AUD 3 Flashcards
What are the risk assessment procedures by PCAOB?
- Obtain understanding of entity and environment
Structure - including compensation
How they use I.T.
Gathers evidence manual and computerized
Auditor assessment of control and inherent risk of IT
Design tests of controls and $ubstantive testing to address that
Nature of the entity - Obtain an understanding of internal control over financial reporting
- Inquire the audit committee, management, BOD, internal auditors and others within the company about risks of material misstatement
Helps identify processes in the company that have failed - Perform analytical procedures to assist in planning by Identifying inconsistencies:
Unusual transactions or events
Trends that have audit implications
generally enhances the auditor’s understanding of the company
Procedures include:
Evaluations on financial information (Financial and Non-financial)
Year-to-year comparisons, budgeted vs actual results
Plan audit procedures to look for these trends or inconsistencies
- Conduct a discussion among engagement teams members regarding RMM
- Observation and inspection Support, corroborate or contradict inquiries of management
- Other procedures
Reviewing external information (journals, Analysis reports)
Results from fraud assessment
Information obtained from client acceptance or continuance process
Engagement information
Prior period evidence
May do $ubstative procedures, if efficient to do so
What are detective controls?
Applied after the process occurs
Examples:
Bank reconciliation
What are Preventative controls
Applied before the process occurs
Examples:
Hiring competent employees
Training
ARC
What are responses to areas of greater RMM for FSs risks?
- Communicate skepticism to team
- Assign staff with more specialization
- More supervision
- Greater level of unpredictability
- Make pervasive changes to audit strategy
What are responses to areas of greater RMM for Assertion level risks?
Design procedures that address NET of items:
Nature
Inquiries (Not enough), Observation, Inspection, reperformance (Tests operating effectiveness)
Extent
Sample size used
Frequency of performance is a large factor
Timing
When the tests are performed
What are the Standard Audit Procedures?
- Observation
a. Auditor looks at a process being completed BY A PERSON - Reperformance
- Inquiry (alone, not enough)
a. Internal
b. External - Walkthrough
- Subsequent events review
a. Type 1 - Provide evidence about conditions existed before BS date
i. Requires disclosure in FSs
b. Type 2 - Provide evidence about conditions that did not exist before BS date
i. Requires disclosure in FSs - Inspection
a. Reviewing a DOCUMENT or a THING - Reconciliation
- Recalculation
a. Cross-footing - Cut-off review
- Analytical procedures
a. Relationships among data
b. Verify internal consistency
c. Scanning for unusual events - Vouching - FSs → Source documents
a. Testing for existence - Tracing - Source documents → FSs
a. Testing for completeness - Confirmation - From external 3rd party
What are Standard Audit Procedures?
- Observation
a. Auditor looks at a process being completed BY A PERSON - Reperformance
- Inquiry (alone, not enough)
a. Internal
b. External - Walkthrough
- Subsequent events review
a. Type 1 - Provide evidence about conditions existed before BS date
i. Requires disclosure in FSs
b. Type 2 - Provide evidence about conditions that did not exist before BS date
i. Requires disclosure in FSs - Inspection
a. Reviewing a document OR A THING - Reconciliation
- Recalculation
a. Cross-footing - Cut-off review
- Analytical procedures
a. Relationships among data
b. Verify internal consistency
c. Scanning for unusual events - Vouching - FSs → Source documents
a. Testing for existence - Tracing - Source documents → FSs
a. Testing for completeness - Confirmation - From external 3rd party
When are analytical procedures done?
Planning and review stage.
What procedures are used for completeness?
- Tracing - Source documents to JEs
- Analytical review
- Observation
What procedures do you use for valuation, allocation and accuracy?
- Inspection
- Footing
- Recalculation
- Reconciliation
What procedures do you use for valuation, allocation and accuracy?
- Inspection
- Footing
- Recalculation
- Reconciliation
What procedures are used for existence and occurrence?
- Vouching
- Confirmation
- Observation, inspection and examination
What are the procedures for rights and obligations?
- Inspection
- Confirmation
What is Incorrect acceptance?
Sample supports conclusion of the balance being not materially misstated, but it actually is.
Questions that use the word “misstatements”
What is Incorrect rejection?
Sample supports conclusion that the balance is materially misstated, but it actually is not.
Questions that use the word “misstatements”
Sampling risks in tests of controls = Too high = ?
Indicates a greater deviation rate in sample than tolerable rate
Does more work than necessary, inefficient
Questions that use the word “deviations”
Sampling risks in tests of controls = Too low = ?
Assessed level of controls risk based on sample is too low than true risk
Indicates a lower deviation rate in sample than tolerable rate
Questions that use the word “deviations”
What is the upper deviation rate?
When can an auditor rely on controls?
Upper deviation rate = Sample deviation rate + Allowance for sampling risk
If upper deviation rate < or = Tolerable rate = Auditor may rely on
If upper deviation rate > Tolerable rate = Auditor would not rely on
RMM and expected misstatement have what effect on sample size?
Positive relationship
Tolerable misstatement and acceptable level of risk have what effect on sample size?
Negative relationship
When should auditor stratify sample?
- Sample has highly variable amounts
- Wants to reduce sample size
How do you calculation misstatement using tainting factor?
Sample Error = # recorded - audited #
Tainting factor = Sample error / # recorded
Misstatement = Tainting factor * sampling interval
What are diagnastic data analytic techniques?
Explains “Why”. Uncovers correlation, patterns, and relationships to explain outcome.
Examples:
Variance analysis
Period-over-period analysis
Data profiling
Clustering
What are descriptive data analytic techniques?
Describes what happened within the data set. May be similar to dectective controls.
Examples:
Range, mean, median, dependence (correlation)
What are predictive data analytic techniques?
Predictive analytics provide expected or predicted outcomes based on historical data.
Examples:
Predictive
Regression
Semtiment analysis
What are prescriptive data analytic techniques?
Prescribes courses of action to help optimize decisions.
Examples:
What-if analysis
Decision support
What are the formulas for Sampling interval and sample size using PPS?
Sampling interval = TM / Reliability factor
Sample size = Recorded amount is population / Sampling interval
What is the formula for (MPU) Mean-per-unit Estimation = Average sample value * Number of items in population
Mean-per-unit Estimation = Average sample value * Number of items in population
What is the formula for Ratio estimation?
Ratio estimation = (Audited value of sample / Book value) * Total Book Value
What is the formula for Difference estimation?
Difference estimation
Calculate Projected error = ((Book value of sample - Audited value of sample) / # of items audited) * Population
Calculate Point estimate = Total book value of population - Projected error
