A3 FINAL Flashcards
What is a result of an increase of detection risk?
assurance that must be provided from substantive tests can decrease thus, can change testing from year-end to interim
Which financial statement covers ratios related to liquidity and financial flexibility?
Balance sheet
What is tolerable misstatement consideration based on?
based on prelim judgements about materiality levels
What sample planning factors would influence the sample size for substantive test of details?
Expected amount of misstatements and measure of tolerable misstatements
What is an advantage of using classical variable sampling rather than PPS sampling?
the selection of negative balances requires no special design considerations
why is a stratified sample more efficient than an unstratified sample?
produces an estimate having a desired level of precision with a smaller sample size
What is the objective of PPS size?
to identify overstatement of errors
What are the inputs of PPS (3)
- Tolerable misstatement
- Risk of incorrect acceptance
- Recorded amount of the population being sampled
What does a lower risk of incorrect acceptance require in terms of sample size?
Larger sample size
When is ratio estimation most effective?
Most effective if there is a correlation between values and audit amounts
How do you calculate the projected error?
Actual misstatement/(%size of population tested aka sample size/total population)
Define control risk
The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls
What is the statistical sampling method when testing controls?
Attribute sampling
What is the ultimate purpose of assessing control risk
To contribute to the auditors evaluation of the risk that material misstatements exist in the financial statements
What is the risk of assessing control risk too high?
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.
What is an judgmental misstatement?
differences between mgmt and the auditors judgment regarding estimates
Define inherent risk
susceptibility of a relevant assertion to a Material misstatement, assuming there are no controls
What is the reason that an auditor would incorrectly asses control risk lower than appropriate?
the deviation rate is less than the tolerable rate, but the true deviation rate exceeds the tolerable rate
What are the 3 things to consider when determining sample size for test of controls?
- tolerable deviation rate
- allowable risk of assessing control risk too low
- expected deviation rate
What is Incorrect rejection
Erroneously concluding that an account balance is materially misstated
When should the auditor reduce the planned reliance on controls?
When the sample rate + allowance for sampling risk exceeds the tolerable rate
Define incorrect acceptance
Risk the sample supports the conclusion that the recorded account balance is not materially misstated when in fact it is materially misstated
What type of sampling allows quantify sampling risk?
Attribute
What is a sampling risk associated with the efficiency of the audit?
Risk of assessing control risk too high
