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AUDIT A3 Sampling
Risk, Evidence and Sampling
| Term | Definition |
|---|---|
| PPS Sampling Projection of Missstatement Recorded Amount < Interval | ((Recorded Amount - Audited Amount)/Recorded Amount) x Sampling Interval |
| Analytical Procedures are most appropriate when testing what kind of accounts | Income Statement Accounts ie., sales, expenses, income |
| Negative Confirmations | Unreturned negative confirmations do not provide explicit evidence - Alt procedures are used for unreturned positive confirmations - Are effective when the combined assessed level of inherent and control risk is low |
| Business Risk | Result from events or circumstances that could adversely effect the entity's ability to achieve its objectives and execute its strategies (Industry developments, new products and services, expansion of business, new accounting requirements) |
| Audit objectives in computerized vs manual environments? | The same |
| Documenting Internal Control | F - Flowchart I - Internal Control Questionnaire N - Narrative D - Documentation |
| Hierarchy of Audit Evidence | A 1.) Auditor's Direct Personal Knowledge E 2.) External Evidence I 3.) Internal Evidence O 4.) Oral Evidence |
| Trend Analysis | Compare F.S. item or acct bal. for the current period with prior periods (low assurance) |
| Ratio Analysis | Compare ratios of current periods with prior periods (low assurance) |
| Nonstatistical predictive modeling | Predictive model to estimate F.S. Amount (high assurance) |
| Regression Analysis | Predict future periods using advanced statistical techniques with data from prior periods (high assurance) |
| F.S. Assertions | C - Completeness O - Cut Off V - Valuation, Allocation and Accuracy E - Existence and Occurrence R - Rights and Obligations U - Understandability of P - Presentation and Classification |
| F.S. Assertions for testing Acct Balances and Disclosures (Asset, Liability, Equity) | C V E R U I |
| When testing transactions the most relevant assertions are? | C O V E U P |
| Attribute sampling vs. variable? | Attribute - IC Variable - Dollar Amt |
| (Expected) Deviation Rate | Auditor's best estimate of the deviation rate in the population from which it was selected |
| Tolerable Deviation Rate | Max amt of error that the auditor is willing to accept (inverse relationship with sample size) |
| Risk of Assessing Control Risk Too Low | The risk that the assessed level of control risk based on the sample is less than the true level of control risk based on the actual operating effectiveness of the control. (Inverse relationship with sample size) |
| Upper Deviation Rate | Sample deviation rate + Allowance for sampling risk |
| Allowance for Sampling Risk | Upper Deviation Rate - Sample Deviation Rate |
| If upper deviation is greater than the tolerable rate, will the auditor rely on the control? | No |
| Mean Per Unit Estimation | Avg Value of audited samples x # of Accts |
| Ratio Estimation | (Audited Value of sample / Book Value of sample) x Total Value |
| Difference Estimation | (((Book Value - Audited Value)/# of samples) x Total population) -Total Value from Books |
| PPS Sampling Interval | Tolerable misstatement/Reliability factor |
| PPS Sample Size | Recorded amount of population/Sampling Interval |
| Inherent Limitations of Internal Control | Mgmt override, human error, design error, deliberate circumvention, external events, entity objectives |
| Test of Controls Result: Operating effectively and can be relied upon | Auditor proceeds to substantive procedures |
| Test of Controls Result: Not operating effectively | Test alternative controls or reassess control risk (which will result in the need for more reliable and extensive substantive procedures) |
| Misstatement of Management Accounting Estimate | Client's recorded estimate - best estimate supported by audit evidence = misstatement If no estimate is available use a range Client's recorded estimate - closest estimate in the range to recorded amount |
| Indications of related party transactions | compensating balance arrangements, loan guarantees, unusual, nonrecurring transactions near YE, transactions based on terms that differ significantly from market terms, non-monetary exchanges |
| Audit procedures used to discover potential litigation, claims and assessments | Mgmt inquiry, review of irs reports and tax returns, review from board and stockholder mtgs, letter from client attorney, review of invoices from attorney, obtaining mgmt rep letter |
| Factors that may indicate substantial doubt | F - Financial difficulties I - Internal Matters N - Negative Trends E - External Matters |
| Mitigating Factors for substantial doubt | Plans to borrow money, restructure debt, sell assets, delay or reduce expenditures, increase ownership equity |
| Non issuer substantial doubt alleviated effect on report | include optional EOM paragraph making reference to mgmts disclosure |
| Non issuer substantial doubt remains effect on report | Include separate section in the auditor's report with the heading "substantial doubt about the entity's ability to continue as a going concern" |
| Issuers substantial doubt remains effect on report | include explanatory paragraph with the phrases "substantial doubt" and "going concern" Rare but the auditor could disclaim an opinion due to a going concern uncertainty |
| Change in quantity supplied | change in amt producers are willing to produce resulting from a change in price |
| Change in supply | change in the amount of good supplied from a change in something other than price |
| factors that increase supply ECOST | Expectations - Expectations of price decreases Cost - Decrease in production Cost Other Goods - Decreases in demand for another good Subsidies/Taxes - Increase in subsidies, decreases in taxes Technology - Technology Improvements |
| Price elasticity of demand | % chg in quantity demanded driven by % chg in price Price Elastic - quantity demanded is highly sensitive to price changes (more substitutes) Price InElastic - Quantity demanded is not sensitive to price changes (less substitutes) |
| Price elasticity of supply | % chg in quantity supplied driven by % change in price price elastic - quantity supplied is highly sensitive to price changes, products stored easily Price InElastic - Qty supplied is not very sensitive to price changes, products perishable |
| cross elasticity | % change in the qty demanded/supplied of one good caused by price change of another good |
| income elasticity | measures % change in quantity demanded given a % change in income |
| normal good | income increases, demand increases |
| inferior good | income increases, demand decreases |
| change in quanity demanded | chg in amt consumers will purchase as a result from chg in price |
| chg in demand | chg in amt of demand form something other than price |
| factors that increase demand (SPINE) | S - Substitutes Price Increase and Compliment Price Decrease P - Popularity increases I - Income Increases N - Number of buyers increases E - Expectations of price increase |
| Recession | Real GDP falls for at least 2 consecutive quarters |
| trough | the lowest point of the economic cycle |
| Audit evidence condition of relevance | design of the procedure, timing of the procedure, level of detail or disaggregation necessary to achieve the audit objective |
| Audit evidence condition of reliability | circumstance under which evidence is gathered, source and nature of the evidence, form of evidence |
| The best evidence to confirm if mgmt has identified all material accounting F.S. estimates | Read available minutes of stockholder and director meeting minutes, material contingencies are often discussed at these meetings |
| How does application of new acct pronouncements affect RMMS? | results in a higher RMMS |
| How to identify subsequent events | P - Post B.S. Transactions R - Rep Letter I - Inquiry M - Minutes E - Examine Other info |
| Demand curve shifting to the right | increased demand at all price levels |
Created by:
amabwalt