Chapter 9
With a reliance on controls approach/substantive approach, the auditor will test and rely more upon...
What are relevant assertions?
With a reliance on controls approach, the auditor will test and rely more upon controls, and will perform fewer substantive tests
With a substantive approach, auditors will test and rely less upon controls, and will perform more substantive procedures
The relevant assertions are assertions that have a reasonable possibility of containing a material misstatement that would cause the financial statements to be materially misstated
Auditor expectations that are developed at a detailed level are more____ than expectations developed at the broad level
precise
What are the 2 types of accounting estimates?
Forecasting the outcome of a transaction or event, as required by a financial reporting framework
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
Audit sampling is the clear choice when (4 things)
Certain audit procedures are required by professional standards (inventory observation, confirmation of receivables
Internal controls are weak
The auditor does not have data that is relevant to the audit test
Sampling is more efficient and effective
Define PPS and when is it most useful (4 areas)
A sample is taken where the probability of selecting any individual population item is proportional to its recorded amount (PPS). In many auditing situations, it is advantageous to select samples that emphasize population items with larger recorded amounts
PPS is most useful in testing the following areas
Receivables
Investment securities
Inventory price test
Plant asset additions
What is the substantive procedure auditors use to test the details of account balances, transactions, and disclosures?
Tests of classes of transactions
Tests of ending account balances
Tests of details
The substantive procedure auditors use to test the details of account balances, transactions, and disclosures
if the substantive analytical procedure is being used in conjunction with tests of details, then the amount of difference auditors could tolerate would ____ since other procedures would also be used to gather evidence
Increase
According to AUC 540 Evaluation of Misstatement Identified During the Audit, the auditor's objective is to
AU-C 540 Evaluation of Misstatements Identified During the Audit and AS 2810 Evaluating Audit Results, state the auditor’s objective is to evaluate the effect of identified misstatements on the audit and the effect of uncorrected misstatements, if any, on the financial statements
What is the difference between sampling risk and nonsampling risk?
Sampling risk is the risk that an auditor reaches an incorrect conclusion because the sample is not representative of the population
Nonsampling risk is the risk that the auditor reaches an incorrect conclusion for any reason not related to sampling risk
What is a logical sampling unit?
The purpose of the substantive test is to obtain reasonable assurance that an assertion is presented fairly in all material respects
Substantive tests that can use sampling techniques are tests of details of transactions and tests of details of account balances
the sample item chosen, and audited by the auditor is known as the logical sampling unit
Nature of Substantive Procedures:
1) For assertions that have a lower RMM, it may be more efficient for auditors to perform...
2)What are analytical procedures referred to when they're used to obtain audit evidence during the risk response phase?
3)What does AUC 330 and AS 2031 state?
4) What is a dual purpose test?
For assertions that have a lower risk of material misstatement, it may be more efficient for auditors to perform substantive procedures on those assertions prior to year-end (during an interim period) to allow more time for testing higher risk assertions at year-end
When analytical procedures are used to obtain audit evidence during the risk response phase, they are referred to as substantive analytical procedures
AU-C 330 and AS 2301 state that auditors are required to perform substantive procedures for all relevant assertions that have been identified during the risk assessment phase
Auditors may design a test of controls and a substantive test of details to be performed at the same time on the same transaction. This is called a dual purpose test
Auditors use ADA to identify items that are at a ____ risk of material misstatement
high
AUC 540 includes 3 categories of misstatements. What are they and are they known or likely?
What 4 things should documentation of substantive procedures include?
Factual misstatements (known)
Judgmental misstatements (likely)
Projected misstatements (likely)
The objective of the test
The substantive procedure performed
What items were selected for testing
The results of testing
Risk of incorrect acceptance: this is the risk that the auditor concludes that a material misstatement does not exist when it does exist
Implications: an increased audit risk
Risk of incorrect rejection: this is the risk that the auditor concludes that a material misstatement exists when it does not exist
Implications: an increase in audit effort when not required
Advantages and Disadvantages of using PPS
The advantages of PPS sampling are
PPS is generally easier to use than classical variables sampling
The size of a PPS sample is not based on any measure of the estimated variation of audit values
PPS systematic sample selection automatically identifies any item that is individually significant if its value exceeds an upper monetary cutoff
If the auditor expects no misstatements, PPS sampling will usually result in a smaller sample size that under classical variables sampling
A PPS sample can be easily designed, and sample selection may begin before the complete population is available
PPS sampling has the following disadvantages
Mostly a test for overstatement- PPS includes an assumption that the audit value of a sampling unit should not be less than 0 or greater than book value
When understatements are identified in the sample, the evaluation of the sample may require special considerations
The selection of sample items with 0 balances, or balances of a different sign (+ -) require special consideration
What are analytical procedures?
Substantive analytical procedures can be used as follows (2 things)
Analytical procedures are evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data
Depending on the risk factors for a particular assertion, substantive analytical procedures can be used as follows:
As the only substantive test for a class of transactions or account balance
In combination with tests of details
Evidence to support the audit test is available in electronic form
The audit population is large and the auditor’s tests are supported by reliable and relevant data in electronic form, making ADA efficient
Relevant data is reliable and internal controls over the reliability of data are strong
Relevant data is “clean” or can be cleaned up easily
What is the order of the revenue cycle?
DR has a ____ relationship with the increase/decrease of IR and CR
Rev Cycle: sales order entry, shipping, billing, cash collection
inverse relationship
What are the 3 advantages and disadvantages of statistical sampling?
Advantages of statistical sampling
Design an efficient sample
Measure the sufficiency of evidence obtained
Quantify sampling risk
Disadvantages of statistical sampling
Training auditors in proper use
Time to design and conduct sampling application
Lack of consistent application across audit teams
1) The risk of incorrect acceptance has a ____ relationship to sample size for substantive testing
2) What is the most commmon selection method used in PPS sampling?
3) Define UML, projected misstatement, allowance for sampling risk
1) inverse
2) systematic sampling
3)
UML- statistical estimate of the max misstatement in the population based on sample
PM- a projection of the misstatement in the population based on finding the sample
ASR- measures the uncertainty associated with sampling and not testing the entire population
What are the 4 factors that impact effectiveness and efficiency of using a substantive analytical procedure to respond to risk?
Nature of the assertion
Plausibility and predictability of the relationship
Availability and reliability of the data used to develop the expectation
Precision of the expectation
An auditor is more likely to use audit sampling when (5 bullet points)
Professional standards expect the auditor to perform certain audit procedures
Evidence to support the audit test is not available in electronic form
The audit population is small and can efficiently be tested using traditional audit tests
Relevant data is not reliable and internal controls over the reliability of data are weak
Relevant data may be in different formats and is not easy to use
An auditor is most likely to use ADA when (3 things)...
Data is available that is relevant to the audit assertion being tested
The available data is reliable and comes from a strong system of internal controls
The available data is clean and does not require significant work to make it usable
What is the difference between probablistic sample selection and nonprobablistic sample selection? What are the selection methods for each (2 for non, 3 for prob)?
Probabilistic sample selection is a method of selecting a sample such that each population item has a known probability of being included in the sample
Non Probabilistic sample selection is a method in which the auditor uses professional judgment rather than probabilistic methods
Nonprobabilistic selection methods
Block sample selection
Haphazard sample selection
Probabilistic selection methods:
Simple random sample selection
Systematic sample selection
Probability proportional to size sample selection
1) what are the 3 disadvantages and advantages for nonstatistical sampling?
2)what are the 2 acceptable methods of projecting misstatements in nonstatistical sampling?
The major advantages of non statistical sampling include
Decreased complexity
Lower training cost
May be less time consuming
The major disadvantages of non statistical sampling include the facts that the auditor
Cannot quantify sampling risk
Cannot measure the sufficiency of evidence
May not get the most efficient sample
Ratio method: the auditor estimates the value of the population (or each stratum) based on a ratio of the audited value of the sample divided by the book value of the sample
Difference method: the auditor estimates the value of the population by adding (or subtracting) the projected difference between audited value and book value of each stratum to the book value of that stratum