Audit 6-11
Control Activities, definition
The policies and procedures that help ensure that management's directives are carried out and that necessary actions are taken to address risks impacting the achievement of the organization's objectives.
Rizal dela Cruz is auditing Cheung Products, Inc., and is using a reciprocal population for prepaid expenses account. Which of the following is most likely the reason for it? * The prepaid expense account is overstated for the year and expired expense is not adjusted or recorded. * The prepaid expense account is correctly adjusted for the expired portion of the expense. * The expense account correctly classified in the journal entry. * The expense account that was used was debited and the prepa
The prepaid expense account is overstated for the year and expired expense is not adjusted or recorded.
Gil Firm is auditing sales revenue of her client who has high volume transactions and is under pressure for revenue reporting, Gil performed more substantive procedures, assigned more experienced staff on the area, and use larger sample sizes in testing sales invoices and shipping documents. Which is more likely the effect on risk that Gil might incorrectly accept that there is no material misstatement? The risk of incorrect acceptance is moderate. The risk of incorrect acceptance is high. The
The risk of incorrect acceptance is low.
Factual misstatements
There is no doubt it is a misstatement as there are no elements of judgment involved
In which of the following scenarios is an auditor more likely to use ADA, as opposed to audit sampling? *Two people carefully check the lead accountant's work, which is all compiled electronically. *A business must determine inventory amounts stored in a centralized warehouse. *Proposed changes to policies on extending lines of credit are handwritten on the previously approved document. *Cash receipts are printed on paper and stored in a file cabinet.
Two people carefully check the lead accountant's work, which is all compiled electronically.
Machine learning
a subset of artificial intelligence that focuses on the idea that machines, and their embedded software and related algorithms, can be taught to learn, similar to the way humans learn
Company XYZ had wages expenses of $350,000 for their 2011 financial year. You are auditing XYZ's financial statements for the 2012 financial period which show payroll expense for the year as being $360,000. You learn that for 2012, the number of employees has remained unchanged compared to the previous year 2011, but all the employees had received a 10% wage increase
a) Develop an expectation for wages expenses for the year 2012 350,000*0.1=385,000 b) Determine a tolerable difference (use 5% of your expected amount) 385,000*0.05=19,250 c) Complete the analytical procedure and state your conclusion about the client's recorded amount. 385,000-360,000=25,000 25,000>19,250 We cannot accept the amount - investigate
An accounting estimate
an approximation of a monetary amount when a precise means of measurement is not available
Benchmarking
an audit testing strategy that can be used to allow evidence obtained in prior audit periods to support a conclusion about IT application controls in the current audit period; is can reduce or eliminate certain substantive audit procedures
Notable Item
an item that stands out from the population being analyzed, and has one or more of the following characteristics for a relevant assertion: * Indicates a risk of a material misstatement not previously identified (a new risk) * Indicates a higher risk of material misstatement than anticipated by the auditor * Provides information useful in designing or tailoring procedures to address risks of material misstatement
During a walkthrough of a transaction cycle, the auditor may do all of the following EXCEPT develop an understanding of the documents and electronic files used by the client. develop an understanding of transaction-level controls and the adequacy of segregation of duties. follow the transaction until it is recorded in the financial records. ask questions of personnel about management oversight.
ask questions of personnel about management oversight.
Testing Controls
audit procedures to test the operating effectiveness of controls in preventing, detecting, correcting material misstatements at the assertion level
Risk of incorrect rejection
auditor conducts substantive procedures on a sample and concludes that there is a material misstatement in an assertion, when in fact there is no material misstatement. This is an efficiency issue because the auditor will end up doing additional and unnecessary work
Risk of incorrect acceptance
auditor conducts substantive procedures on a sample and concludes that there is no material misstatement, when in fact there is a material misstatement. This is an effectiveness issue because the auditor missed the material misstatement.
Imagine you are an auditor and you noticed that earlier in the year there had been a build-up of inventory, which caused you some concern. However, in the last month of the year, records show that inventory drops to more normal levels and revenue increases. You decide to dig further, and you find that, during the last month of the year, there were several large shipments to the entity's largest customers. You are concerned and decide to review these shipments. Based upon the above information, i
bill and hold transactions.
Automated controls
commonly referred to as Information Technology (IT) controls and utilize technology, such as computers and accounting software, to perform checks and balances. Information Technology controls include: IT general controls, IT application controls, and IT dependent manual controls
Components of internal control
control environment, risk assessment, control activities, information and communication, monitoring
Significant deficiency
deficiencies in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Reported to charged with governance; can develop into a material weakness.
Misstatement
difference between what is reported in the client-prepared financial statements and what is required for the item to be presented fairly in accordance with the applicable financial reporting framework
The risk of incorrect acceptance relates to the: effectiveness of the audit. efficiency of the audit. preliminary estimates of materiality levels. tolerable misstatement.
effectiveness of the audit.
Organizational structure
entity, division, operating unit, function
Control deficiency
exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions: to prevent, or detect and correct, misstatements on a timely basis
Automation bias
favoring output from automated systems
Walkthrough
following a transaction (through inquiry and observation) from the time it is initiated until the time it is recorded in the financial records
The tolerable deviation rate for a test of controls is generally: * lower than the expected rate of deviations in the related accounting records. * unrelated to the expected rate of deviations in the related accounting records. * higher than the expected rate of deviations in the related accounting records. * identical to the expected rate of deviations in the related accounting records.
higher than the expected rate of deviations in the related accounting records.
Artificial Intelligence (AI)
intelligence (e.g., the capacity for understanding, reasoning, problem solving, and critical thinking) demonstrated by machines
Information and communication
involve capturing and providing information to management and employees so that they can carry out their responsibilities, including providing an understanding of individual roles and responsibilities as they relate to internal controls over financial reporting
Brad Leung is auditing Ann Arbor Products, Inc., and is using audit sampling to estimate the amount of misstatement that might be present in the accounts receivable balance. If this estimate is less than the tolerable misstatement for the account, then John should conclude the account balance is systematically biased. is materially incorrect. is within tolerable range. is materially correct.
is materially correct
Preventive vs detective
it's more effective to test detective controls, if a preventive control fails, an effective detective control should still identify errors and frauds
During his audit of Casual Fridays Apparel, Jason found evidence of fraud in his sampling of accounts receivable. Based on his findings, Jason must do all of the following EXCEPT * limit any additional examination to the full population of accounts receivables. * determine whether the evidence is consistent with previous assessments of inherent and control risks. * consider implications for the account balance and transaction class being audited. * consider what other audit issues might be infl
limit any additional examination to the full population of accounts receivables.
While performing an audit on the client's revenue process, the auditor increased the sampling sizes of the invoices being reviewed. This is highly likely due to the auditors' expectation of the internal control is not confirmed but the compensating controls in place can be relied on. the auditor expecting the internal controls are effective. there is a lower risk of material misstatement based on preliminary analysis. no compensating control risks and the auditor believes the risk of materia
no compensating control risks and the auditor believes the risk of material misstatement is high.
During an audit, an auditor discovers that revenues for the entity have grown 10%, while accounts receivable have grown 30%. All of the following are key assertions to consider related to receivables, EXCEPT occurrence. rights and obligations. valuation and allocation. existence.
occurrence
Objectives of Internal Control
operations, reporting, compliance
Monitoring the controls
policies and procedures to assess the effectiveness of internal control over time
Risk Assessment Process
process for identifying and responding to risks that an organization will not achieve its objectives
SOC 2 Report Type 1&2
same as SOC 1, only related to IT
Control environment
sets the tone of an entity and influences the control consciousness of its people
Top-down approach
start from entity-level to transaction level (significant accounts with possibility of material misstatement)
Tests of Details
substantive procedures auditors use to test the details of account balances, transactions, and disclosures
Confirmation bias
tendency to seek or interpret evidence in ways that support pre-existing beliefs or expectations
Non-sampling risk
the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues
Sampling Risk
the risk that the sample chosen by the auditor will not be representative of the population of transactions or items within an account balance and, as a consequence, the auditor could arrive at an inappropriate conclusion
Audit Data Analytics (ADA)
the science and art of discovering and analyzing patterns, identifying anomalies, and extracting other useful information in data underlying or related to the subject matter of an audit through analysis, modeling, and visualization for planning and performing the audit
In determining the sample size for a test of controls, an auditor should consider the expected population deviation rate, desired confidence level, and the: tolerable deviation rate. risk of incorrect acceptance. nature and cause of deviations. population size.
tolerable deviation rate.
Roll -forward procedures
updates on audit findings from the time of the interim procedures through to year -end
Audit of outsourcing accounting
user entity (audit client) user auditor service organization service auditor
Projected misstatements
Auditors' best estimates of misstatements in population based on misstatements found in samples
The controller at the construction company is under pressure for year-end reporting as the bonuses rely on strong revenues. The branch manager at the bank is troubled keeping up with high tuition fees for his three kids at a private school. What are the similarities between these two situations? Neither will be considered when doing fraud risk assessment. The auditor doesn't need to be alarmed as this does not affect performing the audit. Both will be considered when doing fraud risk assessment
Both will be considered when doing fraud risk assessments.
Which of the following would an auditor be more concerned about when auditing the revenue process for a multinational oil and gas field machinery and equipment manufacturer versus a hotel chain? Revenue tied to sales volumes and prices Domestic government policies Revenue recognition related to property Collection risk associated with selling to foreign entities
Collection risk associated with selling to foreign entities
The auditor is tracing a sample of shipping documents to the sales invoices, then to the sales journal. This relates to what assertion category? Accuracy Valuation and Allocation Completeness Rights and Obligations
Completeness
You have discovered a material misstatement in the existence assertion regarding credit sales. Which of the following is an appropriate key control to help detect and correct this problem? Computer matches sales invoice date with accounting period in which goods are shipped Computer matches sales invoice information with underlying shipping information Computer checks run-to-run total of beginning receivables, plus sales transactions with sum of ending receivables Computer prints a report of
Computer checks run-to-run total of beginning receivables, plus sales transactions with sum of ending receivables
When confirming accounts receivable, all of the following are true about positive confirmations received from customers, EXCEPT? There is evidence that the balance is complete Evidence about the completeness assertion is incomplete because unrecorded receivables cannot be confirmed Evidence about the completeness assertion is incomplete because customers are more likely to report errors of overstatement than errors of understatement Confirmations cannot provide indications of collectability
Confirmations cannot provide indications of collectability problems
Material weakness
Deficiencies in internal control so that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis Reported to public in audit report, notified those charged with governance, prepared management letter
IT controls, benefits
Greater consistency, digital tools, more timely, enhance the ability to monitor performance and activities
Labelle Corp has a higher volume of sales returns due to product defects. Why is this considered a risk factor for misstatement in the revenue process? This can result in misclassification of income. High sales returns reduce sales revenues. High sales returns can reduce cash receipts. High volume of sales adjustment transactions will likely result in numerous opportunities for errors to occur.
High volume of sales adjustment transactions will likely result in numerous opportunities for errors to occur.
IT controls, types
IT general controls IT application controls
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: Assessing control risk too high. Incorrect acceptance. Incorrect rejection. Assessing control risk too low
Incorrect rejection
If all other factors specified in a sampling plan for a test of controls remain constant, decreasing the tolerable rate and increasing the estimated population deviation rate would have what effect on sample size? Increase. Remain the same. Indeterminate, depends upon exact change being made. Decrease.
Increase
Gil Firm is auditing expenses of her client. She is aware that the client faces pressures which may contribute to a high risk of understating expenses. To reduce the risk of ineffective audit and the risk of incorrect acceptance, which of the following is the best course of action for Gil Firm to implement? Increase reliance on internal controls. Decrease substantive procedures. Decrease the sampling size for testing. Increase substantive procedures
Increase substantive procedures
Procedures for Testing Controls
Inquiry • Observation • Inspection of Physical Evidence • Re-Performance • Software-Based Audit Techniques
All of the following are often correct about not-for-profit organizations or smaller companies EXCEPT An auditor should consider fraud risk to be low. Internal controls are well developed. Segregation of duties may be weak. An auditor should consider fraud risk to be high.
Internal controls are well developed.
All of the following are true for a "three-way match", EXCEPT It assists with appropriate revenue recognition. It is often used by companies that are heavily computerized. It is helpful when goods are received by the customer and title passes. It occurs when the sales invoice matches with underlying shipping documents and the customer's sales order.
It is helpful when goods are received by the customer and title passes.
An auditor notices that on December 12, part of the payment received for account 6680 was transferred to account 5601 to pay the latter's outstanding balance in full. What is this an example of? Lapping Sales allowance Accounts receivable write-off Bill-and-hold transaction
Lapping
Results of audit testing
Logic diagram: * For each sample item, was the control effective or ineffective? Yes, or no? * whether there is a compensating control that might detect and correct a misstatement missed by the original control being tested? * if everything is yes - proceed with planned strategy, reliance approach * if no - revise the audit risk assessment and planned audit strategy; less on control approach, more on substantive approach
The auditor is performing an analytical procedure on the reasonableness of the client's revenues and gross margins in the industry. Which of the following ratio is likely the most useful to him? Gross profit margins Sales to total asset ratio Sales to capacity ratio Market share ratio
Market share ratio
John McNabe is auditing the accounts receivable of Ann Arbor Products, Inc. John is using audit sampling to estimate the amount of misstatement that might be present in the accounts receivable balance. If this estimate is less that tolerable misstatement for the account, then John should conclude the account balance is which of the following? Materially incorrect Materially correct Within tolerable range Subject to additional testing
Materially correct
You are performing an audit for a client in the construction industry. The client uses the percentage of completion method for revenue recognition. Audit data analytics shows that the gross margin on completed contracts declines quarter by quarter. However, gross margin on work in progress increases in the fourth quarter. Additionally, customer receivables are increasing, as is work in progress inventory. From these results, the auditor should identify all of the following risks EXCEPT Capitali
Misappropriation of assets.
In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of: Sampling error. Nonsampling risk. Standard error. Projected misstatement.
Nonsampling risk.
When conducting an audit, does the auditor use any sample selection method and evaluation method that does not have the characteristics of statistical sampling? Nonstatistical sampling Electronic sampling Probability sampling Manual sampling
Nonstatistical sampling
Proton Enterprises makes supplies and replacement parts for high-tech medical devices, and some of its products are potentially dangerous. Proton does not want certain products sent to clients who do not have the required regulatory certifications to receive them. Which of the following is the best course of action for Proton to take? Proton company software matches all issued inventory to authorized sales orders. Proton company software matches the customer number on the sales invoice to that
Only a small number of Proton employees are permitted to change the customer master file, and management reviews all changes.
How do you determine the sampling interval in systematic selection? Population size divided by random sample Random sample size divided by population size Population size divided by sample size Sample size divided by population size
Population size divided by sample size
During an audit of a merchandiser, an auditor discovers that revenues for the entity have grown 10%, while accounts receivable have grown 30%. This might indicate which of the following? Increasing competition Possible collection problems Increasing profitability Decreasing profitability
Possible collection problems
The controller estimates that 2% of the accounts receivable is doubtful. When should the controller likely record the bad debts expense amount? At the time credit sales occur At the time cash receipts occur Quarter-end At the time cash discount is taken
Quarter-end
Sampling Methods
Random selection Stratification Systematic selection Haphazard selection
During the audit of travel expenses, the auditor performs a test by sampling the account balance and had shown evidence of fraud. What should the auditor do? Reevaluate internal controls. Issue an adverse opinion. Report to management. Modify the sampling selection.
Reevaluate internal controls
An auditor is likely to test the effectiveness of IT general controls as part of testing which of the following? Recording of sales in a sales ledger Number of fraudulent sales returns Restricted access, via password security over employees' payroll information Page-level layout of common receiving reports
Restricted access, via password security over employees' payroll information
Audit Data Analytics ADA as risk assessment
Risk analysis decision tree: *Population --- Fits/doesn't fit the auditor expectation? ** if doesn't fit --- acceptable/unacceptable variation from the auditor's expectation? *** if unacceptable --- (remote probability) OR (reasonable possibility) of aggregating to a material misstatement
Based on the sample results of payroll files, the auditor concludes that a material misstatement exists. An increase in audit effort was done but the material misstatement does not exist. What sampling risk occurred? Non-sampling risk Sampling risk Risk of incorrect rejection Risk of incorrect acceptance
Risk of incorrect rejection
Control Activities, types
SCARE S segregation of duties C physical controls A authorization R performance review E EDP/IT information processing (edp means electronic data processing, was replaced with new term IT)
The client included sales revenue in the current period that was correctly earned for the next period. What is the effect on the following accounts? Sales and receivables are overstated No effect on both sales and receivable Sales understated; Receivable understated Cash is overstated
Sales and receivables are overstated
Which of the following is defined as "an approach to sampling that involves a random selection of sample items and the use of an appropriate statistical technique to determine sample size and evaluate sample results"? Nonsampling risk Nonstatistical sampling Sampling risk Statistical sampling
Statistical sampling
A multinational oil and gas company is audited by Peterson firm on their sales revenue account. The auditor wants to use ADA oversampling. Which of the following is the most important factor to consider in choosing ADA? The sample size is large Strong controls on the electronic data The electronic data is available The sample size is small
Strong controls on the electronic data
When would it be best to use statistical sampling, as opposed to nonstatistical sampling? The business to be audited is very large. The auditing team has many years of experience. The auditing team believes that professional discretion is necessary. The rules and regulations for the business are complex.
The auditing team has many years of experience.
If the auditor's estimate of the amount of misstatement that might be present in an audit population is less than the tolerable misstatement for the account, then which of the following is not true? - The auditor can conclude the population is materially correct. The auditor can conclude the account balance is materially correct. - The auditor can conclude the account balance is materially incorrect. - The auditor can estimate the amount of misstatement.
The auditor can conclude the account balance is materially correct.
A single auditor performs a thorough analysis of classification errors, in 20 documents chosen by senior management out of 80 available documents. Her findings, which have a sampling error of 8.0% ±± 1.6%, include the statement that controls should be improved. Which of the following changes would make this analysis consistent with statistical sampling, as opposed to nonstatistical sampling? The auditor works in a large team. The auditor also analyzes existence, cutoff, and other errors. The
The auditor chooses documents at random.
When would it be best to use nonstatistical sampling, as opposed to statistical sampling? The rules and regulations for the business are complex. The business to be audited is very large. The auditor does not need the sampling risk quantified. The board of directors provides extensive help to the auditing team.
The auditor does not need the sampling risk quantified.
Audit Data Analytics ADA as a Substantive Test
The auditor will most likely perform ADA as a substantive test when the auditor has performed tests of controls and concluded that the entity has: 1. Strong IT general controls, including strong access controls 2. Strong IT application controls related to the assertion being tested 3. Strong controls over electronic data interchange and the exchange of electronic information about transactions between the client and its customers or suppliers
A team of 10 auditors performs a thorough analysis of accuracy errors, in six randomly chosen documents out of 30 available documents. Their findings, which have a sampling risk of 8.0% ±± 1.6%, include the statement that existence and valuation errors should be analyzed as well. Which of the following changes would introduce nonstatistical sampling to the analysis? * The auditors limit their analysis to accuracy errors. * The auditors use checklists and flow diagrams. * One auditor works alo
The auditors qualitatively estimate sampling risk.
Josh Audit Firm is auditing MJ Loader Division. Using accounts receivable growth to sales ratio for its analytical procedure results to 1.75 ratios. What is the audit significance of this result? The client's collection period is shorter than it takes to make a sale to the customer. The client's sales are mostly cash basis instead of credit sales. The client's sales are growing faster than the accounts receivable which is good for the company. The client's accounts receivable grows faster th
The client's accounts receivable grows faster than sales, which means the accounts are not paid timely and may result in collection problems in the future.
Which of the following is a correct statement with respect to evaluating results when using non-statistical sampling for substantive tests? * When the projected misstatement percentage exceeds the risk of incorrect acceptance the auditors will generally conclude that the population is materially misstated. * The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement. * When the projected misstatement exceeds the tolerable misstatement,
The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement
Management letter
(a letter of recommendations) is a document prepared by the audit team and provided to those charged with governance, discusses internal control weaknesses and other matters discovered during the course of the audit
Detective controls
(after) controls applied after transactions have been processed and are intended to identify whether fraud or errors have occurred, and to rectify the fraud or errors on a timely basis
Preventive controls
(before) controls applied to each transaction during normal processing and with the intent to stop fraud or errors from occurring
Bases to choose type of Substantive Procedure
* Assessed level of risk * Suitability of audit procedure * Reasons for assessed level of risk
Types of Misstatements
* Factual * Judgemental * Projected
Preliminary Audit Strategy
* If controls mitigate risks - reliance on controls approach - perform tests of controls at an interim date * If controls do not mitigate risks - neither test controls nor rely on controls - high control risk - a substantive approach with year-end substantive testing.
Control deficiencies and auditor action
* Material weakness --- adverse opinion on ICFR + those charged with governance + management * Significant deficiency --- unqualified opinion on ICFR + those charged with governance + management * Control deficiency --- unqualified opinion on ICFR + management
Types of sampling risk
* Risk of incorrect acceptance * Risk of incorrect rejection
Factors that impact the predictability of data
* Stability of the industry (stable - more predictable) * Volume of transactions (large volumes of similar transactions -more predictable; smaller volumes of more unique transactions - less) * Type of account (income statement accounts - more predictable than balance sheet accounts) * Susceptibility to management bias. Transactions that are subject to management discretion are typically less predictable.
Extent of Tests of Controls, factors, sample size
* TDR (tolerable deviation rate) - inverse * Desired level of assurance - direct * Expected rate of deviation of the population to be tested - direct * N of sampling units (small population) - direct * Population size larger than 5000 (no effect)
Timing of tests of controls
* Usually at interim date, often about 3 months prior to year-end * If internal controls are strong and function effectively at an interim date, still test the remaining period to ensure that controls functioned effectively throughout the year.
SOC 1 Report Type 2
* expresses an opinion on the fairness of the presentation of management's description of the service organization's system and the suitability of the design and operating effectiveness of the controls to achieve the related control objectives included in the description throughout a specified period * design and operating effectiveness - control approach
SOC 1 Report Type 1
* expresses an opinion on the fairness of the presentation of management's description of the service organization's system and the suitability of the design of the controls to achieve the related control objectives included in the description as of a specified date * design - substantive approach
Manual controls
* performed by client personal through manual processes such as observation, comparisons, inspection, authorizations, signatures, and various forms of checks and balances * mostly, they're preventive controls
Documenting internal controls
- Narratives (for simple and straightforward activities) - Flowcharts and logic diagrams (for larger and more complex environments) -Questionnaires (if not familiar with industry or less experienced - to identify critical controls)
Evaluate controls and determine strategy
- Strong internal control then reliance on controls approach. - Weak internal control means the risk of material misstatements increases. - Additional substantive testing on the areas of weakness.
IT controls, risks
- short period of time of transaction trail - less documentary evidence - machine-sensible form - no human involvement can cause errors - more vulnerable to physical disaster - changes are difficult to implement - cybersecurity issues - reliance on system that process inaccurate data -unauthorized access
The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.Using the ratio estimation technique, Rotter's estimate (to the nearest dollar) of the projected/likely misstatement is
1,538
IT general controls, types
1. Data center and network operations controls 2. System software acquisition, change, and maintenance controls 3. Program change controls 4. Access controls 5. Application system acquisition, development, and maintenance
An auditor is more likely to use ADA when the following conditions exist:
1. Evidence to support the audit test is available in electronic form. 2. The audit population is large and the auditor's tests are supported by reliable and relevant data in electronic form, making ADA efficient. 3. Relevant data is reliable and internal controls over the reliability of data are strong. 4. Relevant data is clean or can be cleaned up easily.
types of accounting Estimates
1. Forecasting the outcome of a transaction or event, as required by a financial reporting framework. 2. Determining fair value of a transaction or financial statement item for inclusion in the financial statements, and disclosure in the notes as required by a financial reporting framework.
Steps in performing data analytics
1. Obtain company background information and data 2. The audit problem trying to solve 3. Gather information and evidence 4. Perform the analysis and evaluate the results 5. Draw an audit conclusion
Auditors are more likely to use audit sampling when:
1. Professional standards expect the auditor to perform certain audit procedures. 2. Evidence to support the audit test is not available in electronic form. 3. The audit population is small and can efficiently be tested using traditional audit tests. 4. Relevant data is not reliable and internal controls over the reliability of data are weak. 5. Relevant data may be in different formats and is not easy to use
Test of controls, plan
1. What controls should be selected for testing. 2. What audit procedures should be performed? 3. How many items should be selected for testing (the extent of tests of controls). 4. When to perform tests of controls.
Limitations of internal control
1. human error 2. ineffective understanding 3. collusion by two or more for fraud 4. overriding a control 5. decisions about the nature and extent of control
Assume the following values: Estimated audit value of the population = $75,000 Book value of population = $50,000 Book value of sample = $10,000 What is the audit value of the sample, using the ratio method?
15,000
The 2,000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.Using the difference estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be:
38,500
An auditor is likely to test the effectiveness of IT general controls as part of testing which of the following? Change in the number of uncollected accounts over the past year Demeanor of the head of company tech support A business's policies and procedures for upgrading security software Recording of information in journal entries
A business's policies and procedures for upgrading security software
Which of the following best indicates that an auditor should check for lapping? Clients have repeatedly complained of ill-informed sales support. Company IT support has recently experienced large turnover. A customer's credit limit is exceeded, yet then mysteriously returns to normal. Management has been accused of nepotism.
A customer's credit limit is exceeded, yet then mysteriously returns to normal.
In which of the following scenarios is an auditor more likely to use audit sampling, as opposed to ADA? * A furniture store must inventory its unsold couches and mattresses. * A company has many project managers, who all keep clear electronic records. * Management documents orders from the board of directors electronically. * A clothing business can easily bring up its clients' entire account history.
A furniture store must inventory its unsold couches and mattresses.
Internal control
A process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives related to operations, reporting and compliance
Paolo is auditing a retail chain with a large population of accounts payable. To conduct an efficient and effective audit, Paolo has decided to use sampling. Which of the following will most likely provide Paolo a representative sample to work with? A non-random sample A stratified sample A random sample A statistical sample
A random sample
Which of the following best illustrates the concept of sampling risk? * An auditor may select audit procedures that are not appropriate to achieve the specific objective. * The documents related to the chosen sample may not be available for inspection. * A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. * An auditor may fail to recognize deviations in the documents examined for the chosen sample.
A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
The client wrote off $200,000 of bad debts. What is the effect on the accounts receivable balance? Accounts receivable balance is debited. Accounts receivable will be overstated. Accounts receivable balance is reduced. Accounts receivable is not affected.
Accounts receivable balance is reduced.
Flash Company sells its computer-related repair services on account. A misstatement of cash receipts will result in which of the following? Accounts receivable will be misstated. Accounts payable will be misstated. Bad debt expense will be misstated. Inventory will be misstated
Accounts receivable will be misstated.
Which of the following test of details of transaction pertains with cut-off assertion? Analyzing ratio results relative to expectations based on prior year results. An auditor tracing a sample of revenue transactions from shipment to invoicing. An auditor vouches credit memos to authorizations of sales returns. An auditor observing that all cash received through the close of business on the last day of the fiscal year is included in cash on hand.
An auditor observing that all cash received through the close of business on the last day of the fiscal year is included in cash on hand.
Which of the following substantive procedure is classified as an analytical procedure? An auditor confirming accounts receivable. An auditor performing ratio calculation to compare sales grown and receivable growth. An auditor taking an understanding of the entity's business and industry. An auditor tracing a sample of revenue transactions from shipment to invoicing.
An auditor performing ratio calculation to compare sales grown and receivable growth.
Substantive Analytical Procedures
Analytical procedures used to obtain audit evidence during the risk response phase
An auditor is assigned to determine whether management follows board policies against nepotism. The auditor determines that only analyzing the recent hires to senior management has a high sampling risk of incorrect acceptance. Which of the following actions should the auditor take to minimize this sampling risk as much as possible? Perform the analysis again, by the same auditor. Check the accuracy of the documentation. Analyze recent hires throughout the company. Contract another agency to per
Analyze recent hires throughout the company.
Simpson Construction Equipment group employed SAP for all areas of the business, which facilitates ease of use of the data, and enables downloading reports in pdf and excel. What is the best method for the auditor to use? Audit Data Analytics Audit Sampling Observation Substantive Procedure
Audit Data Analytics
Frey's Grocery is using obsolete software which makes formats and downloading of data not available. What is the best method for the auditor to use? Audit Sampling Evidence Gathering Substantive Procedure Audit Data Analytics
Audit Sampling
Judgmental misstatements
Auditor feels that management estimates are unreasonable or based on inappropriate accounting policies
Which of the following exemplifies the characteristic of random sampling? Auditor selects only the most recent cash deposits. Auditor inspecting inventory in stacks of boxes that do not influence the choice of items. Auditor selecting sales invoices issues for the last quarter but excludes certain customers. Auditor inspecting inventory of bags of material, but did not select the ones in the very bottom of the shelf.
Auditor inspecting inventory in stacks of boxes that do not influence the choice of items.