Internal Controls
What is a reliance strategy?
When internal controls are deemed reliable and can provide assurance for the audit
What is sampling risk?
The risk that the chosen sampling is not indicative of the entire population.
If Book value is greater than Audit value would that result in an overstatement or understatement
Overstatement
What assertions are we primarily concerned with testing Revenue or asset accounts?
Existence or occurence
Rank the least to worst control deficiency definitions.
Control deficiency
Significant deficiency
Material Weakness
Which is worse incorrect acceptance or incorrect rejection and why?
Incorrect Acceptance
What are the 7 steps in the MUS Process?
Step 1: Determine the Test Objective
Step 2: Define the Population Characteristics
Step 3: Determine the Sample Size
Step 4: Select Sample Items
Step 5: Perform the Audit
Step 6: Calculate the Projected Misstatement and the Upper Limit on Misstatement
Step 7: Draw Final Conclusion upon Sample
What assertions are we primarily concerned with testing Expense or Liability accounts?
Completeness
For an integrated audit, an auditor must issue an adverse opinion on the effectiveness of an entity’s internal controls in which of the following situations?
A. A material weakness exists.
B. Three or more significant deficiencies exist.
C. The entity may not continue as a going concern.
D. The entity informed the auditor that they would be changing auditors next year due to disagreement on interpreting specific accounting standards.
A. A material weakness exists.
What is the last step in testing when sampling internal controls vs sampling substantive procedures?
IC = Computed upper deviation Rate vs Tolerable deviation Rate
Substantive = Upper misstatements limit vs Tolerable misstatement limit
How do you calculate the tainting factor?
Difference or misstatement divided by book value
When performing the search for unrecorded liabilities what time period would you primarily look at the cash disbursements?
The first month or two after the cut off period. i.e. year end.
Which one of the approaches for Internal Controls testing is more closely related to “High Control Risk”?
Substantive strategy
In which of the following situations is attribute sampling likely to be used?
A. Examining invoices and canceled checks in support of recorded operating expenses.
B. Making selections from a cash disbursements journal to test liabilities for understatement.
C. Determining the estimated number of occurrences of improperly authorized cash disbursements.
D. Inquiring of the client to determine the dollar magnitude of fraud that occurred during the fiscal year.
C. Determining the estimated number of occurrences of improperly authorized cash disbursements.
Why do we project misstatements when using MUS sampling?
Becuase we are only testing a portion of the population and the errors would need to be extrapolated over the entire population
If the objective of a substantive test of details is to detect the overstatement of sales, the auditor should either trace or vouch transactions from the
A. shipping documents to the sales journal.
B. sales journal to the shipping documents.
C. cash disbursement journal to the sales journal.
D. sales journal to the cash disbursement journal.
B. sales journal to the shipping documents.
For an auditor to determine the materiality of a control deficiency, what are the two primary things to evaluate?
Magnitude and likelihood
The auditor did not find any deviations within the sample of observations tested during internal control testing. Therefore, which of the following would be zero percent (i.e., 0%)?
Sample Deviation Rate
Why do we need to increase the projected misstatements up to the upper misstatement limit?
What are the inherent limitations of Monetary unit sampling?
Underlying assumptions are that the misstatement rate is small and the misstatements are overstatements.