Performing Further Procedures & Obtaining Evidence

Question 1

audit evidence - sufficiency, appropriateness

Answer 1

sufficiency: measure of the quantity of audit evidence

appropriateness: measure of the quality of evidence; i.e. relevance and reliability in providing support for conclusions on which auditor’s opinion is based

if audit evidence or results of an audit procedures are inconsistent with other evidence or other audit procedure then auditor must determine whether modifications or additions to audit procedure are necessary to resolve such inconsistencies in or doubts about reliability of audit evidence

Question 2

audit evidence - reasonable assurance

Answer 2

reasonable assurance: obtained when auditor has obtained sufficient appropriate evidence to reduce audit risk (risk that auditor expresses an inappropriate opinion when FS are materially misstated) to an acceptably low level

Question 3

The (higher or lower?) the assessment of risk, the (more or less?) persuasive evidence is needed to respond to the risk.

Answer 3

The higher the assessment of risk, the more persuasive evidence is needed to respond to the risk.

Question 4

As the quality of audit evidence (increases or decreases?), the need for additional corroborating audit evidence (increases or decreases?).

Answer 4

As the quality of audit evidence increases, the need for additional corroborating audit evidence decreases.

Question 5

reliability of audit evidence: (when is it more reliable?)

Answer 5

1) audit evidence is more reliable when obtained from knowledgeable independent sources outside the entity
2) internally generated audit evidence is more reliable when the related controls are more effective
3) audit evidence obtained directly by auditor (observation of control) may be more reliable than that obtained indirectly or by inference (inquiry about control)
4) audit evidence is more reliable when exists in documentary form (paper, electronic)
5) original documents are more reliable than photo copies or facsimiles

Question 6

reliability of information to be used as audit evidence is affected to varying degrees by the following attributes:

Answer 6

1) accuracy - info transferred from original medium to electronic or digitized format, reliability depends on controls over info’s transformation and maintenance
2) completeness - when significant amount of data is electronically initiated/recorded and is only available in electronic form, sufficiency and appropriateness of audit evidence usually depends on controls over accuracy and completeness
3) authenticity - when a document may not be authentic, additional audit procedures are necessary: confirming directly with 3rd party, using work of specialist to assess document’s authenticity
4) susceptibility to mgmt bias - (usually internally generated information) considered less reliable than information with less susceptibility to mgmt bias, auditor must exercise professional judgment to determine
a) ability of entity to influence external information source
b) mgmt’s selection of information for external source known to be favorably biased toward corroborating mgmt’s assertions of the information
c) external information, which is less likely to be subject to influence if provided to the public for free or to a wide range of users for payment/fee

Question 7

The auditor should obtain audit evidence to draw reasonable conclusions on which to base the audit by performing audit procedures to: (what are risk assessment procedures, substantive procedures, tests of controls?)

Answer 7

1) risk assessment procedures: obtain understanding of entity and its environment, incl IC to assess risks of material misstatement at FS and relevant assertion levels
2) substantive procedures: tests of details or classes of transactions, account balances and disclosures, and substantive analytic procedures to detect material misstatements at the relevant assertion level
(audit procedures include: inspection of records or documents, inspection of tangible assets, observation, remote observation tools, inquiry, confirmation, recalculation, reperformance, analytical procedures (study of plausible relationships among financial and nonfinancial data))
3) tests of controls: test operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertion level

Question 8

substantive procedures include: FIVE CARROT CARS

Answer 8

footing
inquiry
vouching
examination
confirmation
analytical procedures
reperformance
reconciliation
observation
tracing
cutoff review
audit related accounts
subsequent events review

Question 9

Reg S-K annual report on internal control over financial reporting

Answer 9

Regulation S‐K under the securities laws requires management to provide an annual report on internal control over financial reporting. In this report, management must make statements, or assertions, about
the entity’s internal control. One of these statements is whether or not the internal control over financial reporting is effective. Management’s discussion must include disclosure of any material weaknesses in the entity’s internal control.
Management is not permitted to conclude that the entity’s internal control is effective. The auditor must identify procedures to validate the completeness and accuracy of data and information obtained from management
If one or more material weaknesses are detected, more substantive audit test work will be required.
With this report, the entity must include an attestation report from a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB). The attestation report provides an opinion on the
effectiveness of the entity’s internal control over financial reporting. As issuers are required to have their financial statements audited as well, the auditor integrates the two
audits (audit of internal control over financial reporting and audit of the financial statements).

Question 10

Do controls sufficiently address risks of material misstatement?
What to consider -

Answer 10

controls over significant unusual transactions, particularly late or unusual JEs
controls over JE made at year end
controls over related party transactions
controls related to significant estimates
controls that mitigate incentives for and pressure on mgmt to falsify or manage financial results

Question 11

to integrate the audit of IC over financial reporting and the audit over the financial statements, auditor should design testing of controls to accomplish the objectives of both audits simultaneously:

Answer 11

a) to obtain sufficient evidence to support the auditor’s opinion on internal control over financial reporting as of year‐end and
b) to obtain sufficient evidence to support the auditor’s control risk assessments for purposes of the audit of financial statements.

Obtaining sufficient evidence to support control risk assessments of low for purposes of the financial statement audit ordinarily allows the auditor to reduce the amount of audit work that otherwise would have been necessary to provide an opinion on the financial statements.

Question 12

auditor should design sufficient tests of controls to obtain sufficient appropriate audit evidence that the controls are operating effectively throughout the period of reliance, considering following factors:

Answer 12

frequency of performance of control
length of time relied upon the effectiveness of control
relevance and reliability of audit evidence obtained to support control preventing/detecting/correcting material misstatements at relevant assertion level
extent that audit evidence is obtained from tests of other controls related to the relevant assertion
extent to which auditor plans on relying on the operating effectiveness of the control in the assessment of risk
expected deviation from control

Question 13

When the auditor has determined that it is not possible or practicable to reduce the risks of material misstatement at the relevant assertion level to an acceptably low level with audit evidence obtained only from substantive procedures, should perform tests of controls to obtain audit evidence about their operating effectiveness.

If auditor plans to rely on controls that have not changed since they were last tested, the auditor should test the operating effectiveness of such controls at least once in every third audit (while a shorter period of reliance may be necessary).

In considering whether it is appropriate to use audit evidence about the operating effectiveness of controls obtained in prior audits and, if so, the length of the time period that may elapse before retesting a control, the auditor should consider:

Answer 13

1) effectiveness of other elements of IC, incl control environment, entity’s monitoring of controls, entity’s risk assessment
2) risks arising from characteristics of control, incl whether control is manual or automated
3) effectiveness of IT controls
4) effectiveness of control and application of the control by entity, incl nature and extent of deviations in application of control in tests during prior audits
5) whether lack of change in particular control poses risk due to changing circumstances
6) risk of material misstatement and extent of reliance on control

Question 14

The (more or less?) the auditor relies on the operating effectiveness of controls in the assessment of risk, the (greater or lesser?) is the extent of the auditor’s tests of controls. In addition, as the rate of expected deviation from a control (increases or decreases?), the auditor should (increase or decrease?) the extent of testing of the control.

Answer 14

The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the greater is the extent of the auditor’s tests of controls. In addition, as the rate of expected deviation from a control increases, the auditor should increase the extent of testing of the control.

Question 15

auditor bias:
1) availability bias -
2) confirmation bias -
3) overconfidence bias -
4) anchoring bias -
5) automation bias -

Answer 15

auditor bias:
1) availability bias - tendency to place more weight on events or experiences at top of mind or more readily available than those not
2) confirmation bias - tendency to place more weight on information that corroborates an existing belief
3) overconfidence bias - tendency to overestimate one’s own ability to make accurate assessment of risk or other judgments or decisions
4) anchoring bias - tendency to use initial piece of information as anchor against which subsequent info is inadequately assessed
5) automation bias - tendency to favor output generated from automated systems, even when human reasoning or contradictory information raises questions about whether such output is reliable or fit for purpose

Question 16

8 types of legal evidence:

Answer 16

1) best evidence (provides primary evidence) - examination of cash receipts to prove evidence of collectibility; reconciling shipping records to recorded sales provides evidence about completeness of recirded revenues
2) secondary evidence (cannot be relied upon)
3) direct evidence (no presumptions or inferences are required)
4) circumstantial evidence (doesn’t directly prove existence of primary fact)
5) conculsive evidence (does not directly provide existence of primary fact)
6) corroborative evidence (additional evidence of a different character)
7) opinion evidence (based on seeing or hearing; expert opinion permitted)
8) hearsay evidence (second-hand evidence; not admissible)

Question 17

AUDIT RISK =

Answer 17

AUDIT RISK = (INHERENT RISK X CONTROL RISK = RISK OF MATERIAL MISSTATEMENT) X (ANALYTIC PROCEDURES X TESTS OF DETAILS = DETECTION RISK)

Question 18

RMM higher = DR lower/higher?

Answer 18

if risk of material misstatement is higher it means that the acceptable level of detection risk should be lower; more substantive procedures needed

Question 19

RMM lower = DR lower/higher?

Answer 19

if risk of material misstatement is lower it means that the acceptable level of detection risk can be higher; less substantive procedures are necessary

Question 20

inherent risk =
control risk =
detection risk =

Answer 20

inherent risk = RMM in company’s process; control risk = MM not detected by company’s IC procedures; detection risk = MM not detected by auditor during audit

Question 21

sample size too low = risk of assessing control risk too ___?

Answer 21

sample size too low = risk of assessing control risk too high

Question 22

sampling risk -

Answer 22

sampling risk - possibility that conclusions about a test of controls or substantive test would be different if test had been applied to the entire population rather than the test sample.

Question 23

what is complement to sampling risk?

Answer 23

complement to sampling risk is confidence or reliability - if auditor accepts 5% sampling risk, the reliability/confidence level is 95%

Question 24

sampling risk varies _______? to sample size - (greater or smaller?) the sampling risk you’re willing to accept, the (larger or smaller?) the sampling size needs to be

Answer 24

sampling risk varies INVERSELY to sample size - greater the sampling risk you’re willing to accept, the smaller the sampling size needs to be

Question 25

nonsampling risk -

Answer 25

nonsampling risk - all aspects of audit risk that are not due to sampling:
1) failure to properly define audit population
2) failure to clearly define nature of audit exception
3) failure to recognize an error when one exists in the sample
4) failure to evaluate sample findings properly

Question 26

Statistical sampling -

Answer 26

Statistical sampling - laws of probability can be used to make statements about a population. For a sampling plan to be statistical, the following two requirements must be met:
a) sample must be statistically selected (eg random number table selection)
b) sample results must be mathematically evaluated

Question 27

statistical sampling examples

Answer 27

random: random number table or computer generated
systematic: interval, random starting point with uniform interval (as long as no pattern to bias)

Question 28

Nonstatistical sampling -

Answer 28

Nonstatistical sampling - any sampling plan that does not meet all the rigorous requirements of statistical sampling

Question 29

nonstatistical sampling examples

Answer 29

haphazard - no conscious bias
block sampling - contiguous population items (all invoices processed on a certain date)
discovery sampling - use when expected occurrence rate is near zero, designed to yield sample size large enough so if auditor is wrong at least one occurrence will be produced, used to search for very critical characteristic that might indictae more serious issue

Question 30

mean -
standard deviation -
normal distribution/distribution of sample means -
standard error of the mean =

Answer 30

mean - A measure of central tendency that is obtained by totaling all the values and dividing by the number of items
standard deviation - measures the extent to which the values of the items are spread about the mean.
normal distribution/distribution of sample means - shape of distribution is normal if sample size is large enough; distribution is centered at the population mean; standard error of the mean = estimated population standard deviation (SD) divided by square root of the sample size

Question 31

Variable sampling (substantive procedures) -

Answer 31

Variable sampling - substantive procedures (analytical procedures - evaluations of financial information through analysis of plausible relationships among both financial and non-financial data, tests of details - collect evidence that balances, disclosures, and underlying transactions associated with FS are correct)

AUDIT RISK = (INHERENT RISK X CONTROL RISK = RISK OF MATERIAL MISSTATEMENT) X (ANALYTIC PROCEDURES X TESTS OF DETAILS = DETECTION RISK)

Question 32

factors that increase sample sizes:

Answer 32

factors that increase sample sizes:
1) larger population monetary amount (note that number of sampling units has no effect)
2) decreased tolerable misstatement
3) higher risk of material misstatement
4) fewer/no other relevant substantive procedures (detection risk not satisfied by other procedures)
5) increased size or frequency of expected misstatement

Question 33

stratifying the population:

what is it?
when to use it?
why use it?

Answer 33

stratifying the population:
1) divide population into groups (strata)
2) use when population is highly variable
3) reduces variability; results in smaller sample sizes

Question 34

defining the population

Answer 34

defining the population
1) verifying completeness of population
2) define the sampling unit: any individual element that constitutes the population, i.e. customer total vs invoice total vs individual dollars within an invoice that makes up a customer total
3) project results only to the population from which selected
4) identify and separately test individulally significant items (higher quantitative or qualitative risk)

Question 35

selecting the sample for substantive testing purposes:
1) statistical -
2) nonstatistical -

Answer 35

selecting the sample for substantive testing purposes:
1) statistical - PPS (probability proportionate to size) = random selection of individual dollars from a population; classical variables sample = use normal distribution theory
2) nonstatistical - random (random number table or computer generated), haphazard (without conscious bias), systematic (random start with sampling interval)

Question 36

evaluating sampling results

Answer 36

evaluating sampling results
1) consider qualitative factors (nature and cause of misstatements - fraud, noncompliance, changes earnings results)
2) If projected error > expected misstatement: sample may not be large enough to provide planned risk of incorrect acceptance, inadequate allowance for sampling risk, possibility of other undetected misstatements
3) evaluate both known and projected error in aggregate

Question 37

PPS (probability proportionate to size) sampling (aka monetary unit sampling (MUS):

what is it?
why use it?
when to use it?

Answer 37

PPS (probability proportionate to size) sampling:
1) sampling unit is not an account balance or transaction, but individual dollars in an account balance
probability of an item being selected is directly proportional to the dollar value of the item
2) population automatically stratified by monetary value
large dollar amounts have higher probability of being selected, thus OVERSTATEMENTS ARE MORE LIKELY DETECTED
3) must give special attention to zero or negative balances
4) selections made via calculator or computer
Use when you expect a LOW error rate

Question 38

advantages of PPS sampling (monetary unit sampling)

Answer 38

advantages of PPS sampling
1) automatically results in stratified sample because items selected in proportion to dollar value
2) automatically identifies any item that exceeds sampling interval (individually significant items that must be individually examined)
3) usually results in smaller sample size if no errors are expected compared to classical variable sampling
4) overstatement more likely to be identified than understatement

Question 39

PPS/MUS example:
CPA is performing PPS sampling of client’s AR that is reported at $1.2 million with over 1000 customers, tolerable misstatement is $40,000, allowance for sampling risk/risk of incorrect acceptance is 10%, so rate of confidence/reliability is 90%.
AICPA audit guide:
risk of incorrect acceptance of 5% = confidence level of 3
risk of incorrect acceptance of 10% = confidence level of 2.31
risk of incorrect acceptance of 15% = confidence level of 1.90

1) What is sampling interval?
2) What is the sample size for PPS/MUS sample?

Answer 39

1) tolerable misstatement of $40,000 / confidence level factor of 2.31 = $17,316
2) $1.2 million / sampling interval $17,316 = sample size of 69.30 or 70 rounded since you can’t sample 0.3 of an item

(so CPA will examine 70 account balances to test for overstatement. If no misstatements are found in the sample, then CPA can conclude with confidence that $1.2 million is not overstated by more than the $40,000. No misstatements in sample does NOT mean that the risk of incorrect acceptance is reduced)

Question 40

classical variables sampling -

Answer 40

$ value in sample gives indication of $ value in population

classical variables sampling - uses normal distribution theory to evaluate selected population characteristics, Involves complex mathematical calculations that generally require use of computer audit programs, generally select on an item-by-item basis, and not a proportional-to-size basis, so appropriate to test for understatement

Question 41

Classical variables sampling (substantive tests)
Attribute sampling (tests of controls)

alpha risk (efficiency) vs beta risk (effectiveness)

Answer 41

sampling risk with test of controls: risk of assessing control risk too low = beta risk; risk of assessing control risk too high = alpha risk
sampling risk with substantive tests: risk of incorrect acceptance = beta risk = balance balance accepted as correct when it isn’t; risk of incorrect rejection = alpha risk = balance rejected as incorrect when it’s correct

Question 42

attribute sampling (tests of controls)

Answer 42

error rate in sample indicates error rate in population

Attribute sampling - tests of controls, also may be used in substantive tests not intended to project misstatement in $$$/monetary terms

AUDIT RISK = (INHERENT RISK X CONTROL RISK = RISK OF MATERIAL MISSTATEMENT) X (ANALYTIC PROCEDURES X TESTS OF DETAILS = DETECTION RISK)

Question 43

sampling in tests of controls; things to consider:

Answer 43

sampling in tests of controls; things to consider:
completeness of population - POPULATION SIZE DOES NOT FACTOR INTO DETERMINATION OF SAMPLE SIZE
define sample unit
determine method of sample selection
determine sample size
establish tolerable deviation rate - apply professional judgment (lower tolerable deviation rate = more persuasive evidence/higher confidence level = more persuasive evidence)

Question 44

evaluate results of attribute sampling in tests of controls

Answer 44

evaluate results:
statistical sample = use table or program to assist in measuring precision of test ot upper limit on control deviations
nonstatistical sample = compare number of deviations to expected deviation rate in desgin of sample; if > than planned then objective wasn’t met, so either expand sample or perform other tests to achieve objective
consider qualitative aspects of deviations (nature and cause, fraud?) and possible relationship of deviations to other phases of audit - professional skepticism
actual sample error rate + allowance for sampling risk = achieved upper precision limit (worst case)
if the achieved upper precision limit > tolerable rate = test failed

Question 45

Analytical procedures:

Answer 45

Analytical procedures: evaluations of financial information (with comparisons made between both financial and nonfinancial data) made by a study of plausible relationships reasonably expected to exist and continue by investigating fluctuations/relationships inconsistent with other relevant information or significant deviation from predicted amounts

Question 46

Analytical procedures in:
1) planning
2) substantive testing
3) overall review

Answer 46

1) planning = required
2) substantive testing = optional
3) overall review = required

Question 47

Analytical procedures in:
1) planning

Answer 47

analytical procedures during planning is required
1) assists in planning nature, timing, extent of substantive tests
2) should focus on enhancing the auditor’s understanding
3) used to identify areas that may represent risks relevant to audit

Question 48

Analytical procedures - sources of information:

Answer 48

comparable prior periods
anticipated results, budgets or forecasts
relationships amoung accounts within period
industry
nonfinancial information

Question 49

Analytical procedures - factors that increase reliability of data used:

Answer 49

obtained from independent sources outside of entity
obtained from internal sources outside of accounting
design effectiveness of controls over the system
subjected to testing in current or prior period
applies data from a variety of sources

Question 50

Analytical procedures - evaluating differences

Answer 50

evaluate significant unexpected differences
corroborate mgmt responses concerning these differences with other audit evidence
if not explained, design other procedures to determine whether difference is likely

Question 51

Analytical procedures - scanning

Answer 51

use of professional judgment to review accounting data to identify significant or unusual items and perform tests of details on those items
includes anomalies within accounts or other data
search for large or unusual items, like nonstandard journal entries

Question 52

Analytical procedures - required documentation

Answer 52

document your expectation, the results of your comparison of expectation to recorded amounts/ratios, any other audit procedure performed (responses to inquiries about significant unexpected differences), and results of additional procedures

Question 53

Analytical procedures in:
2) substantive testing

Answer 53

analytical procedures during substantive testing is optional

Used to obtain evidential matter about particular assertions related to account balances or classes of transactions

Question 54

Analytical procedures in:
3) overall review

Answer 54

analytical procedures during overall review is required

Assists in assessing conclusions reached and in evaluating the overall financial statement presentation throughout course of audit:

Assists in evaluation of overall F/S presentation and disclosure
Results may indicate additional evidence needed
Results may indicate previously unrecognized risk of material misstatement due to fraud; auditor must decide extent of additional procedures to be performed
after reading FS and notes is evidence gathered adequate to explain unusual or uinexpected balances identified in planning or in the course of the audit?
are there any unusual or unexpected balances or relationships not previously identified?

Question 55

Obtain and document evidence - COMPILATIONS

Answer 55

needs for compilation:
-you are not performing inquiry analytics, you’re not giving any assurance, so you don’t need to be independent, but you must state that you are not independent if that is the case
-you need an engagement letter, but do not need a rep letter
-you need to understand client’s business, but not as extensively as if this was a review or an audit
-you need to obtain knowledge of accounting principles and industry practices
-knowledge of client’s general organization
-operating characteristics
-nature of assets, liabilities, revenues and expenses
-understand applicable financial reporting framework
-significant accounting policies intended to be used in preparation of financial statements
reading the FS: consider whether appear appropriate in form and free from obvious material misstatements (arithmetic and clerical mistakes, mistakes in applying accounting principles, inadequate disclosure)
response to accountant concerns -if aware that records, documents or other are incomplete, inaccurate, bring to attention of mgmt and request additional or corrected information
when to withdraw - unable to complete engagement b/c mgmt failed to provide records, documents, other information or if mgmt does not make appropriate proposed revisions or disclose departure in FS
SSARS requirements - no specific workpaper retention requirements, general principle focus on engagement quality control - have enough evidence and retain your workpapers so you can ensure you are following statement on quality control standards

Question 56

confirmations - required unless:

Answer 56

1) obtain representation of information or existing condition IN WRITING (not orally)
2) generally more reliable than mgmt assertions
3) presumed confirmations will be sent to confirm receivables - REQUIRED unless:
a) receivable balance is immaterial
b) procedures would be ineffective (response rates are inadequate/unreliable
c) assessed level of RMM is low
d) other planned procedures are sufficient and appropriate
e) receivables aren’t related to sale of goods or services in normal course of business or a financial institution loan

Question 57

positive vs negative confirmations

Answer 57

Positive confirmations - asks confirming party to reply in all cases
Negative confirmations - only respond if you disagree
1) less persuasive than positive confirmations
2) cannot be sole substantive audit procedures unless:
a) RMM low for relevant assertions
b) have obtained sufficient appropriate audit evidence relating to operating effectiveness of relevant controls
c) population has high volume of small homogenous items
d) very low exception rate is expected
e) unaware of conditions that would cause recipients to disregard the confirmation request

Question 58

audit data analytics (ADA) - the practice of using models and visuals to discover patterns and anomalies within an audit dataset

5 steps

Answer 58

1) plan
2)access and prepare data
3) consider relevance and reliability of data used
4) perform ADA
5) evaluate results and conclude on whether purpose and objectives were met

Question 59

audit data analytics (ADA) - 1) plan

Answer 59

1) plan ADA
a) risk assessment
b) test of controls
c) substantive procedures
d) combination of all three major steps of audit process

Question 60

audit data analytics (ADA) - 2) access and prepare data

Answer 60

2) access and prepare data for purposes of ADA - TIE OUT THE DATASET
verify accuracy and completeness of data sets that are used to complete planned procedures
a) organize data into hierarchy
b) search for specified characteristics or attributes that would not be expected
c) evaluate similar attributes that would not be expected
d) classify key attributes of types of accounts or classes of transactions
e) utilize check digit identification codes within an algorithm
f) develop an esitmate of value of another attribute
g) determine whether there are any relationships among variables
h) tag and trace data within a computer audit trail

Question 61

audit data analytics (ADA) - 3) consider relevance and reliability of data used (attribute, structure, source)

Answer 61

3) consider relevance and reliability of data used (attribute, structure, source)
a) attribute = data that can be classified and counted that holds the following:
1) immutable - not changeable
2) copyable
3) indivisible
4) accumulative
b) structure is the particular manner in which data is organized so it can be properly managed. Common data structure:
1) array (table, database)
2) queues
3) stack
4) hash
5) tree (decision process)
c) source is identified as initial place where information use for analysis is first digitized. Common data source:
1) relational databases
2) public databases
3) flat files
4) streaming data
5) cloud storage

Question 62

audit data analytics (ADA) - 4) perform ADA

Answer 62

4) perform ADA
Perform procedures using outputs (e.g., reports and visualization) from audit data analytic techniques to determine relationships among variables, interpret results, and determine additional procedures to be performed. Traditional techniques:
1) descriptive analytics (describe - mean, median, mode - what happened in the past)
2) predictive analytics (what might happen in the future)
3) prescriptive analytics (how did we respond to it)

Question 63

audit data analytics (ADA) - 5) evaluate results and conclude on whether purpose and objectives were met

Answer 63

5) evaluate results and conclude on whether the purpose and specific objectives of performing the ADA have been achieved
a) properly document work via flow charts, data visualizations, reports
b) implement continuous control monitoring to facilitate future reviews
c) store ADA audit program, audit workpapers, etc. within central repository to facilitate peer review and related QC measures

Question 64

Emerging technologies:
artificial intelligence
blockchain =
predictive analytical tools
big data =

Answer 64

Emerging technologies:
artificial intelligence
blockchain = a decentralized, distributed and public digital ledger that is used to record transactions (“blocks” of transactions) across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the consensus of the network.
predictive analytical tools
big data = combination of structured, semistructured and unstructured data collected by organizations that can be mined for information and used in machine learning projects, predictive modeling and other advanced analytics applications.

Question 65

special consideration - accounting estimates

Answer 65

auditor is responsible for evaluating the reasonableness of accounting estimates made by mgmt
1) apply professional skepticism
2) consider both subjective and objective factors
audit objectives:
1) all material accounting estimates have been developed
2) accounting estimates are reasonable; methods and changes are appropriate and consistently applied
3) accounting estimates are presented in conformance with applicable accounting framework and properly disclosed
mgmt bias:
1) indicators of bias are NOT necessarily misstatement
2) document basis for conclusions regarding bias
common testing techniques:
1) use post-BS information to refine estimates and corroborate the reasonableness of assumptions
2) develop a range of reasonableness and verify that client’s estimate falls within range
3) reconcile amounts produced by different models
4) retrospective lookback, which provides evidence of effectiveness of the process itself and is required for significant estimates subject to fraud
mgmt vs auditor estimate
1) mgmt’s point estimate: amount selected by mgmt for estimate
2) auditor’s point estimate or auditor’s range: amount or range derived from audit evidence used to evaluate mgmt’s amount
difference between auditor’s and mgmt’s point estimates is a likely misstatement
required documentation
1) basis for auditor conclusions
2) written representations from mgmt regarding reasonableness of significant assumptions
3) document how those charged with governance informed process used by mgmt to formulate sensitive accounting estimates and basis for reasonable conclusions

Question 66

special consideration - contingencies

Answer 66

NO ACCRUAL FOR GAIN CONTINGENCY (disclose)
loss contingency accrual:
1) info available before FS issued indicates probable that asset has been impaired or liability incurred at FS date
2) loss can be reasonably estimated
estimable within range of amounts:
1) accrue amount that appears to be best estimate
2) accrue SMALLEST amount in range if no amount in range is better than another
if loss cannot be reasonably estimated
1) if not accrued, then charge to income in period it CAN be reasonably estimated
2) DO NOT DO PRIOR PERIOD ADJUSTMENT TO RETAINED EARNINGS
disclosure:
1) nature of accrual (“estimated liability” NOT “reserve”)
2) amount of accrual
3) indicate that it’s reasonably possible that a change in estimate of a probable liability could occur in the near term
losses after FS date:
1) disclosure (nature, estimate of range)

Question 67

special consideration - litigation

Answer 67

consider following to determine accrual and/or disclosure:
1) period in which underlying cause occurred
2) degree of probability of unfavorable outcome
3) ability to make reasonable estimate of amount of loss
accrual not always warranted:
don’t accrue if underlying cause is event or condition occurring after FS date, but disclosure may still be required
auditing litigation:
1) inquire of policies and procedures for identifying, evaluating for litigation
2) obtain a description and evaluation of relevant conditions, including matters referred to legal counsel
3) obtain written assurance for mgmt that all matters requried to be disclosed have been
4) examine relevant docuemnts, incl correspondence
5) consider sending inquiry to internal and external legal counsel and perform alternate procedures if not sent
attorney’s or legal letter:
1) corroborates information provided by mgmt
2) auditor is required to seek direct communications with external legal counsel if risk of material misstatement indicates that material litigation may exist
May not provide sufficient detail:
1) auditor may need further evidence to support conclusions
2) in-house consel does not substitute for refusal to communicate necessary information by external counsel
3) scope limitation if mgmt refuses to allow communication
legal inquiry:
1) identify conditions or circumstances that warrant further analysis
2) determine period in which underlying cause of legal action occurred (to determine whether an accrual or disclosure event)
3) evaluate mgmt’s assertions related to the probability of an unfavorable outcome and amount or range of potential loss
lawyer’s response:
1) preferable for response to be dated to cover a period that closely approximates the auditor’s report date (usually within 10 days of audit report date)
2) if letter doesn’t specify date, assume date of repsonse is the effective date
3) consider getting updated response (oral if documented, writing if significant)

Question 68

special consideration - going concern

Answer 68

going concern audit requirements:
1) conclude based on audit evidence obtained whether substantial doubt about ability to continue as a going concern for a reasonable period of time
a) one year beyond FS date
b) consider time period required by applicable financial reporting framework
2) assess adequacy of uncertainty disclosures
3) determine implications on auditor’s report
a) emphasis-of-matter paragraph
b) disclaimer of opinion is an option
additional procedures if substantial doubt exists:
1) document and review cause
2) ask about mgmt’s plans to mitigate
3) assess likelihood
4) identify elements significant to mitigating the risk
5) review reasonableness of projections and future performance
6) plan and perform sufficient appropriate procedures (review subsequent events, verify compliance with terms of debt agreements, read minutes of meetings, inquire of legal counsel, confirm 3rd/related party support arrangements)
7) obtain appropriate written representations for mgmt
8) summarize procedures performed and conclusions reached
potential mgmt plans:
1) dispose of assets (liquidate)
2) delay or reduce payments (reamortize, restructure)
3) raise capital
4) borrow money
audit documentation required:
1) mgmt rep letter
2) communication to those charged with governance (even if auditor overcomes substantial doubt)
impact on auditor’s report - substantial doubt NOT alleviated:
1) consider adequate disclosure in footnotes
2) include emphasis-of-matter paragraph following opinion paragraph (using “substantial doubt” and “going concern”)
3) disclaimer of opinion is an option
information to disclose:
1) conditions and events creating doubt
2) possible effects
3) mgmt’s evaluation of significance and mitigating factors
4) whether operation need to be discontinued
5) mgmt’s plans including prospective FS
6) information about asset recoverability

Question 69

E - Misstatements and Internal Control Deficiencies - types

Answer 69

Types: factual, judgmental (unreasonable or inappropriate selection/application of policies), projected (best estimate, projection of results of sample to entire population)

Question 70

evaluation of misstatements:

if misstatements approach materiality

aggregating misstatement resulting from sampling -

Answer 70

evaluation of misstatements:
1) consider effects of both individual and aggregation of misstatements
2) separately evaluate known and likelyl misstatements
3) consider continuing impact of prior period uncorrected misstatements
if misstatements approach materiality
1) reconsider nature and extent of further audit procedures (may be a greater than acceptable level that undetected misstatements could exceed materiality)
2) consider if appropriate to offset misstatements (revenue and expense)

aggregating misstatement resulting from sampling - separately evaluate known misstatement from sample results

Question 71

examples of qualitative considerations of misstatements:

Answer 71

examples of qualitative considerations of mistatements:
1) potential effects on trends such as profitability
2) regulatory/statutory requirements
3) loan covenants
4) exec comp
5) does it involve fraud, illegal acts, conflicts of interest
6) likelihood of future period material impact
7) significance to reasonable user needs

Question 72

required documentation for MATERIALITY:

required documentation for EVALUATION OF MISSTATEMENT:

Answer 72

required documentation for MATERIALITY:
1) levels of planning materiality
2) levels of performance materiality (tolerable misstatement in context of sampling)
3) threshold below which misstatements would be considered to be clearly trivial
4) basis of determination (any changes as result of audit)
required documentation for EVALUATION OF MISSTATEMENT:
1) summary of both corrected and uncorrected misstatements, except those clearly trivial
2) conclusion as to whether FS are materially misstated (basis for conclusion)
3) levels of materiality applied and how those considerations were determined

Question 73

written representations from management
Management rep letter:

Answer 73

1) obtain written representations for mgmt and those charged with governance
a) mgmt’s responsibility for prep and fair presentation of FS
b) verify completeness of information provided to auditor
c) support other relevant audit evidence
2) request written representations for all other periods referred to in the auditor’s opinion (previous reps from prior period remain appropriate)

Question 74

other objectives of mgmt written representations:

Answer 74

other objectives of mgmt written representations:
1) confirm oral representations that were given to auditor during engagement
2) serve as documentation of continuing appropriateness of representations
3) reduce chance of misunderstanding between auditor and client

Question 75

examples of matters to include in rep letter

Answer 75

examples of matters to include in rep letter
1) instances of identified or suspected noncompliance with laws and regulations whose effects should be considered by mgmt when prepping FS have been disclosed
2) all known actual or possible litigation and claims whose effects should be considered by mgmt when prepping FS have been disclosed and accounted for in accordance with applicable financial reporting framework
3) whether assumptions used in making estimates are reasonable
4) all events occurring subsequent to the date of the FS have been adjusted as disclosed in accordance with applicable financial reporting framework

Question 76

format of rep letter:

Answer 76

format of rep letter:
1) addressed to auditor
2) reps should be made no earlier than auditor’s report (same day)
3) signed by CEO and CFO
4) mgmt’s reps may be limited to matters considered material
5) mgmt’s refusal constitutes a scope limitation: DISCLAIM AN OPINION OR WITHDRAW

Question 77

subsequent events - audit objective

required procedures for subsequent events

Answer 77

subsequent events - audit objective
1) evaluate whether events occurring between FS date and audit report date require adjustment or disclosure
2) auditor report informs FS users of the effect of events and transactions of which auditor becomes aware up through audit report date
3) perform procedures as near audit report date as practicable
required procedures for subsequent events
1) obtain understanding of mgmt procedures to ensure subsequent events are identified
2) inquire of mgmt and others about whether any subsequent events that might affect the FS have occurred
3) read minutes held after FS date
4) read interim FS

Question 78

TYPE 1 vs TYPE 2 SUBSEQUENT EVENTS:

Answer 78

TYPE 1 SUBSEQUENT EVENTS: provide additional evidence about conditions existing at FS date
1) provide additional evidence about conditions existing at FS date
2) affect inherent estimates in FS
3) require actual adjustment
4) product warranty reserves, settlement of litigation
TYPE 2 SUBSEQUENT EVENTS: conditions or events arising after FS date
1) conditions or events arising after FS date
2) fire, flood, theft, bond issuance, business acquisition
3) disclosure but no adjustment to the FS

Question 79

Not required subsequent disclosure events:

Answer 79

Not required subsequent disclosure events: product changes, mgmt changes, loss of customer, strikes, other events not normally resulting in JE

Question 80

subsequent events footnote:

Answer 80

subsequent events footnote:
1) requires entities to disclose date through which subsequent events have been evaluated and whether that date is the date of issuance
2) required regardless of whether entity recognizes or discloses a subsequent event in FS
3) auditor’s report date cannot be earlier than date of mgmt’s subsequent events evaluation note (same date as rep letter)

Question 81

subsequently discovered facts:
1) through audit report date:
2) after audit report date, but before release:

audit report dating options		

written representations when audit report is changed:		

if mgmt refuses to appropriately revise FS - MODIFY OPINION TO QUALIFIED OR ADVERSE (depending on pervasiveness)

Answer 81

subsequently discovered facts:
1) through audit report date: Perform audit procedures to evaluate all subsequent events that may require adjustment of, or disclosure in, the financial statements
2) after audit report date, but before release:
a) not required to perform any audit procedures, but must consider impact on FS if event becomes known
b) discuss matter w/mgmt and determine whether the financial statements need revision and, if so, determine if management intends to address the matter in the financial statements
audit report dating options
1) dual dating - “2/1/201X, except for Note X as to which the date is 2/14/201X”
2) date entire report for a later date which means a larger responsibility for subsequent events extends the date of the report and must extend subsequent procedures to the later date
written representations when audit report is changed:
1) request written representations from mgmt as of new audit report date
2) request written representations from mgmt for dual date report as of the additional date of the report
a) do any previous representations need to be modified?
b) have any other events occurred subsequent to date that need adjustment/disclosure?
if mgmt refuses to appropriately revise FS - MODIFY OPINION TO QUALIFIED OR ADVERSE (depending on pervasiveness)

Question 82

subsequent events for UNAUDITED FS

Answer 82

-disclose event that arose after original report date “Event (Unaudited) Subsequent to the Date of the Independent Auditor’s Report”
-auditor is not required to perform any procedures on revision and auditor report carries the original date

If fact known to auditor AFTER report release date:
1) discuss matter w/mgmt (and those charged w/governance if necessary) and determine if management intends to address the matter in the financial statements
2) audit report dating options
1) dual dating - “2/1/201X, except for Note X as to which the date is 2/14/201X”
2) date entire report for a later date which means a larger responsibility for subsequent events extends the date of the report and must extend subsequent procedures to the later date

If auditor’s opinion changes from original opinion:
1) disclose in Other Matter paragraph: date of previous report, type of opinion previously expressed, substantive reasons for different opinion, auditor’s opinion on revised FS is different that previously expressed opinion

if mgmt DOES NOT revise FS when needed:
1) if FS HAVE NOT been provided to 3rd parties, advise client not to disseminate until FS and auditor’s reports have been revised
2) if FS HAVE been provided , take action to ensure that anyone in receipt before revision is informed that those FS should not be relied upon

if client refuses cooperation:
1) auditor may notify regulatory bodies as well as each person known to rely on the FS
2) consult with attorney regarding privileged communication state statutes