A3 - Risk, evidence, and sampling Flashcards

(33 cards)

1
Q

Audit Process-General Principles

A

Overall objectives
Documentation
Communication
Quality control-firm

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2
Q

Audit Process

A

Engagement Acceptance
-Ethics & Independence
-Terms of engagement

Assess risk & plan response
-Planning, including audit strategy
-Materiality
-Risk assessment procedures:
—Understand entity & environment
—Understand internal control
-Identify & assess risk
-Respond to risk

Perform procedures & obtain evidence
-Test controls
-Substantive testing

Form conclusions
-Subsequent events
-Management representation
-Evaluate audit results
-Quality control-engagement

Reporting
-Report on audited FS
-Other reporting considerations

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3
Q

Inherent Risk Factors

A

Complexity
Subjectivity
Change
Uncertainty
Management bias or fraud risk
Significance
Volume or lack of uniformity

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4
Q

Assertion Level Risks

A

Risk of material misstatement that relate to specific transactions, account balances, or disclosures.

Assertion definition: claims that need to be tested for financial statement accuracy.

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5
Q

Elements of Further Audit Procedures

A

NET:
Nature
Extent
Timing

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6
Q

Going Concern

A

Ability to continue business operations.

“Reasonable period of time”
FASB - one year after the date of FS are issued.
GASB - one year beyond the date of FS. If information that raises substantial doubt within three months after, info should be considered.

Reporting:
Nonissuers - if substantial doubt, separate section with heading “substantial doubt about the entity’s ability to continue as a going concern.”
-If no substantial doubt, if adequate disclosures have been made, an optional emphasis of matter paragraph.

Issuer - if substantial doubt, either; unqualified opinion and explanatory paragraph (“substantial doubt” or “going concern”) or disclaimer of opinion based on auditor’s judgment.

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7
Q

Corroborating Evidence

A

Meeting minutes

Confirmations

Industry analysis reports

Data about competitors

Evidence obtained through management specialists

Info obtained through observation

Inquiry and inspection

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8
Q

Hierarchy of Audit Evidence

A

Auditor’s direct personal knowledge.
External evidence.
Internal evidence.
Oral evidence.

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9
Q

Auditor Bias

A

Availability bias - place more weight on more recent events.

Confirmation bias - place more weight on info that corroborates rather than contradicts.

Overconfidence bias - overestimating ability to make accurate judgments.

Anchoring bias - using initial info to anchor against subsequent info.

Automation bias - favor info from automated systems regardless of circumstances.

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10
Q

Standard Auditing Procedures

A

Confirmation.
Footing, cross footing, & recalculation.
Inquiry.
Vouching.
Examination/inspection.
Cutoff review.
Analytical procedures.
Reperformance.
Reconciliation.
Observation.
Tracing.
Walkthrough.
Audit related account simultaneously.
Representation letter.
Subsequent events review.

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11
Q

Directional Testing

A

Completeness (understated) - Tracing forward from source documents to journal entries.

Existence (overstated) - Vouching backwards from journal entries to source documents.

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12
Q

Sampling Methods

A

Statistical - (used in attribute sampling/tests of controls) specify sampling risk they are willing to accept then calculate sample size that provides degree of reliability. Evaluated quantitatively. (Objective, quantifies risk, confidence level, & sampling risk measurable)

Non-statistical - (used in variable sampling/substantive testing of account balances) sample size is not determined mathematically. Determined by auditors judgement. (Subjective)

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13
Q

Types of sampling

A

Attribute sampling - rate of character occurrence - primarily used in testing controls. (Yes or No answer) (Statistical) (Tolerable deviation)

Variables sampling & Probability proportional to size (PPS) sampling - typically used in substantive testing of account balances. ($ misstatements, estimate balance, overstatement/understatement, confidence interval)

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14
Q

Audit Risk vs Sampling Risk

A

Audit Risk - uncertainty due to sampling AND due to factors other than sampling.

Sampling Risk in substantive testing - risk of incorrect acceptance (effectiveness) or rejection (efficiency).

Sampling Risk in tests of controls - risk of assessing control risk too low (effectiveness) or too high (efficiency).

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15
Q

Attribute Sampling

A

Testing controls

Statistical sampling method used to estimate the rate (percentage) of occurrence (exception) of a specific characteristic (attribute).

Upper deviation rate = Sample deviation rate + Allowance for sampling risk.

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16
Q

Deviation Rate vs Tolerable Rate

A

Deviation rate - auditor’s best estimate of the deviation rate in the population selected.

Tolerable rate - maximum rate of deviation tolerated without modifying planned reliance on a control.

17
Q

Sampling Steps

A
  1. Define the objective
  2. Identify the population
  3. Define the sampling unit
  4. Define the attributes of interest
  5. Determine the sample size
  6. Select the sample
  7. Evaluate the sample results
  8. Form conclusions about internal control tested.
  9. Document the sampling procedure
18
Q

Discovery Sampling vs Stop or Go Sampling

A

Discovery sampling - looking for critical characteristics (fraud). Zero deviation rate.

Stop or go sampling - sequential sampling designed to avoid oversampling. Few errors are expected.

19
Q

Audit Data Analytics (ADA) Techniques

A

Descriptive analytics - explain what happened or what is happening. (What)

Diagnostic analytics - understand the underlying cause. (Why)

Predictive analytics - uses historical data to make predictions/estimates.

Prescriptive analytics - builds upon predictive analytics and addresses what will happen/how to make something happen. Most advanced/complex.

20
Q

Interpreting Results

A

Regression analysis - evaluate relationships between variables.

Variance analysis - compare forecasted/budgeted against actual values.

Period over period analysis - compare financial & non-financial values across given periods.

Classification - a predictive analytic that utilizes historic data to make predictions about categories for new data points.

Trend analysis - used to develop expectations of future results.

21
Q

Analytical Procedures

A

Evaluation of financial info by studying relationships among financial & non-financial data.

During planning, required to perform procedures related to revenue to identify unusual relationships.

22
Q

Sampling - Formula PPS

A

Sampling intervals = tolerable misstatement/reliability factor(risk of incorrect acceptance)

Sample size = recorded amt of population/sampling interval

Tainting value = difference/BV

Projected error = tainting value X sampling interval

23
Q

Variable Sampling

A

Testing balances

Means per unit estimation = avg audited value X # of items in population.

Ratio estimation = (audited BV / BV of sample) X total Book Value.

Difference estimation:
-Step 1: Calculate projected error = ((BV of sample - audited value of sample) / # of items audited) X population items.

-Step 2: Calculate point estimate = total BV of population - projected error.

24
Q

Understanding the entity & its environment

A

-Obtain an understanding of: Nature of entity, Entities objectives, strategies, & business policies, Selection & application of accounting policies, Financial performance, Group, components, & environment, Inherent risk factors, IT environment, & External factors.

-Risk Assessment Procedures to understand: 1. Entity & its environment, 2. Financial reporting framework, 3. System of internal controls.

-Risk Assessment Procedures: 1. Inquiry, 2. Analytical procedures, 3. Review internal & external info.

-The degree of which IT is used in the accounting function affects the extent of the documentation for an auditor’s understanding of system of internal controls.

25
Inherent limitations
Mgmt override, Human error & collusion, External events, & Issues w/suitability of entity objectives.
26
Test the design & Implementation of controls
Walk-through, Inquiry, Observation, & Inspection
27
Identifying, Assessing, & Responding to Risk
-Identify & Assess RMM at: 1. FS level, 2. Assertion level, 3. Identify relevant assertion & related significant transactions, account balances, & disclosures. -FS level addressed by increasing professional skeptisim, experienced staff, & NET. -Relevant assertion level addressed by Substantive approach (test of details & substantive analytical procedures) or Combined approach (test of controls)(Inquiry, Inspection, Observation, & Reperformance)-(inquiry alone is not sufficient ) -Substantive audit procedures are required in a FS audit not an audit of internal control Auditor decides not to perform tests of controls = not cost beneficial/efficient. Perform tests of controls - auditors risk assessment is based on the effective operation of controls.
28
Sampling Pt 1
-Substantive tests of details aspects of sampling risk: 1. Incorrect acceptance 2. Incorrect rejection. -Tests of controls aspects of sampling risk: 1. Assessing control risk too low (Inverse relationship with sample size when planning) 2. Assessing control risk too high Tests of controls: Attribute sampling - Factors affecting sample size. *Buzzword for sampling in tests of controls = rate -Allowance for sampling risk recognizes that it is likely that what we found in the sample isnt exactly what we would find in the population. -Sample deviation rate + Allowance for sampling risk = Upper deviation rate. -Upper deviation rate < or = Tolerable deviation rate - Rely on control. -Upper deviation rate > Tolerable deviation rate - Not rely on control (either select & test another control or Modify N.E.T of substantive tests). -If unable to apply test of controls with no alternative - treat as a deviation from prescribed control. -A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the sample size.
29
Sampling Pt 2
Variable Sampling: -(Direct relationship to sample size) Expected misstatement, Population variability/standard deviation, Assessed level of risk. -(Inverse relationship to sample size) Tolerable misstatement, Acceptable level of risk. * Buzzword in sampling in substantive tests = Misstatement -Variable sampling plans: Means per unit, Ratio estimation, & Difference estimation. -Propability-Proportional-to-size(PPS) Sampling: Express a conclusion in dollar amounts instead of rate of occurance -Dual purpose samples: Tests of controls & Tests of details -Standard deviation - measure of variability of a frequency distribution about its mean. -Projected error - auditors best estimate of the error in the total population. -Precision - auditors evaluation by calculating possible error in either direction. -Reliability - frequency the procedure will yeild differences between estimated value & population value." -After identification of misstatements in the sample, the next step is to project the detected error to the entire population.
30
ADA
-For Tests of Details, ADAs can perform sequence checks, tests populations, compare transactions against external data, & evaluate source date to identify missing data. -For Analytical Procedures, ADAs can be used to compare current year data to preceding year, compare industry trends, develop expectations for transactions or balances, & perform drill down on expected vs actual amounts -Potential misstatements, group into: Clearly inconsequential or Not clearly inconsequential. - If not clearly inconsequential, perform further procedures. -Data analytics = Data mining (uses AI - no manual procedures) -Primary key - unique identifier. -Secondary key - non-identifying column candidate key. -Foreign key - links data between two tables -Nominal scale: basic level of measurement (gender, race, or religion) -Ordinal scale: order or ranking (poor, good, or excellent) -Interval scale: intervals between values (temperature-no true zero point) -Ratio scale: intervals between values (weight, length, or duration-true zero point) -Continuous scale: (time, height, temperature) -Discrete scale: countable items (# of employees or clients)
31
Automated vs Manual Controls
Focusing on automated rather than manual controls is not necessarily more effective or efficient. Client by client basis
32
Engagement Risk & Consideration
During risk assessment - Gain an understanding and evaluate procedures for identifying related party transactions. Statement from lawyer that would need to be clarified - "I believe that the action can be settled for less than the damages claimed." Evaluating reasonableness of accounting estimate concentrate on deviations from historical patterns
33
Procedures for Obtaining Evidence
-Cutoff is not a FS assertion recognized by PCAOB -Decision to use analytical procedures as substative test is based in part on availability, reliability, & precision of data used to develop expectations. -Analytical procedures does not include projecting -Analytical procedures in the final review stage are used to determine whether adequate evidence has been gathered in response to unusual balances. -Recalculation of benefits based on plan provisions would provide evidence that benefit plan payments are accurate & appropriate -Inspection does not = completeness assertion