Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
Audit3Fraud Risk
| Question | Answer |
|---|---|
| fraud involving an officer should be reported to those charged with governance | |
| During planning, the auditor is required to document the assessment of risk of material misstatement due to fraud and any related risk factors identified. | |
| the most important factor concerning an auditor's responsibility to detect errors & fraud is the risk that mistakes, falsifications, & omissions may cause the financial statements to contain material misstatements. | |
| the auditor should inquire whether management has communicated to those charged with governance regarding internal control & how it functions to prevent, deter, or detect material misstatements due to fraud. | |
| Bearer bonds represent the highest risk of material misappropriation of assets by an entity b/c they are unregistered w/ no records kept of the owners or transactions involving ownership. | Historically, bearer bonds have been used to facilitate money laundering, tax evasion, & to conceal business transactions. |
| the nature of tests to be applied on a particular engagement is a matter of the auditor's professional judgement | |
| the ultimate purpose of assessing control risk is to | contribute to the auditor's evaluation of the risk that material misstatements exists in the financial statements |
| control risk is the risk that | a material misstatement that could occur in an assertion within MD&A that will not be prevented or detected on a timely basis |
| the acceptable level of detection risk is inversely related to the assurance provided by substantive tests | for example: if the acceptable level of detection risk decreases, more assurance is required from substantive tests |
| increasing the extent of tests of details will result in a reduction in detection risk | |
| an auditor uses the knowledge provided by the understanding of internal control & the final assessed risk of material misstatement primarily to determine the nature, timing, and extent of the substantive tests to be performed | |
| Tests of controls used in assessing control risk ordinarily include procedures such as | inquiry of appropriate entity personnel, inspection of docs/reports indicating performance of the policy or procedure, observation of the application of the policy or procedure, & reperformance of the application of the policy or procedure by the auditor |
| tests of details of transactions are used to detect material misstatements in the Fin. stmts after the auditor has assessed risk, not as part of making this assessment | |
| some substantive procedures | confirmation, verification, & analytical procedures |
| if interim substantive procedures for an account identified no exceptions, | then the auditor does not need to test details for the entire year under audit at year-end |
| An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports the planned level of assurance at the relevant assertion level | |
| the auditor is not required to evaluate operating effectiveness as part of obtaining an understanding of internal control, and therefore need not document the basis for this decision | |
| as part of understanding internal control, an auditor is not required to obtain knowledge about the operating effectiveness of controls. Operating effectiveness is evaluated later, & only for those controls on which the auditor plans to rely | |
| the objective of tests of details used as tests of controls is to evaluate whether an internal control operated effectively | |
| regarding a nonissuer's compliance w/ laws & regulations, an auditor performing an audit of the entity's Fin. STMTS is responsible for | obtaining a general understanding of the legal & regulatory framework applicable to the entity & how the entity is complying w/ that framework |
| if specific info concerning a possible act of noncompliance w/ laws & regulations comes to the auditor's attention, the auditor should apply procedures to determine whether an act of noncompliance w/ laws & regulations has in fact occurred. | Professional skepticism throughout the audit is important in this context, given the extent of laws & regulations that affect the client |
| the auditor should design the audit to provide reasonable assurance that the direct effect acts of noncompliance are detected. | B/c of the nature of acts of noncompliance w/ laws & regulations having an indirect effect on the Fin STMTs, the auditor provides no assurance that such acts will be detected |
| during an audit of an nonissuer, if the terms of a related party transaction are found to be materially inconsistent w/ the explanations provided by management, | an auditor should consider the reliability of management's explanations & representations on other significant matters |
| the auditor uses their professional judgment to evaluate the sufficiency and appropriateness of audit evidence | |
| the concept of cost benefit is embodied in the auditor's opinion, to be economically useful, is formed w/in reasonable time and based on evidence obtained at a reasonable cost | the cost benefit concept does not relate to the auditor's reliance of evidence |
| strong effective internal controls improve the reliability of data | |
| the auditor's risk assessment affects the nature, extent, & timing of audit procedures, but does not determine the relevance of audit evidence | |
| checking the accuracy of a file is a form of recalculation | |
| if not already performed during the overall review stage of the audit, the auditor should perform analytical review procedures relating to the revenue cycle because there is the presumption of revenue fraud in all audits | |
| comparing current-yr balances to prior yr balances is an example of an analytical procedure. | Analytical procedures are evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data and generally involve comparisons of recorded amounts |
| relationships involving income stmt accts tend to be more predictable than relationships involving only balance sheet accounts. | Income stmt accounts are more predictable b/c they are for a period of time rather than a balance sheet acct, which is of a point of time |
| the decision as to whether or not to use analytical procedures as substantive tests is based in part on the availability, reliability, and precision of the data used to develop expectations | |
| the act of interviewing | inquiry |
| the act of verifying or examining | inspection |
| analytical procedures are required during an audit's planning and final review | |
| confirmations involve obtaining representations from external parties, such as a bank, regarding account balances or transactions. | Confirmations are a substantive procedure generally used to test the existence of an asset such as cash or A/R |
| reviewing board of director minutes involves inspection, which involves examine records or docs, whether internal or external in paper form, electronic form, or other media or a physical examination of an asset. | This procedure is used as a test of controls b/c the auditor is looking for evidence of authorization |
| recalculation consists of checking the math accuracy of docs or records either manually or electronically. | This procedure is a substantive procedure b/c it provides evidence that the depreciation amount reported in the fin stmts is reasonable & confirms w/ GAAP |
| during the final review stage of an audit, an auditor evaluates the overall financial statement presentation & assesses the conclusions reached. | As part of this evaluation, the auditor would likely read the financial statements and consider whether there are any unusual or unexpected balances that were not previously identified |
| the manager & partner on a specific job generally bear a great deal of responsibility 4 the audit & the report. Typically they would perform analytical procedures during the final review stage 2 evaluate overall FIN STMT presentation | & 2 assess the conclusions reached In order 2 evaluate the results of the analysis & 2 perform an effective review, the manager or partner should have a comprehensive knowledge of the client's business & the industry |
| Analytical procedures R required 2 be applied 2 some extent in planning & in the final review stage. In addition, although not required, analytical procedures may be used as a substantive test when they R more effective or efficient than tests of details | |
| the purpose of applying analytical procedures during the overall review stage of an audit is to evaluate the overall financial statement presentaion, to assess the conclusions reached, | & to assist in forming an opinion on whether the financial statements as a whole are free of material misstatement |
| analytical procedures used in planning an audit should focus on enhancing the auditor's understanding of the client's business | |
| If the objective of a test of details is to detect overstatement of sales (existence assertion), | the auditor should trace transactions from the accounting records (ex: sales journal) to the source documents (ex: customer order, sales order, shipping docs) |
| in testing the existence assertion for an asset, an auditor ordinarily works from the accounting records to the supporting evidence | |
| when evaluating whether & to what extent analytical procedures should be used, the auditor should consider the nature of the assetion tested. | the other factors the auditor considers are the plausibility & predictability of the data relationship, availability & reliability of the data used to develop the expectation, and the precision of the expectation |
| the entity holds or controls the rights to assets and liabilities are obligations of the entity are management assertions that relate to the rights and obligation assertion about account balances at period end | |
| unlike trend analysis, ratio analysis, and nonstatistical predictive modeling, regression analysis provides direct and quantitative measures of the precision of expectation | |
| relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts b/c income statement accounts represent transactions over a period of time, | whereas balance sheet accounts represent amounts as of a point in time. As a result, analytical procedures are more appropriate for operating expense accounts |
| a characteristic of nonstatistical sampling is it requires judgment to select a sample | |
| the auditor should consider the tolerable rate of deviation from the control structure or procedures being tested, the likely rate of deviations, and the allowable risk of assessing control risk too low | |
| As the auditor's rate decreases (the auditor cannot accept as large an error rate), the sample size increases & vice-versa. | Therefore, there is an inverse relationship between the sample size & the tolerable rate |
| Unless the population is very small, the population size has virtually no impact on determining the sample size for statistical sampling when testing internal control using attributes sampling. | population size is not an issue in determining a sample size, provided the population is relatively large (greater than 5,000 items) |
| both the risk of incorrect acceptance & the risk of assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement | |
| when determining the sample size for a test of controls the auditor should consider the expected deviation rate(which is the auditor's best estimate of the deviation rate in the population before the sampling plan is executed), | the tolerable deviation rate, & the allowable risk of assessing control risk too low |
| the sample size for a test of controls varies directly w/ the expected deviation rate & inversely w/ the tolerable rate | if the auditor expects more errors, she will increase sample size; conversely, if the tolerable rate of deviation increases, not as many items need to be selected |
| A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the sample size | |
| by using statistical sampling, the auditor can quantify sampling risk to assist in limiting it to a level considered acceptable | |
| tolerable misstatement is considered when determining sample size in variable sampling | |
| Nonsampling risk includes all aspects of audit risk that are not due to sampling. It is always present & cannot be measured, the auditor can only attempt to reduce this risk to a very low level | through adequate planning and supervision of the audit and quality control of all firm practices |
| Variable Sampling | is used to estimated a numerical measurement of a population, such as the dollar value of inventory. This method is used in substantive testing |
| In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if | the auditor may be able to reduce the required sample size by separating items subject to sampling into relatively homogenous groups in the basis of some characteristic related to the specific audit objective |
| stratification = | separating the population into relatively homogeneous groups |
| tolerable misstatement is the maximum monetary misstatement in an account balance that may exist w/out causing the FIN STMTs to be materially misstated. | Tolerable misstatement is a planning concept related to the auditors' preliminary judgments about materiality levels |
Created by:
tiffany17ann