Audit 5 Flashcards
Central limit theorem of sampling
That the population is normally distributed, like a bell curve
Sampling Risk is
the risk that the sample is not representative of the population
Trick questions on CPA exam involving statistical sampling
Try to trick you into thinking that stat sampling eliminates auditing judgement
It does not
How do samples need to be chosen?
Randomly
Name Types of Sampling and what they do?
Attribute Sampling= tests for internal controls, (yes or no questions)
Variables Sampling= Substantive tests of account balances
Sampling Beta risk is
Risk of incorrect acceptance ,
Picked too many good samples and not enough bad
Ineffective
Sampling Alpha Risk is
Risk of Incorrect Rejection
Picked too many bad samples and not enough good
Inefficient- will do more work than necessary
Sample Deviation Rate is
number of missing items found in sample size
1 out of 100 items is 1%
Allowance for Sampling Risk equation is…
Upper Deviation Rate
minus
Sample Deviation Rate
Equation for Upper Deviation Rate is
Sample Deviation
plus
Allowance for Sampling Risk
Discovery Sampling is used for..
detecting fraud/critical items
Probability to Proportion Sampling is…
individual dollars are used for selection and then everything from that account is selected
Advantages and Disadvantages of PPS
Advantage
Emphasizes larger balance
Smaller Samples
Disadvantages
doesnt work well with zero, negative or understated balances
Control deficiency is
when internal controls fail to prevent or detect and correct (omit correct for issuers)
misstatements on a timely basis
Material weakness is a ..
internal control deficiency that a has a reasonable possibility that material misstatement of fin stmt will not be prevented or detected and corrected (omit corrected for issuers)
How to communicate Significant and Material Deficiencies?
Significant and Material deficiencies must be communicated in writing to both mgmt and governance in a timely manner
Significant deficiencies are
less severe than material weakness yet important enough to merit attention by those charged with goverance
Other deficiencies can be communicated how?
Written or Orally
ONLY to Mgmt
What is mgmt’s response to internal control problems?
IC problem
Fixed
Plan to Fix
Cost/Benefit not fixing
Inherent Limitations Paragraph of Internal Controls says what..
May not prevent or detect and correct misstatements
If separate reports for audit opinion and opinion on internal controls what needs to go in both?
Reference to the other report
A Material weakness in internal control requires what sort of opinion?
Adverse
Failure to obtain a representation letter is what…
Scope limitation
A Smaller tolerable misstatement results in what change to sample size..
Increases it
A Higher risk of incorrect acceptance changes sample size how..
decreases it
What does a smaller amount of variability do to sample size?
Decreases sample size
Sample Size is determined by
Expected or likely rate of deviation
Allowable risk of assessing control risk too low
Tolerable Rate of deviation
Ratio estimation is used when
audit amounts are approximatley proportional to book amounts
An estimate of numerical measurement of population would use what sampling method
Variables Sampling
When to express an effectiveness of internal control?
Need to for issuers
Not for Non Issuers
Variable sampling Mean per unit point of estimate formula
(Auditor true value/sample size)x population size
Variable sampling ratio point of estimate
(TVsample/BVsample)x Total book value
variable sampling -difference estimation
((BVsample-AVsample)/sample size)x population= projected error
POE= TBV -projected error
Content of Mgmt representation letter
- mgmt responsible for fair presentation of the FS and DIM of IC
- Completeness of info
- Fraud
- laws and regs
- uncorrected misstatements
- litigations and claims
- Estimates reasonable
- related party transactions- disclosed who they are
- subsequent event
- additional representations
