Test 2 In-Class

Question 1

Sampling Risk:

Type 1 Errors

Answer 1

Risk of incorrect Rejection:
Audit EFFICIENCY is reduced
Auditor erroneously thinks they found a problem

Question 2

Sampling Risk:

Type 2 Errors

Answer 2

Risk of Incorrect Acceptance:
Audit EFFECTIVENESS is reduced
-Auditor erroneously thinks no problems exist

Question 3

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).

Answer 3

Expected deviation rate: 2.0%
Sample size: 132
Sample deviation rate (5/132): 3.8%
Allowance for sampling risk: 3.0%

Question 4

Upper Deviation Rate

Answer 4

= Sample deviation rate + Allowance for sampling risk(tol dev rate - expected dev rate)

Question 5

If UDR > TDR

Answer 5

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).

Question 6

Evidence Types that Involve sampling:

Answer 6

First four
Physical Inspection
Reperformance
Recalculation
Documents (Inspection of)
Confirmations

Question 7

Reporting Options:

Impaired Evidence

Answer 7

Disclaimer

Question 8

Reporting Options:

Insufficient Evidence

Answer 8

Disclaimer

Qualified for Scope

Question 9

Reporting Options:

Not GAAP

Answer 9

Qualified for GAAP

Adverse

Question 10

Reporting Options:

Inconsistent GAAP

Answer 10

Unqualified with Explanatory Paragraph

Question 11

Reporting Options:

Inadequate Disclosures

Answer 11

Qualified for GAAP

Adverse

Question 12

Reporting Options:

Emphasize Something

Answer 12

Unqualified with Explanatory Wording

Question 13

Reporting Options:

Unable to form opinion

Answer 13

Disclaimer

Question 14

Reporting Options:
Financial Trouble (going concern)

Answer 14

Disclaimer

Unqualified with Explanatory Wording

Question 15

Sampling Risk

Answer 15

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

Question 16

Non-Sampling Risk

Answer 16

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.

Question 17

How to Reduce Non-Sampling Risk -

Answer 17

• Effective planning
• Supervision of audit engagements
• Implementation of appropriate quality procedures

Question 18

Non-statistical Sampling Standards

Answer 18

• 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

Question 19

Types of Statistical Sampling

Answer 19

• 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)

Question 20

Haphazard Selection

Answer 20

Auditor’s best efforts to be random, only can be used for nonstatistical sampling.

Question 21

Systematic Selection

Answer 21

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

Question 22

Revenue/AR Test of Controls

Answer 22

• Reperformance of Control activity
• Walkthroughs
• Documentation (looking for auth. and pre-# docs)
• Inquiry of Personnel
• Observe operation of control

Question 23

Confirmations are required by auditing standards unless:

Answer 23

1-AR Balance is immaterial to F/S
2- Confirmations would not be effective
3 - IR and CR are low\

Question 24

Rev/AR Tests of Bal/Transactions

Answer 24

Existence and Occurence (Top Down)

Cutoff and Completeness (Bottom Up)

Question 25

Greatest Risk of AR and Associated Assertion

Answer 25

Overstatement, Occurence (Trans) or Existence(Bal)

Question 26

Rev/ AR analytical procedures

Allowance for Doubtfull Account

Answer 26

Valuation
Credit Policy&raquo_space;> Days AR Outstanding
Cust Cred Limit&raquo_space;> Allowance/AR
AR Aging&raquo_space;> Subsequent Cash Receipts

Question 27

Rev Transactions > Accounts

Sales Transactions

Answer 27

Trade AR
Sales
Allow for DA
Bad-debt Expense

Question 28

Rev Transactions > Accounts

Cash Receipts Transaction

Answer 28

Cash
Trade AR
Cash Discounts

Question 29

Rev Transactions > Accounts

Sales Returns and Allow Transaction

Answer 29

Sales Returns
Sales Allow
Trade AR

Question 30

Purch Transactions > Accounts

Purchase Transaction

Answer 30

AP
Inv
Purchases or COGS
Various asset and exp accts

Question 31

Purch Transactions > Accounts

Cash Disbursement Transaction

Answer 31

Cash
AP
Cash Discounts
Various asset and exp accts

Question 32

Purch Transactions > Accounts

Purch Return Transaction

Answer 32

Purchase Returns
Purch Allowances
AP
Various asset and exp accts

Question 33

Revenue SOD

Credit Function

Answer 33

from Billing

Question 34

Revenue SOD

Shipping

Answer 34

from Billing

Question 35

Revenue SOD

AR function

Answer 35

from Gen Ledger function

Question 36

Revenue SOD

Cash Receipts

Answer 36

from AR function

Question 37

Purch SOD

Purchasing

Answer 37

from requisitioning and receiving

Question 38

Purch SOD

Invoice-processing

Answer 38

from AP function

Question 39

Purch SOD

Disbursement

Answer 39

from AP function

Question 40

Purch SOD

AP function

Answer 40

from Gen Ledger function