Procedures & Evidence Flashcards
Assessed level of RMM determines
Level of Detection Risk >
Determine Assessed Risk (nature, timing, extent of Audit proc >
Detect Material Misstatement
Audit Risk
Risk auditor will issue incorrect opinion; prob of clean opinion w/ material misst present
Inherent Risk
Susceptibility of an assertation; Material misst due to error/ommision other than IC; Controls can’t catch
Control Risk
Material misst will not be prevented, detected, corrected by IC
Detection Risk
Auditor’s procedures to reduce risk to low level did not detect Material misst (DT= AP x TD)
Risk Material Misstatement
IR x CR
Auditor’s Procedures
Nature- specific substantive procedures = TD & AP
Timing- substantive proc performed;
Interim- prior to year end & books closed
Final- after year end & books closed
Extent- size of sample
Analytics & stages
Expectation; relationship between financial & non financial data
1) Planning- high level; quarterly & unaudited
2) Substantive
3) Review/Conclusion- unusual/unexpected balances
Analytical Factor expectations
Prior comparison- 3 years sales Budget anticipation Industry ratios F/S relationships- sales & HR Financial & Non financial- payroll cost to # employees
Analytical factors
Effectiveness & efficiency; doing act
Nature
Predictable & effective
Reliability- quality
Expectation precision- sales by product instead total sales
Significant risks often involve
Judgmental matters
Audit Evidence
Info to base opinion; Persuasive, rarely conclusive; Auditor’s judgment
Sufficient Quantity
Based on assessed risk & quality
Appropriate Quality
Assertions
1) Independent sources
2) Directly obtained
3) Hard copy/original
Sampling
Selection & value of less than 100% of population; eval if characteristics
Sampling Attributes- Test of Controls
Test of controls
1) Objective
2) Deviation
3) Population
4) Sample- Statistical= random;systematic
Judgmental=hap hazard; block
5) Size- AICPA tables
6) Test & Deviation % = Tolerance % (# errors/n) 1/20th or 5%
7) Tolerable- # errors & still rely on IC
8) Upper Precision- AICPA tables
9) Reliable- Upper precision <= Tolerable
Sampling Attributes - Substantive (variable)
Ending Balance
Stratification- separating population; lower sample size
Sample Risk Types
Type #1 Incorrect Rejection-
Unereliance on IC; Assess Control Rick increased
Sample = Material misst
Acct bal= no
Type #2 Incorrect Acceptance-
Overeliance on IC; Assess Control Risk decreased
Acct bal = Material misst
Sample= no
Projected Misstatement (Sample Error)
1) Recorded < Sample Interval; (recorded-audited)/recorded Tainted % + Sample Interval= Sample Error
2) Recorded >Sample Interval; Recorded-audited- Sample Error
Sample Interval =
Tolerable (Deviation Rate) / Table Size (Reliability Factor)
Upper Precision Limit =
Sample % + Allow Sample Rick
Ratio Method =
Sample Audit / Sample Book= Ratio % x Book Population $ = Population Audit $
Probability Proportional Size (PPS)
Controls risk incorrect accept by specifying risk level for sampling
Disadvantage- undestatm less likely detected
Advantage- efficiency
Sample & Non Sample Risk
Sample does not reflect population
Auditor makes judgment error (Detection Risk)
Efficiency & Effective
Action Moral (doing right)
External Confirmations
Positive- response if agree or not with $ (not enough responses- alt procedures)
Negative (less reliable)- response if disagree w/ correct $; no response = agree
UW Letters
Comfort letter- opinion F/S comply w/ SEC
Financial Projection
Mgmt & 3rd party in negotiations; no eval assumptions; not for distribution
Precision
Allowable Sample Risk; possibility of errors in either direction
Tolerable Misstatement is high
Control Risk is high
More mistakes allowed = smaller sample size
High risk of material misstatement = larger population size
Top down approach in audit of IC
Understand overall risks to IC over financial reporting @ the F/S level
Substantive procedures prior
Assess difficulty in controlling incremental audit risk
Cost of tests
