A3- Risk, Evidence, And Sampling Flashcards
Error vs fraud
Errors are unintentional & fraud is intentional
3 procedures to obtain information in identifying potential fraud risk
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
4 attributes of risk
1- type of risk
2- significance of the risk
3- likelihood of the risk
4- pervasiveness of the risk
There is a presumption in every audit that the following two risks exist
1- improper revenue recognition
2- management override of controls
Required response to assessed fraud risk three levels
1- overall general response
2- response encompassing specific audit procedures
3- response addressing risks related to management override
What is audit risk
Risk the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated
Audit risk model
AR = RMM x DR
AR= audit risk
RMM= risk of material misstatement (assessed by auditor)
DR= detection risk (controlled by auditor)
Audit risk formula
Inherent risk x control risk x detection risk
4 steps in assessing audit risk
1- determine audit risk
2- assess inherent risk
3- assess control risk
4- determine detection risk
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)
1- high, no control tests (unless heavy use of IT), yes: maximum
2- medium, yes control tests
3- low, yes control tests, minimal
Hierarchy of audit evidence (from most reliable to least reliable) AEIOU
Auditors direct personal knowledge
External evidence
Internal evidence
Oral evidence
U know this
Standard auditing procedures (C FIVE CARROT WARS)
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
If a test starts with items in the financial statements, the proper assertion is most likely to be
Existence
If a test starts with source documents, it is most likely related to which assertion
Completeness /coverage
Positive vs. Negative confirmation
Positive = must respond whether agree or disagree
Negative= only respond if you disagree
Account balance assertions
CVERUP
Completeness
Valuation, allocation, and accuracy
Existence and occurrence
Rights and obligations
UP understandability of presentation and classification
Transaction assertions
COVEUP
Completeness
O- cutOff
Valuation, allocation, and accuracy
Existence and occurrence
UP understandability of presentation and classification
Increase in numerator = X in ratio
Increase
Increase in the Denominator = x in the ratio
Decrease
2 sampling methods
1- statistical sampling
2- non- statistical sampling
Upper deviation rate formula
Sample deviation rate + allowance for sampling risk = upper deviation rate
Sampling interval formula
Tolerable misstatement / reliability factor
Sample size formula
Recorded amount of the population / sampling interval
If there is fraud, an auditor may have a duty to disclose it to who (3)
1- SEC
2- successor auditor
3- government funding agency from which client receives financial assistance
Requiring mandatory vacations does what to control risk
Decreases risk
Risk of incorrect rejection
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
When sample deviation rate + allowance for sampling risk >= tolerable deviation rate a control (can / cannot) be relied on
Cannot
Detection risk
Risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality
Control risk
The auditors assessed risk that a misstatement could occur in the assertions and not be prevented or detected by a clients internal control
What risk do we solve for
Detection risk
A decrease in population variability results in
a decrease in sample size
Increase in risk of incorrect acceptance results in
Decrease in sample size
Non sampling risk
All aspects of audit risk not due to Sampling
Upper deviation rate
Sample deviation rate plus allowance for sampling risk
What to consider when determining number of items to test
Tolerable rate of deviation from controls being tested
Expected deviation rate
Allowable risk
Risk of incorrect acceptance & likeliness of assessing control risk too low relates to the
Effectiveness of the audit
