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AUDIT > A5 > Flashcards

A5 Flashcards

1
Q

What are the rules to audit sampling?

A
  • Bell-shaped
  • Samples have to be unrestricted and randomly selected
    • Every item in the population must have an absolutely equal chance of being selected
    • CPA cannot use “bias” in deciding which items will be selected. No substitute items may be used
  • If the sample is large enough and is randomly selected it will be representative of the population
  • Standard deviation is the measure of “variability” which refers to the range of values within the population
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2
Q

What is sampling risk?

A

Risk that the sample is not representative of the population and that the auditor’s conclusion will be different from the conclusion had the auditor examined 100% of the population

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3
Q

What are the types of sampling?

A

Attribute sampling- testing characteristics, flagging errors for IC

Variable sampling - substantive testing of acct bal - est of $ value of the population

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4
Q

What is audit risk and what does it include?

A

Is the uncertainty inherent in applying audit procedures

  • uncertainties due to sampling; and
  • uncertainties due to factors other than sampling
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5
Q

In performing substantive tests of details, the auditor is concerned with two aspects of sampling risk:

A
  • Risk of incorrect acceptance - ineffective

- Risk of incorrect rejection - inefficient

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6
Q

In performing test of controls, the auditor is also concerned with two aspects of sampling risk:

A
  • Risk of assessing control risk too low (Over reliance) -Ineffective
  • Risk of assessing control risk too high (under reliance)- Inefficient
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7
Q

What percentage of risk does an auditor typically accept?

A

5%-10%. the auditor is 95% (90%) confident that the sample is representative of the population

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8
Q

What are some nonsampling risk examples? what can the auditor do?

A

Examples: (1) use inappropriate audit evidence (2) improperly evaluating the results

-The auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit engagement and quality control of all firm practices

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9
Q

What is attribute sampling?

A

Is a statistical sampling method used to estimate the rate (%) of occurrence (exception) of a specific characteristic (attribute). Samples taken to test the operating effectiveness of controls are intended

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10
Q

When planning a particular audit sample for test of controls, the auditor applies professional judgment in considering:

A
  • Objective of the test of controls
  • Tolerable Deviation Rate/Mistakes
  • Auditor’s allowable risk of assessing control risk too low
  • Characteristics of the population
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11
Q

What is deviation rate?

A

The deviation rate in the sample is the auditor’s best estimate of the deviation rate in the population from which it was selected

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12
Q

The auditor performs the following steps when conducting an attribute sampling application

A
  • Define the objective of the test
  • Define the population
  • Define the sampling unit
  • Define the attributes of interest
  • Determine Sample Size
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13
Q

Determine the sample size - the auditor must specify the following factors:

A
  • Risk of assessing control risk too low
  • Tolerable deviation rate
  • Expected deviation rate
  • Population size
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14
Q

What is the most common technique in selecting the sample?

A

Random selection

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15
Q

What is systematic selection?

A

Is also acceptable, but a disadvantage is that results may be skewed if errors occur in a systematic pattern

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16
Q

What is block (cluster) sampling?

A

Where groups of adjacent items are selected - is not acceptable

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17
Q

What happens if the upper deviation rate is less than or equal to the auditor’s tolerable deviation?

A

The auditor may rely on the control

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18
Q

What happens if the upper deviation rate exceeds the auditor’s tolerable deviation rate?

A

The auditor may not rely on the control

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19
Q

What are the three commonly used classical variables sampling plans?

A
  • Mean-per-unit estimation
  • Ratio Estimation
  • Difference estimation
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20
Q

The auditor must perform the following steps when conducting a variables sampling application

A
  1. Define the objective of the test
  2. Define the population
  3. Define the sampling unit
  4. Determine the sample size
  5. Select the sample
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21
Q

Variable Sampling - The auditor uses the following parameters, in conjunction with tables or formulas, to determine sample size

A
  • Tolerable misstatement
  • Expected misstatement
  • Audit Risk
  • Characteristics of the population
  • Assessed risk of material misstatement and assessed risk for other substantive procedures related to the same assertions
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22
Q

Variable sampling: Sample size will increase as the following increase: (direct relationship)

A
  • Expected misstatement
  • Standard Deviation (population variability)
  • Assessed level of risk
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23
Q

Variable sampling: Sample size will decrease as the following increase: (inverse relationship)

A
  • Tolerable misstatement

- Acceptable level of risk

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24
Q

What is Probability-Proportional-to-size sampling (PPS)?

A

Is the technique where the sampling unit is defined as an individual dollar in a population – is considered to be a hybrid method, because it uses attribute sampling theory to express a conclusion in dollar amounts rather than as a rate of occurrence

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25
Q

What are the advantages of PPS?

A
  1. PPS automatically emphasizes larger items by stratifying the sample. The chance of an item being selected is proportionate to its dollar amt
  2. If no errors are expected, PPS sampling generally requires a smaller sample than other methods
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26
Q

What is the disadvantage of PPS?

A

Is that zero balances, negative balances, and understated balances generally require special design considerations

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27
Q

What is tolerable misstatement?

A

Is the maximum dollar error that may exist in the account without causing the FS to be materially misstated

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28
Q

How is sampling interval and sampling size determined?

A

Sampling Interval = Tolerable misstatement / Reliability factor (from table)

Sampling Size = Recorded amt of the population / sampling interval

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29
Q

What is a control deficiency?

A

Exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.

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30
Q

When does a deficiency in design happen?

A

When a necessary control is missing or when an existing control does not achieve the desired objective

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31
Q

When does a deficiency in operation happen?

A

When a properly designed control does not operate as designed, or is performed by an inappropriate person

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32
Q

What is a significant deficiency?

A

A deficiency, or a combination of deficiencies, in IC that is less severe than a material weakness, yet important enough to merit attention by those charged with governance

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33
Q

Examples of Deficiencies in the design

A
  • Inadequate design IC over preparation of FS
  • Control Consciousness
  • Segregation of duties or safeguarding assets
  • IT controls
  • Qualifications or training
  • Monitoring
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34
Q

Failure in the operation of controls

A
  • Lack of objectivity
  • Misrepresentation
  • Management Override
  • Failure of an application control caused by a deficiency of a general control
  • Deviation rate that exceeds the auditor’s expected rate
  • Failure of the info and communication
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35
Q

When does audit sampling occur?

A

When the auditor tests less than 100 percent of the items in a population and tries to draw conclusions about the population based on the sample

36
Q

What is sampling risk?

A

Is the risk that the sample is not representative of the population, and therefore the auditor’s conclusion will be incorrect

37
Q

What is audit risk?

A

Is the uncertainty inherent in applying audit procedures, which includes both uncertainities due to sampling and uncertainities due to other factors beyond sampling

38
Q

Can sampling be either statistical or nonstatistical?

A

Yes.

  • Either method is acceptable
  • Statistical methods rely on mathematical concepts
  • Both methods involve the use of judgment
39
Q

What are the advantages of statistical sampling?

A

Enables the auditor to:

  • Measure the sufficiency of the audit evidence obtained
  • Provide an objective basis for quantitatively evaluating sample results
  • Design an efficient sample
  • Quantify sampling risk so as to limit risk to an acceptable level
40
Q

What is attribute sampling?

A

Used to estimate a rate of occurence (exception) of a specific characteristic (attribute). Used in tests of controls.

41
Q

Sampling risks associated with attribute sampling includes:

A
  • The risk of assessing control risk too low.
    - The sample indicates the control is working when, in fact, it is not
    - The auditor will erroneously rely on the control
    - This is an effectiveness problem
  • The risk of assessing control risk is too high
    - The sample indicates the control is not working when, in fact, it is.
    - The auditor will erroreously extend audit work
    - This is an efficiency problem - the auditor will do more work than is actually necessary
42
Q

What is the formula for inventory turnover?

A

COGS / Average inventory

43
Q

What is the formula for Return on assets?

A

Net income / Avg total assets

44
Q

What is the formula for accounts receivable turnover?

A

Net Credit sales / Avg net receivables

45
Q

What is variables sampling?

A

Used to estimate a numerical quantity. Variables sampling is used in substantive testing.

46
Q

Sampling risk associated with variable sampling includes:

A
  • Risk of incorrect acceptance
    • The sample indicates the balance is fairly stated when, in fact, it is not
    • The auditor will erroreously fail to modify his or her opinion
    • This is an effectiveness problem
  • Risk of incorrect rejection
    • The sample indicates the balance is not fairly stated when, in fact, it is fairly stated
    • The auditor may erroneously modify his or her opinion
    • This is an efficiency problem - the auditor will do more work than is necessary
47
Q

What is a dual-purpose sample?

A

The same sample my be used to perform both test of controls and tests of details

48
Q

What is deviation rate?

A

Error rate in the sample

49
Q

What is tolerable deviation rate?

A

The maximum rate of error the auditor can accept

50
Q

What is expected deviation rate?

A

The auditor’s estimated error rate (before sampling)

51
Q

What is upper deviation rate?

A

The high end of the range for the auditor’s estimate of the error rate (based on results from testing the sample)

52
Q

What is the allowance for sampling risk?

A

Adjusts the sample rate to get to the upper deviation rate:

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

53
Q

What factors affect sample size?

A
  • risk of assessing control risk too low - inverse relationship
  • Tolerable deviation rate - inverse relationship
  • Expected deviation rate - direct relationship
54
Q

What happens when upper deviation rate is less than or equal to tolerable deviation rate

A

Rely on control

55
Q

What happens when upper deviation rate is greater than tolerable deviation rate

A

Do not rely on control

56
Q

What is tolerable misstatement?

A

The maximum monetary misstatement in an account balances or class of transactions that the auditor is willing to accept

57
Q

What is expected misstatement?

A

The auditor’s estimate of misstatement (before sampling)

58
Q

What is projected misstatement?

A

The auditor’s estimated misstatement, based on the sample

59
Q

Sample size will increase as the following increases (direct relationship):

A
  • Expected misstatement
  • Standard deviation (population variability)
  • Assessed level of risk
60
Q

Sample size will decrease as the following increase (inverse relationship):

A
  • Tolerable misstatement

- Acceptable level of risk

61
Q

What are the three variable sampling plans?

A
  • Mean-per-unit estimation
  • Ratio estimations
  • Difference estimation
62
Q

What is mean-per unit estimation?

A

Is a sampling plan that uses the average value of the items in the sample to estimate the true population value
(i.e. Estimate = avg sample value x number of items in population)

63
Q

What is ratio estimation?

A

Is a sampling plan that uses the ratio of the audited (correct) values of items to their book values to project the true population value. It is highly efficient technique when the calculated audit amts are approximately proportional to the client’s book amounts

64
Q

What is difference estimation?

A

Is a sampling plan that uses the avg difference b/n the audited (correct) values of items and their book values to project the actual population value. Is used instead of ratio estimations when the differences are not nearly proportional to book value

65
Q

What is proportional-to-size (PPS) sampling?

A

A hybrid method that uses attribute sampling theory to express a conclusion in dollar amounts instead of as a rate of occurrence

66
Q

What is the formula for sampling interval?

A

Tolerable misstatement / reliability factor (From table)

67
Q

What is the formula for sample size?

A

Recorded amt of the population / sampling interval

68
Q

How to calculate projected error of the sample?

A

(1) Recorded amount - audit amount
(2) = (1) / Recorded amount
(3) = Sample Interval X (2)

69
Q

What is control deficiency?

A

Occurs when the design or operation of a control does not allow management or employees, int eh normal course of performing their functions, to prevent or detect and correct misstatements on a timely basis

70
Q

The sample size in a variables sampling application is affected by the

A

Variability in the population (generally represented by the standard deviation), the acceptance level of risk (i.e. the risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement

71
Q

What terms to looks for to identify which option is a test of controls?

A

Authorization, validity, completeness, accuracy, appropriate classification, accounting in conformity with GAAP, and proper period

72
Q

What words relate to substantive tests?

A

Account balances, amount, valuation, presentation, and disclosure

73
Q

What happens if the actual deviation rate in the population exceeds the maximum deviation rate based on the sample?

A

Control risk will be understated, since the control will be less effective than sample results would indicate

74
Q

The auditor may be able to reduce the required sample size by

A

Separating items into subject to sampling into relatively homogenous groups on the basis of some characteristics related to the specific audit objective

75
Q

The sampling size in variables sampling application is affected by…

A

the variability in the population (generally represented by the standard deviation), the acceptable level of risk (i.e. the risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement

76
Q

To determine the number of items to be selected for a particular sample for a test of controls

A

The auditor should consider the tolerable rate of deviation from the controls being tested, the likely rate of deviations (expected deviation rate), and the allowable risk of assessing control risk too low

77
Q

What sampling method is used to estimate a numerical measurement of a population, such as a dollar value?

A

Variables sampling

78
Q

What is stratification and what is its goal?

A

Stratification involves the grouping of transactions sharing some characteristic (such as recorded amts). The goal of stratification is to ensure selection of items for which potential misstatements may individually equal or exceed tolerable misstatement. Thus, the auditor should stratify the sample such that the unusually large transactions are selected.

79
Q

When planning a particular sample for a substantive test of details, the auditor should consider…

A

How much monetary misstatement in the account might exist without causing the FS to be materially misstated (tolerable misstatement) as well as the expected size and frequency of misstatements

80
Q

When evaluating whether a control deficiency is a significant deficiency or a material weakness, the auditor should…

A

Consider both the likelihood and magnitude of any potential misstatement

81
Q

What is significant deficiency?

A

Is a deficiency , or a combination of deficiencies, in the IC over fin reporting that is less severe than a material weakness, yet important enough to merit the attention of those responsible for oversight of the company’s financial reporting

82
Q

What is material weakness?

A

Is a deficiency, or a combination of deficiencies, in IC over fin reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim FS will not be prevented or detected and corrected on a timely basis.

83
Q

Nonissuers- Whose responsibility is it to evaluate and address control deficiencies?

A

Management

84
Q

Nonissuers- What is the auditor’s responsibility with control deficiencies?

A

The auditor’s responsibility is to evaluate control deficiencies of which he/she becomes aware during an audit (not to search for such deficiencies), and to report those that rise to the level of significant deficiency or material weakness.

85
Q

What should the communication report include for control deficiencies?

A

-Should be in writing -addressed to management and those charged with governance
-Indicate purpose of the engagement
-Restricted use
-Definition of material weakness, a list that was found and an explanation of potential effects
-If there are sign deficiencies then the same as above
-No later than 60 days after the report release date
-any previous deficiencies that have not been corrected should be communicated again
-

86
Q

How is ISAs different with deficiencies?

A

Since ISAs do not define the term material weakness, the ISAs do not contain a requirement to separately identify and communicate material weaknesses. Additionally, ISAs do not require a written explanation indicating that the auditor is not expressing an opinion on the effectiveness of IC (which is required under GAAP)

87
Q

When is significant deficiencies communicated?

A

Because timely communication may be important, the auditor may choose to communicate significant deficiencies during the course of the audit rather than after the audit is concluded

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