AUD - all subjects Deck 3 Flashcards
What are tests of controls primarily concerned with?
(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.
What is considered to determine the sample size for a test of controls?
1) The tolerable population deviation rate
2) The risk of overreliance
3) Expected population deviation rate
Which is a prospective financial statement for general use upon which a practitioner may appropriately report?
A financial forecast.
NOTE: A financial projection is only appropriate for limited use
When should an emphasis-on-the-matter paragraph be used?
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.
Give examples of when an emphasis-on-the-matter paragraph should be used.
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.
When should an auditor use an “other matter” paragraph?
An “other matter” paragraph is used by the auditor to refer to “a matter other than those presented or disclosed in the financial statements.
Which type of sampling does not allow an auditor to quantify sampling risk?
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.
Define sampling risk
Sampling risk is the risk that the sample selected does not represent the population.
When should attribute sampling be use?
Attribute sampling should be used to test the effectiveness of controls.
What is the statistical term in accounting that corresponds to quantities?
Variables
What is the statistical term in accounting that corresponds to deviation rates?
Attributes
What is an audit?
An audit is a type of attestation of historical financial statements that provides an opinion on whether the f/s are fairly presented
What is an examination?
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
What are forecasts and projections known as?
They are examinations (a type of attestation) with hope of adding credibility. Note: this is NOT an audit
Who are members of the Audit Committee?
Members of the BOD, not in management. They must be independent of management
An auditor’s independence is considered impaired when they have which type of material financial interest in an audit client?
1) Direct financial interest
2) Indirect financial interest
When is auditor independence impaired?
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).
Which type of independence would impair an auditor’s independence regardless of materiality?
Direct financial interest
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?
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
What is the formula for elasticity of demand?
Change in demand/change in price
If less than 1, then inelastic
If greater than 1, then elasltic
Scope limitations can result in what type of opinions?
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.
Does the auditor give any assurance on a review or compilation engagement?
No, an auditor does not express an opinion on a review engagement
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?
Trace shipping documents to Sales invoices
What procedures does a review engagement include to provide limited assurance?
Inquiries and analytical procedures. These should be designed to accumulate review evidence that will provide a reasonable basis for obtaining limited assurance.
