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T/F: The more variability there is in the range, the need for a larger sample size.

True

What does variability equate to?

Uncertainty

What is the central limit theorem?

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

How is statistical sampling evaluated?

Quantitatively

How is nonstatistical sampling evaluated?

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

Is defining the attribute of interest unique to attribute or variable testing?

Attribute

When the auditor is willing to accept greater risk, what sample size should be used?

Smaller

When the auditor is willing to accept less deviation, what sample size will be used?

more

When the auditor expects fewer deviations, what sample size would be needed?

Less

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

False, random selection!

T/F: Block sampling is acceptable.

False

What is the upper deviation rate/

sum of the sample deviation rate + allowance for sampling risk

T/F The auditor may rely on the control if the upper deviation rate is exceeds the auditor's tolerable deviation rate.

False!

Does stratification result in a smaller or larger sample size?

Smaller

Does variability result in a larger or smaller sample size?

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

T/F: Variable sampling is used to determine whether a given account balance is reasonable.

True

What is the primary objective of PPS?

Identify overstatement errors

Would an auditor use attribute or variable sampling to identify entries posted to incorrect amounts?

Attribute

If an auditor assesses control risk too low and decreased substantive testing, is the true deviation rate in the population more or less than the deviation rate in the auditor's sample?

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

T/F: A deficiency in design occurs when a properly designed control does not operate as designed.

False

T/F: A deficiency in design exists when a necessary control is missing or when a control doesn't achieve the desired objective

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

T/F: Management's failure to furnish a written assertion and make a written representation should result in withdrawal of the auditor.

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

What kind of opinion results from a material weakness in internal control for nonissuers?

Adverse

T/F: For nonissuers, the auditor should express an opinion directly on the effectiveness of I/C and not on management's assertion.

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

What opinion is issued when an auditor obtains evidence that the material weakness has been eliminated?

Unqualified

Is the involvement of another auditor permitted for public or private companies?

Private

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

Board of directors and audit committee

T/F: The auditor may not communicate how significant risks of material misstatement will be addressed, the planned approach toward internal control, factors affecting materiality, and any potential use of internal audit staff.

False, they may!

With regards to significant findings, should the auditor communicate the auditor's views about qualitative aspects of the entity's accounting practices?

Yes

T/F: The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance should be communicated to those charged with governance.

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

What source of standards require more fieldwork and reporting standards?

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

T/F: As the level of detection risk increases, the assurance provided by tests of details increases.

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

T/F: Audit reports should be provided to the appropriate officials of the entity requiring or arranging for the audit.

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

T/F: The Single Audit Act requires a separate evaluation of materiality for each major program selected.

True

What is an audit of entire organization that includes additional audit procedures on specific programs called?

Single audit

T/F: Audits of specific programs are called single audits.

False

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

Reporting significant deficiencies to specific regulatory bodies or grantor agencies

What opinion would an auditor issue for reportable instances of noncompliance?:

Qualified or adverse

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

T/F: A single audit does not represent a combined audit of both an entity's financial statements and federal financial assistance programs.

False, it does

T/F: OMB Circular A-133 allows auditors to use a risk-based approach to determine major grants.

True

T/F: The auditor's standard report does refer to the entity's I/C.

False, does not!

Which standards require audit documentation that contains sufficient information so that supplementary oral explanations are not required?

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

What is the statistical concept when an auditor evaluates the sampling results by calculating the possible error in either direction/

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

Would an engagement to express an opinion on the I/C of a nonissuer be more extensive or limited in the assessment of control risk made during a f/s audit?

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

T/F: Audit evidence obtained from an independent party provides greater assurance of reliability.

True

T/F: Relationships among balance sheet accounts tend to be more predictable that income statement accounts.

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

T/F: Information obtained indirectly from outside sources is the most reliable evidential matter.

False, directly

What procedure would be most effective in reducing attestation risk?

Examination of evidence

T/F: Strong, effective internal controls improve the reliability of data.

True

How is risk reduced by through segregation of duties?

ARC
Authority, Recordkeeping, Custody

T/F: The biggest concern with revenue is overstatement of assets and revenue.

True

Who makes the deposit if there is no cashier under the revenue cycle - Collections?

The Treasury

When auditing the revenue cycle, what assertion is more relevant?

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

What cash fraud scheme involves the theft of cash often concealed by failing to account for cash receipts

Lapping

What is the best method to guard against 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!

T/F: Frequent kiting may result in a high level of deposits coupled with a low average balance.

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

What department approves proper authorization of write-offs of uncollectible accounts?

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

Accounting for unused prenumbered purchase orders and receiving reports is usually performed in the vouchers payable department.

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

T/F: Examination of evidence of credit approval supports the assertion of rights and obligations.

False

T/F: There is an opportunity for a person to embezzle cash and cover it up if he/she who disburses cash (via blank checks and signature plates) also reconciles the bank statement.

True

What procedure would best detect a liability omission by management?

Review purchase contracts and other legal documents

T/F: By tracing from the shipping documents to the invoices, the auditor confirms that goods that were shipped were properly billed.

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

T/F: In auditing payroll, an auditor would most likely compare payroll costs with entity standards of budgets.

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

Should periodic inventory counts be used to adjust perpetual records to maintain perpetual inventory records?

YES

T/F: Examining an analysis of inventory turnover helps identify slow-moving and obsolete items included in inventories.

True

What assertion would analyzing inventory turnover rates support?

Valuation and allocation

T/F: When the A/P manager issues purchase orders, this indicates a strength in A/P procedures.

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

T/F: A related party transaction is considered to be an arm's length transaction.

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

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