Audit 5 - Sampling & Communications

Question 1

Sample Size Increase

Direct Relationship

Answer 1

Sample size will increase as following increase:

1. Expected misstatement
2. Standard deviation (population variability)
3. Assessed level of risk

Question 2

Sample Size Decrease

Inverse Relationship

Answer 2

Sample size will decrease as following INCREASE:

1. Tolerable misstatement
2. Acceptable level of risk

Question 3

What affects sample size in a variables sampling application?

Answer 3

1. Variability in population (generally standard deviation)
2. Acceptable level of risk (risk of incorrect acceptance)
3. Tolerable misstatement
4. Expected misstatement

Question 4

Keywords leading to Attribute Sampling

Answer 4

Used to test internal controls:

1. Authorization
2. Validity
3. Completeness
4. Accuracy
5. Appropriate classification
6. GAAP accounting conformity

Question 5

Keywords related to Substantive Tests

Answer 5

Variables sampling: $$$

1. Account balance
2. Amount
3. Valuation
4. Presentation
5. Disclosures

Question 6

What is related to effectiveness of the audit?

Answer 6

1. Risk of incorrect acceptance

2. Risk of assessing control risk too low

Question 7

What is related to the efficiency of the audit?

Answer 7

Auditor does more work than necessary:

1. Risk of incorrect rejection
2. Risk of assessing control risk too high

Question 8

What does upper deviation rate consist of?

Answer 8

Sample deviation rate plus

Allowance for sampling risk

Question 9

What is considered in determining sample size for a test of controls?

Answer 9

1. Tolerable rate of deviation from the controls being tested
2. Likely rate of deviations (expected deviation rate)
3. Allowable risk of assessing control risk too low

Question 10

When is ratio estimation most effective?

Answer 10

When there is a correlation between book values and audit amounts.

Question 11

Auditor may fail to identify an existing problem

Answer 11

Incorrect acceptance

Assessing control risk too low

Question 12

Auditor may falsely identify a problem where none actually exists

Answer 12

Inccorect Rejection

Assessing control risk too high

Question 13

What is compared to tolerable deviation rate to determine reliance on control?

Answer 13

Upper deviation rate (not the rate found in the sample)

Question 14

Objective of variables sampling

Answer 14

Used to estimate numerical measurement of a population, such as dollar value.To obtain evidence about reasonableness of monetary amounts.

Question 15

Type of Audit Required Under PCAOB Standards

Answer 15

Integrated audit: audting both FS and management’s assessment of the effectiveness of IC over financial reporting.

Question 16

Date of management representation letter should coincide with the date of the:

Answer 16

Auditor’s report

Question 17

Purpose of management representation letter

Answer 17

1. Confirm representations explicity or implicity given to the auditor.
2. Indicate and document the continuiing appropriateness of such representations.
3. Reduce the possibility of misunderstanding concerning matters that are the subject of the representations.

Question 18

When a material weakness exists when reporting on a nonissuers control over financial reporting, the auditor should….

Answer 18

Issue an adverse opinion

Question 19

Upper deviation rate < auditor’s tolerable deviation rate

Answer 19

Auditor may rely on control

Question 20

Upper deviation rate > auditor’s tolerable deviation rate

Answer 20

Auditor would not rely on the control

Question 21

Upper deviation rate formula

Answer 21

Sum of sample deviation rate and allowance (cushion) for sampling risk.

Question 22

Factors in determining the sample size in attribute sampling (test of controls)

Answer 22

1. Risk of assessing control risk too low (use table)
2. Tolerable deviation rate
3. Expected deviation rate
4. Population size - determined after 3 above determined

Question 23

Comparing upper deviation rate and tolerable rate in auditor’s reliance on control.

Answer 23

The tolerable rate is maximum rate of error auditor willing to accept without changing control risk assessment or planned reliance on IC. This is used to calculate sample size and determined prior to arriving at upper deviation rate.

You then compute upper deviation (sample deviation + allowance for sampling risk) and compare to tolerable rate to determine if you can rely or need to adjust (form conclusion)

The upper deviation is related to sample while tolerable is population as whole. If upper deviation > than tolerable than likely that entire population deviation will be hire since upper is only related to just a sample.

UDR = TDR = Do not rely

Question 24

Translation of upper deviation rate equaling 4.7%.

Answer 24

The auditor is x% sure the deviation rate does not exceed 4.7%

Question 25

Variable Sampling & Attribute Sampling

Answer 25

Variable = Misstatements - $
Attribute = Deviations/Errors - Test of controls

Question 26

Variable Sampling - Point Estimate

Answer 26

Projected misstatement (using one of 3 formulas) is applied to the recorded balance to obtain a point estimate of the true balance.

Question 27

PPS Sample Size Determination

Answer 27

Selected by dividing total number of dollars in population (book value) into uniform groups of dollars or intervals.

Sampling Interval =

Tolerable Misstatement/Reliability Factor (from table)

Sample Size =

Recorded amount of population/Sampling interval

Question 28

Significant Deficiency

Material Weakness

Answer 28

Significant Deficiency - not as bad, important enough to merit attention by those charged with governance.

Material Weakness - worse, reasonable possibility that a material misstatement will not be prevented, or detected and corrected on a timely basis.