chapter 5

Question 1

Variable sampling (numerical quantity)

Answer 1

Used in substantive testing of account balances. Estimate of $$

Question 1

Attribute sampling (rate of occurrence)

Answer 1

Primarily used to test IC

Question 2

Statistical sampling

Answer 2

Auditors specifies accepted sampling risk and then calculate the sample size.
Quantitative approach – judgment required

Question 3

Non-statistical sampling

Answer 3

Sample size is not determined mathematically - results evaluated judgmentally

Question 4

Planning consideration - attribute sampling

Answer 4

1) objective of controls
2) tolerable deviation rate
3) auditors allowable risk of assessing control risk too low
4) characteristics of the population

Question 5

Upper deviation rate

Answer 5

What auditor concerned with – worst case scenario

Question 6

Steps for testing controls/attribute sampling

Answer 6

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

Question 7

Discovery sampling

Answer 7

Used for detecting fraud/critical items; when auditor believes the population deviation rate is zero or near zero

Question 8

Planning consideration - variable sampling

Answer 8

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

Question 9

Variable sampling plan: ratio estimation

Answer 9

Plan uses the ratio of the audited values of items to their book values to project the true population

Question 10

Variable sampling plan: mean-per-unit estimation

Answer 10

Plan that uses the avg value of the items in the sample to estimate the true population value. Doesn’t require book value

Question 11

Variable sampling plan: Difference estimation

Answer 11

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

Question 12

Steps for testing variable/substantive testing sampling

Answer 12

1) define the objective of the test
2) define the population
3) define the sampling unit
4) determine sample size

Question 13

PPS sampling

Answer 13

Technique where the sampling unit is defined as an individual dollar in a population

Question 14

Advantages of PPS Sampling

Answer 14

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

Question 15

DisAdvantages of PPS Sampling

Answer 15

Zero balances, negative balances and understated balances generally require special design considerations

Question 16

Indicators of material weakness

Answer 16

• 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

Question 17

NONISSUER – Communicate the deficiency to mgmt in writing

Answer 17

Significant deficiency and material weakness

Question 18

NONISSUER – Communicate to mgmt only: either orally or in writing

Answer 18

Control deficiency

Question 19

NONISSUER – Communicate the deficiency to those charged with governance in writing

Answer 19

Significant deficiency and material weakness

Question 20

Written communication of significant deficiencies should include:

Answer 20

• 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

Question 21

Enable those in governance to understand context of communication

Answer 21

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

Question 22

NONISSUER – Communication should be made within 60 days of the report release date:

Answer 22

Control deficiency, significant deficiency and material weakness

Question 23

Nonissuer: FS Audit vs. Exam of Internal Control — Purpose of FS audit

Answer 23

enable the auditor to plan the audit and determine the nature, extent and timing of tests to be performed

Question 24

Nonissuer: FS Audit vs. Exam of Internal Control — Purpose of examination of Internal Control

Answer 24

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.

Question 25

Nonissuer: FS Audit vs. Exam of Internal Control — Relevant Period

Answer 25

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

Question 26

Nonissuer: FS Audit vs. Exam of Internal Control — Extent of Testing

Answer 26

consideration of IC in a FS Audit is more limited than that of an examination of the effectiveness of the entity’s IC.

Question 27

Nonissuer: FS Audit vs. Exam of Internal Control — communication of control deficiences

Answer 27

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

Question 28

Nonissuer: FS Audit vs. Exam of Internal Control — communication of control deficiencies

Answer 28

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.

Question 29

FCPA - Foreign Corrupt Practices Act

Answer 29

includes provisions regarding IC for certain entities; compliance with is a legal determination; an examination under SSAE would not be sufficient to determine compliance

Question 30

Functions of Audit Committees

Answer 30

• 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

Question 31

Mgmt Representation letter

Answer 31

Failure to obtain a rep. letter = scope limitation

Question 32

Signficant Audit Findings – all of governance not involved with managing the entity - communicate:

Answer 32

• significant issues
• material, corrected misstatements brought to mgmts attention
• mgmt representations requested
• mgmt consulation with other accountants

Question 33

Purposes of Representation letter

Answer 33

• 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

Question 34

Representation requirements

Answer 34

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

Question 35

Significant Audit Findings - Communicate:

Answer 35

• 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

Question 36

Contents of mgmt representation letter

Answer 36

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

Question 37

ISSUER – Communicate deficiency to mgmt, in writing, and inform the audit committee that communication as been made

Answer 37

control deficiency, significant deficiency, material weakness

Question 38

ISSUER – Communicate the deficiency to the audit committee, in writing

Answer 38

signficant deficiency and material weakness

Question 39

Managements report on Internal Control

Answer 39

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

Question 40

ISSUER – Communication (to mgmt & audit committee) should be made prior to the issuance of the auditors report on internal control

Answer 40

Material weakness

Question 41

USE of Service Organizations

Answer 41

1) obtain an understanding of relevant controls

2) obtain evidence that controls are operating effectively

Question 42

written communication of significant deficiences and material weaknesses should include:

Answer 42

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

Question 43

what affects sample size

Answer 43

expected amount of mistatements in population and measure of tolerable misstatement

Question 44

communication regarding significant deficiencies to mgmt and governance

Answer 44

REQUIRED