Cards to remember Flashcards
mean per unit estimation to determine point estimate
(total audited value / number of items audited from population) * total population of items
ratio estimation to determine point estimate
(audited value of sample / book value of sample) * total book value of acct balance
difference point estimation to determine point estimate
1) projected error = (book value of sample - audited value of sample)/number of items audited * population of items
2) point estimate = total book value of population - projected error
incentive/pressure
incentive is a reason to commit fraud. Pressure is from outside or inside sources to prompt someone to commit fraud to meet expectations
opportunity
allows a misrepresentation to occur, such as known deficiencies of internal control
rationalization/attitudes
rationalization is where employee has a mindset to justify misrepresentation. Attitudes can be that mgmt disregards lack of internal controls or deficiencies to meet certain goals
misappropriation of assets
the theft of the entity’s assets
fraudulent financial reporting
involves intentional misstatements, such as omission of amts or disclosures in F/S to deceive F/S users
why is it important to review repair and maintenance expense?
because there could be errors in accidentally expensing PP&E when they should actually be capitalized and treated as additions
why is it important to look at sales returns?
to substantiate mgmt claims of increasing sales, where if there are large sales returns, it actually means that company shipped more goods before year end than what customers actually ordered (to inflate sales)
assessing control risk too low
auditor believes controls are on the whole operating effectively when they really are not
-refer to effectiveness of audit
assessing control risk too high
auditor believes controls are not operating effectively when they really are
-refer to efficiency of audit
risk of incorrect acceptance
auditor believes the sample supports the conclusion that the account balance is not materially misstated when it is
-refer to effectiveness of audit
risk of incorrect rejection
auditor believes the sample supports the conclusion that the account balance is materially misstated when it is not
-refer to efficiency of audit
attribute sampling
type of statistical sampling that measures rate of occurrence of a particular characteristic. Deals with yes or no questions and sometimes used to test internal controls
tolerable deviation rate
the maximum rate of deviation from a prescribed procedure auditor willing to accept without modifying reliance on control
sample deviation rate
used to estimate the amount of errors in the population
expected deviation rate
auditor’s best estimate of rate of deviation from a prescribed control procedure. If do not expect great number of deviations, okay with smaller sample size
upper deviation rate calc
sample deviation rate + allowance for sampling risk
if the upper deviation rate is less than or equal to the tolerable deviation rate…
auditor can rely on control and vice versa
what does the auditor do if upper deviation rate is greater than tolerable deviation rate?
1) select and test compliance with some other identified control
OR
2) modify nature, extent, or timing of related substantive tests to reflect reduced reliance
variables sampling
a statistical sampling method used primarily in substantive testing to estimate numerical measurement of a population, like dollar value
-gain reasonableness of monetary amounts
stratification
sample items separated into homogeneous groups and these groups are treated as separate populations and generally results in reduced sample sizes. Generally used for highly variable recorded amts
projected misstatement
an estimate of the total error in a population based on errors found in a sample taken from population
