AUD 3 - Risk, Evidence, and Sampling Flashcards
if the assessed level of fraud risk is high, then the audit procedures will be designed to (increase or decrease) detection risk?
decrease
When control risk is assessed at a maximum level, then the auditor should?
document the assessment and the auditor should make the decision to perform more substantive procedures
If the acceptance level of detection risk decreases, then the auditor?
will need more assurance which is achieved through substantive test
what is the relationship between risk of material misstatement and detection risk?
an increase in the risk of material misstatement would cause a decrease in allowable detection risk
What is a dual purpose test?
this is a test of controls that is performed concurrently with a test of details on the same transaction
To determine the number of items to be selected for a particular sample for a test of controls, the auditor should consider…
- the tolerable rate of deviation from the controls being tested
- the likely rate of deviations (expected deviation rate)
- the allowable risk of assessing control risk too low
What are examples of nonsampling risk?
- the auditor selecting inappropriate auditing procedures,
- using inappropriate audit evidence
- failure by the auditor to recognize misstatements in documents examined
When an analytical procedure is used as the principal substantive test of a significant assertion, the auditor is required to document…?
- the auditor’s expectations
- factors considered in developing those expectations
To determine the sample size for a test of controls, the auditor should consider:
- the tolerable deviation rate
- the allowable risk of assessing control risk too low
- the expected deviation rate
The refusal of a client’s legal counsel to provide a representation on the legality of a particular act committed by the client is ordinarily
a scope limitation or reason to withdraw from engagement
a scope limitation
Does an auditor rely on conclusive or persuasive audit evidence?
persuasive
An auditor typically relies on persuasive, rather than conclusive, evidence because of inherent limitations of the audit.
what assertion does a bank rec satisfy?
Bank reconciliations typically test for the existence of cash.
Which of the following might be detected by an auditor’s review of the client’s sales cutoff?
inflated sales for the year
Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed?
A. Obtaining a client representation letter.
B. Physical inspection of a sample of inventory.
C. Search for unrecorded cash receipts.
D. Confirmation of accounts receivable.
C. Search for unrecorded cash receipts.
GAAS do not specifically require a search for unrecorded cash receipts. Given a low assessed RMM, the auditor might decide to reduce the audit effort devoted to substantive tests of assertions about cash and omit the procedure.
Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors?
A. Creditor statements are not available and internal controls relating to accounts payable are unsatisfactory.
B. Internal controls relating to accounts payable are effective and there is sufficient appropriate evidence on hand to minimize the risk of material misstatement.
C. The majority of accounts payable balances are with associated companies.
D. Confirmation response is expected to be favorable and accounts payable balances are immaterial in amount.
A. Creditor statements are not available and internal controls relating to accounts payable are unsatisfactory.
When the internal controls relevant to assertions about accounts payable are ineffective, the risk of material misstatement is increased. The greater the RMM, the greater the assurance required from substantive procedures related to an assertion. The auditor may need to change the nature, timing, or extent of substantive procedures and consider external confirmations. The auditor also should confirm accounts payable when (1) documentary evidence is lacking, (2) individual creditors have relatively large balances, (3) the client has made a major purchase from the creditor regardless of the size of the balance, (4) unusual transactions are involved, or (5) the account is secured.
An entity’s internal control requires that an approved voucher, a prenumbered purchase order, and a prenumbered receiving report accompany every check request. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all
A. Purchase orders.
B. Receiving reports.
C. Canceled checks.
D. Approved vouchers.
C. Canceled checks.
The best procedure is to test whether any checks have been issued without vouchers, purchase orders, and receiving reports. An appropriate sample of canceled checks should be traced to the related supporting documentation. The checks should not have been written before the dates on the receiving reports.
An auditor found material misstatements in other information that is unrelated to matters in the audited statements, and management refused to correct those misstatements. Which of the following actions may the auditor not perform?
A. Withhold the audit report on the financial statements.
B. Modify the opinion on the audit report of the financial statements.
C. Withdraw from the engagement.
D. Notify those charged with governance.
B. Modify the opinion on the audit report of the financial statements.
When management refuses to correct a material misstatement in other information that is unrelated to matters in the audited statements, the auditor should notify those charged with governance. The auditor should also take any appropriate further action, such as consulting counsel, withholding the audit report, or withdrawing from the engagement. However, this is not a basis for modifying the opinion on the audit report.
