AUD 3-4 Flashcards
What is reperformance?
When an auditor independently performs procedures or controls to ensure that they were performed appropriately
*Be careful not to mix reperformance with recalculation
What does the relevance of audit evidence depend on?
- Design of the audit procedure
- directly test an assertion
- test for understatement vs overstatement - Timing of the audit procedure
In attribute sampling, which two rates are compared in making decisions?
The upper deviation rate (worst-case scenario) and the tolerable rate
UDR < TR = rely on the control
UDR > TR = cannot rely on the control
What is the formula to calculate the upper deviation rate in attribute sampling?
Sample deviation rate + Allowance for sampling risk = Upper deviation rate
When are analytical procedures required?
During an audit’s planning and final review
Note: May be used as a substantive procedure, but are not required
Distinguish between the 3 types of material misstatements
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
A duty to disclose client info outside the entity may exist when:
- change of auditor/ response to successor auditor’s inquiries (with client permission)
- in response to a court order
- in compliance with government agency
What is the formula for Net Profit Margin?
Net Income / Net Sales
Profitability Ratio
What is incorrect acceptance/rejection? What is the risk of assessing control risk too high/too low?
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)
In variables sampling, sample size has a direct relationship with which characteristics?
- Expected misstatement
- Standard deviation (population variability, expected deviation rate)
- Assessed level of risk
In variables sampling, sample size has an inverse relationship with which characteristics?
- Tolerable misstatement
- Acceptable level of risk
When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the-
Estimate of the total misstatement is less than a material amount
Who does the term “those charged with governance” refer to?
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
What is Audit Risk?
The risk that auditors issued the incorrect audit opinion on the F/S
What is Inherent Risk?
Risks that cannot be prevented or detected by internal control. Could happen due to complexity of the client’s nature of business or transactions.
What is Control Risk?
Risk that a material misstatement that could occur will not be prevented or detected on a timely basis by the entity’s internal control
What is Detection Risk?
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
When performing cutoff tests related to revenues, when should sales and relief of inventory be recognized?
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
What is the difference between a consignee and a consignor?
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
What is the order of reliable evidence?
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
What is the summary of uncorrected misstatements?
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
An auditor is unlikely to require further clarification from a lawyer in regards to litigation, claims, and assessments when:
The lawyer asserts the contingent liability is immaterial (“nominal”) or improbable (“without merit” or “successful defense likely”)
What is stratification?
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
What functions does the AP department typically perform in the expenditure cycle?
- Record the payable
- Approve the invoice for payment
- Record the payment after it is paid by the treasurer
