Topic 4 - Fundamental Audit Concepts II

Question 1

what are the three types of Selection of Items for testing?

Answer 1

■100% examination
■Specific identification
■Sampling

Question 2

List three facts about 100% examination

Answer 2

■Can be used in substantive testing
■population contains a small number of 
large value items
■There is significant risk in applying other
methods

Question 3

List three reasons/types of things tested for Specific identification

Answer 3

■High value items
■Items of special interest
■Items over a specified dollar value

Question 4

List three facts about Sampling

Answer 4

■Testing of less than 100% of the population
■Inference
■Most common of the three means of selecting items for testing.

Question 5

What are the two types of audit testing?

Answer 5

• test of controls- do controls work

- substantive testing- testing a particular item in the financial statements.

Question 6

what does a test of controls do?

Answer 6

Provide evidence of:

(1) the effectiveness of the design,
(2) the operation of the auditee’s internal control system

Question 7

What does a substantive test do?

Answer 7

Provide evidence of the validity and the propriety of the accounting treatment of transactions and balances.

Question 8

what are examples of testing from controls?

Answer 8

inspecting for evidence of authorization

ie inspecting purchase orders have been verified

Question 9

what are the five different types of substantive testing?

Answer 9

• Test of details (eg account balances/class of transactions)
• Substantive Analytical Procedures
• Test of balances (ledger account balance.)
• Tests of Transactions (validity of transaction classes)
• Test of Disclosures

Question 10

what is involved in Substantive Analytical Procedures?

Answer 10

Compare relationships between accounting data and related information to determine the reasonableness of relationships, and to identify unusual fluctuations.

Question 11

a sample of entries in the Sales Journal to the Shipping Order, what it the assertion, direction of testing and which substantive test is being carried out?

Answer 11

• Occurrence
• Vouching - backwards
• Transaction test

Question 12

all Accounts Payable are recognised in balance sheet by Compare the closing balance of
Accounts Payable with those of previous years, what it the assertion, and which substantive test is being carried out?.

Answer 12

• completeness

- Substantive Analytical Procedures

Question 13

Write to sample of the client’s debtors and

ask them to confirm the balance owed to client. what it the assertion, and which substantive test is being carried out?.

Answer 13

• existence, rights and obligations

- Test of balances

Question 14

Which type of testing provides direct evidence of misstatement in accounts? indirect?

Answer 14

Substantive tests provide direct evidence

Test of controls provides indirect evidence

Question 15

what is the formula for evaluating sufficient

appropriate evidence?

Answer 15

AR= CR x IR x DR

Question 16

What is audit risk?

Answer 16

the risk that an auditor expresses an inappropriate audit opinion when the financial report is materially misstated.

Question 17

when an auditor whats to express a correct opinion will the audit risk be higher or lower? what does this mean for the auditor?

Answer 17

the value will be a lower number, the auditor will have to do more work?

Question 18

list three things that impact upon audit risk?

Answer 18

■the nature of the entity and its environment;
■the effectiveness of the control structure;
■the effectiveness of the auditor’s procedures.

Question 19

What is inherent risk?

Answer 19

risks that arise because of the nature

of the entity and its environment, how susceptible they are to misstatement

Question 20

list three examples of inherent risk? there are many!!!

Answer 20

■Management experience and knowledge
■Unusual pressures on management
■Nature of the client’s business
■Inventory subject to obsolescence
■Dependence on a single supplier/ customer
■Foreign currency transactions
■Related parties
■Factors affecting the client’s industry
■Macro economic factors
■Rapid change
■Complexity of transactions
■Judgment required in determining account balances
■Transactions not subject to ordinary processing

Question 21

What are control risks?

Answer 21

Control risks arise because of the nature
of the entity’s internal control system

risks that misstatements will not be prevented
or detected and corrected on a timely
basis by the entity’s internal control
system

Question 22

list three examples of control risk?

Answer 22

Poor control environment
Problems with the information system
Ineffective control activities

Question 23

Which two risks are out of the auditors control?

Answer 23

control and inherent risk

Question 24

what is detection risk?

Answer 24

Detection risk arises because of the

(in)effectiveness of the audit work.

Question 25

list three examples of detection risk?

Answer 25

Problems with planning
Problems with collection of evidence
Problems with interpreting results of testing

Question 26

How much testing is needed for low level of control risk?

for high levels?

Answer 26

high control testing
reduced substantive testing

no test of controls, extensive substantive testing

Question 27

what are Audit Working Papers? why are they kept?

Answer 27

Records kept by the auditor of the

client engagement. Planning/performing, reviewing, collecting evidence

Question 28

what are two different types of audit working papers?

Answer 28

permanent file- past/long term info

current file - current details needed for the current audit

Question 29

what is materiality?

Answer 29

reasonably be expected to influence the
economic decisions of users taken on the
basis of the financial report.

Question 30

what is the relationship between audit risk and materiality?

Answer 30

inverse, if auditors set materially at a high level, audit risk will be low as will the evidence needed