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AUD > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

In an audit, what stage are analytical procedures performed ?

A

In the planning stage

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2
Q

What do analytical procedures focus on?

A

Unusual transactions and events that might be significant to financial statements and/or represent risks.

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3
Q

An auditor’s primary objective for performing procedures is to obtain….

A

Knowledge neccessary for risk assessment and audit planning

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4
Q

A planning stage of an audit includes what type of procedures?

Ex: Comparison of the financial statements with budgeted or anticipated results, unaudited information from internal quarterly reports

A

The application of analytical procedures

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5
Q

As part of an issuer’s audit, for their risk assessment procedures, PCAOB recommends the auditor to develop an understanding of the client’s…..over financial reporting

A

Internal control

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6
Q

A stage in the business cycle when economic activity is at its lowest point with no positive indicators for the future is a

Firms often try to reduce the size of their workforce and reduce other costs.

A

Trough

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7
Q

In what stage of the business cyle would this most likely be?

Scenario: Capacity constraints and labor shortages are likely to put upward pressure on the overall price level

A

Peak

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8
Q

What occurs in a contractionary phase?

This phase follows a peak and firm profits will generally be decreasing

A

A decrease in economic activity

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9
Q

What occurs in a expansionary phase?

Firm profits will generally be increasing, because the demand for goods and services is increasing. Examples include: GDP increases, firms’ profits rise, and the demand for goods and services increases

A

Rising economic activity and growth

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10
Q

Name the normal sequence of a business cycle.

A
  1. Expansion
  2. Peak
  3. Contraction
  4. Trough
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11
Q

Difference between a lagging economic indicator and a leading economic indicator

A

Lagging economic indicators tend to follow economic activity, or occur as result of economic activity (i.e. “after the fact”)

Leading economic indicators tend to occur before the fact or predict economic activity

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12
Q

What is the economic indicator?

  • The average length of the workweek
  • money supply
  • prices of selected stocks
  • orders for goods
  • price changes of materials
  • index of consumer expectations
  • building permits
A

Leading

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13
Q

What is the indicator?

  • Inventories-to-sales ratios
  • prime rate charged by banks
  • bank loans outstanding
  • consumer debt-to-income ratio
  • The length of time, on average, that job seekers are unemployed

“after the fact”

A

Lagging

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14
Q

What is the indicator?

  • number of employees on nonagricultural
  • payrolls
  • production
  • sales
A

Coincident

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15
Q

The indicator that changes approximately the same time as the whole economy is what?

A

Coincident economic indicator

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16
Q

Difference between a preventative control and a detective control

A

Preventitve controls are performed before to provide reasonable assurance that only valid transactions are recognized, approved, and submitted for processing.

Detective controls are performed after to provide reasonable assurance that errors or irregularities are discovered and corrected on a timely basis.

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17
Q

Define an inherent limitation

Think management override

A

A limitation that prevents seemingly good controls from working

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18
Q

True or false?

Preforming preliminary test of controls over selected transaction cycles is not a recommended risk assessment procedure by PCAOB Standards

A

True; preforming test of controls is done after the auditors completes his/hers risk assessment

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19
Q

When would you use manual controls?

A

For large, unusual, or nonrecurring transactions

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20
Q

What is the phrase?

…of audit evidence refers to its quality such as accuracy, completeness, authenticity, and susceptibility to management bias

A

Reliability

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21
Q

…of audit evidence refers to the amount of corroborative evidence obtained

A

Sufficiency

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22
Q

True or false?

In obtaining an understanding of a manufacturing entity’s controls concerning inventory balances, an auditor most likely would review the entity’s descriptions of inventory controls

A

True

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23
Q

An overall response to address a high-assessed risk of material misstatement at the financial statement level of a nonissuer may include:

A

Providing more supervision of the audit team

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24
Q

These factors relate to which risk? Control or Inherent Risk?
Complexity, subjectivity, change, uncertainty, management bias or fraud risk, significance, and volume or lack of uniformity

A

Inherent Risk

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25
Q

What type of account would yield the highest level of evidence?
* Accounts receivable
* Travel and entertainment expense
* Interest expense
* Accounts payable
E.g. Relationships involving transactions

A

Interest Expense; because they represent transactions over a period of time rather than at one point in time.

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26
Q

What does an auditor’s inspection involve?

A

Examining records or documents (inspection and examination are often used interchangeably)

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27
Q

Analytical procedures tend to focus on…

A

Relationships between financial data that are more predictable

An auditor typically develops an expectation and compares it to what is actually recorded

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28
Q

True or False

Balance sheet transactions are typically less predictable and require analytical procedures to test transactions.

A

False; balance sheet accounts are more predictable since they represent an amount at a point in time

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29
Q

The auditor should trace the…to the….to detect overstatements of sales

A

Accounting records to the source documents

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30
Q

True or False

In the final review stage of an audit, considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

A

True

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31
Q

What is the assertion?

The auditor starts with source documents and then traces transaction information to client’s journal entries.

A

Completeness

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32
Q

Describe the completeness assertion

Reconciliation processes to identify missing transactions

A

The completeness assertion relates to the recording of all transactions

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33
Q

Describe the accuracy assertion

Automated checks can detect and correct data entry errors

A

The accuracy assertion relates to controls recorded correctly

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34
Q

Materially misstatements refer to…testing

A

Substantive Testing

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35
Q

Materially deviation refer

A

Test of Controls

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36
Q

What is the next action taken by an auditor that discovers lawsuits filed against a client?

A

Have the client assess the degree of profitability of an unfavorable outcome for the company

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37
Q

Audit Procedures regarding authorization, valididty, completenesss, accuracy, appropriate classification, accounting in conformity with GAAP, and proper period, are substantive testing or test of controls?

A

Test of Controls

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38
Q

Audit procedures regarding dollar amounts such as account balances or amounts, valuation, presentation, and disclosures are test of controls or substantive testing?

A

Substantive Testing

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39
Q

Confirmations involve….

A

Obtaining representation from external third parties regarding account balances or transations

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40
Q

Inquiry involves…

A

Questioning

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41
Q

Observation involves…

A

Observing or watching procedures

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42
Q

Recalculation consist of….

A

Checking the mathematical accuracy of documents or records either manually or electronically

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43
Q

Reperformance involves…

A

The independent execution of procedures that were originally performed as part of the entity’s internal control

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44
Q

Analytical procedures involve…

A

The comparison of an account balance from period to period looking for unusual variances

45
Q

Define tolerable deviation rate

Tolerable deviation has an inverse relationship with sample size

A

The maximum rate of deviation from a prescribed procedure the auditor will tolerate without modifying planned reliance on control

46
Q

Define deviation rate

Expected deviation rate has a direct relationship with sample size

A

The auditor’s best estimate in the population from which the sample was selected

47
Q

Sampling

Deviation Rate < Tolerable Rate
means:

A

Assess control risk low/medium and controls are operating effectively

48
Q

Population

Deviation Rate > Tolerable Rate
means:

A

Assess control risk high and controls are not operating effectively

49
Q

If the upper deviation rate is less than or equal to the tolerable deviation rate, the auditor may rely or not rely on the control?

A

Rely

50
Q

If the upper deviation rate exceeds the auditor’s tolerable deviation rate, the auditor may rely or not rely on the control?

A

Not rely

51
Q

Difference between incorrect acceptance versus incorrect rejection

A

Incorrect acceptance (wrongly accepted) supports the conclusion that the account balance is not materially misstated (due to sample size not being representative of population)

Incorrect rejection (wrongly rejected) supports the conclusion that the account balance mistakenly indicates a material misstatement

52
Q

Sampling risks and deviations refer to…

A

Either risk of assessing control risk too low or risk of assessing control risk too high

53
Q

Sampling risks and misstatements refer to…

A

Risk of incorrect acceptance or risk of incorrect rejection

54
Q

What does it mean to reduce planned reliance on controls?

A

To reassess control risk as high

55
Q

Both the risk of incorrect acceptance and the risk of assessing control risk too low relates to:

A

The effectiveness of an audit

56
Q

The risk of incorrect rejection and the risk of assessing control risk too high relates to:

A

The efficiency of an audit

57
Q

True or false?

The stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually produces an estimate having a desired level of percision with a smaller sample size

A

True

58
Q

True or False?

A low level of tolerable misstatement necessitates a larger sample size.

Tolerable deviation has an inverse relationship with sample size

A

True

59
Q

True or false

The risk of assessing control risk too low has an inverse relationship with sample size

A

True

60
Q

Formula

Upper Deviation Rate

A

Sample deviation rate + Allowance for sampling risk = Upper deviation rate

61
Q

Formula

Mean-per-unit Estimation

A

Average audited value x number of items in population

Average Audited Value is the Audit Value / # of items in sample

62
Q

Formula

Ratio Estimation

A

(Audited book value / book value of sample) x total book value

63
Q

Formula

Difference Estimation

2 steps

A
  1. Calculate projected error
    * [(Book value of sample -audited value of sample) / # of items in sample] x population items
  2. Calculate point estimate
    * Total book value of population - projected error
64
Q

Formula

Sampling Interval

A

Tolerable misstatement / Reliability factor

65
Q

Formula

Sampling Size

A

Recorded amount of population / Sampling Interval

66
Q

Documentation may include:

FIND

A
  1. Flowchart (for complex control structures)
  2. Internal Control Questionnaire or Checklists (yes or no questions)
  3. Narrative (for less complex control structures)
  4. Documentation from the client, including copies of the entity’s procedures manuals and organizational charts
67
Q

What do dual-purpose tests test?

A

Dual-purpose tests test of controls and test of details

68
Q

True or false

Under substantive procedures, test of details provides less assurance.

A

False, test of details provides more assurance

69
Q

True or false

Under substantive procedures, substantive analytical procedures provides less assurance.

A

True

70
Q

True or false

It is the auditor’s responsibility for preventing noncompliance

A

False, the auditor is not responsible for noncompliance, the auditor is responsible for obtaining reasonable assurance that the financial statements are free of material misstatement due to noncompliance with laws and regulations.

71
Q

Define cleary inconsequential

A

Less than material

72
Q

Fill in the blank

The higher the risk of material misstatement the more…

A

Persuasive evidence is needed

73
Q

Define an auditor’s point estimate

A

An amount, or range of amounts, developed by the auditor in evaluating management’s point estimate

74
Q

Fill in the blank

The client’s recorded estimate - best estimate supported by the audit evidence is equal to the…

A

Misstatement

75
Q

Fill in the blank

The client’s recorded estimate - the closest estimate in range to recorded amount is equal to the…

A

Range of reasonable estimate

76
Q

What do you if a loss is probable?

A
  1. If you can estimate the loss, accrue and disclose
  2. If you cannot estimate the loss, disclose
77
Q

What do you if a loss is reasonably possible?

A
  1. If you can estimate the loss, disclose
  2. If you cannot estimate the loss, disclose
78
Q

What do you do if a loss is remote?

A

Generally ignore unless it is a DOG Guarantee
D - Debt of others guaranteed
O - Obligations of commercial banks
G - Guarantees of repurchase A/R sp;d

79
Q

If an auditor has substantial doubt about the entity’s ability to continue as a going concern, when should an auditor report this for FASB and GASB?

A

FASB - 1 year after the date of the financial statements are issued (or available to be issued as applicable); this is true for special purpose frameworks
GASB - 1 year beyond the date of the financial statements

80
Q

What are factors that may indicate substantial doubt?

FINE

A
  1. Financial difficulties
  2. Internal Matters
  3. Negative trends
  4. External matters
81
Q

Difference between corroborating evidence versus contradictory evidence

A

Corrobating evidence is proof that evidence is correct (e.g. meeting minutes, confirmations, etc.)
Contradictory evidence is proof that evidence is incorrect

82
Q

What are the 5 biases that impact auditors?

A
  1. Availability bias
  2. Confirmation bias
  3. Overconfidence bias
  4. Anchoring bias
  5. Automation bias
83
Q

What are the standard audit procedures used in audits as risk assessment procedures, test of controls, or substantive test?

C the FIVE CARROT WARS

A
  1. Confirmation
  2. Footing, Cross-footing, and recalculation
  3. Inquiry
  4. Vouching
  5. Examination/Inspection
  6. Cutoff review
  7. Analytical procedures
  8. Reperfomance
  9. Reconcilation
  10. Observation
  11. Tracing
  12. Walk-through
  13. Auditing related accounts simultaneously
  14. Representation letter
  15. Subsequent events review
84
Q

True or false

Analytical procedures are required in the planning and final review stage of an audit.

A

True

85
Q

True or false

Substantive procedures are required as an analytical procedure of an audit.

A

False

86
Q

What are the methods that provide a level assurance (from least to greatest) that an auditor uses to develop their expectation?

A
  1. Trend analysis
  2. Ratio analysis
  3. Nonstatistical predictive modeling*
  4. Regression analysis*

*Auditors typically use these method because it provides the highest level of assurance

87
Q

Fill in the blank

Directional testing for existence is when you go from…

Vouching is often used for existence

A

The record to the source

(i.e. you start from big to small)

88
Q

Directional testing for completeness is when you go from…

Tracing is often used for completeness

A

The source to the record

(i.e. you start from small to big)

89
Q

Vouching is used to test overstatements or understatments?

A

Overstatements

90
Q

Tracing is used to test overstatements or understatements?

A

Understatements

91
Q

The most relevant assertions for account balances (asset, liability, and equity balances) and disclosures are:

CVERUP

A
  1. Completeness
  2. Valuation, Allocation, and Accuracy
  3. Existence
  4. Rights and Obligations
  5. Understandability of Presentation and Classification

*The auditor focuses on testing the existence assertion rather than the completeness assertion because assets for example are more likely to be overstated (existence) than understated (completeness). The auditor focuses on testing the completeness assertion for liability balances, because liabilitities are more likely to be understated than overstated

92
Q

The most relevant assertions for transactions, events, and disclosures are:

COVEUP

A
  1. Completeness
  2. Occurence*
  3. Valuation, Allocation, and Accuracy
  4. Existence*
  5. Understandability of Presentation and Classification

*The auditor typically focuses on testing the existence and occurrence rather than the completeness assertion because revenues for example are more likely to be overstated (existence) than understated (completeness). The auditor focuses on testing the completeness assertion for expense transactions, because expenses for example are more likely to be understated than overstated

93
Q

List the auditing procedures for the completeness assertion:

A
  1. Tracing
  2. Analytical review
  3. Observation
94
Q

List the auditing procedur for the cutoff assertion:

A
  1. Cutoff procedures
95
Q

List the auditing procedures for the valuation, allocation, and accuracy assertion:

A
  1. Inspection
  2. Footing
  3. Independent recalculation
  4. Reconciliation
96
Q

List the auditing procedures for the existence and occurence assertion:

A
  1. Confirmation
  2. Observation, inspection, and examination
  3. Vouching
97
Q

List the auditing procedures for the rights and obligation assertion:

A
  1. Inspection
  2. Confirmation
98
Q

List the auditing procedures for the understandability of presentation and classification assertion:

A
  1. Inspection
  2. Review
  3. Inquiry of management
99
Q

Audit sampling methods can be either statistical or nonstatistical. Both approaches are allowed by GAAS, but requires the use of professional judgement. What is the difference between both sampling methods?

A

Statistical include quantative samples
Nonstatistical include samples based on the auditor’s professional judgement (i.e. not determined mathematically)

100
Q

What is management’s assertion?

An auditor’s purpose in reviewing credit rating of customers with delinquent accounts receivable

A

Valuation and allocation

101
Q

If the assessed level of control risk is high, an auditor would probably…
Scenario: A client maintains perpetual inventory records in both quantities and dollars

A

Request the client to schedule the physical inventory count at the end of the year.

102
Q

True or false

Interim testing is permitted when the risk of material misstatement is low.
Scenario: Well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts

A

True

103
Q

True or false

Review of vendor list for fictious vendors in the system would not be effective for detecting misstatements of inventory item pricing schedules.

A

True

104
Q

What is the assertion?

Performing cutoff procedures for shipping and receiving

A

Completeness

105
Q

What are the four categories of information included in the management’s representation letter?

A
  1. Financial statements
  2. Completeness
  3. Recognition
  4. Measurement, and disclosure; and subsequent events.
106
Q

True or false

All material weaknesses are signifcant deficiencies

A

True

107
Q

True or false

All significant deficiencies are material weaknesses

A

False

108
Q
A

AUD (8 decks)

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