AUD Flashcards
Unqualified vs Unmodified
Issuers vs Nonissuers
Modified Audit Opinion
-unable to obtain sufficient audit evidence (audit issues)
-material misstated f/s (f/s issue) (but not pervasive)
Audit Issues
Disclaimer, Qualified, or Unqualified
Disclaimer:
Qualified:
Unqualified:
Qualified is…
“except for”
Comparative F/S - Unmodified Predecessor’s Report - How does current auditor address?
In an other-matter paragraph indicate that the predecessor auditor expressed an unmodified opinion on the prior year’s F/S
What should an auditor do when she becomes aware of an apparent material misstatement of fact in other information included in a document containing audited financial statements?
The auditor should discuss the matter with management.
What are OCBOAs?
Other Comprehensive Basis of Accounting
I. Basis of accounting used by an entity to file its income tax return.
II. Cash receipts and disbursements basis of accounting.
III. A Basis prescribed by a regulatory agency
IV. Contractual basis
If there is a scope limitation issue, what types of opinions may be given?
An auditor would issue either a qualified opinion or a disclaimer of opinion when there is a scope limitation (GAAS issue).
Deviation Rate
Error Rate in the sample
Tolerable Deviation Rate
Maximum rate of error the auditor can accept
Expected Deviation Rate
The Auditor’s estimated error rate (before sampling)
Upper Deviation Rate
high end of range for auditor’s estimate of error rate (based on results from testing the sample)
Allowance for Sampling Risk
adjusts sample rate to get to upper deviation rate: Sample deviation rate + Allowance for sampling risk = Upper deviation rate
Affect to sample size: Risk of Assessing Control Risk too Low
Inverse Relationship
Affect to sample size: Tolerable Deviation Rate
Inverse Relationship
Affect to sample size: Expected Deviation Rate
Direct Relationship
Risk of incorrect rejection
The sample indicates that the balance is not fairly states when, in fact, it is fairly stated. (Efficiency - The auditor will do more work than is necessary.)
Risk of assessing control risk too low
The sample indicates that the control is working when, in fact, it is not. (Effectiveness - The auditor will erroneously rely on the control)
Risk of assessing control risk too high
The sample indicates that the control is not working when, in fact, it is. (Efficiency - The auditor will erroneously extend audit work.)
When an auditor can rely on control:
Upper deviation rate < (or =) Tolerable deviation rate
When an auditor cannot rely on control:
Upper deviation rate > Tolerable deviation rate
Risk of incorrect acceptance
The sample indicates that the balance is fairly stated when, in fact, it is not. (Effectiveness)
Give a summary of Variable Sampling
Tolerable Misstatement - max monetary misstatement in an account balance or class of transactions that the auditor is willing to accept
Expected Misstatement - the auditor’s estimate of misstatement (before sampling)
Projected Misstatement - the auditor’s estimated misstatement, based on the sample.
Variable Sampling: Summarize which factors which increase/decrease sample size
Expected Misstatement - direct relationship
Population Variability (standard deviation) - direct relationship
Assessed Level of Risk - direct relationship
Tolerable Misstatement - inverse relationship
Acceptable Level of Risk - inverse relationship
A risk assessment based on the effective operation of internal control increases allowable detection risk, which reduces…
…the required extent of substantive testing.
Qualified or adverse opinion - financial issues:
Qualified: GAAP violation, low materiality
Adverse: GAAP violation, substantial materiality
Attribute Sampling calculation
Sample deviation rate + Allowance for sampling risk = Upper deviation rate
Accounts receivable turnover
Sales (net) / Average accounts receivable (net)
Days sales in accounts receivable
Ending accounts receivable (net) / Sales (net)/365
Current Ratio
Current assets / current liabilities
Gross margin
Sales (net) - COGS / Sales (net)
Profit margin
Net income / Sales (net)
Inventory Turnover
COGS / Average Inventory
Inherent Risk
The susceptibility of an assertion to material misstatement assuming there are no related controls.
Audit risk
The risk that the auditor may unknowingly fail to modify appropriately the opinion on financial statements that are materially misstated.
