A3- Risk, Evidence, And Sampling

Question 1

Error vs fraud

Answer 1

Errors are unintentional & fraud is intentional

Question 2

3 procedures to obtain information in identifying potential fraud risk

Answer 2

1- inquire of entity personnel regarding their views of fraud risk
2- consider the results of analytical procedures (required during planning and final review)
3- evaluate fraud risk factors

Question 3

4 attributes of risk

Answer 3

1- type of risk
2- significance of the risk
3- likelihood of the risk
4- pervasiveness of the risk

Question 4

There is a presumption in every audit that the following two risks exist

Answer 4

1- improper revenue recognition
2- management override of controls

Question 5

Required response to assessed fraud risk three levels

Answer 5

1- overall general response
2- response encompassing specific audit procedures
3- response addressing risks related to management override

Question 6

What is audit risk

Answer 6

Risk the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated

Question 7

Audit risk model

Answer 7

AR = RMM x DR

AR= audit risk
RMM= risk of material misstatement (assessed by auditor)
DR= detection risk (controlled by auditor)

Question 8

Audit risk formula

Answer 8

Inherent risk x control risk x detection risk

Question 9

4 steps in assessing audit risk

Answer 9

1- determine audit risk
2- assess inherent risk
3- assess control risk
4- determine detection risk

Question 10

Status of internal control.
1. none or weak.
2. some.
3. strong

Control risk assessment (high medium low)
Perform control tests (yes or no)
Perform substantive procedures (yes or no)

Answer 10

1- high, no control tests (unless heavy use of IT), yes: maximum
2- medium, yes control tests
3- low, yes control tests, minimal

Question 11

Hierarchy of audit evidence (from most reliable to least reliable) AEIOU

Answer 11

Auditors direct personal knowledge
External evidence
Internal evidence
Oral evidence
U know this

Question 12

Standard auditing procedures (C FIVE CARROT WARS)

Answer 12

C- confirmation

F- footing, crossfooting, and recalculation
I- inquiry
V- vouching
E- examination , inspection

C- cutoff review
A- analytical procedures
R- re-performance
R- reconciliation
O- observation
T- tracing

W- walk through
A- audit related accounts simultaneously
R- representation letter
S- subsequent events review

Question 13

If a test starts with items in the financial statements, the proper assertion is most likely to be

Answer 13

Existence

Question 14

If a test starts with source documents, it is most likely related to which assertion

Answer 14

Completeness /coverage

Question 15

Positive vs. Negative confirmation

Answer 15

Positive = must respond whether agree or disagree
Negative= only respond if you disagree

Question 16

Account balance assertions

Answer 16

CVERUP

Completeness
Valuation, allocation, and accuracy
Existence and occurrence
Rights and obligations
UP understandability of presentation and classification

Question 17

Transaction assertions

Answer 17

COVEUP

Completeness
O- cutOff
Valuation, allocation, and accuracy
Existence and occurrence
UP understandability of presentation and classification

Question 18

Increase in numerator = X in ratio

Answer 18

Increase

Question 19

Increase in the Denominator = x in the ratio

Answer 19

Decrease

Question 20

2 sampling methods

Answer 20

1- statistical sampling
2- non- statistical sampling

Question 21

Upper deviation rate formula

Answer 21

Sample deviation rate + allowance for sampling risk = upper deviation rate

Question 22

Sampling interval formula

Answer 22

Tolerable misstatement / reliability factor

Question 23

Sample size formula

Answer 23

Recorded amount of the population / sampling interval

Question 24

If there is fraud, an auditor may have a duty to disclose it to who (3)

Answer 24

1- SEC
2- successor auditor
3- government funding agency from which client receives financial assistance

Question 25

Requiring mandatory vacations does what to control risk

Answer 25

Decreases risk

Question 26

Risk of incorrect rejection

Answer 26

When a sample indicates that there a risk of material misstatement when this is the not actually case, this leads to more testing and REDUCES EFFICIENCY

Question 27

When sample deviation rate + allowance for sampling risk >= tolerable deviation rate a control (can / cannot) be relied on

Answer 27

Cannot

Question 28

Detection risk

Answer 28

Risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality

Question 29

Control risk

Answer 29

The auditors assessed risk that a misstatement could occur in the assertions and not be prevented or detected by a clients internal control

Question 30

What risk do we solve for

Answer 30

Detection risk

Question 31

A decrease in population variability results in

Answer 31

a decrease in sample size

Question 32

Increase in risk of incorrect acceptance results in

Answer 32

Decrease in sample size

Question 33

Non sampling risk

Answer 33

All aspects of audit risk not due to Sampling

Question 34

Upper deviation rate

Answer 34

Sample deviation rate plus allowance for sampling risk

Question 35

What to consider when determining number of items to test

Answer 35

Tolerable rate of deviation from controls being tested Expected deviation rate Allowable risk

Question 36

Risk of incorrect acceptance & likeliness of assessing control risk too low relates to the

Answer 36

Effectiveness of the audit