A3 Risk, Evidence, and Sampling Flashcards
What should an auditor do if specific information about an act of non compliance comes to auditors attention?
Apply audit procedures to determine if it is true.
Don’t NEED to have qualified or adverse opinion if financial statements are still free of material misstatement
What is the relationship between sample size and tolerable rate?
Inverse.
As the auditors tolerable rate decreases (cannot accept as large an error rate), the sample size increases.
What are the factors to determine sample size in attribute testing (test of controls)?
- Allowable risk of assessing control risk too low (inverse)
- Tolerable deviation rate (inverse)
- Expected deviation rate (direct)
What is non sampling risk?
All aspects of audit risk that are not due to sampling.
Including selecting inappropriate audit procedures, using inappropriate audit evidence, failure to recognize misstatement in documents examined.
The sample size in variable sampling is determined by:
- variability in the population ( standard deviation)
- the acceptable level of risk (the risk of incorrect acceptance aka desired precision)
- the tolerable misstatement (desirable sample reliability)
- the expected misstatement
What are the steps of applying audit data analytics?
- Planning of audit data analytics
- Access and prepare data
- Assess the relevance and reliability of data
- Performing audit data analytics
- Evaluate and Conclude
What type of assurance is required for direct and indirect effect of non compliance would have a material effect on financial statements ?
- Direct effect of non compliance - reasonable
- Indirect effect of non compliance - NONE
- Too difficult to ascertain the indirect effect of non compliance, no assurance provided
What is the objective of test of details of transactions performed as test of controls?
Evaluate wheter internal controls operated efficiently.
Inquiry alone is not sufficient to test operating effectiveness of controls. What other procedure with inquiry would not provide strong assurance?
Inquiry and observation.
Observation is only relevant for the point in time which it was made. Just because you see Sally reviewing one invoice doesn’t mean it is done all the time.
In determinining to what extent to use analytical procedures, what should the auditor consider when assessing efficiency and effectiveness of analytical procedure compared to test of details?
Nature of the assertion tested.
For example, testing interest expense might be easy to test with analytical procedures comparing it to debt and interest rates. However, the nature of accounts receivable with complex might not be be sufficiently tested with ADA.
What is Auditor’s Responsibility in relation to compliance with laws and regulation?
- Auditor is responsible for obtaining reasonable assurance that the financials are free from material misstatement due to noncompliance
- NOT Responsible to detect or prevent noncompliance
- MANAGEMENT is responsible for compliance
- It is not AR to report to regulatory authorities due to client confidentiality
- Report to one level above those suspected of not complying
What is the hierarchy of Audit Evidence?
- A- Actual Knowledge
- E - External Information
- I- Internal Verification
- O- Oral Representation
- U- Did YOU do all of these?
What is a tolerable deviation rate?
Attribute sampling
How many errors can be found and still rely on the internal control.
Inverse relationship to sample size. If you want to have a very LOW toleration for deviation (errors), than you must have a BIGGER sample size.
What is expected deviation rate?
Attribute sampling
Best estimate of the rate of deviation from a control.
DIRECT relationship to sample size. If you expect LESS errors going in, need LESS samples.
What is the risk of assessing control risk too low?
Attribute sampling
Risk that the assessed level of control risk based on the sample is less that the ture level of control risk bed on actual operating effectiveness of control.
Inverse relationship to sample size. If auditor is willing to accept MORE risk, than SMALLER sample size can be used.
