chapter 5 Flashcards
Variable sampling (numerical quantity)
Used in substantive testing of account balances. Estimate of $$
Attribute sampling (rate of occurrence)
Primarily used to test IC
Statistical sampling
Auditors specifies accepted sampling risk and then calculate the sample size.
Quantitative approach – judgment required
Non-statistical sampling
Sample size is not determined mathematically - results evaluated judgmentally
Planning consideration - attribute sampling
1) objective of controls
2) tolerable deviation rate
3) auditors allowable risk of assessing control risk too low
4) characteristics of the population
Upper deviation rate
What auditor concerned with – worst case scenario
Steps for testing controls/attribute sampling
1) define the objective of the test
2) define the population
3) define the sampling unit
4) define the attributes of interest
5) determine the sample size
Discovery sampling
Used for detecting fraud/critical items; when auditor believes the population deviation rate is zero or near zero
Planning consideration - variable sampling
1) the relationship of the sample to the relevant audit objective
2) preliminary estimates of materiality levels
3) auditor allowable risk of incorrect acceptance
4) characteristics of the population
Variable sampling plan: ratio estimation
Plan uses the ratio of the audited values of items to their book values to project the true population
Variable sampling plan: mean-per-unit estimation
Plan that uses the avg value of the items in the sample to estimate the true population value. Doesn’t require book value
Variable sampling plan: Difference estimation
Sampling plan that uses the avg difference btwn the audited values of items and their book values. Used instead of ratio estimation when the differences are not nearly proportional to book values
Steps for testing variable/substantive testing sampling
1) define the objective of the test
2) define the population
3) define the sampling unit
4) determine sample size
PPS sampling
Technique where the sampling unit is defined as an individual dollar in a population
Advantages of PPS Sampling
1) automatically emphasizes larger items by stratifying the sample.
2) if no errors are expected PPS sampling generally required a smaller sample than other methods
DisAdvantages of PPS Sampling
Zero balances, negative balances and understated balances generally require special design considerations
Indicators of material weakness
- ID of any type of fraud perpetrated by senior mgmt
- restatement of previously issued FS
- ID by the auditor of a material misstatement that would not have been detected
- ineffective oversight by those charged with governance
NONISSUER – Communicate the deficiency to mgmt in writing
Significant deficiency and material weakness
NONISSUER – Communicate to mgmt only: either orally or in writing
Control deficiency
NONISSUER – Communicate the deficiency to those charged with governance in writing
Significant deficiency and material weakness
Written communication of significant deficiencies should include:
- the definition of the term material weakness and the definition of the term sig deficiency
- description of the sig def including an explanation of their potential effects
- stmts to say to governance
- restriction regarding the use of communication
Enable those in governance to understand context of communication
Say:
1) purpose of the audit was for the auditor to express an opinion
2) audit included consideration of internal control
3) auditor is not expressing an opinion on the effectiveness of internal control
NONISSUER – Communication should be made within 60 days of the report release date:
Control deficiency, significant deficiency and material weakness
Nonissuer: FS Audit vs. Exam of Internal Control — Purpose of FS audit
enable the auditor to plan the audit and determine the nature, extent and timing of tests to be performed
Nonissuer: FS Audit vs. Exam of Internal Control — Purpose of examination of Internal Control
express an opinion about whether the entitiy maintained, in all material respects, effective internal control as of a point in time based on the control criteria.
Nonissuer: FS Audit vs. Exam of Internal Control — Relevant Period
an examination of IC results in an opinion on IC as of a point in time, while an opinion on the FS relates to a longer period of time, such as a year
Nonissuer: FS Audit vs. Exam of Internal Control — Extent of Testing
consideration of IC in a FS Audit is more limited than that of an examination of the effectiveness of the entity’s IC.
Nonissuer: FS Audit vs. Exam of Internal Control — communication of control deficiences
FS Audit = communication of significant deficiences and material weaknesses should include RESTRICTED USE LANGUAGE;
Audit of IC - no restriction on the use of the report required
Nonissuer: FS Audit vs. Exam of Internal Control — communication of control deficiencies
FS Audit - Communication of significant deficiencies and material weaktness done within 60 days of report release date; examination of IC communication made by report release date.
FCPA - Foreign Corrupt Practices Act
includes provisions regarding IC for certain entities; compliance with is a legal determination; an examination under SSAE would not be sufficient to determine compliance
Functions of Audit Committees
- Selects and appoints the independent auditor and sets the audit fee
- ensures recommendations by auditor are given proper attention
- assures that the auditor is independent of the company
- reviews the quality of the auditors work
- reviews scope of the audit
- Evaluates IC of the company with the help of the independent auditor
Mgmt Representation letter
Failure to obtain a rep. letter = scope limitation
Signficant Audit Findings – all of governance not involved with managing the entity - communicate:
- significant issues
- material, corrected misstatements brought to mgmts attention
- mgmt representations requested
- mgmt consulation with other accountants
Purposes of Representation letter
- to confirm representations explicitly or implicitly given to the auditor
- to indicate and document the continuing appropriatenss of such representations
- to reduce the possibility of misunderstanding concerning matters that are subject of the representation
Representation requirements
1) Final piece of evidential matter
2) Letter is Mandatory
3) Dated same date as audit report
4) signed by CEO and CFO
5) Representations
6) Materiality
7) Doubt about the reliability of written representations
Significant Audit Findings - Communicate:
- auditors views about aspects of the entity’s accounting practices
- significant difficulties encountered in performing the audit
- disagreements with mgmt
- uncorrected, nontrivial misstatements and their possible effect on the audit
- any circumstances that may appear to impair independence
Contents of mgmt representation letter
1) FS
2) Completeness of Information
3) Fraud
4) Laws and Regulations
5) Uncorrected Misstatements
6) Litigation and Claims
7) Estimates
8) Related Party Transactions
9) Subsequent Events
ISSUER – Communicate deficiency to mgmt, in writing, and inform the audit committee that communication as been made
control deficiency, significant deficiency, material weakness
ISSUER – Communicate the deficiency to the audit committee, in writing
signficant deficiency and material weakness
Managements report on Internal Control
1) Indicate that mgmt is responsible for IC
2) Describe the subject matter of the examination
3) identify the criteria used by mgmt to measure the effectiveness of the entitys IC
4) Include a stmt of mgmts assertion about the effectiveness of IC, including ‘as of’ date
5) Describe any material weaknesses ID’d by mgmt
ISSUER – Communication (to mgmt & audit committee) should be made prior to the issuance of the auditors report on internal control
Material weakness
USE of Service Organizations
1) obtain an understanding of relevant controls
2) obtain evidence that controls are operating effectively
written communication of significant deficiences and material weaknesses should include:
1) definition of the term material weakness and the definition of the term significant deficiency
2) description of the sig deficiences and material weaknesses
3) sufficient info to enable those charged with governance and mgmt to udnerstand the context of the communication
4) restriction regarding the use of the communication to mgmt
what affects sample size
expected amount of mistatements in population and measure of tolerable misstatement
communication regarding significant deficiencies to mgmt and governance
REQUIRED
