B BUS 411: Chapter 17 -- Chapter 25
A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, what would lead to a larger sample size?
Smaller measure of tolerable misstatement
A client has a calendar year-end. What subsequent events might result in adjustment of the December 31 financial statements?
Write-off of a substantial portion of inventory as obsolete
If no exceptions were found in the substantive tests of transactions
ARIA would increase
When may auditors observe the physical inventory count?
At an interim date and at year-end
The highest level of assurance is provided for in what engagement?
Audit
Inventory price tests
Audit procedures used to verify the costs used to value physical inventory
What conditions would lead to a larger sample size?
High control risk
General cash account
the primary bank account for most organizations; virtually all cash receipts and disbursements flow through this account at some time
Inventory and warehousing cycle
the transaction cycle that involves the physical flow of goods through the organization, as well as related costs
Kiting
the transfer of money from one bank to another and improperly recording the transfer so that the amount is recorded as an asset in both accounts; this practice is used by embezzlers to cover a theft of cash
Dual-dated audit report
the use of one audit report date for normal subsequent events and a later date for one or more subsequent events that come to the auditor's attention after the date of the audit report
Subsequent events
transactions and other pertinent events that occurred after the balance sheet date that affect the fair presentation or disclosure of the statements being audited
Inventory Analytical Procedures
• Gross margin to previous years • Inventory turnover • Unit cost with previous years • Compare extended inventory value with previous year • Compare OH costs to previous year
Audit Cost Accounting
• Test physical controls over inventory • Test documentation of inventory transfers • Test accuracy of perpetual master files • Test unit cost records
In an MUS sample with a sampling interval of $5,000, an auditor discovered that a selected accounts receivable with a recorded amount of $10,000 had an audit value of $8,000. If this is the only error discovered by the auditor, the projected error of the sample would be
$2,000
You are auditing Raji and Company. You discover an item of inventory with an audited value of $5,000 with a recorded amount of $3,000. If this is the only error you discover, the projected misstatement for the sample would be
$2,000
Mr. Murray decides to use stratified sampling. The reason for using stratified sampling rather than unrestricted random sampling is to
Allow the auditor to emphasize larger items from the population
What are the amount of evidence, level of assurance, form of conclusion, and distribution level for Examination engagement?
Amount of Evidence: Extensive Level of Assurance: High Form of Conclusion: Positive Distribution: General
What are the amount of evidence, level of assurance, form of conclusion, and distribution level for Review engagement?
Amount of Evidence: Significant Level of Assurance: Moderate Form of Conclusion: Negative Distribution: General
What are the amount of evidence, level of assurance, form of conclusion, and distribution level for Agreed-upon procedures engagement?
Amount of Evidence: Varying Level of Assurance: Varying Form of Conclusion: Findings Distribution: Limited
A commitment is best described as
An agreement to commit the firm to a set of fixed conditions in the future
Define misstatement bound
An estimate of the largest likely overstatement in a population at a given ARIA, using monetary unit sampling
In a probability-proportional-to-size sample with a sampling interval of $3,000, what can be determined?
An overstatement error of $200 in an item recorded at $300 will result in a projected error of $2,000
_______ is a method of projecting from the sample to the population to estimate the population misstatement. It assumes that misstatements in the.unaudited population are proportional to the misstatements found in the sample.
Point estimate
In applying variables sampling, an auditor attempts to
Predict a monetary population value within a range of precision
One of the primary approaches in dealing with uncertainties in loss contingencies uses a(n) ______ threshold
Probability
What is not a function within the inventory and warehousing cycle?
Process invoices for shipped goods
There must be a periodic physical count by the client of the inventory items on hand
Regardless of the client's inventory valuation method
When using the probability threshold for contingencies, the likelihood of the occurrence of the event is classified as
Remote, reasonably possible, or probable
Branch bank accounts
separate bank accounts maintained at local banks by branches of a company
What are the two types of sampling risk faced by the auditor when testing an account balance?
1) Acceptable risk of incorrect acceptance (ARIA) - The risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated 2) Acceptable Risk of Incorrect Rejection (ARIR) - The risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not materially misstated
What is the primary concern of tests of controls and substantive tests of transaction?
1) Testing the effectiveness of internal controls and the rate of monetary misstatements 2) Determine if the exception rate in the population is sufficiently low to justify reducing assessed control risk to reduce substantive test 3) Measures the frequency of occurrence
What are the steps for tests of details of balances?
1. State objective of the test 2. Determine if sampling applies 3. Define a misstatement 4. Define population 5. Define sampling unit 6. Specify tolerable misstatement 7. Specify acceptable risk of incorrect acceptance 8. Estimate misstatements in the population 9. Determine initial sample size 10. Select sample 11. Perform audit procedures 12. Generalize to population 13. Analyze misstatements 14. Decide on acceptability of the population
Four steps of audit process for inventory
1. Understand business and control environment 2. Preliminary assessment of control risk 3. Decide on TOC vs. TOB evidence mix 4. Develop audit plan
Additional Physical Count Considerations
1. Understand units of measure - cases, boxes, items, etc. 2. Gather shipping and receiving cutoff evidence during count 3. Cycle count strategies - inquiry, ABC value approach, counting zero balances 4. Watch for product stacking variances and potential miscounts 5. Evidence about obsolescence can be gathered at the count 6. Consider impact of WIP off site with subcontractors 7. Be aware and thorough in counting like items in different locations 8. Select test counts to cover various teams 9. Keep copies of your counts for later tracing into final records 10. Select items in obscure locations to verify existence 11. Open boxes to verify product is inside
Perpetual inventory master file
A continuously updated computerized record of inventory items purchased, used, sold, and on hand for merchandise, raw materials, and finished goods
Define point estimate
A method of projecting from the sample to the population to estimate the population misstatement, commonly by assuming that misstatements in the unaudited population are proportional to the misstatements found in the sample
Define stratified sampling
A method of sampling in which all the elements in the total population are divided into two or more subpopulations that are independently tested and evaluated
Define Mean-per-unit estimation
A method of variables sampling in which the auditor estimates the audited value of a population by multiplying the average audited value of the sample by the population size and also calculates sampling risk
Define Difference estimation
A method of variables sampling in which the auditor estimates the population misstatement by multiplying the average misstatement in the sample by the total number of population items and also calculates sampling risk
Define ratio estimation
A method of variables sampling in which the auditor estimates the population misstatement by multiplying the portion of sample dollars misstated by the total recorded population book value and also calculates sampling risk
When there are no perpetual inventory files and inventory is material
A physical inventory should be taken by the client near the end of the accounting period
What accurate statement would not be correct regarding agreed-upon procedures engagement?
A report for such an engagement describes the finding resulting from the procedures, but cannot describe the procedures agreed upon.
Define monetary unit sampling (MUS)
A statistical sampling method that provides misstatement bounds expressed in monetary amounts; also referred to as dollar unit sampling, cumulative monetary amount sampling, and sampling with probability proportional to size
Financial instruments
A tradable asset of any kind, including cash, equity securities, debt securities, and derivative instrument
The accounting department reports the accounts receivable balance as $175,000. You are willing to accept that balance if it is within $15,000 of the actual balance. Using a variables sampling plan, you compute a 95% confidence interval of $173,000 to $187,000. You would therefore
Accept the $175,000 balance because the confidence interval is within the materiality limits
What need to be considered when the auditor generalizes from the sample to the population?
Acceptable risk of incorrect acceptance | Sampling error
With what client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities?
Accounts receivable clerk
Comparing the physical counts with the perpetual inventory master files satisfies the balance-related audit objective of
Accuracy
An auditor is reconciling the amounts included in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. What audit objective is being satisfied?
Accuracy and valuation
In most manufacturing companies, the inventory and warehousing cycle begins with the
Acquisition of raw materials for production
The auditor has completed her assessment of subsequent events. The proper accounting for subsequent events that have a direct effect on the financial statements is to
Adjust the financial statements for the year under audit
What needs to be included in a standard inquiry to the client's attorney letter sent to a client's legal counsel?
Any pending threatened litigation with which the attorney has had significant involvement; the amount of legal fees paid by the client to the attorney
Provide a statement that best describe the audit of inventory cost accounting.
Auditors test perpetual inventory master files by examining documentation that supports additions and reductions of inventory amounts in the master file.
The auditor has the responsibility to actively search for subsequent events that occur subsequent to the
Balance sheet date, but prior to the audit report
The date of the management representation letter received from the client should
Be dated no earlier that the date of the audit report
How is basic precision calculated?
By multiplying the sampling interval by the confidence factor for zero misstatements at the specified level of ARIA (Acceptable Risk of Incorrect Acceptance
When auditors observe the client accounting inventory, what does the auditor do not have to be careful with?
Calculating the unit cost of the inventory items
What is likely to be detected as part of the audit of the bank reconciliation?
Cash received by the client after year-end, but included in cash receipts in the current year
The standard inquiry to the client's attorney should be prepared on
Client's letterhead and signed by a company official
If the perpetual inventory master files show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded
Compare inventory turnover ratio with previous years
Two of the types of services provided in connection with the Statements on standards for Accounting and Review Services are
Compilation and review services
Compilation reports may not be what?
Compilation with limited independence
The auditor's primary concern relative to presentation and disclosure-related objective is
Completeness
Define statistical inferences
Conclusions that the auditor draws from sample results based on knowledge of sampling distributions
If the auditor concludes that physical controls over inventory are so inadequate that the inventory will be difficult to count, the auditor should ordinarily
Conduct expanded observation tests of physical inventory
Letter of representation
a written communication from the client to the auditor formalizing statements that the client has made about matters pertinent to the audit
As the amount of misstatements expected in the population approaches tolerable misstatement, the planned sample size will
Decrease
What is the primary concern of tests of details of balances?
Determining whether the monetary amount of an account is materially misstated.
Explain why difference estimation is commonly used by auditors
Difference estimation can be very effective and efficient where 1) An audited value and a book value are available for each population item 2) A relatively high frequency of misstatements is expected 3) A result in the form of a confidence interval is required In those circumstances, difference estimation far outperforms both MUS and mean-per-unit estimation. It may or may not outperform ratio estimation, depending on the relationship of misstatement amounts to recorded amounts. If focus on large dollar value items is required, difference estimation can be used with stratification.
You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to
Disclose a liability and provide a range of outcomes
How can an auditor obtain a stratified sample of 30 items from each of the three strata in the confirmation of accounts receivable?
Divide the population into three mutually exclusive strata. A random sample of 30 items is then selected independently for each stratum.
What would normally be discovered as part of the audit of the bank reconciliation?
Failure to include a deposit in transit on the bank reconciliation
What is most likely to be uncovered during an audit of a client's bank reconciliation?
Failure to record a collection of a note receivable by the bank on the client's behalf
A CPA firm can issue a compilation report
Even if it is not independent
The general cash account is considered a significant account in almost all audits
Even when the ending balance is immaterial
Auditors will generally send a standard inquiry to the client's attorney letter to
Every attorney that the client has been involved with the current or preceding year, plus any attorney the client engages on occasion
What balance-related audit objectives typically is assesses as having inherent risk for cash?
Existence
What sample planning factors will influence the sample size for a test of details of balances for a specific account?
Expected amount of misstatements and measure of tolerable misstatement
The reliability of perpetual inventory master files affects the timing and _____ of the auditor's physical and examination of inventory
Extent
When a physical count of inventory is performed at an interim date, the auditor observes it at that time and tests the perpetual records for transactions
From the date of the count to year-end
When the auditor uses monetary unit statistical sampling to examine the total dollar value of invoices, each invoice
Has a probability proportion to its dollar value of being selected
While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was not materially misstated. It was, in fact, materially misstated. This situation illustrates the risk of
Incorrect acceptance
While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
Incorrect rejection
If analytical procedures are performed with no indications of likely misstatements ARIA will _______ and the sample size will ________.
Increase; decrease
Accurately describe a statement regarding how the acceptable risk of overreliance (ARO) and the acceptable risk of incorrect acceptance (ARIA) interact to affect evidence accumulation.
If controls are found to be effective, control risk can remain low, which permits the auditor to increase ARIA, thereby requiring a smaller sample size in the substantive tests of details of balances.
What is an accurate statement regarding presentation and disclosure?
In phase IV (completing the audit), auditors evaluate whether the overall presentation of the financial statements and related footnotes compiles with the accounting standards.
______ is normally characterized as a difficult and complex account to audit
Inventory
The inventory and warehousing cycle can be thought of as having two separate but closely rated systems, one involving the actual physical flows of goods, and the other the
Inventory and warehousing cycle
A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory item. The audit objective being achieved by this procedure is
Inventory as recorded on tags actually exists (existence).
Inventory is a complex area to audit for all except for what reason?
Inventory valuation includes few estimates
What is the relationship between ARIA (Acceptable risk of Incorrect Acceptance) for TDB (Tests of Details of Balances) and ARO (Acceptable Risk of Overreliance) for tests of controls?
Inverse relationship between ARO for TOC and ARIA for TDB. If internal controls are considered to be effective, control risk can be reduced. If controls are determined to be effective after testing, control risk can be estimated below maximum, which permits the auditor to increase ARIA. By increasing ARIA, auditors can reduce sample sizes for TDB.
An imprest petty cash fund
Is being replaced by pre-approved purchase cards in many companies
_____ accumulate costs by individual jobs as material is issued into production and labor costs are incurred
Job cost systems
What groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities?
Management
When auditing manufacturing overhead costs assigned to inventory, auditors should keep in mind that
Management typically allocates overhead using total direct labor dollars as the basis for the allocation
What is not a "cash equivalent"?
Marketable securities
Auditors are likely to prepare a proof of cash when the client has
Material internal control weaknesses in cash
Periodic System
Mechanism for measuring the level of inventory and the cost of goods sold (COGS) by using an occasional physical count. Use regular and random inventory audits to update inventory-tracking information
Perpetual System
Method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software
The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication
Must be written
The statement that "We are not aware of any material modifications that should be made to the accompany financial statements" expresses what?
Negative assurance
If a potential loss on a contingent liability is remote, the liability usually is
Neither accrued nor disclosed in footnotes
When auditing inventory cost accounting, what is the auditor not concerned about?
Net realizable value
Auditor tests of the physical controls over raw materials, work in process, and finished goods are generally limited to
Observation and inquiry
You are auditing the inventory account and are concerned about the possibility of an inventory overstatement. What is the best audit procedures to detect damaged inventory?
Observe the condition of inventory during the client's physical count.
Audit procedures related to contingent liabilities are initially focused on
Occurrence
What are the major audit factors affecting ARIA?
One of the main factors that affect the decision of the auditor related to ARIA is control related risk present in the audit risk model. It means the degree to which the auditor depends on internal controls. Control related risk can be reduced in case internal controls are effective which helps the auditor to raise ARIA which ultimately leads to fall in the size of the sample. Also, ARIA is influenced by audit that is acceptable and other tests that are substantive and have already performed on the balance of accounts.
The audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger can be tested by what procedure?
Proving the bank reconciliation as to additions and subtractions, including all reconciling items
Refusal by a client to prepare and sign the representation letter would require the auditor to issue a(n)
Qualified opinion or a disclaimer of opinion
Define monetary unit sampling and explain its importance in auditing. How does it combine the features of attributes and variables sampling?
Rather than judging whether the point estimate is material, the auditor should construct a statistical confidence interval around the point estimate and consider whether the interval indicates a material misstatement. Among other factors, the interval will reflect appropriate levels of risk and sample size. The auditor's mistake is that he or she treats the point estimate as if it is the true population value, instead of but one possible value in a statistical distribution. The statement illustrates how the misuse of statistical estimation can impair the use of an otherwise valuable audit tool.
You are preparing to issue a report on the compilation of financial statements for a nonpublic company. Prior to issuing the report, you should:
Read the financial statements to determine if they are free from obvious material errors
Receipt of ordered materials by the receiving department will generate the completion of a form called the
Receiving report
Standard cost records
Records that indicate variances between projected material, labor, and overhead costs and the actual costs
The concept of limited assurance is provided for in what engagement?
Review
What audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern?
Review compliance with the terms of debt agreements
An auditor must inquire about consigned or customer inventory included on the client's premises to satisfy the balance-related audit objective of
Rights
Define Probability Proportion to Size sample selection (PPS)
Sample selection of individual dollars in a population by the use of random or systematic sample selection
Define variables sampling
Sampling techniques for tests of details of balances that use the statistical inference process
The standards for preparation, compilation, and review engagements of financial statements are the
Statements on Standards for Accounting and Review Services (SSARS)
The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for
Subsequent events
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures normally integrated as a part of he verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. What procedures is in the second category?
Subsequent period sales and purchases transactions are examined to determine whether cutoff is accurate
The risk of incorrect acceptance relates to
Substantive tests and affects audit effectiveness
Job cost system
System of cost accounting in which costs are accumulated by individual jobs when material is used and labor costs are incurred
Process cost system
System of cost accounting in which costs are accumulated for a process, with unit costs for each process assigned to the products passing through the process
Auditors often integrate procedures for presentation and disclosure objectives with
Tests for balance-related objectives
accept the population as fairly stated or to require further action If an auditor concludes that internal controls are likely to be effective, the preliminary assessment of control risk can be reduced, leading to which of the following impacts on the acceptable risk of incorrect acceptance?
The acceptable risk of incorrect acceptance will be increased.
Define tolerable misstatement
The application of performance materiality to a particular sampling procedure
Fair value estimate
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
What statement describe an auditor's required communication with management and those charged with corporate governance?
The auditor is required to inform those charged with governance about significant errors discovered and subsequently correctly by management
An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of
The auditor's report
If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. What is not true?
The client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit
McKesson & Robbins Company is a well-known audit case involving auditor responsibility. What occurred at the McKesson & Robbins Company to change the way in which auditors audit inventory?
The company recorded nonexistent inventory
If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report?
The date of the subsequent event only; The date on which the last day of fieldwork occurred along with the date of the subsequent event
Why is it difficult to determine the appropriate sample size for MUS?
The difficulty in determining sample size lies in estimating the number and amount of misstatements that may be found in the sample. The upper bound of a monetary unit sample is sensitive to these factors. Thus, sample size varies a great deal with differing assumptions about them.
What would be an advantage of using variables sampling rather probability-proportion-to-size (PPS) sampling?
The inclusion of zero and negative balances usually does not require special design considerations
Define Basic Precision
The minimum allowance for sampling risk inherent in the sample for MUS; it is equal to the allowance for sampling risk when no misstatements are found in the sample
The most important part of the observation of inventory is to determine whether
The physical count is being taken in accordance with the client's instructions
Distinguish between the point estimate of the total misstatements and the true value of the misstatements in the population.
The point estimate is made by auditors as to the total amount of misstatement projected from the known misstatements found in the sample to the entire population. The projection is based on either the average misstatement in the sample times the population size, or the net percent of misstatement in the sample times the population book value. By making the point estimate, it means that the auditors use non-statistical, non-probabilistic sample which does not allow auditor to express his/her audit conclusion in the range of possible misstatements or percentage of confidence.
What is the relationship between the population standard deviation and the required sample size?
The required sample size is directly proportional to the square of the population standard deviation
Define Acceptable Risk of Incorrect Acceptance (ARIA)
The risk that the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance exceeds tolerable misstatement
Define Acceptable Risk of Incorrect Rejection (ARIR)
The risk that the auditor is willing to take of rejecting a balance as incorrect when it is not misstated by a material amount
How should the auditor determine the proper sample size?
The sample size also varies with the specified ARIA, which is also an auditor judgment that depends on several factors, such as assessed control risk and inherent risk
Evaluate the following statement made by an auditor: "I took a random sample and derived a 90 percent confidence interval of $800,000 to $900,000. That means that the true population value will be between $800,000 and $900,000, 90 percent of the time."
The statistical inference process is based on the long-run probability that the process will produce correct results in a predictable proportion of the times it is applied. Thus, a random sampling process that produces 90% confidence interval will produce intervals that do, in fact, contain the true population value 90% of the time. However, the confidence limits of each interval will not all be the same. The statement reflects a misunderstanding of the statistical inference process.
When should auditors generally assess a client's ability to continue as a going concern?
Throughout the entire audit process
Reports on agreed-upon procedures are intended to be distributed
To only the involved parties, who would have the requisite knowledge about those procedures and the level of assurance resulting from them.
An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known. This is an example a(n)
Unasserted claim
What factor would lead to a larger sample size?
Unsatisfactory results in other related substantive procedures
What is the major difference between tests of controls and substantive tests of transactions and tests of details of balances?
What the auditor wants to measure
When does sampling risk occur?
Whenever a sample is selected from a population and thus applies to each sampling method. While the risk related to incorrect acceptance to all sampling methods, the risk related to incorrect rejection is only applicable in variables sampling and difference estimation.
An auditor using nonstatistical sampling cannot formally measure sampling error and therefore must subjectively consider the possibility that the true population misstatement exceeds a tolerable amount. Should "The dollar difference between the point estimate and tolerable misstatement" / "The extent to which items I the population have been audited 100 percent" by considered by the auditor in making this assessment?
Yes; Yes
When selecting a sample size for substantive tests of balances which factor, other factors being equal, would result in a larger sample?
a decrease in the tolerable misstatement
Standard bank confirmation form
a form approved by the AICPA and American Bankers Association through which the bank responds to the auditor about bank balance and loan information provided on the confirmation
Proof of cash
a four-column audit schedule prepared by the auditor to reconcile the bank's record of the client's beginning balance, cash deposits, cleared checks, and ending balance for the period with the client's records
Imprest petty cash fund
a fund of cash maintained within the company for small cash acquisitions or to cash employees' checks; the fund's fixed balance is comparatively small and is periodically reimbursed
Inquiry of the client's attorneys
a letter from the client requesting that legal counsel inform the auditor of pending litigation or any other information involving legal counsel that is relevant to financial statement disclosure
Preparation service
a nonattest engagement in which the accountant is engaged by the client to prepare or assist in preparing financial statements, but the CPA does not provide any assurance on the financial statements or issue a report, even if the financial statements are expected to be used by, or provided to, a third party
Compilation service
a nonaudit engagement in which the accountant is engaged to assist management in the preparation of financial statements and issue a report to a client or third party without providing any CPA assurance about those statements
Cutoff bank statement
a partial-period bank statement and the related cancelled checks, duplicate deposit slips, and other documents included in bank statements, provided by the bank directly to the auditor; the auditor uses it to verify reconciling items on the client's year-end bank reconciliation
Contingent liability
a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place
Unasserted claim
a potential legal claim against a client where the condition for a claim exists but no claim has been filed
Financial statement disclosure checklist
a questionnaire that reminds the auditor of disclosure problems commonly encountered in audits and that facilitates final review of the entire audit by an independent partner
Completing the audit checklist
a reminder to the auditor of aspects of the audit that may have been overlooked
Review of audit documentation
a review of the completed audit files by another member of the audit firm to ensure quality and counteract bias
Engagement quality review (Independent Review)
a review of the financial statements and the entire set of audit files by a completely independent reviewer to whom the audit team must justify the evidence accumulated and the conclusions reached; also referred to as "independent review"
Review service (SSARS review)
a review of unaudited financial statements designed to provide limited assurance that no material modifications need be made to the statements in order for them to be in conformity with accounting standards or, if applicable, with another comprehensive basis of accounting
Unadjusted misstatement audit schedule
a summary of immaterial misstatements not adjusted at the time they were found, used to help the auditor assess whether the combined amount is material; also known as a summary of possible misstatements
Attestation engagement
a type of assurance service in which the CPA firm issues a report about the reliability of information or an assertion made by another party
What does audit plan consist of?
a. Assess directional risk and audit objectives b. Design audit steps and evidence c. Leverage analytical procedures d. Perform TOB audit procedures
The word below that best explains the relationship between required sample size and the acceptable risk of incorrect acceptance is
accept the population as fairly stated or to require further action
The auditor's principal objective when using a sample of tests of details of balances is whether the
account balance being audited is fairly stated.
Commitments
agreements that the entity will hold to a fixed set of conditions, such as the purchase or sale of merchandise at a stated price, at a future date, regardless of what happens to profits or to the economy as a whole
Examination
an attest engagement that results in positive assurance expressed as an opinion as to whether or not the assertions under examination conform with the applicable criteria
Review
an attestation engagement that provides limited assurance expressed in the form of negative assurance as to the CPA's awareness of any information indicating that the assertions are not presented in conformity with the applicable criteria
Agreed-upon procedures engagement
an engagement in which the procedures to be performed are agreed upon by the CPA, the responsible party making the assertions, and the intended users of the CPA's report; the degree of assurance provided by the CPA will vary based on procedures agreed to and performed
Service organization control (SOC) report
an engagement where a service organization's auditor reports on internal controls at the service organization, with a type 1 report including information about management's description of the service organization's system and the suitability of the design of the organization's controls while the type 2 report also includes information about the operating effectiveness of those controls
Management letter
an optional letter written by the auditor to a client's management containing the auditor's recommendations for improving any aspect of the client's business
Inventory compilation tests
audit procedures used to verify whether physical counts of inventory are correctly summarized, inventory quantities and prices are correctly extended, and extended inventory is correctly footed
Inventory is often a significant part of a company's current assets. Because of its importance, auditors are required by
auditing are required by auditing standards to observe the client taking a physical inventory count
Subsequent discovery of facts
auditor discovery that the financial statements are materially misstated, or that the opinion on internal controls over financial reporting may not have been appropriate, after they have been issued
Cost accounting controls
controls over physical inventory and the related costs from the point at which raw materials are requisitioned to the point at which the manufactured product is completed and transferred to storage
One of the steps involved in planning the sample for the tests of details of balances is to
define a misstatement
In monetary unit sampling, a sampling interval of 900 means that
every 900th dollar in the account will be sampled.
Cash equivalents
excess cash invested in short-term, highly liquid investments such as time deposits, certificates of deposit, and money market funds
Prospective financial statements
financial statements that deal with expected future data rather than with historical data
Other information included in annual reports
information that is not a part of the financial statements but is published with them; auditors must read this information for inconsistencies with the financial statements
The audit tests to verify that the client is using an inventory method which is generally accepted and to verify that physical counts were correctly summarized are performed during the audit of the
inventory and warehousing cycle
If an auditor desires a greater level of assurance in auditing a balance, the acceptable risk of incorrect acceptance
is reduced.
In estimating the population misstatement, the first step in projecting from the sample to the population is to
make a point estimate
An imprest petty cash fund would least likely to be used to pay for what item?
monthly interest expense
Auditors usually test cost accounting records as part of the
payroll tests; sales test; acquisition tests
Forecasts
prospective financial statements that present an entity's expected financial position, results of operations, and cash flows for future periods, to the best of the responsible party's knowledge and belief
Projections
prospective financial statements that present an entity's financial position and results of operations and cash flows for future periods, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions
Public company interim review
reviews of interim, unaudited financial information performed to help public companies meet their reporting responsibilities to regulatory agencies
Statements on Standards for Accounting and Review Services (SSARS)
standards issued by the AICPA Accounting and Review Services Committee that govern the CPA's association with unaudited financial statements of nonpublic companies
Statements on Standards for Attestation Engagements (SSAE)
statements issued by the AICPA to provide a conceptual framework for various types of attestation services
Cost accounting records
the accounting records concerned with the manufacturing and processing of the goods and storing of finished goods
Review for subsequent events
the auditing procedures performed by auditors to identify and evaluate subsequent events; also known as a post-balance-sheet review
Bank reconciliation
the monthly reconciliation, usually prepared by client personnel, of the differences between the cash balance recorded in the general ledger and the amount in the bank account
Parts of Inventory Audit
• Acquire raw material, labor, and OH • Transfer of assets and costs internally • Ship goods and record sales • Physically observe inventory • Price and compile inventory
How would increase in tolerable misstatement assessed level of control risk affect the sample size in substantive tests of details?
• Increase in tolerable misstatement will decrease sample size • Increase in assessed level of control risk will increase sample size
Inventory Price Testing
• Internal controls over standard cost records • Pricing of purchased inventory • Pricing of manufactured inventory • Valuation methods (FIFO, LIFO) • Obsolescence - Lower of cost or market
Audit Decisions
• Timing - Year end or off cycle • Extent - Sample size and methods
