A3 Risk, Evidence, and Sampling

Question 1

The Hierarchy of Audit Evidence from most Reliable to Least “AEIOU”

Answer 1

• *A**uditor’s direct personal knowledge
• *E**xternal evidence
• *I**nternal evidence
• *O**ral evidence
• *U** buy a vowel

Question 2

“C the FIVE CARROT WARS” The procedures used in an Audit..

Answer 2

Confirmations
the
Footing, Cross-Footing, and Recalculation
Inquiry
Vouching
Examination/Inspection

• *C**utoff Review
• *A**nalytical Procedures
• *R**eperformance
• *R**ecalculation
• *O**bservation
• *T**racing
• *W**alk-through
• *A**uditing related accounts simultaneously
• *R**epresentation Letter
• *S**ubsequent Review Events

Question 3

COVERU

How do we test managements assertions?

Answer 3

Completeness: Liabilities and expenses; Trace up from source docs to F/S

O Cut Off

Valuation, Allocation, and Accuracy

Existence& Occurrence; Revenues and Assets; Vouch down from F/S to source documents

Rights & Obligations; board minutes and loan agreements, etc.

Understandability of Presentation and Classification Presentation and disclosures

Question 4

The Main assertions relevant to the Audit of the Account Balances, Transactions, and Disclosures (3 buckets) “CVERUP”

Answer 4

• *C**ompleteness
• *V**aluation, Allocation, and Accuracy
• *E**xistence and Occurrence
• *R**ights and Obligations
• *U**nderstandability of Presentation and Classification Presentation and disclosures

Question 5

Most Relevant assertions when testing transactions: “COVEUP”

Answer 5

Completeness

O cutOff

Valuation, Allocation, and Accuracy

Existence and Occurrence

Understandability of presentation and Classification Proper Accounts

Question 6

**AUDIT RISK MODEL

Answer 6

AR Audit Risk (low) = RMM (Risk of material misstatement) x DR (Detection Risk)

RMM = IR X CR

Question 7

3 Types of Audit Test

Answer 7

1. Assessment
2. Test of Controls
3. Substantive Testing

Question 8

We Cast our NET over the audit.

We Cast our NET over the audit.

Answer 8

Nature: What is the purpose of the procedure? To test controls or substantive.

Extent: QTY or # of observations or sample size to use.

Timing: When to perform the test. Low risk interim date, high risk year end.

Question 9

SOAP

How to detect more material misstatements? SOAP

Answer 9

Aggregate of all immaterial misstatements summed together, total may be material.

Summary

Of

Adjustments

Passed