Unit 8 - Risk Response Flashcards
The Risk Response phase of an audit is often referred to as ________.
performing substantive procedures.
What are the three approaches to an audit strategy?
- take a reliance on controls approach
- a substantive approach
- a combo of both
Define substantive procedures.
Audit procedures designed to detect material misstatements at the assertion level and to gather evidence to support management assertions.
When combined assessed levels of inherent risk and control risk (RMM) is high:
Detection Risk is _________.
Substantive tests are _________.
Collect evidence __________.
How much evidence ________.
Detection Risk is LOW.
Substantive tests are MORE EFFECTIVE.
Collect evidence AT YEAR-END.
How much evidence LARGER SAMPLE SIZES.
When combined assessed levels of inherent risk and control risk (RMM) is low:
Detection Risk is _________.
Substantive tests are _________.
Collect evidence __________.
How much evidence ________.
Detection Risk is HIGH.
Substantive tests are LESS EFFECTIVE.
Collect evidence IN THE INTERIM.
How much evidence SMALLER SAMPLE SIZES.
Explain the relationship between inherent risk, control risk, and detection risk.
Inherent risk and control risk make up Risk of Material Misstatement (RMM)
RMM and detection risk have an inverse relationship. When RMM is high, then detection risk will be low.
Describe why management assertions are important in the determination of detection risk.
Auditing standards require that auditors assess the risk of material misstatement at the assertion level. Therefore, assertions are important because they impact the assessment of inherent and control risks which is the driving force in determining detection risk.
If significant fraud risk exists, auditors should respond by including elements of _____________________ in their audit plan.
Unpredictability
What factors affect the auditor’s risk response at the financial statement level?
Risk response at the financial statement level is affected by the auditor’s understanding of the entity’s control environment and the assessed risk of material misstatement due to fraud.
AU-C 330 and AS 2301 state that auditors are required to perform substantive procedures for all __________ that have been identified during the risk assessment phase.
Relevant assertions
Define dual-purpose test.
A substantive test of a transaction and a test of control relevant to that transaction that are performed concurrently.
Auditors may design a test of controls and a substantive test of details to be performed at the same time on the same transaction.
Define Analytical Procedures.
Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data; analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a signification amount.
Give examples of analytical procedures. (4)
Ratio analysis, trend analysis, simple comparisons of data, and complex statistical analysis techniques
When is using analytical procedures required in an audit?
At the end of the audit to assist the auditor when forming an overall conclusion on the financial statements (risk assessment)
What are the four factors that impact the effectiveness and efficiency of using a substantive analytical procedure to respond to risk?
1) the nature of the assertion
2) the plausibility and predictability of the relationship
3) the availability and reliability of the data used to develop the expectation
4) the precision of the expectation
Define Tests of Details.
The substantive procedures auditors use to test the details of account balances, transactions, and disclosures.
What are the eight types of Tests of Details?
1) Inspection
2) Observation
3) Inquiry
4) Confirmation
5) Recalculation
6) Reperformance
7) Scanning
8) ADA
Define confirmation bias.
The tendency to seek or interpret evidence in ways that support pre-existing beliefs or expectations.
What are some advantages of using audit data analytics in the audit process? (4)
- can be used during risk assessment or risk response
- analyze entire populations of data
- compare two sets of data, such as vendor and employee addresses
-quickly identify outlier, or unusual, items
Define roll-forward procedures.
When substantive procedures are performed during an interim period, auditors perform roll-forward procedures to update their audit findings from the time of the interim procedures through to year-end.
Procedures performed at year-end on transactions occurring between an interim date and year-end (the roll-forward period) to provide sufficient appropriate audit evidence on which to base conclusions at year-end when substantive procedures are performed at an interim date.
What are two situations in which auditors may decide to test 100% of a population?
1) when the population is very small
2) when the population is large, the data is reliable and in electronic form and the auditor can use ADA software
Auditors are required to perform substantive procedures for all _________ ___________ that have been identified during the risk assessment phase.
Relevant Assertions
Define Audit Sampling
application of an audit procedure to LESS THAN 100% of the items within an account balance or class of transaction for the purpose of evaluating some characteristic of the balance or class
When data is available in electronic form, ADA software can analyze an entire population regardless of size. If it is not in electronic form and the population size makes it cost or time prohibited to analyze the entire population, a sampling of the population can be used.
Define estimation uncertainty.
The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement
Define management bias
A lack of neutrality by management in the preparation and fair presentation of information.
What are the three categories of misstatements?
1) Factual misstatements
2) Judgmental misstatements
3) Projected misstatements
What are the 3 purposes of analytical procedures?
1) Required in planning
2) May be useful as substantive audit evidence
3) Required in final review
Which assertion is typically related to income statement accounts rather than balance sheet accounts or presentation and disclosure?
a) Rights and obligations
b) Cutoff
c) Completeness
d) Accuracy
b) Cutoff
How should a misstatement be classified if an auditor feels that the allowance for doubtful accounts is understated?
a) As a quantitative misstatement
b) As a judgmental misstatement
c) As a projected misstatement
d) As a factual misstatement
b) As a judgmental misstatement
Judgmental misstatements are caused by management judgment regarding accounting estimates the auditors feel are unreasonable.
This would not be considered a projected misstatement because it is only one transaction.
Which level of detail is required in the substantive testing working papers?
a) A summary of the selections without specific selections
b) Documentation of specific items selected for testing
c) As determined by professional judgment
d) A discussion of sampling techniques
c) As determined by professional judgment
The level of detail to include in the working papers is a matter of professional judgment. Another auditor must be able to review the working papers, re-perform the steps, and reach the same conclusion as the auditor who prepared the working papers.
An auditor verified that a sales transaction represented in the income statement occurred and was recorded in the correct accounting period.
Which assertions are tested in this procedure?
a) Classification in the presentation and disclosure
b) Accuracy in the presentation and disclosure
c) Valuation in the balance sheet accounts
d) Existence in the balance sheet accounts
d) Existence in the balance sheet accounts
Showing that these sales transactions occurred provides evidence that the balance of the accounts receivable at year-end exists, and that the client holds those rights.
Which extent of substantive audit procedures is warranted when an auditing sales discount program that was created in the current does not have a material balance and the detection risk is very low?
a) Substantive procedures should decrease due to the low detection risk
b) Substantive procedures should begin in the second year
c) The sample size would increase due to the implementation of the new process.
d) The sample size should not be affected by the new process.
c) The sample size should increase due to the implementation of the new process.
Due to the new system implemented in the current year and the low detection risk, the sample size should be higher.
