Test 2 In-Class Flashcards
Sampling Risk:
Type 1 Errors
Risk of incorrect Rejection:
Audit EFFICIENCY is reduced
Auditor erroneously thinks they found a problem
Sampling Risk:
Type 2 Errors
Risk of Incorrect Acceptance:
Audit EFFECTIVENESS is reduced
-Auditor erroneously thinks no problems exist
Based on prior history, you believe the control works 98% of the time. You design a statistical sample of 132 items (see Table 8-6) and find 5 deviations. This gives you a 3% allowance for sampling risk (5% tolerable deviation rate less 2% expected deviation rate).
Expected deviation rate: 2.0%
Sample size: 132
Sample deviation rate (5/132): 3.8%
Allowance for sampling risk: 3.0%
Upper Deviation Rate
= Sample deviation rate + Allowance for sampling risk(tol dev rate - expected dev rate)
If UDR > TDR
we cannot conclude, with XX% confidence that the actual deviation rate for the population is less than the amount that we can tolerate. Thus, we are unable to rely on the control to the level that was originally planned (i.e. raise CR) and would need to increase substantive testing (i.e. lower DR).
Evidence Types that Involve sampling:
First four Physical Inspection Reperformance Recalculation Documents (Inspection of) Confirmations
Reporting Options:
Impaired Evidence
Disclaimer
Reporting Options:
Insufficient Evidence
Disclaimer
Qualified for Scope
Reporting Options:
Not GAAP
Qualified for GAAP
Adverse
Reporting Options:
Inconsistent GAAP
Unqualified with Explanatory Paragraph
Reporting Options:
Inadequate Disclosures
Qualified for GAAP
Adverse
Reporting Options:
Emphasize Something
Unqualified with Explanatory Wording
Reporting Options:
Unable to form opinion
Disclaimer
Reporting Options: Financial Trouble (going concern)
Disclaimer
Unqualified with Explanatory Wording
Sampling Risk
The risk that the sample drawn does not represent the population. Risk that the auditor’s conclusion based on a sample may be different from the conclusion that would have been reached had the whole population been tested. Can be reduced by ^ sample size and by using a stat unbiased method to choose sample
Non-Sampling Risk
Risk that the sample isn’t representative of pop due to mistakes. Two things that cause it:
1 - Failure to recognize exceptions or errors.
2 - Inappropriate or ineffective audit procedures.
How to Reduce Non-Sampling Risk -
- Effective planning
- Supervision of audit engagements
- Implementation of appropriate quality procedures
Non-statistical Sampling Standards
- Must result in comparable sample size to statistical sampling
- Selection methods should be expected to result in a representative sample
- Errors observed must be projected
- Auditor must consider sampling risk
Types of Statistical Sampling
- Attribute Sampling - est. of % of pop possessing a specific characteristic (Controls)
- Monetary-unit Sampling - est dollar amt of misst for a class of transaction sor an account balance. (subst test)
- Classical Variable Sampling - “” but more to determine whether an account is materially misst. (subst)
Haphazard Selection
Auditor’s best efforts to be random, only can be used for nonstatistical sampling.
Systematic Selection
Divide pop by sample size, a starting number is randomly selected in the first interval, then every nth items is selected. because the first item is random, can be usted for stat or non-stat sampling
Revenue/AR Test of Controls
- Reperformance of Control activity
- Walkthroughs
- Documentation (looking for auth. and pre-# docs)
- Inquiry of Personnel
- Observe operation of control
Confirmations are required by auditing standards unless:
1-AR Balance is immaterial to F/S
2- Confirmations would not be effective
3 - IR and CR are low\
Rev/AR Tests of Bal/Transactions
Existence and Occurence (Top Down)
Cutoff and Completeness (Bottom Up)
Greatest Risk of AR and Associated Assertion
Overstatement, Occurence (Trans) or Existence(Bal)
Rev/ AR analytical procedures
Allowance for Doubtfull Account
Valuation
Credit Policy»_space;> Days AR Outstanding
Cust Cred Limit»_space;> Allowance/AR
AR Aging»_space;> Subsequent Cash Receipts
Rev Transactions > Accounts
Sales Transactions
Trade AR
Sales
Allow for DA
Bad-debt Expense
Rev Transactions > Accounts
Cash Receipts Transaction
Cash
Trade AR
Cash Discounts
Rev Transactions > Accounts
Sales Returns and Allow Transaction
Sales Returns
Sales Allow
Trade AR
Purch Transactions > Accounts
Purchase Transaction
AP
Inv
Purchases or COGS
Various asset and exp accts
Purch Transactions > Accounts
Cash Disbursement Transaction
Cash
AP
Cash Discounts
Various asset and exp accts
Purch Transactions > Accounts
Purch Return Transaction
Purchase Returns
Purch Allowances
AP
Various asset and exp accts
Revenue SOD
Credit Function
from Billing
Revenue SOD
Shipping
from Billing
Revenue SOD
AR function
from Gen Ledger function
Revenue SOD
Cash Receipts
from AR function
Purch SOD
Purchasing
from requisitioning and receiving
Purch SOD
Invoice-processing
from AP function
Purch SOD
Disbursement
from AP function
Purch SOD
AP function
from Gen Ledger function
