AUD III Blake CPA Flashcards
What are examples of nonsampling risk in an audit?
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
What are examples of sampling risk?
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)
Precision (statistical concept)
Describes auditors evaluation of sampling results by calculating the possible error in either direction
What does Reliability measure?
How frequently the procedure used will yield differences between the estimated value and the population value.
What does the standard deviation measure?
Measure of the variability of a frequency distribtution about its mean
What is a projected error?
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
When is stratification used?
When population is Highly Variable recorded amounts & involves grouping population into similar groups.
ex: grouping large recorded amounts as a group
Assertion: Valuation & Allocation
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
Assertion: Understandability of presentation and classification
Deal with whether financial information is appropriately presented and described, & disclosures are clearly expressed
When are blank confirmations used? (Lower response rate)
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
What are the two assertions that confirmations provide regarding A/R?
Gives evidence of 1. rights and obligations (do the client have the right to the receivable)
- Existence (does the A/R really exist?)
When you are testing for an understatement in the revenue cycle what assertion is being evaluated?
What do you trace from?
Testing for completeness
Source documents to accoutning records
When you are testing for an overstatement what assertion is being tested?
What do you trace from?
Testing existence assertion
Accounting records to source documents
When tracing what assertions are being tested?
Completeness and Existence
Kiting
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
What does tracing (vouch) from inventory schedule too Inventory tags test?
Existence (validity) of inventory
What assertion does tracing tags to computer listing test?
Test of completeness
What does examining an analysis of inventory turnover help identify, and what assertion does it test?
Assertion is valuation, helps identify slow moving, excess, defective and obsolete itemes
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?
- Plans to borrow money or restructure debt
- Plans to sell assets
- Plans to delay or reduce expenditures (including R&D)
- Plans to increase ownership equity (sells stock)
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?
“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?
What are procedures that may be effective in an audit of contingent liabilities?
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
What falls under partial presentation in an AUP? What does it Omit?
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
Parallel simulation
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
When does SSARS not apply?
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
