A3 Flashcards
Risk, Evidence, and Sampling
1
Q
Although documentation that is lost may be a result of error, the auditor should approach lost documentation with:
A
a heightened risk that fraud may have occurred
2
Q
an employee buying an for personal, not business use is an example of:
A
an abusive purchase
3
Q
when client cannot provide documentation on material asset purchased recently, the auditor will need to evaluate a situation with a heightened sense that fraud could have occurred and will need to obtain other corroborating evidence from doing WHAT to get comfortable with the balance?
A
inspect the actual asset, review payment of item
4
Q
________ is required to include a description of the discussion among engagement personnel regarding the risk of material misstatement due to fraud
A
audit documentation
5
Q
The auditor should determine whether and to what extent fraud risk factors are present during the ______ stage of the audit
A
planning
6
Q
What factor would heighten an auditor’s concern about the risk of fraudulent financial reporting?
A
overly complex organization structure involving unusual lines of authority
7
Q
(financial/nonfinancial) management’s participation in the selection of accounting principles might heighten the auditor’s concern
A
non financial. financial Is expected to participate in those activities.
8
Q
What factor would heighten an auditor’s concern about the risk of misappropriation of assets?
A
large amounts of liquid assets that are easily convertible into cash
9
Q
During _____ stage of the audit, the auditor should consider the assessment of the risk of material misstatement
A
every
10
Q
During the ______ stage of the audit, the auditor should consider whether the results of any of the audit procedures affect the assessment of the risk of material misstatement due to fraud
A
overall review
11
Q
The auditor should consider the implications of an act of noncompliance with laws and regulations in relation to other aspects of the audit, particularly in:
A
the reliability of the management representation letter
12
Q
An auditor’s concern about he risk of ______ would be heightened if the entity were unable to generate cash flows from operations, but still reported substantial earnings growth
A
fraudulent financial reporting
13
Q
It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles because there is:
A
a high degree of management judgement and subjectivity
14
Q
An auditor who initially detects fraud doesn’t make the legal determination of whether fraud has occurred. The legal determination is determine by:
A
someone who specializes in law
15
Q
The disclosure of fraudulent activities to parties other than the client’s senior management and those charged with governance is:
A
not the auditor’s responsibility
16
Q
What kinds of fraud should be reported to those charged with governance?
A
- fraud that causes a material misstatement of the FS
2. fraud involving senior management
17
Q
Missing or unavailable documents or electronic evidence MAY be indicative of
A
an intentional material misstatement in the entity’s FS
18
Q
An auditor prepares an unmodified opinion on FS that are materially misstated due to fraud. The auditor will be considered to have met her responsibility provided the audit was:
A
planned and performed appropriately, including a specific assessment of the risk of material misstatement due to fraud
19
Q
If the auditor becomes aware of managements interest in maintaining the entity’s earnings trend by using aggressive accounting practices, this would be indicative of:
A
an attitude conducive to fraud
20
Q
Frequent disputes between management and the auditor is a fraud risk factor that would heighten an auditors concern about the risk of MM arising from:
A
fraudulent financial reporting
21
Q
management’s excessive interest in maintaining or increasing the stock price and earnings trend is a fraud risk factor that would heighten an auditors concern about the risk of MM arising from:
A
fraudulent financial reporting
22
Q
a lack of independent checks is a fraud risk factor that would heighten an auditors concern about the risk of:
A
misappropriation of assets
23
Q
A high turnover of senior management is a fraud risk factor that would heighten an auditors concern about the risk of:
A
fraudulent financial reporting
24
Q
The reevaluation of fraud risk might cause the auditor to increase the sample size using:
A
non-random statistical methods
25
Bearer bonds represent the highest risk of misappropriation of assets by an entity because:
they are unregistered with no records kept of the owners or transactions involving ownership. (historically they have been used to facilitate money laundering, tax evasion, and to conceal business transactions)
26
Having a large number of inventory items with low sales prices may result in asset misappropriation if:
the inventory items are easy to steal
27
The primary objective of the fraud brainstorming session is:
to assess the potential for material misstatement due to fraud
28
any indication of fraud (even immaterial fraud) the auditor finds should be discussed with:
an appropriate level of management at least one level above those involved
29
Excessive pressure on management to meet financial targets is a fraud risk factor that would heighten an auditor's concern about the risk of:
intentional manipulation of FS
30
The lack of supporting document of transactions calls into question:
the occurrence of the transactions under examination
31
Receiving significantly fewer confirmation responses that expected implies some AR's:
may be fictitious
32
Clerical errors listed on an exception report would be a control over data processing that would:
tend to minimize the risk of MM
33
The definition of fraud is:
an intentional act that results in a material misstatement in FS that are the subject of an audit
34
The definition of error is:
an unintentional misapplication of accounting principles relating to amounts, classifications, manner of presentation, or disclosure
35
If risk factors are identified, then the auditor should:
document them
36
Investigation of risk factors occur:
after the planning stage of the audit
37
hedging activities:
highly sophisticated transactions. fraud risk increases
38
If the assessed level of fraud risk is high, the auditor should attempt to reduce:
detection risk
39
audit risk is comprised of:
risk of MM and detection risk
40
Audit risk is the risk that:
the auditor may unknowingly fail to modify appropriately the opinion on financial statements that are materially misstated
41
The auditor uses the assessed level of control risk and inherent risk to determine:
the assessed risk of MM which affects the acceptable level of detection risk for financial statement assertions
42
As the acceptable level of detection risk decreases, the assurance provided from substantive tests should:
increase
43
As the acceptable level of detection risk decreases, the assurance provided from substantive tests should increase. The auditor should do one or more of the following:
1. change the nature of substantive tests from a less effective to a more effective procedure
2. change the timing of the tests (performing at year end instead of interim)
3. change the extent of substantive tests (using a larger sample size)
44
Control risk should be assessed in terms of:
financial statement assertions
45
In assessing control risk, The auditor identifies internal controls relevant to specific financial statement assertions, and then:
performs tests of controls to evaluate their effectiveness in preventing material misstatements in those assertions
46
A factual misstatement is:
a misstatement which there is no doubt
47
Projected misstatements are:
the auditor's best estimate of misstatements (both identified and estimate of unidentified) in the population, based on the auditors projection of the audit sample to the entire population
48
The risk of MM and detection risk may be assessed in:
1. quantitive terms (percentages)
| 2. nonquantitive terms (minimum or maximum)
49
The existence of audit risk is recognized by the statement in the standard report that:
the auditor obtained reasonable assurance about whether the FS are free of material misstatement
50
The acceptable level of detection risk is inversely related to:
the assurance provided by substantive tests
51
Regardless of the assessed level of control risk, the auditor would perform:
substantive tests to restrict detection risk for significant transaction classes
52
Dual purpose tests are often performed because:
they increase audit efficiency
53
Inherent risk and control risk differ from detection risk:
in that they exist independently of the audit of FS, whereas detection risk is related to the auditor's procedures and can be changed at the auditor's sole discretion
54
A misstatement that involves an estimate or accounting policy is considered a:
judgmental misstatement (subjective decisions)
55
______ is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls
inherent risk
56
______ is the risk that the audit procedures implemented will not detect a misstatement that exists in a relevant assertion
detection risk
57
_____ is the risk that a material misstatement will not be detected (or prevented) on a timely basis by the entity's internal control
control risk
58
The auditor would consider confirming a large complex sale when the risk of MM is:
high. then detection risk is low and the auditor would perform more reliable auditing procedures
59
The nature of tests to be applied on a particular engagement is:
a matter of the auditor's professional judgement
60
Analytical procedures can be very efficient in obtaining assurance, especially when potential misstatements are not:
apparent from an examination of detailed evidence or when such detail is unavailable
61
Sampling risk arises from the possibility that when a tests of controls or a substantive test is restricted to a sample, the auditor's conclusions may be different from the conclusions that would have been reached had:
the test been applied to all items in the account balance or class of transactions
62
______ is a risk resulting from significant conditions, events, circumstances, actions, or inactions that could adversely affect an entity's ability to achieve its objectives and execute its strategies
business risk (exists independently of audit)
63
The ultimate purpose of assessing control risk is:
to contribute to the auditor's evaluation of the risk that material misstatements exist in the FS
64
technological developments that may render inventory obsolete is an example of what risk?
inherent risk
65
Inaccurate physical inventory count is an example of what risk?
control risk
66
An audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do?
document their own understanding of the internal controls (they have to anyways)
67
An auditor of a nonissuer should design test of details to ensure:
that sufficient audit evidence supports the planned level of assurance at the relevant assertion level
68
Test of controls would support the planned level of:
control risk
69
While performing interim audit procedures of AR, numerous unexcepted errors are found resulting in a change of risk assessment. what should the auditor do?
Perform testing at year-end and utilize more experienced audit team members to perform those tests
70
negative confirmations provide (more/less) assurance than positive confirmations
less
71
Numerous unexpected errors may result in the auditor (increasing/decreasing) the dollar threshold of vouching customer invoices
decreasing
72
Audit evidence that was obtained in prior audits about the effective design or operation of internal controls:
may be considered by the auditor in assessing control risk in the current audit
73
The auditor is _______ to document the assessment of risk and the basis for the assessment
required
74
Some risk assessment procedures performed to obtain an understanding of internal control may provide evidence about:
operating effectiveness, even if they were not intended for that purpose
75
After obtaining an understanding the entity and its environment, including its internal control, the auditor may make a risk assessment that assumes controls are operating effectively. In such cases, the auditor
performs tests of controls to obtain evidence supporting this assessment
76
Assessing risk based on the effective operation of controls involves:
1. identifying specific internal controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions
2. performing tests of such controls to evaluate their effectiveness
77
If the audit effort required to perform tests of controls exceeds the potential reduction in substantive testing:
tests of controls will not be performed because doing so would reduce audit efficiency
78
The objective of tests of details used as tests of controls is:
to evaluate whether an internal control operated effectively
79
The objective of tests of details of transactions performed as substantive tests is:
to detect material misstatements in the FS
80
Are Analytical procedures always necessary in a FS audit?
yes, the planning process and overall review stage of the audit must include them
81
Are tests of operating effectiveness of controls always necessary in a FS audit?
No, only performed wen the auditor's risk assessment is based on the assumption that controls are operating effectively or if substantive procedures alone are insufficient
82
True or false: An audit of the FS is a cumulative process.
true
83
True or false: Audit documentation should be sufficient to show that accounting records agree or reconcile with the FS
true
84
True or false: The basis of the auditor's decision not to perform tests of controls concurrently with obtaining an understanding of internal control should be documented
false, auditor is not required to evaluate operating effectiveness as part of obtaining an understanding internal control so its not required to document the basis for the decision
85
As part of understanding internal control, an auditor is not required to:
obtain knowledge about operating effectiveness of internal control
86
attorneys' responses to the auditor's inquires are a part of a:
substantive test
87
Obtaining letters of representation corroborating inventory pricing is a:
substantive test
88
Inquiry, inspection, observation, recalculation, and reperformance are:
tests that may be used to evaluate the operating effectiveness of a control (test of controls)
89
The amount of time budgeted to complete the audit should not be a primary factor in determining the extent of consideration of the client's internal controls. why?
if more time is needed to adequately consider internal control, then the budget should be revised
90
True or false: the expected deviation rate would affect the extent of the auditor's consideration of the client's internal controls
true
91
If it would take less time or be more efficient to perform substantive tests then test of controls, and if there is no other reason to test controls (no high degree of electronic processing), the auditor:
wouldn't test controls
92
Evidence concerning proper segregation of duties is generally obtained through;
inspection and observation
93
Recalculation related to a control would help the auditor obtain:
evidence of the control's effectiveness
94
Recalculation of the balance of accounts is a:
substantive procedure
95
Providing more supervision during an audit of a nonissuer in response to assessed risks of material misstatement at the FS level is an example of:
an overall response
96
Assigning more experienced staff or those with specialized skills to high-risk areas is considered:
an overall response to risk assessed at the FS level
97
An appropriate response to an identified business risk associated with plans for a new product line is for the auditor to:
analyze the newly identified risk in conjunction with other know business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit
98
an unsuccessful new product may affect the risks of material misstatement related to:
the valuation of inventory
99
Business risks often affect:
risk of MM at the FS level
100
If interim substantive procedures for an account identified no exceptions, then the auditor does not need to:
test details for the entire year under audit at year-end
101
Substantive procedures include:
test of details and substantive analytical procedures
102
An auditor should reconcile year-end balances to interim dates. This procedure is performed as part of:
roll-forward procedures
103
Specific account balances, classes of transactions, and disclosures relate to:
responding to risks at the relevant assertion level (lower than FS level)
104
The control environment is pervasive and reflects the overall tone of the organization. Therefore, the auditor is most likely to focus on the highest level of risk of material misstatement, which is assessed at the:
financial statement level
105
An auditor uses the knowledge provided by the understanding of internal control and the final assessed risk of material misstatement primarily to determine the nature, timing and extent of:
substantive tests to be performed
106
Attribute tests, compliance tests, and tests of controls are all tests that assist the auditor in:
assessing control risk and determining the final assessed risk of material misstatement
107
Before performing substantive tests at an interim date, an auditor should consider whether the amounts of the year-end balances selected for interim testing are:
reasonably predictable with respect to amount, relative significance and composition
108
A letter of audit inquiry to the client's legal counsel relates to:
pending or threatened litigation matters that existed at the balance sheet date and for a period thereafter
109
The auditor should inquire of management concerning pending or threatened litigation, and should obtain a letter from the client's lawyer to corroborate this information. Included in this letter is:
either an identification of the omission of any pending or threatened litigation, claims, and assessments OR a statement that the list of such matters is complete
110
Evaluating deviations from historical patterns assists an auditor in determining if:
a recorded estimate is reasonable
111
The auditor should view related party transactions within the framework of existing pronouncements, placing primary emphasis on:
the adequacy of disclosure
112
After identifying the occurrence of a related party transaction, the auditor should:
apply the procedures considered necessary to obtain satisfaction concerning the purpose and nature of the transaction and its effect on the FS
113
Unusual nonrecurring transactions near year-end are characteristic of:
related party transactions
114
Compensating balance arrangements may be maintained by or for:
related parties
115
related party transactions typically relate to transactions with:
affiliates, owners, or management
116
Transactions based on terms that are significantly different from those that would be expected in an arm's length transaction, may be indicative of:
related party involvement
117
selling real estate at a price significantly different from appraised value, may be indicative of:
related party involvement
118
In order to determine the existence of related parties the auditor must first:
request that management provide a list of related parties
119
The auditor should design the audit to provide _____ assurance that direct effect acts of noncompliance are detected
reasonable
120
Because of the nature of acts of noncompliance with laws and regulations having an indirect effect on the FS, the auditor provides ____ assurance that such acts will be detected
no
121
An auditor concludes that management has been involved in noncompliance with a certain law and that this fact has not been properly accounted for or disclosed. the auditor should withdraw from the engagement if:
client refuses to accept the auditor's report as modified for the noncompliance. the auditor should also notify in writing those charged with goverance
122
The auditor may conclude that withdrawal is necessary if the client doesn't take remedial action that the auditor considers necessary in the circumstances, even when the act of noncompliance is:
not material to the FS
123
If specific information concerning a possible act of noncompliance with laws and regulations comes o the auditor's attention, the auditor should:
apply additional audit procedures to determine whether an act of noncompliance with laws and regulations has in fact occurred
124
an illegal payment of an otherwise immaterial amount could be material if:
theres a reasonable possibility that it could lead to a material contingent liability or a material loss of revenue
125
the audit should be designed to identify material misstatements due to acts of noncompliance with laws and regulations, but acts of noncompliance with laws and regulations that relate to operating aspects rather than accounting aspects may not directly affect he financial statements and therefore:
they may be less likely to be discovered by the auditor
126
Information that may raise a question concerning possible noncompliance with laws and regulations include unusually large payments made to:
cash, bearer, purchase cashiers checks, transfer funds to numbered accounts
127
Conflict of interest statements require management to disclose:
any relationships with related organizations that do business with the entity
128
Regarding a nonissuer's compliance with laws and regulations, an auditor performing an audit of the entity's FS is responsible for:
obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework
129
the auditor's direct personal knowledge obtained through ______________ is one of the most reliable forms of evidence
observation, examination, inspection, or recalculation
130
Strong, effective internal controls improve:
the reliability of data
131
Shipping documents and receiving reports are internally-generated evidence, since:
they are created by the client rather than received from independent sources outside the enterprise
132
Vendor invoices, bills of lading, customer purchase orders, packing slips are external evidence, since
they are received from independent sources outside the enterprise
133
Reliability of audit evidence is enhanced by:
a satisfactory internal control structure
134
The amount of corroborative evidence obtained refers to:
the sufficiency of the evidence
135
In the great majority of cases, the auditor finds it necessary to rely on evidence that is _____ rather than _______.
persuasive, conclusive
136
The measure of the sufficiency of audit evidence lies:
in the auditor's judgement
137
The difficultly and expense of obtaining audit evidence concerning an account balance is not a valid basis for omitting the test when:
there is no acceptable alternative procedure
138
An auditor is required to communicate significant deficiencies to management and those charged with governance, and a disclaimer of opinion on:
the effectiveness of controls would be included in this communication. (not a part of the auditor's report on the FS)
139
most reliable audit evidence is directly connected to:
actual knowledge obtained from procedures performed by the auditor
140
most reliable evidence to least reliable:
1. actual knowledge
2. external
3. internal
141
The objective of analytical procedures used in the overall review stage of the audit is:
to assist the auditor in assessing conclusions reached and in the evaluation of the overall financial statements presentation
142
the objective of tests of details of transactions performed as substantive tests is to:
detect material (dollar) misstatements in the FS
143
The objective of tests of controls is:
attaining assurance about the reliability of the information system relevant to financial reporting
144
Total debt / total assets indicates the the portion of assets financed by creditors, which is a meaningful ratio to calculate during;
the final audit review
145
Analytical procedures applied during the final review stage should be used to:
determine whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit
146
_______ generally involve comparison of recorded amounts to auditor expectations
analytical procedures
147
The purpose of applying analytical procedures during the overall review stage of an audit is to:
1. evaluate the overall FS presentation
2. assess the conclusions reached
3. assist in forming an opinion on whether the FS as a whole are free of MM
148
relationships among income statement accounts tend to be more predictable than balance sheet accounts because:
they represent transactions over a period of time rather than at one point in time
149
relationships involving transactions subject to management discretion (travel and entertainment are less predictable) are:
less predictable
150
When an analytical procedure is used as the principal substantive test of a significant FS assertion, the auditor is required to:
document both the auditor's expectation and the factors considered in developing that expectation
151
the auditor relies on _______ to achieve audit objectives related to particular assertions
substantive tests
152
An auditor's analytical procedures are facilitated when an entity uses a standard cost system with variance reports because:
the comparison of actual to budget will already have been performed. management will already be aware of significant variations from budget and will be better able to address any questions the auditor may have.
153
______ involve comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor
analytical procedures
154
To audit the statement of cash flows, the auditor:
reconciles the amounts on the statement to amounts on other financial statements
155
the objective of analytical procedures used in the planning stage of the audit is to:
assist in planning the nature, timing, and extent of auditing procedures to be performed
156
To determine whether transactions have been recorded (completeness assertion, the auditor should;
trace from the source documents to the accounting records (general ledger, trial balance)
157
Testing from the accounting records to the source documents provides evidence of:
existence or occurrence
158
Reconciling physical counts to perpetual records and general ledger balances represents:
test of details procedure
159
Comparing relationships among data, such as inventory balances to recent sales activities, represents:
analytical procedure
160
"The entity holds or controls the rights to assets" and "liabilities are obligations of the entity' are management assertions that relate to the rights and obligation assertion about:
account balances at period end
161
Transactions and events that have been recorded have occurred and pertain to the entity are statements that relate to:
the existence and occurrence assertion about transactions and events
162
The statement "transactions and events have been recorded in the proper accounts" relates to:
the understandability and classification assertion about transactions and events
163
Amounts and other data related to transactions and events have been recorded appropriately is a statement that relates to:
the valuation, allocation an accuracy assertion about transactions and events
164
What is the first step performed in applying analytical procedures?
develop an expectation of a balance or ratio by using relationships that are expected to exist
165
Overstatement of sales is detected by what assertion/
existence
166
understatement of liabilities is detected by what assertion?
completeness
167
Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the:
completeness of cash receipts
168
Analytical procedures are not required to be used as a substantive test and are more likely to be used for:
accounts that are predictable
169
when evaluating whether and to what extent analytical procedures should be used, the auditor should consider:
the nature of the assertion tested, plausibility and predictability of the data relationship, availability and reliability of data used to develop the expectation, and the precision of the expectation
170
inventory turnover calculation:
COGS / average inventory
171
Trading securities are both _________ and ________
current and quick assets
172
If trading securities are sold at their carrying value, then both total current assets and total quick assets:
remain constant since one type of current or quick asset is traded for another
173
rate of return on assets calculation
net income / average total assets
174
accounts receivable turnover ratio
net credit sales / average accounts receivable
175
average number of days sales in inventory
365 / inventory turnover
176
Which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility?
balance sheet
177
liquidity ratios and coverage ratios focus on;
balance sheet account balances
178
the statement of retained earnings is:
a reconciliation of the retained earnings account
179
income statement information is primarily used for:
profitability analysis
180
The statement of cash flows assesses:
cash inflows and cash outflows
181
quick ratio
quick assets / current liabilities
182
since quick assets (or current assets) are less than current liabilities, when each is decreased by the same amount, the percentage decrease of quick (or current) assets will be ______ than that of the current liabilities. resulting in the quick ratio (or current ratio) ______.
greater, decrease.
183
since quick assets (or current assets) are more than current liabilities, when each is decreased by the same amount, the percentage decrease of quick (or current) assets will be ______ than that of the current liabilities. resulting in the quick ratio (or current ratio) ______.
less, increasing
184
acid test ratio
current assets excluding inventory and prepaid expenses / current liabilities
OR
cash equivalents + marketable securities + AR / CL
185
average number of days in AR
365 / AR turnover
186
In order for the inventory turnover to increase, either cost of sales must ____ or average inventory must ______.
increase, decrease
187
If cost of sales increased and sales remained constant, the gross profit percentage would ______
decrease
188
accounts payable turnover
purchases / average AP
189
the sample size in an attribute sampling application is affected by:
the allowable risk of assessing control risk too low, the tolerable deviation rate, and the expected deviation rate
190
If the auditor assesses control risk too low then the true population deviation rate exceeds the auditor's tolerable rate while:
the auditors estimate of the maximum deviation rate was less than the tolerable rate
191
Both the risk of incorrect acceptance and the risk of assessing control risk too low relate to:
the effectiveness of an audit in detecting an existing MM
192
the efficiency of the audit is related to;
the risk of incorrect rejection and the risk of assessing control risk too high
193
To determine the number of items to be selected for a particular sample for a test of controls, the auditor should consider:
the tolerable rate of deviation from the controls being tested, the likely rate of deviations and the allowable risk of assessing risk too low
194
Erroneously concluding that an account balance is materially misstated is an example of:
incorrect rejection
195
If the auditor had concluded that an account was fairly presented when, in fact, it was not, it would be an example of;
incorrect acceptance
196
Attribute sampling is used to:
test controls
197
Authorization, validity, completeness, accuracy, appropriate classification, accounting in conformity with GAAP, and proper period are terms in identifying which option is a;
test of controls
198
Account balance, amount, valuation, presentation, and disclosure are more likely to relate to:
substantive tests
199
statistical sampling helps the auditor to measure the sufficiency of the audit evidence because:
the auditor can quantify the audit risk, thus assisting in limiting it to an acceptable level
200
nonsampling errors relate to:
improper evaluation of evidence by the auditor and are not dependent on the sampling method used
201
______ can be reduced to a relatively low level with non-statistical sampling
audit risk
202
By using statistical sampling, the auditor can quantify sampling risk to assist in;
limiting it to a level considered acceptable
203
Statistical sampling provides the auditor with a better measure of:
the sufficiency of the evidence found
204
account balance assertions
Completeness, valuation, existence, rights and obligations (CVER)
205
transactions and events assertions
completeness, cutoff, valuation, existence/occurence, understandability (COVEU)
206
presentation and disclosure
completeness, valuation, rights and obligations and occurrence, understandability (CVRU)
207
completeness procedures
tracing, analytical review, observation
208
cutoff procedures
analyze transactions before and after year-end for proper accounting period recognition
209
valuation, allocation, and accuracy procedures
inspection, footing, independent recalculation, reconciliation
210
existence / occurrence
confirmation, observation, inspection, and examination, vouching
211
rights and obligations procedures
inspection
212
understandability and classification
inspection, review, inquiry of management
213
liquidity ratios
working capital, current ratio (WC ratio), acid-test ratio, cash ratio
214
working capital
CA - CL
215
Cash ratio
cash equivalents + marketable securities / CL
| excluding AR and inventory
216
activity ratios
AR turnover, AR turnover in days, inventory turnover, inventory turnover in days, operating cycle, working capital turnover, total asset turnover, AP turnover, days in AP
217
operating cycle
AR turnover in days + inventory turnover in days
218
working capital turnover
sales / average working capital
219
total asset turnover
net sale / average total assets
220
profitability ratios
net profit margin, return on total assets, return on investment, return on common equity, net operating margin percentage, gross profit margin percentage, operating cash flow per share
221
net profit margin
net income / net sales
222
return on total assets
net income / average total assets
OR
net profit margin * total asset turnover
223
return on investment
net income + interest expense (1- tax rate) / average of total long-term liabilities and equity
224
return on common equity
net income - preferred dividends / average common equity
225
net operating margin percentage
operating income / net sales
226
gross profit margin percentage
gross profit margin / net sales
227
operating cash flow per share
operating cash flow / common shares outstanding
228
investor ratios
degree of financial leverage, earnings per share, price/earnings ratio, dividend payout ratio, dividend yield, book value per share
229
degree of financial leverage
earnings before interest and taxes / earnings before taxes
230
earnings per share
net income - preferred dividends / weighted average number of common shares outstanding
231
price / earnings ratio
market price per share / diluted earnings per share
232
dividend payout ratio
dividends per common share / diluted earnings per share
233
dividend yield
dividends per common share / market price per common share
234
book value per share
total stockholder's equity - preferred stock / numbers of common shares outstanding
235
long-term debt paying ability ratios
debt / equity ratio, debt ratio, times interest earned, operating cash flow / total debt
236
debt / equity ratio
total liabilities / common stockholders equity
237
debt ratio
total liabilities / total assets
238
times interest earned
earnings before taxes and interest / interest
239
operating cash flow / total debt
operating cash flow / total debt
240
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods provide an objective basis for:
quantitatively evaluating sample risk
241
deviations from pertinent control activities at a given rate would ordinarily be expected to result in
misstatements at a lower rate
242
In test of controls, ________ has virtually no effect on sample size unless the _______ is small
population size, population
243
The sample size for a test of controls varies directly with the ________ and inversely with the _______.
deviation rate, tolerable rate
244
If the auditor expects more errors, he or she would increase sample size, conversely, if:
the tolerable rate of deviation increases, not as many items need to be selected
245
as a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. the most likely explanation for this situation is:
the deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate
246
If the sample deviation rate exceeds the tolerable rate, but the deviation rate in the population does not, the auditor would assess control risk at a ______ level
higher (than appropriate)
247
Stratified sampling, ratio estimation, and variables sampling are used in:
substantive testing
248
the sum of the percentage of the errors and the allowance for sampling risk equals:
upper deviation rate
249
_______ is used to determine whether a given account balance is reasonable
variable sampling
250
______ is used to test the attributes or characteristics of each item in a sample
attribute sampling
251
the risk of assessing control risk too ____ is the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control
high
252
the risk of assessing control risk too ____ is the risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control
low
253
if the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be ________, because:
understated, the control will be less effective than sample results would indicate
254
_____ is used to estimate a rate of occurrence, and often involves a yes-no question.
attribute sampling
255
the auditor's allowable risk of assessing control risk too low has an inverse relationship with _______ when planning a sample for a test of controls
sample size
256
as the auditor is willing to accept a greater deviation rate, a ______ sample size can be used
smaller
257
as the tolerable deviation rate increases, and sample size ____
decreases
258
When determining the sample size for a test of controls, the auditor should consider the:
expected deviation rate, the tolerable deviation rate, and the allowable risk of assessing control risk too low
259
consideration should be given to the qualitative aspects of deviations, including:
the nature and cause of deviations and the possible relationship of the deviations to other phases of the audit
260
____ refers to uncertainty in applying audit procedures to specific risks
audit risk
261
_____ includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective
nonsampling risk
262
Examples of nonsampling risk:
the auditor selecting inappropriate auditing procedures, using inappropriate audit evidence, and failure by the auditor to recognize misstatements in documents examined
263
If an auditor of a nonissuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management's review and approval of timesheets, then the auditor would:
increase the assessed risks of MM (increase control risk)
264
____ is a nonstatisical technique that involves the auditor selecting items without any conscious bias in the selection of the population
haphazard sampling
265
haphazard sampling is different from random sampling because:
random sampling involves utilizing computer software or number tables to select items for sampling, which guarantees that each item in the population has an equal chance of being selected. haphazard sampling might result in unconscious bias
266
stratified nonstatistical sampling doesn't allow the auditor to quantify sampling risk because:
every item in the population doesn't have an equal chance of being selected
267
_______ is a nonstatistical technique which involves selecting items in the population that are clustered together
block sampling
268
Statistical approaches allow auditors to:
quantify sampling risk
269
Selection of every twentieth item results in a sample that is:
5%
270
The sample size in a variables sampling application is affected by:
the variability in the population (generally represented by the standard deviation), the acceptable level of risk (risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement
271
the auditor would be likely stratify when the standard deviation is ____
high
272
The auditor may be able to reduce the required sample size by separating items subject to sampling into relatively homogenous groups on the basis of:
some characteristic related to the specific audit objective
273
an increase in tolerable misstatement results in a _____ sample size
smaller
274
an increase in assessed level of control risk leads to a ______ sample size
larger
275
ratio estimation is most effective if:
there is a correlation between book values and audit amounts
276
_______ is normally used to estimate a numerical measurement of a population
variables sampling
277
_______ is a type of attribute sampling used when testing controls
stop or go sampling
278
_____ involves the grouping of transactions sharing some characteristic (such as recorded amounts)
stratification
279
the goal of stratification is to ensure selection of items for which potential misstatements may individually ________ tolerable misstatement
equal or exceed
280
By stratifying the sample, the auditor can:
examine each of the unusually large transactions and also reduce the sample size
281
qualitative aspects might include whether deviations are indicative of:
error or fraud
282
When planning a particular sample for a substantive test of details, the auditor should consider:
how much monetary misstatement in the account might exist without causing the FS to be materially misstated (tolerable misstatement), and the expected size and frequency of misstatements
283
inclusion of negative balances requires special design considerations with _______, but it does not require special design considerations with _______
PPS sampling, classical variables sampling
284
If no errors are expected, ______ generally requires a smaller sample than other methods
PPS sampling
285
the primary objective of probability proportional to sample size:
to identify overstatement errors
286
_______ emphasizes larger items, which are more likely to be selected for the sample
PPS sampling
287
a stratified sample generally is more efficient than an unstratified sample since:
the population is classified in a manner that emphasizes the higher dollar value items. the result is an estimate having a desired level of precision with a smaller sample size
288
In _______, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan
PPS sampling
289
The inputs for PPS sampling are:
tolerable misstatement, risk of incorrect acceptance, and the recorded amount of the population being sampled
290
In PPS sampling, the sampling interval is calculated:
recorded amount of the population (not the number of physical units) / the sample size
291
Overstated units have a _____ probability of sample selection than units that are understated because with PPS sampling, each item is given a probability of selection in proportion to its recorded amount
higher
292
The statistical concept of _____ is used to describe the auditor's evaluation of sampling results by calculating the possible error in either direction
precision
293
______ is the auditor's best estimate of the error in the total population based upon evaluating the actual error rate in the sample results
projected error
294
_____ is a measure of the variability of a frequency distribution about its mean
standard deviation
295
_____ measures how frequently the procedure used will yield differences between the estimated value and the population value
reliability
296
_______ is a special case of sampling for attributes (errors) where the auditor's initial estimate of error occurrence is zero or near zero.
discovery sampling
297
Decreasing the acceptable level of risk will result in a larger sample size, which the auditor might not want to do unless:
the cost and effort of selecting additional sample items is low
298
After identification of misstatements in the sample, the next step is to:
project the detected error to the entire population
299
mean-per unit estimation
average value * accounts
300
ratio estimation
(audited value / book value) * total value
301
difference estimation
total value - (((book value - audited value)/sample) * accounts)
302
related party transactions provide an opportunity to:
commit fraud because of the uniqueness and complexity of the transactions
303
When management's promotions, compensation, or other rewards are inconsistent with expectations it may pressure management to:
misappropriate assets
304
Significant bank accounts in tax-haven jurisdictions for which there appears to be no clear business justification creates an opportunity to:
fraudulently report
305
Management's attitude of having excessive interest in maintaining or increasing the entity's stock price may result in:
management fraudulently reporting so stock price increases
306
If management has significant financial interests in the entity, this may create excessive:
pressure for management to ensure that the entity performs well resulting in fraudulent reporting
307
Failure of management to correct known deficiencies on a timely basis may reflect that:
management disregards controls (attitude/rationalization) which could allow fraudulent reporting
308
year to year change
Y2 - Y1 / Y1
309
If a larger percentage of sales occurred during the last month of the year, as compared to the prior year, the total sales figure would not change, but the receivable balance at year end would:
be larger in year 2 than year 1
310
management has declined to disclose something material to the FS. what key words should be used to search the codification?
inadequate disclosure
311
an auditor obtained a copy of the companys accounting manual and read the section on inventory to prepare for the physical inventory observation. what is the type of audit procedure?
inspection
312
the auditing firms computer-assisted audit specialist obtained an electronic billing file from the company and checked the accuracy of the summarized billings file. what is the type of audit procedure?
recalculation
313
the auditor obtained the company's aging of AR and independently created the aging of certain accounts
reperformance
314
checking the accuracy of the file is a form of:
recalculation
315
independent re-creation of client documentation is a form of:
reperformance
316
agreed sales invoices to credit files to determine whether the customer had a credit file and had been approved for credit. audit procedure performed?
reperformance
317
reviewed board of director minutes for authorization of new debt financing. audit procedure performed? classification of procedure?
inspection, test of controls. because the auditor is looking for evidence of authorization
318
selected various voucher packages that had been approved and matched the invoice, purchase order, and receiving report. audit procedure performed? classification of procedure?
reperformance, test of controls, auditor is verifying that the accounting department matched the reports
319
reperformance involves:
the independent execution of procedures that were originally performed as part of the entity's internal control
320
the reliability of data increases when:
an entity has a strong internal control, the data comes from external resources, the analytical uses reliable nonfinancial data and the data has been subjected to auditing procedures
321
an auditor is allowed to perform reasonablness testing on interrelated accounts. however, when an account is ____ on another account, then the _____ account should not be sued to create the expectation for the ____ account
dependent, dependent, independent
322
an auditor is allowed to perform reasonablness testing on interrelated accounts. ____ account can be used to test the completeness of ____ account
independent, dependent
323
example of a projected misstatement:
sampling,
324
example of judgemental misstatement:
believes the misstatement is (no facts or sample)
325
Nonsampling risk:
- always present and cannot be measured
- the auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit and quality control of all firm practices
- can arise because an auditor failed to recognize misstatements in documents examined
326
methods used by auditor to limit sampling risk?
- evaluate the sample results
- evaluate the sample through random sample selection
- ensure that sample items have an equal probability of being selected
- select a representative sample from the pop
327
according to PCAOB standards, relevance of audit evidence depends on:
- timing of audit procedure
- whether the audit procedure is meant to test for understatement or overstatement
- whether the design of the audit procedure directly tests the assertions
328
according to PCAOB standards, reliability of audit evidence depends on:
-the circumstances under which the audit evidence is gathered
329
Financial statement assertions recognize by PCAOB standards for issuer audits:
CEO aproved
- completeness
- existence
- occurrence
- allocation
- presentation
- rights
- obligations
- valuation
- e
- disclosure
330
an account has minimal activity during the year. What audit procedures would the auditor use?
test of details
331
the client's improper disclosure of derivative activity would pertain to:
assertion level risk
332
financial statement risks have a direct impact on:
- FS taken as whole
| - many relevant assertions as well
333
four attributes used by the auditor to identify material misstatement as a result of client fraud:
(focus on current years audit)
- the likelihood of the risk
- pervasivenesss of the risk (impact FS as a whole or specific transactions, accounts, or assertions)
- type of risk (misappropriation of assets or fraudulent reporting)
- significance of the risk (lead to a MM?)
334
during the planning phase of the audit, the auditor obtains an understanding of the IC system by considering:
- types of M that may occur
- risks that M may occur
- factors that influence the design of tests of controls and substantive tests
- assessment of IC
- judgements about materiality
- the complex of entit's operations and systems
- use of manual vs computized procedures
