Audit Final Pt.2

LO 8-7 What is the relationship between sample size and each of these factors?

(i) The nature of control - larger samples imply that the auditor should test manual controls because they are subject to less consistency, smaller sampling implies that the auditor is checking automated controls. (ii) Frequency of operations - larger samples imply that every transaction should be checked, smaller sampling implies that the operation of control happens less frequently. (iii) Tolerable deviation rate - larger samples imply that the smaller the rate of deviation from the prescribed control procedure, the larger the sample size, while the larger the rate of deviation, the smaller the sample size. (iv) Expected population deviation rate - larger samples imply that the closer tolerable deviation rate and expected deviation rate are to one another, the larger the sample size, the greater the amount between tolerable deviation rate and expected deviation rate, the smaller the sample size.

Under what circumstances would the auditor dual date an audit report?

-Dual dating is the stating of two dates in the audit report -The auditor dual dates the auditor report when any events are disclosed in the financial statements after the date of collecting sufficient and reliable evidences, but before the issue of the financial statements.

What are the types of subsequent events relevant to financial statement audits? Give one example of each type of subsequent event that might materially affect the financial statements.

-Subsequent events mean those events which are occuring after the balance sheet date and require special audit concern from the auditor 1. Type 1 subsequent events: Those events which provide evidence of conditions that existed on the balance sheet date. Financial statements should be adjusted to reflect such condition and additional notes to financial information may also be provided, if so required EX: A lawsuit settlement for a distinct amount than was accrued 2. Type 2 subsequent events: Those events which provides evidence of conditions that did not exited on balance sheet date but required to be disclosed. Events should be in financial terms and material in nature EX: A hefty lawsuit initiated for an event after the balance sheet date.

LO 8-7 List the four factors that enter into the sample size decision.

1. Nature of Control 2. Frequency of Operations 3. Tolerable Deviation Rate 4. Expected Population Deviation Rate

What items should be included in the auditors communication with those charged with governance

1. The auditors responsibilities under GAAP or under the standards of the PCAOB if the clients is a public company. 2. An overview of the planned scope and timing of the audit 3. Significant findings from the audit.

Describe the purposes of an independent engagement quality review by a quality review partner

1. To provide a comprehensive and analytical observation of the engagement. 2. To verify the consistency of the audit report, financial statements presentation, and the disclosures made in the financial statements.

Define what is meant by contingent liability. What three categories are used to classify a contingent liability? give four distinct examples of contingent liabilities

A contingent Liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or ,a present obligation that arises from past events but is not recognized because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient reliability. Three categories of Contingent Liabilities are ; Probable : There is a present obligation that probably requires an outflow of resources. Then a provision is recognized Reasonably probable: There is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. Here no provision recognized , only contingent liability disclosed. The chance of future event happening is more than remote but less than probable. Remote There is a possible obligation or a present obligation where the likelihood of an outflow of resources is remote. Here no provision is required and even no contingent liability disclosure also required. Example of contingent liability: Probable; Due to the Tax rule change , Income Tax department has demanded extra tax , company has appealed against it. The liability is contingent on the verdict of the court but probable and can be estimated,. So a contingent liability is recognized and disclosed. Probable; The rival company has sued for their patent violation. The violation can be easily proved and chance of the rival company winning is high and compensation liability known. A contingent liability recognized and disclosed. Reasonably Probable; There is a chance of potential warranty claim against a new product launched , but so far no claim received. Quality control test revealed a defect in the product happened but in a small batch only. Chance of warranty is probable but cannot be estimated. Treated as contingent liability and disclosed. Remote : A client has lodged a claim of compensation for product failure and accident but the evidence strongly proves that the accident was result of other faulty parts not for company product. The company can surely win the case. The contingent liability is ignored and not disclosed.

LO 8-2 What costs are potentially incurred by auditors when such decision errors occur?

Allowance for sampling risks to reflect the concept of precision in a sampling application

Which of the following is a misappropriation of assets?

An employee of a consumer electronics store steals 12 CD players.

LO 8-3 List audit evidence types that do not involve sampling and provide an example of a situation where an auditor would not use audit sampling.

Analytical Procedures Scanning Inquiry Observation

LO 8-5 Define attribute sampling. Why is this sampling technique appropriate for tests of controls?

Attribute Sampling is used to determine the proportion of a population that posses a specified characteristics

An auditor would be most likely to identify a contingent liability by obtaining a

C) Letter from the entity's general legal counsel

Which of the following is an example of fraudulent financial reporting?

Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.

An auditor should request that an audited entity send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide.

Corroboration of the information furnished by management concerning litigation, claims, and assessments

What steps should an auditor perform to identify the risk of material misstatement due to fraud?

Discussion among the audit team members regarding the risks of material misstatement due to fraud. Inquire of management and others about their views on the risks of fraud and how it is addressed. Consider any unusual or unexpected relationships that have been identified in performing analytical procedures in planning the audit. Understand the client's period-end closing process and investigate unexpected periodend adjustments.

LO 8-1 Why do auditors sample instead of examining every transaction?

Due to size and complexity of an entity auditors may find that it is not economical to test every transaction, so instead they select and evaluate a representative sample that is used to provide a reasonable basis for conclusions about the entire population of transactions.

Which of the following is correct concerning required auditor communications about fraud?

Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.

The auditor needs to understand how selected inherent risk factors affect the transactions processed by the revenue process. Discuss the potential effect that industry-related factors and misstatements detected in prior periods have on the inherent risk assessment for the revenue process

If the industry is experiencing a lack of demand for its products, the entity may be faced with a declining sales volume, which can lead to operating losses and poor cash flow, management may engage in activities that can result in misstatement. The presence of misstatements in previous audits is a good indicator that misstatements are likely to be present during the current audit.

LO 8-5 Why is attribute sampling sampling technique appropriate for tests of controls?

In applying this technique to test of controls, the auditor normally attempts to determine the operating effectiveness of a control in terms of deviations from a prescribed internal control

An auditor issued an audit report that was dual dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditors responsibility for events occurring subsequent to the date on which the has obtained sufficient appropriate audit evidence was

Limited to the specific event referenced

Monetary-Unit Sampling Advantages

MUS does not require the user to make any assumptions about the distribution of misstatements, whereas classical variables sampling relies on normal distribution theory and requires an estimate of the variation of misstatements in the population

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements

Management places substantial emphasis on meeting earnings projections.

An advantage of statistical sampling over non-statistical sampling is that statistical sampling helps an auditor to

Measure the sufficiency of the evidential matter obtained

Distinguish between positive and negative confirmations. Under what circumstances would positive confirmations be more appropriate than negative confirmations.

Positive= requires a response Negative= does not require a response Positive is stronger because it requires a response if they do or do not agree A positive accounts receivable confirmation requests that the customer indicate whether or not it is in agreement with the amount due to the client stated in the confirmation. Thus, a response is required regardless of whether the customer believes that the amount is correct or incorrect. A negative confirmation requests that the customer respond only when it disagrees with the amount due to the client. Positive confirmations are generally used when an account contains large individual balances or if errors are anticipated because control risk was judged to be high. Negative confirmation requests are used when there are a large number of accounts with small balances, control risk is assessed to be low, and the auditor believes that the customers will devote adequate attention to the confirmation.

LO 8-2 Distinguish between Type I and Type II errors.

Risk of incorrect rejection (type 1) In testing internal control, this is the risk that the sample supports a conclusion that the control is not operating effectively, when in truth, the control is operating effectively Risk of incorrect acceptance (Type 2) in testing a control, this is the risk that the sample supports a concussion that the control is operating effectively when in truth it is not operating effectively.

Negative confirmation of accounts receivables is less effective than positive confirmation of accounts receivable because

The auditor cannot infer that all non-respondents have verified their account information (a nonresponse is not a yes)

LO 8-1 Define audit sampling.

The selection and evaluation of less than 100 percent of the items in a population of audit relevance selected in such a way that the auditor expects the sample to be representative of the population and thus likely to provide a reasonable basis for conclusions about the population

Why would a company institute a control policy that required mandatory vacations?

There are numerous risk factors that can cause an individual to misappropriate assets, such as cash (see Table 4-5). By requiring that an individual take a vacation, another individual will perform that person's duties. If some type of misappropriation is taking place, there is a strong probability that the misappropriation will be detected. Such a policy is particularly helpful in a small business that does not have sufficient personnel to provide total segregation of duties or where there is poor oversight by personnel responsible for the asset.

LO 8-2 What terms are used to describe these errors when the auditor is conducting tests of controls and substantive tests?

Typical statistical sampling terminology, the term precision relates s to the population characteristics being trusted. given specific sampling risk

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of

Valuation and allocation

Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either

a. A qualified opinion or a disclaimer of opinion.

In which of the following situations would an auditor ordinarily issue an unqualified/ unmodified financial statement audit opinion with no explanatory paragraph?

b. The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor's opinion.

Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders that contains financial statements and the auditor's report?

b. The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially inconsistent with the financial statements.

In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client's financial statements?

c. Inability of the auditor to obtain sufficient competent evidence

A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. The client's financial statements contain no material misstatements and the auditor concurs with this change. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)

c. Unqualified opinion.

Distinguish between accounting changes that affect consistency and changes that do not. To what does the word consistency refer? How is it possible for an accounting change to affect comparability but not consistency?

changes that affect consistency: changes in accounting methods (requires explanatory paragraph) changes that do not affect consistency: changes in accounting estimates, correction of an error unrelated to accounting principles (doesnt require explanatory paragraph, only a note in the disclosures) consistency: the continuation of accounting practices from year to year accounting change can affect comparability but not consistency because underlying data can change without accounting principles being changed.

What are the main transaction-related assertions for investments? Identify the key segregation of investment-related duties and possible errors or fraud that can occur if this segregation is not present.

https://www.chegg.com/homework-help/main-transaction-related-assertions-investments-identify-key-chapter-16-problem-8rq-solution-9780077862336-exc

How does the materiality of a departure from GAAP affect the auditors reports?

if a departure from GAAP is immaterial, then auditor issues unmodified/unqualified opinion if departure is material but not pervasive, then qualified opinion if departure severe and material and therefore has a material effect on the FS as a whole, the auditor would issue an adverse opinion

What are the auditor's responsibilities for other information included in an entity's annual report?

no responsibility unless clearly stated by auditor and management that they are auditing that information

LO 8-4 Distinguish between nonstatistical and statistical sampling. What are the advantages and disadvantages of using statistical sampling?

statistical Sampling: uses the law of probability to compute sample size, and to evaluate sample results. permits the use of the most efficient sample size and to quantify the sampling risk for the purpose of reaching a statistic conclusion about the population non statistical sampling : The auditor must rely on his or her professional judgement in combination with audit firm guidance an knowledge on the underlying sampling theories.