A3 - Risk, evidence, and sampling Flashcards
(33 cards)
Audit Process-General Principles
Overall objectives
Documentation
Communication
Quality control-firm
Audit Process
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
Inherent Risk Factors
Complexity
Subjectivity
Change
Uncertainty
Management bias or fraud risk
Significance
Volume or lack of uniformity
Assertion Level Risks
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.
Elements of Further Audit Procedures
NET:
Nature
Extent
Timing
Going Concern
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.
Corroborating Evidence
Meeting minutes
Confirmations
Industry analysis reports
Data about competitors
Evidence obtained through management specialists
Info obtained through observation
Inquiry and inspection
Hierarchy of Audit Evidence
Auditor’s direct personal knowledge.
External evidence.
Internal evidence.
Oral evidence.
Auditor Bias
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.
Standard Auditing Procedures
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.
Directional Testing
Completeness (understated) - Tracing forward from source documents to journal entries.
Existence (overstated) - Vouching backwards from journal entries to source documents.
Sampling Methods
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)
Types of sampling
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)
Audit Risk vs Sampling Risk
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).
Attribute Sampling
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.
Deviation Rate vs Tolerable Rate
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.
Sampling Steps
- Define the objective
- Identify the population
- Define the sampling unit
- Define the attributes of interest
- Determine the sample size
- Select the sample
- Evaluate the sample results
- Form conclusions about internal control tested.
- Document the sampling procedure
Discovery Sampling vs Stop or Go Sampling
Discovery sampling - looking for critical characteristics (fraud). Zero deviation rate.
Stop or go sampling - sequential sampling designed to avoid oversampling. Few errors are expected.
Audit Data Analytics (ADA) Techniques
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.
Interpreting Results
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.
Analytical Procedures
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.
Sampling - Formula PPS
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
Variable Sampling
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.
Understanding the entity & its environment
-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.
