AUD - all subjects Deck 3

Question 1

What are tests of controls primarily concerned with?

Answer 1

(1) how the controls were applied at relevant times,
(2) were the controls performed consistenly, and
(3) by whom and by what means they were applied.

Question 2

What is considered to determine the sample size for a test of controls?

Answer 2

1) The tolerable population deviation rate
2) The risk of overreliance
3) Expected population deviation rate

Question 3

Which is a prospective financial statement for general use upon which a practitioner may appropriately report?

Answer 3

A financial forecast.

NOTE: A financial projection is only appropriate for limited use

Question 4

When should an emphasis-on-the-matter paragraph be used?

Answer 4

In the auditor’s report to draw attention to a matter appropriately disclosed in the F/S that is fundamental to users understanding of the F/S.

Question 5

Give examples of when an emphasis-on-the-matter paragraph should be used.

Answer 5

1) An uncertainty relating to the future outcome of unusually important litigation or regulatory action
2) A major catastrophe that has had, or continue to have a significant effect on the entity’s financial position.
3) Signicant transaction with related parties and,
4) Unusually important subsequent events.

Question 6

When should an auditor use an “other matter” paragraph?

Answer 6

An “other matter” paragraph is used by the auditor to refer to “a matter other than those presented or disclosed in the financial statements.

Question 7

Which type of sampling does not allow an auditor to quantify sampling risk?

Answer 7

Block sampling.
Block sampling randomly selects groups of items as sampling units, not individual items. One problem is that variability within blocks of items may not represent population variability. Another is that, unless many blocks are selected, the sample (a block, not an item) size is too small for valid audit sampling. Thus, the method does not allow the auditor to quantify sampling risk.

Question 8

Define sampling risk

Answer 8

Sampling risk is the risk that the sample selected does not represent the population.

Question 9

When should attribute sampling be use?

Answer 9

Attribute sampling should be used to test the effectiveness of controls.

Question 10

What is the statistical term in accounting that corresponds to quantities?

Answer 10

Variables

Question 11

What is the statistical term in accounting that corresponds to deviation rates?

Answer 11

Attributes

Question 12

What is an audit?

Answer 12

An audit is a type of attestation of historical financial statements that provides an opinion on whether the f/s are fairly presented

Question 13

What is an examination?

Answer 13

An examination is a type of attestation that is forward looking that provides an opinion regarding fair presentation ex. CPA reports on f/s that shows what next year’s results might look like

Question 14

What are forecasts and projections known as?

Answer 14

They are examinations (a type of attestation) with hope of adding credibility. Note: this is NOT an audit

Question 15

Who are members of the Audit Committee?

Answer 15

Members of the BOD, not in management. They must be independent of management

Question 16

An auditor’s independence is considered impaired when they have which type of material financial interest in an audit client?

Answer 16

1) Direct financial interest
2) Indirect financial interest

Question 17

When is auditor independence impaired?

Answer 17

Independence is impaired if the auditor directly owns shares (a direct financial interest) or if the auditor owns a material indirect financial interest, such as a mutual fund ownership that is significant to the auditor’s net worth (an indirect financial interest).

Question 18

Which type of independence would impair an auditor’s independence regardless of materiality?

Answer 18

Direct financial interest

Question 19

Determine the new quantity demanded if price elasticity of demand for a good is 2.0, and the quantity demanded is 5,000 units. The price increases by 10%. What is the new quantity demanded?

Answer 19

Step 1: 2.0 x 10% = 20%

Step 2: 5,000 x 20% = 1,000

Step 3: 5,000 - 1,000 = 4,000 new qty demanded

Question 20

What is the formula for elasticity of demand?

Answer 20

Change in demand/change in price
If less than 1, then inelastic
If greater than 1, then elasltic

Question 21

Scope limitations can result in what type of opinions?

Answer 21

1) Qualified opinion - The auditor issues a qualified opinion when they identify a scope limitation or material misstatement, but the misstatement isn’t pervasive.

2) A Disclaimer of opinion - The auditor issues a disclaimer of opinion when they are unable to collect enough evidence to base the audit on. This can happen when there are material and pervasive misstatements, and the auditor can’t verify a large number of accounts.

Question 22

Does the auditor give any assurance on a review or compilation engagement?

Answer 22

No, an auditor does not express an opinion on a review engagement

Question 23

If the objective of an auditor’s test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the?

Answer 23

Trace shipping documents to Sales invoices

Question 24

What procedures does a review engagement include to provide limited assurance?

Answer 24

Inquiries and analytical procedures. These should be designed to accumulate review evidence that will provide a reasonable basis for obtaining limited assurance.

Question 25

Does an accountant contemplate obtaining an understanding of internal control in an engagement to compile and an engagement to review a nonissuer’s financial statements?

Answer 25

No, neither a compilation nor a review involves obtaining an understanding of internal control and assessing fraud risk.

Question 26

When is the demand for a product elastic?

Answer 26

When elasticity of a product is greater than one.
For products with elastic demands, as price increases, the percentage decrease in quantity demanded is larger than the percentage increase in price. Thus, total revenue decreases.

Question 27

Name three major reason not to accept a new client.

Answer 27

1) Mgmt lacks integrity
2) Inadequate financial records or mgmt unwilling to provide all records (scope limitation
3) High risk of intentional manipulation of f/s.

Question 28

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

Answer 28

It refers to those who bear responsibility to over the obligations , financial reporting process, and strateic direction of an entity. The term is broadly interpreted to encompass the terms BOD and Audit Committee. Officers/Management are NOT included in the term.

Question 29

According to the clarified standards (for non-issuers) if a generally accepted audit standard is unconditional, what does that mean?

Answer 29

That the auditor must comply with the standard, in order for the auditor to complete an engagement in accordance with GAAS.

Question 30

What does the word “unconditional” in audit mean

Answer 30

Unconditional must be complied with in all cases. It is indicated by the words MUST, SHALL, IS REQUIRED