AUD 3-4

Question 1

What is reperformance?

Answer 1

When an auditor independently performs procedures or controls to ensure that they were performed appropriately

*Be careful not to mix reperformance with recalculation

Question 2

What does the relevance of audit evidence depend on?

Answer 2

• Design of the audit procedure
  - directly test an assertion
  - test for understatement vs overstatement
• Timing of the audit procedure

Question 3

In attribute sampling, which two rates are compared in making decisions?

Answer 3

The upper deviation rate (worst-case scenario) and the tolerable rate

UDR < TR = rely on the control
UDR > TR = cannot rely on the control

Question 4

What is the formula to calculate the upper deviation rate in attribute sampling?

Answer 4

Sample deviation rate + Allowance for sampling risk = Upper deviation rate

Question 5

When are analytical procedures required?

Answer 5

During an audit’s planning and final review

Note: May be used as a substantive procedure, but are not required

Question 6

Distinguish between the 3 types of material misstatements

Answer 6

Factual misstatements: there is no doubt about the misstatements

Judgmental misstatements: MGMT and auditor have material judgment differences on acct. estimates or application of acct. policies

Projected misstatements: auditor’s best estimate of misstatements in populations, by projecting misstatements in an audit sample to the population from which samples were drawn

Question 7

A duty to disclose client info outside the entity may exist when:

Answer 7

• change of auditor/ response to successor auditor’s inquiries (with client permission)
• in response to a court order
• in compliance with government agency

Question 8

What is the formula for Net Profit Margin?

Answer 8

Net Income / Net Sales

Profitability Ratio

Question 9

What is incorrect acceptance/rejection? What is the risk of assessing control risk too high/too low?

Answer 9

Variable Sampling; substantive tests (balances)
Risk of incorrect acceptance – auditor incorrectly accept a balance as fairly stated when it is not fairly stated (Ineffective: wrong conclusion)

Risk of incorrect rejection - balance is ruled as materially misstated when in fact it is not materially misstated (Inefficient: more work than is necessary)

Attribute Sampling; internal control (yes-no)
Too low: relying on controls more than you should be; less tests (Ineffective)

Too high: under-relying on controls; more tests (Inefficient)

Question 10

In variables sampling, sample size has a direct relationship with which characteristics?

Answer 10

• Expected misstatement
• Standard deviation (population variability, expected deviation rate)
• Assessed level of risk

Question 11

In variables sampling, sample size has an inverse relationship with which characteristics?

Answer 11

• Tolerable misstatement

- Acceptable level of risk

Question 12

When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the-

Answer 12

Estimate of the total misstatement is less than a material amount

Question 13

Who does the term “those charged with governance” refer to?

Answer 13

Those who bear responsibility to oversee the obligations, financial reporting process, and strategic direction of an entity.

Usually includes the Board of Directors and the Audit Committee

Note: MGMT is not typically included

Question 14

What is Audit Risk?

Answer 14

The risk that auditors issued the incorrect audit opinion on the F/S

Question 15

What is Inherent Risk?

Answer 15

Risks that cannot be prevented or detected by internal control. Could happen due to complexity of the client’s nature of business or transactions.

Question 16

What is Control Risk?

Answer 16

Risk that a material misstatement that could occur will not be prevented or detected on a timely basis by the entity’s internal control

Question 17

What is Detection Risk?

Answer 17

Risk that the procedures performed by an auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists in the F/S and that could be material

Question 18

When performing cutoff tests related to revenues, when should sales and relief of inventory be recognized?

Answer 18

Sales and relief of inventory should be recognized when the title of the goods has transferred

FOB shipping: title transfers when the goods are shipped

FOB destination: title transfers when goods are received by the customer

Question 19

What is the difference between a consignee and a consignor?

Answer 19

Consignee: aka agent; retains the goods and passes them along to a third party, or the final buyer (does not own the inventory)

Consignor: aka shipper; keeps title of the property until it is transfer to or sold to the final party

Question 20

What is the order of reliable evidence?

Answer 20

AEIO

Auditor’s direct personal knowledge (analytical procedures relies on internal data)

External evidence (sent directly to auditor more valid than sent to client)

Internal evidence

Oral evidence

Question 21

What is the summary of uncorrected misstatements?

Answer 21

It includes misstatements that management elected not to book (whether material or not)

Should include the effect of uncorrected misstatements related to prior periods on relevant classes/balances and the F/S as a whole

Question 22

An auditor is unlikely to require further clarification from a lawyer in regards to litigation, claims, and assessments when:

Answer 22

The lawyer asserts the contingent liability is immaterial (“nominal”) or improbable (“without merit” or “successful defense likely”)

Question 23

What is stratification?

Answer 23

A technique of dividing the population into subpopulations and applying different sample selection methods to the subpopulations.

*Used to minimize the effects of variance within the overall population –> smaller sample size

Question 24

What functions does the AP department typically perform in the expenditure cycle?

Answer 24

1. Record the payable
2. Approve the invoice for payment
3. Record the payment after it is paid by the treasurer

Question 25

What is the primary audit procedures used in testing cash balances?

Answer 25

Positive confirmations (Bank confirmation)

Question 26

What is the effect on sample size when the acceptable level of risk is decreased?

Answer 26

Results in a larger sample size (afford fewer mistakes, tests on larger sample size)

Question 27

When would an auditor be most likely to extend substantive tests?

Answer 27

When significant errors are discovered in performing the tests of details

Question 28

What is the purpose of a standard bank confirmation?

Answer 28

To corroborate information regarding deposit and loan balances

Question 29

What is the objective of tests of details when used as tests of controls vs as substantive tests?

Answer 29

Tests of details used as test of controls: evaluate when an internal control operated effectively

Tests of details used as substantive tests: detect material misstatements in the F/S

Question 30

If an auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern and that the entity’s disclosures are adequate, then the audit report may be either:

Answer 30

• Unqualified with explanatory paragraph; or

- Disclaimed (high degree of uncertainty)

Question 31

When auditing procedures are performed before year-end, what additional procedures should be performed to extend the interim conclusions to year-end?

Answer 31

Large balances would be tested by reviewing supporting evidence, and significant changes in the balance would also be investigated