AUD Deck 4 Flashcards
When do you use negative confirmations?
negative confirmations are used when the combined assessed level of inherent and control risk is low, a large number of small balances are involved, and the auditor has no reason to believe that recipients of the requests are unlikely to give them consideration
When do you use blank positive confirmations?
*blank positive confirmations should be used if the recipient is likely to return a positive confirmation without verifying the accuracy of the information
When do you use positive confirmations?
*if a small number of accounts are involved and a large number of errors are anticipated, positive confirmations should be used
What is Kiting?
Kiting occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank. Frequent kiting may result in a high level of deposits coupled with a low average balance
What is Equity Method Accounting?
Under Equity Method Accounting, the amortization of the excess of the investor’s cost over the investment’s underlying book value reduces the investor’s income from the equity method investment. If amortization is calculated incorrectly (Ex: amortization is too high), this could lower the return on the investment. *Dividends are recorded as a reduction of the investor’s investment in the B/S under equity method of accounting
What is the difference between periodic and perpetual inventory?
The periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold. The perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold.
What is stratified sampling?
the auditor would divide the entire population into homogenous subgroups
What is cluster sampling?
the auditor treats (ex: each branch) as a cluster and then selecting samples from each cluster
What is inherent risk?
the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls
What is control risk?
risk that a material misstatement will not be detected or prevented on a timely basis by the entity’s internal control
What is detection risk?
risk that the audit procedures implemented will not detect a misstatement that exists in a relevant assertion
(T/F) The auditor sets detection risk based on the assessed levels of inherent risk and control risk, and would only increase the acceptable level of detection risk in response to a decrease in inherent or control risk.
TRUE
If the auditor does not receive responses from positive confirmation requests, what should the auditor do?
the auditor should generally follow up with a second and sometimes third request to those parties. In addition, asking the client to contact its customers may encourage responses.
What is the auditor’s primary purpose in performing a retrospective review?
helps the auditor identify and assess the risk of material misstatement in the current period
What type of relationship does detection risk and control risk have?
Inverse; ex: less control risk an auditor believes exists, the greater the level of detection risk he or she can accept
