risk that assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of control
