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Audit - CPA > A3 - Risk, Evidence, and Sampling > Flashcards

A3 - Risk, Evidence, and Sampling Flashcards

1
Q

During an audit, the auditor should maintain an attitude of:

A
  • Professional skepticism

- Which includes a questioning mind and a critical assessment of audit evidence

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2
Q

The auditor’s responsibility is to plan and perform the audit to obtain:

A
  • Reasonable assurance about whether the FS are free of material misstatement, whether caused by error or fraud
  • This includes a specific assessment of the RMM due to fraud
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3
Q

The disclosure of fraudulent activities to parties other than the client’s senior management and those charged with governance is:

A
  • NOT ordinarily part of the auditor’s responsibility
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4
Q

Inquiries the auditor should make to identify the RMM due to fraud:

A
  • How management has communicated to those charged with governance regarding IC and how it functions to prevent, deter or detect MM due to fraud
  • How management communicates to employees its views on acceptable business practices
  • Whether there are any particular business segments for which a risk of fraud may exist
  • Whether management is aware of any allegations of fraud
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5
Q

The auditor should consider implications of an act of noncompliance with laws and regulations in relation to other aspects of the audit, particularly:

A
  • The reliability of the management representation letter (representations of management)
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6
Q

Lack of ownership identification on the entity’s fixed assets would heighten:

A
  • An auditor’s concern about the RMM arising from the misappropriation of assets
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7
Q

If evidence is not reliable, the auditor should:

A
  • Reevaluate the risk of fraud and design alternate tests
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8
Q

What attributes should be considered in the process of identifying client risks that may result in a MM due to fraud?

A
  • Type of risk
  • Significance of the risk
  • Likelihood of the risk
  • Pervasiveness of the risk
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9
Q

How does inherent risk and control risk differ from detection risk?

A
  • They exist independently of the audit
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10
Q

Judgmental misstatement:

A
  • Differences arising from judgments of management and the auditor
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11
Q

Factual misstatement:

A
  • Misstatements about which there is no doubt
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12
Q

Projected Misstatement:

A
  • The auditor’s best estimate of misstatements in populations, involving the projection of misstatements identified in audit samples to the entire population
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13
Q

Control risk:

A
  • Risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected (and corrected) on a timely basis by the entity’s internal control
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14
Q

The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the:

A
  • Risk that material misstatements exist in the financial statements
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15
Q

The auditor assesses control risk because it:

A
  • Affects the level of detection risk that the auditor may accept
  • To obtain an understanding of internal control
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16
Q

To determine the assessed RMM, the auditor:

A
  • Uses the assessed level of control risk along with the assessed level of inherent risk
  • This affects the acceptable level of detection risk for FS asserstions
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17
Q

If the assessed level of fraud risk is high, the auditor should attempt to reduce:

A
  • Detection risk
  • This helps ensure that the auditor will obtain reasonable assurance about whether the FS are free of material misstatement caused by fraud
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18
Q

Audit risk is comprised of:

A
  • The risk of material misstatement and detection risk
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19
Q

Audit risk:

A

The risk that the auditor may unknowingly fail to modify appropriately the opinion of the FS that are materially misstated

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20
Q

Fraud risk:

A
  • The risk that misstatements will arise from fraudulent financial reporting or misappropriation of assets
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21
Q

Detection risk:

A
  • The risk that the audit procedures implemented will not detect a misstatement that exists in a relevant assertion
  • This is not assessed, but rather controlled by the auditor through the level of testing performed
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22
Q

Inherent Risk:

A
  • The susceptibility of a FS assertion to a material misstatement assuming there are no related controls
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23
Q

Regardless of the assessed level of control risk, an auditor would perform some:

A
  • Substantive tests to restrict detection risk for significant transaction classes
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24
Q

In an audit of FS, substantive procedures:

A
  • Will always be necessary for all relevant assertions related to material transaction classes
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25
Q

If an auditor assesses control risk at the maximum level:

A
  • Document the assessment and make decisions to potentially perform more substantive procedures
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26
Q

The acceptable level of detection risk is INVERSELY related to the:

A
  • Assurance provided by substantive tests (perform more tests/change extent of tests)
  • Risk of material misstatements (IR x CR)
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27
Q
  • Increasing the assessed level of control risk would increase the:
A
  • Extent of test of details
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28
Q

What is always necessary in a FS audit:

A
  • Analytical procedures

- Risk assessment procedures

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29
Q

When are tests of operating effectiveness in controls performed?

A
  • Only when the auditor’s risk assessment is based on the assumption that controls are operating effectively
    When substantive procedures alone are insufficient
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30
Q

An auditor may decide not to perform tests of controls after performing risk assessment procedures because:

A
  • The time required to perform tests of controls would be greater than the reduction in time spent on substantive testing
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31
Q

In assessing control risk, an auditor would perform:

A
  • Inquiry
  • Inspection
  • Observation
  • Reperformance
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32
Q

When risk assessment is based on the effective operations of controls, an audit will involve:

A
  • Identifying specific internal controls relevant to specific assertions
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33
Q

An auditor should design tests of details to ensure that evidence supports:

A
  • the planned level of assurance at the relevant assertion level
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34
Q

Auditor should consider when determining the appropriate extent of testing controls:

A
  • Frequency of performance of control during the period
  • Length of time auditor wishes to rely on control
  • Relevance and reliability of evidence obtained
  • Extent to which other tests provide evidence about the same assertion
  • Extent auditor wishes to rely on operating effectiveness on the control to reduce substantive procedures
  • Expected deviation rate from the control
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35
Q

What level would address the RMM by the auditor’s consideration of an entity’s control environment?

A
  • Financial statement
36
Q

If substantive tests solely do not reduce detection risk, an auditor would:

A
  • Perform tests of controls to support a lower level of assessed control risk
37
Q

During the planning phase of the audit, an auditor obtains an understanding of IC system by considering:

A
  • Type of misstatements that may occur
  • Risks that misstatements may occur
  • Factors that influence the deign of tests of controls and substantive tests
  • Assessment of inherent risk
  • Judgements about materiality
  • Complexity and sophistication of the entity’s operations and systems
  • Use of manual vs. computerized control procedures
38
Q

AN auditor determines whether a risk is significant by:

A
  • Its inherent risk alone
39
Q

What procedure would assist an auditor in identifying related party transactions?

A
  • Reviewing confirmations of loans receivable and payable for indications of guarantees
40
Q

What procedure would assist an auditor in determining whether management has identified all accounting estimates that could be material to FS?

A
  • Review the lawyer’s letters for information about litigation
41
Q

Reliability of audit evidence:

A
  • Auditor’s direct personal knowledge (and observation)
  • External
  • Internal
  • Orally
42
Q

PCAOB standards state that RELEVANCE of audit evidence depends on:

A
  • Timing of the audit procedure
  • Whether audit procedure is designed to tests for an understatement or overstatement
  • Whether the audit procedure is designed to directly test an assertion
43
Q

Corroborating evidence:

A
  • Includes minutes of meetings, confirmations industry analysts’ report, data about competitors, evidence obtained from management specialists, and information obtained through OBSERVATION, INQUIRT, and INSPECTION
44
Q

Risk of incorrect rejection:

A
  • Risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not materially misstated
45
Q

Risk of incorrect acceptance:

A
  • Risk that the sample supports the conclusion that the recorded account balance is NOT materially misstated when it is
46
Q

Deviation rate:

A
  • The auditor’s best estimate of the deviation rate in the population from which it was selected
47
Q

Tolerable deviation rate:

A
  • The maximum rate of deviation from the prescribed procedure the auditor will tolerate without modifying planned reliance on internal control
  • INVERSE relationship with the sample size
48
Q

Attribute sampling (used to determine the NET of the substantive testing):

A
  • Define objective of the test
  • Define the population
  • Define the sampling unit
  • Define attributes of interest
  • Determine the sample size
  • Select the sample
  • Evaluate the results
  • Form conclusions
  • Document the procedure
49
Q

Upper deviation rate =

A

Sample deviation rate + Allowance for sampling risk

50
Q

In determining the sample size, the auditor must determine the following factors:

A
  • Risk of assessing control risk too low
  • Tolerable deviation rate
  • Expected deviation rate
51
Q

Risk of assessing control risk too low:

A
  • Risk that the assessed level of control risk based on the sample is less than the true level of control risk based on the actual operating effectiveness of the control
  • Inverse relationship to sample size
52
Q

What effect does the population size have on the sample size?

A
  • Little effect
53
Q

If the upper deviation rate is LESS than or equal to the tolerable deviation rate:

A
  • The auditor MAY rely on the control
54
Q

If the upper deviation rate EXCEEDS the tolerable deviation rate:

A
  • The auditor would NOT rely on the control
55
Q

Sample size of a test of controls is INVERSELY related to:

A
  • Tolerable rate
56
Q

Statistical compared to nonstatistical sampling provides a basis for planning the:

A
  • Sample size

- Provides an objective basis for quantitatively evaluating sample risk

57
Q

Statistical sampling advantages:

A
  • Provide a scientific basis for planning the sample size
  • Provide an objective basis for quantitatively evaluating sample risk
  • Measure the sufficiency of the audit evidence obtained
58
Q

Deviations from specific control activities at a given rate ordinarily result in:

A
  • Misstatements at a lower rate
59
Q

Nonsampling risk

A
  • Includes all aspects of audit risk that are not due to sampling
  • Always present and cannot be measured; can only attempt to REDUCE this risk through planning and supervision
60
Q

Sampling risk:

A
  • Arises from the possibility that a conclusion may be different from the conclusions that would have been reached had the tests been applied to all items
61
Q

If deviation rate in the sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate:

A
  • The control risk was assessed too low
62
Q

If sample rate of deviation + allowance for sample risk exceeds tolerable rate, the auditor would reduce:

A
  • The planned reliance on the prescribed control
63
Q

In statistical sampling for substantive tests, and auditor would stratify the population into meaningful groups if:

A
  • The population has highly variable recorded amounts
64
Q

Tolerable misstatement:

A
  • A planning concept related to the auditor’s preliminary judgment about materiality levels
  • The maximum monetary misstatement in an account balance that may exist without causing the FS to be materially misstated
65
Q

When planning a sample for a test of subsequent cash receipts, the auditor should consider:

A
  • Preliminary judgments about materiality levels
66
Q

Ratio estimation is most effective if:

A
  • There is a correlation between book values and audit amounts
67
Q

Which sample method results in a smaller sample if no errors are expected?

A

-Probability-Proportional-to-size (PPS)

68
Q

What is an advantage of variable sampling compared to PPS?

A
  • The selection of negative balances requires NO special design considerations
69
Q

Probability-Proportional-to-Size Sampling:

A
  • The sampling unit is defined as an individual dollar in a population. Once a dollar is selected, the entire account (containing that dollar) is audited
  • Advantages:
    - Automatically emphasized larger items by stratifying the sample
    - In no errors are expected, generally smaller samples
  • Disadvantages:
    - Zero balances, negative balances, and understated balances generally require special design considerations
  • Recorded amount in the population/the sample size
  • Auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan
70
Q

Mean-per-Unit Estimation:

A
  • A sampling plan that uses the average value of the items in the sample to estimate the true population value (i.e. Estimate = Average sample value x Number of items in the population)
71
Q

Stratified vs. Unstratified MPU:

A
  • Stratified is more efficient produces an estimate having a desired level of precision with a smaller sample size
72
Q

Projected error:

A
  • The auditor’s best estimate of the error in the total population based upon evaluating the actual error rate in the sample results
73
Q

Statistical concept of precision:

A
  • The auditor’s evaluation of sampling results by calculating the possible errors in either direction
74
Q

An auditor may decide to decrease the acceptable level of risk when:

A
  • The cost and effort of selecting additional sample items is low
75
Q

PPS Sample Size Determination:

A

Sampling Interval = Tolerable misstatement/Reliability factor

Sample size = Recorded amount of the population/Sampling interval

Projected error = (Recorded amount - Audit amount)/Recorded amount

76
Q

Smaller tolerable misstatement results in:

A
  • Increase in sample size
77
Q

Higher risk of incorrect acceptance results in:

A
  • Smaller sample size
78
Q

Scatter plots:

A
  • Allow for the auditor to graphically show the relationships among variables
  • Allow for regression lines to be added to show the direction and strength of correlation
79
Q

Best type of visualization when performing a trend analysis?

A
  • Line chart

- They appropriately address the forward-moving concept of time

80
Q

Structured data:

A
  • Organized, has consistent data types and formats, and is easily searchable
  • i.e. Information systems, spreadsheets, databases, data warehouses, and data marts
81
Q

Unstructured data:

A
  • Not structured
  • Data is typically in its original unmodified format and remains that way until transformed and modified for analysis
  • Not organized and difficult to sort
  • i.e. Social media posts, interview or phone transcrips, data sourced from sensors (internet of things), videos or images
82
Q

Descriptive analytics:

A
  • Explain what happened or what is happening with data
83
Q

Diagnostic analytics:

A
  • Utilized when an org wants to understand the underlying cause of results, essentially, why something happened with the data
84
Q

Predictive analytics:

A
  • Use historical data and facts to make predictions, estimates, and assertions about future events
  • What will happen in the future
85
Q

Prescriptive analytics:

A
  • Most advanced and complex type
  • Builds on predictive analytics
  • How to make something happen
  • Prescribes courses of actions to help optimize decisions
86
Q

Benefits of Audit Data Analytics:

A
  • Better understanding of clients and operations
  • Advanced assessment of risk
  • Expanded audit coverage
  • Increase efficiency of applied procedures
  • Enhanced fraud detection
  • Improved communication through visualizations

Audit - CPA (4 decks)

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