AUD III Blake CPA

Question 1

What are examples of nonsampling risk in an audit?

Answer 1

All audit risks not due to sampling

Auditor selecting inappropriate procedures, using inappropriate audit evidence, and failure by auditor to recognize misstatements in documents examined

Question 2

What are examples of sampling risk?

Answer 2

Internal control NOT being effective as the auditor believes

Internal control being MORE effective than the auditor believes

The auditor concluding that account balance is NOT materially misstated, but is, in fact, materially misstated (Incorrect acceptance)

Question 3

Precision (statistical concept)

Answer 3

Describes auditors evaluation of sampling results by calculating the possible error in either direction

Question 4

What does Reliability measure?

Answer 4

How frequently the procedure used will yield differences between the estimated value and the population value.

Question 5

What does the standard deviation measure?

Answer 5

Measure of the variability of a frequency distribtution about its mean

Question 6

What is a projected error?

Answer 6

Auditor’s best estimate of the error in the total population based upon evaluating the Actual Error rate in the sample results.

Auditor adds an Allowance for sampling risk + Projected error = Precisions interval - which is the population is expected to fall

Question 7

When is stratification used?

Answer 7

When population is Highly Variable recorded amounts & involves grouping population into similar groups.

ex: grouping large recorded amounts as a group

Question 8

Assertion: Valuation & Allocation

Answer 8

deal with whether assets, liabilities, revenue and expense components have been included in the F/S at the appropriate amounts.

& any resulting valuation adjustments are appropriately recorded

ex: A/R is net of AFDA - Stated at NRV

Question 9

Assertion: Understandability of presentation and classification

Answer 9

Deal with whether financial information is appropriately presented and described, & disclosures are clearly expressed

Question 10

When are blank confirmations used? (Lower response rate)

Answer 10

When recipient is likely to sign confirmation without careful investigation

Requires person to fill in the balance, so one cannot simply sign off without checking and verifying the balance

Question 11

What are the two assertions that confirmations provide regarding A/R?

Answer 11

Gives evidence of 1. rights and obligations (do the client have the right to the receivable)

2. Existence (does the A/R really exist?)

Question 12

When you are testing for an understatement in the revenue cycle what assertion is being evaluated?

What do you trace from?

Answer 12

Testing for completeness

Source documents to accoutning records

Question 13

When you are testing for an overstatement what assertion is being tested?

What do you trace from?

Answer 13

Testing existence assertion

Accounting records to source documents

Question 14

When tracing what assertions are being tested?

Answer 14

Completeness and Existence

Question 15

Kiting

Answer 15

occurs when a check drawn on one bank is deposited in another bank no record is made of the disbursement in the balance of the first bank

ex: frequent kiting may result in ahigh level of deposits coupled with a low average balance

Question 16

What does tracing (vouch) from inventory schedule too Inventory tags test?

Answer 16

Existence (validity) of inventory

Question 17

What assertion does tracing tags to computer listing test?

Answer 17

Test of completeness

Question 18

What does examining an analysis of inventory turnover help identify, and what assertion does it test?

Answer 18

Assertion is valuation, helps identify slow moving, excess, defective and obsolete itemes

Question 19

What are the four things that auditor’s look at when there is substantial doubt about the entity’s ability to continue as a going concern?

Answer 19

1. Plans to borrow money or restructure debt
2. Plans to sell assets
3. Plans to delay or reduce expenditures (including R&D)
4. Plans to increase ownership equity (sells stock)

Question 20

Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessment most likely would cause the auditor to request clarification?

Answer 20

“I believe that the plaintiff will have problems establishing any liability.”

“Will have problems establishing any liability” is vague… it does not provide an evaluation of the likelihood of an unfavorable outcome.

Not sure “will have problems” mean a loss is probable, reasonably possible or remote?

Question 21

What are procedures that may be effective in an audit of contingent liabilities?

Answer 21

Discussing L/T purchase commitments with purchasing Agent

Reviewing L/T leases

Obtaining client representation letter

Reviewing board minutes

Bank Confirm letter

Examining invoices for professional services

Question 22

What falls under partial presentation in an AUP? What does it Omit?

Answer 22

Sales or Gross revenue

Gross profit or cost of sales

Unusual or infrequently occurring items

Provision for income taxes

Discontinued operations or extraordinary items

Income from continuing operations

Net income

EPS

Significant changes in financial position

Question 23

Parallel simulation

Answer 23

technique used by an auditor that reprocess the client’s data using the auditors OWN software.

Auditor than compares their results to results obtained by client

Question 24

When does SSARS not apply?

Answer 24

when an accountant prepares personal financial statements for inclusion in written personal financial plans (cannot prepare F/S) - standards and procedures are created for an engagement to compile personal F/S to be used to obtain a mortgage

Solely for submission to taxing authorities

In conjunction with litigation services that involve pending or potential legal or regulatory proceedings

in conjunction with business valuation services

Question 25

what would cause an auditor not to accept an engagement to compile F/S?

Answer 25

indications that report of asset misappropriation are not investigated by MGT

This is a theft of entity’s assets and should be investigated by MGT

Lack of interest would raise concern about attitude of MGT - not accept engagement

Question 26

Non-attest service

Answer 26

Preperation of F/S

Question 27

Preparation Engagements

Answer 27

Independence not required

No assurance provided and stated on each page

Engagement letter should be included in document preperation

Question 28

Who takes on responsibility got a preparation engagement regarding completeness of information?

Answer 28

Management

Question 29

Attestation services and levels of assurance

Answer 29

Examinations (reasonable assurance)

Reviews (limited assurance) - analytics and inquiry only

Agreed-upon procedures (No assruance)