# Audit 1-5

### 580 terms by Jamantr

#### Study  only

Flashcards Flashcards

Scatter Scatter

Scatter Scatter

## Create a new folder

True

Uncertainty

### What is the central limit theorem?

The population being sampled is normally distributed/can be described by a 'normal' or 'bell-shaped' curve

Quantitatively

Judgmentally

### What kind of sampling is primarily used for testing internal controls?

Attribute sampling

### What are variables sampling and PPS sampling used for?

Substantive testing of account balances

### What is audit risk?

the uncertainty inherent in applying audit procedures

### What is the beta risk associated with test of controls?

Risk of assessing risk too low

### What is the beta risk associated with substantive testing?

Risk of incorrect acceptance

### What is the alpha risk for substantive testing and test of controls?

Risk of incorrect rejection and risk of assessing risk too high

### What are the sampling risks associated with efficiency?

Risk of assessing risk too high and risk of incorrect rejection

### What are the sampling risks associated with effectiveness/

Risk of assessing risk too low and risk of incorrect acceptance

Attribute

Smaller

more

Less

### T/F: The most common technique in selecting the sample of test of controls is systematic selection.

False, random selection!

False

### What is the upper deviation rate/

sum of the sample deviation rate + allowance for sampling risk

False!

Smaller

Larger

### What are the variable sampling plans?

MPU Estimation, Ratio estimation, Difference estimation

### What parameters for substantive testing have a direction relationship with sample size?

Estimated misstatement, assessed level of risk, standard deviation

### What parameters for substantive testing have an indirect relationship with sample size?

Tolerable misstatement and acceptable level of risk

### What is an advantage of statistical sampling over nonstatistical sampling?

Measure the sufficiency of the audit evidence obtained

### T/F: Inclusion of zero and negative balances require special design considerations with classical variables sampling.

False, with PPS sampling

True

### What is the primary objective of PPS?

Identify overstatement errors

Attribute

More!

### When does a control deficiency exist for nonissuers?

When a control doesn't allow management or employees, in the normal course of performing their assigned functions, to PREVENT, DETECT AND CORRECT a misstatement

### When does a control deficiency exist for issuers?

When a control doesn't allow management or employees, in the normal course of performing their assigned functions, to PREVENT or DETECT a misstatement

False

True

### What are the keywords associated with deficiencies in the design of controls?

PCSIQM
Preparation, consciousness, segregation of duties, safeguarding of assets, qualifications, IT controls, monitoring

### What are indicators of material weakness?

-Identification of any level of FRAUD perpetrated by senior management
-Restatement
-Identification by the auditor of a material misstatement that wouldn't have been detected by their IC
-Ineffective oversight by those charged with governance

### T/F: An auditor is permitted to report on the absence of significant deficiencies.

False, not allowed

### What may the auditor issue a communication indicating?

No material weaknesses were identified

### What is management's requirements in a private company?

Management makes assertion/claim and how they can prove it

True

### When would it be okay to scale the audit?

"small" public co/issuer

### T/F: Using the work of others is permitted for high risk areas.

False, for NON high risk areas

True

### T/F: An engagement to report on whether a previously reported internal control weakness continues to exist is a required professional standard.

False, voluntary engagement

Unqualified

Private

### What does the term ''those charged with governance' encompass?

Board of directors and audit committee

False, they may!

Yes

True

### T/F: The degree of reliance the auditor placed on the management representation letter is required to be communicated to those charged with governance.

False, not required

### What is the purpose of the management representation letter?

To confirm management's oral evidence supplied during the engagement

### T/F: GAAS includes designing the audit to provide reasonable assurance of detecting material misstatements resulting from noncompliance.

False, GAGAS does

GAGAS;

### What requirements apply for audits of federal financial assistance?

-Expanded internal control documentation and testing requirements
-Expanded reporting to include formal written reports on the consideration of internal control and the assessment of control risk
-Expanded reporting regarding compliance
-Application of single audit standards to federal financial assistance

### What are the two types of audits?

Financial and performance

### What are the objectives under performance audits?

EIC
Effectiveness, economy, efficiency, Internal control, & compliance

### What are increased responsibilities of management identified by GAGA

-Identification of applicable laws and regulations w/ compliance requirements
-Establishment of I/C to provide reasonable assurance that the entity complies w/ those laws and regulations
-Preparation of supplementary financial reports
-Obtaining an audit that satisfies contractual, regulatory, or legal requirements

### What is the audit risk of noncompliance?

Audit risk of noncompliance = risk of material noncompliance * Detection risk

### T/F: The auditor can change the risk of material noncompliance, but can't change their assessment of the risk.

False, can't change risk, but can' change assessment

False, decreases

### When would tests of the operating effectiveness of controls be required?

If
-Substantive tests do not provide evidence to support a conclusion
-The risk assessment includes an expectation of the operating effectiveness of controls over compliance
-tests of controls are required

### What are the compliance requirements for documentation?

-assessed risk of material noncompliance
-Responses to risk assessment
-Compliance with supplemental requirements
-Basis or rationale for materiality levels

### T/F: Internal control documentation should be based on GAGAS, which does not contain additional audit documentation requirements beyond GAAS.

False, it does include additional audit documentation

### What are the additional reporting standards under GAGAS?

-Include an affirmative statement of compliance with GAGAS
-Describe the scope of testing of regulatory compliance and IC
-Describe omitted information
-Describe the distribution of the report

True

### T/F: A written report on the auditor's understanding of internal control and the assessment of control risk is required under GAAS.

False, under GAGAS

### What is the Single Audit Act?

Requires entities that expend federal assistance of \$500,000 or more in a fiscal year to have an audit performed to act in accordance with the act

### What are the objectives of a single audit?

-Audit of the entity's f/s and reporting on a separate schedule of expenditures of federal awards in relation to those f/s
-Compliance audit of federal awards expended during the year as a basis for issuing additional reports on compliance related to major programs and on internal control over compliance

True

Single audit

False

### What communication requirement do auditors have the responsibility of in government settings?

Reporting significant deficiencies to specific regulatory bodies or grantor agencies

### T/F: The scope of the auditor's testing of internal control is not required to be included in the auditor's report on I/C and compliance w/ laws and regulations in accordance w/ GAGAS.

False, it IS required

### Who do Government Auditing Standards published by the Government Accountability Office apply to?

Primarily to audits of federal financial assistance and government organizations

False, it does

True

False, does not!

GAGAS

### What is the focus of auditors conducting an audit in accordance with the Single Audit Act using risk-based approach?

High-risk programs

### How is a subrecipient defined as?

A nonfederal entity that expends federal awards received from another entity to carry out a federal program

### To determine the sample size for a test of controls, what should the auditor consider?

TEL
-Tolerable deviation rate, expected deviation rate, risk of assessing risk too low

Precision

### T/F: All significant deficiencies are material weaknesses.

False, all material weaknesses are significant deficiencies.

### When would a restriction on the use of a report be made?

Engagement to report on I/C

More extensive

### What are the standard auditing procedures?

FIVE-CARROT-CARS
Footing
Inquiry
Vouching
Examining, Confirmation, Analytical Procedures, Reperformance, Reconciliation, Observation, Tracing, Cut-off review, Auditing related accounts simultaneously, Representation letter, Subsequent events review

### What are the relevant assertions to the audit of account balances?

CVER
Completeness, Valuation, allocation and accuracy, Existence, Rights and obligations

### What are the relevant assertions to the audit of transactions and events?

COVEU
Completeness, Cut-off, Valuation allocation and accuracy, Existence, Understandability and classification

### What are the relevant assertions to the audit of disclosures?

CVRU
Completeness, valuation allocation and accuracy, Rights and obligations, Understandability

True

False

### Where should the direction of the audit test come from to determine whether transactions have been recorded?

Original source documents

### When an analytical procedure is used as the principal substantive test of a significant f/s assertion, what is the auditor required to document?

The auditor's expectation and the factors considered in developing that expectation

### What assertion would recalculation of the amortization and review of the amortization period test?

Valuation and allocation assertion

False, directly

### What procedure would be most effective in reducing attestation risk?

Examination of evidence

True

### How is risk reduced by through segregation of duties?

ARC
Authority, Recordkeeping, Custody

True

The Treasury

Existence

### When would positive confirmations be acceptable to send?

-Large accounts
-Weak internal control
-Expected errors and disputes

### When would negative confirmations be used?

-Small balances
-Expect customer attention
-Low risk

### What assertions are more relevant for accounts payable?

Completeness and accuracy

### T/F: A/P confirmations are required.

False, NOT required

Lapping

Lock box system

### What is the audit procedure for kiting?

Bank cut off procedure

### T/F: The payroll department is a custodial department.

False, recordkeeping!

True

### What is kiting?

When one check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the 1st bank

### What internal control would most likely reduce the risk of diversion of customer receipts by an entity's employees?

Bank lockbox system

### What would a responsible employee do immediately upon receiving checks from customers by mail?

Prepare a duplicate listing of checks received

### How would an auditor provide assurance that each voucher is submitted and paid only once?

Stamp 'paid' by the check signer

Treasurer

### T/F: Reconciling the control totals for sales invoices w/ the A/R subsidiary ledger would be an effective internal control to reduce the risk of errors in the billing process.

False! Not effective

No

### What assertion would an auditor's review of credit ratings of customers with delinquent accounts receivable concern?

Valuation and allocation

### What assertion does examination of evidence of credit approval support?

Valuation and allocation

False

True

### What procedure would best detect a liability omission by management?

Review purchase contracts and other legal documents

True

### What account would an auditor focus increased attention on during a recession?

Allowance for doubtful accounts

### Why would an auditor review the reconciliation of payroll tax forms that a client is responsible for filing?

To identify potential liabilities for unpaid payroll taxes

### How is dividend income from investments tested by?

Referring to dividend record books produced by investment advisory services

### How would an auditor generally test the segregation of duties related to inventory by?

Personal inquiry and observation

### What assertion does inquiries of production and sales personnel concerning possible excess or obsolete inventory items support?

Valuation and allocation

True

### In auditing long-term bonds payable, what would an auditor most likely do?

Compare interest expense w/ the b/p amount for reasonableness

### What would an auditor do in performing tests concerning the granting of stock options?

Trace the authorization for the transaction to a vote of the board of directors

YES

True

### What assertion would analyzing inventory turnover rates support?

Valuation and allocation

False,weakness

### What is a key control for ensuring sales are properly authorized when assessing control risks for sales?

Sales orders are sent to the credit department for approval

### What evidence does tracing shipping documents to prenumbered sales invoices provide?

Shipments to customers were properly invoiced

### What substantive testing of payroll balances would be limited if the control risk is assessed as low

Applying analytical procedures and recalculating payroll accruals

### What assertion does looking at related party transactions support?

Valuation, allocation, and accuracy

False, it is NOT

### What is the auditor's objective with related party transactions?

Disclosed in accordance with GAAP

### What procedures would be applied to determine the existence of related parties?

-Evaluating the company's procedures for identifying and accounting for related party transactions, and obtaining a conflict of interest statement from the client
-Asking management for the names of all related parties
-Reviewing the entity's filings with the SEC
-Reviewing material transactions for related party evidence
-Reviewing prior years' audit documentation or inquiring of the predecessor auditor

### T/F: To identify a contingency, an auditor would NOT send an inquiry letter to the client's attorneys.

False, they would!

### What factors would an auditor concentrate on in evaluating the reasonableness of an estimate?

-Significant to the accounting estimate
-Sensitive to variations
-Deviations from historical patterns
-Subjective and susceptible to misstatements and bias

See More

Example: