12.01 IMPORTANT

Question 1

Inherent Risk (IR)

Definition

Answer 1

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures

Audit Risk = Control Risk X Inherent Risk X Detection Risks

Question 2

Inherent Risk (IR)-The probability that a material misstatement would occur in the particular audit
area in the absence of any internal control policies and procedures
. Control Risk (CR)-The probability that a material misstatement that occurred in the first place would
not be detected and corrected by internal controls that are applicable
. Detection Risk (DR)-The probability that a material misstatement that was not prevented or detected
and corrected by internal control was not detected by the auditor’s substantive audit procedures
(ie, an undetected material misstatement exists in a relevant assertion)

Question 3

AICPA’s Guidance

Obtain Understanding of Entity’s Internal Controls

Answer 3

AU-C 315 - Auditor is to Identify and assess the risks of material mistatement.

Question 4

Transaction Cycles

Answer 4

A group of homogeneous transactions - Ex. Revenue/receipts, Expenditures/disbursements

Question 5

Adequacy of controls

Answer 5

The design effectiveness of controls

Question 6

Procedures designed to obtain an understanding include

Answer 6

1. Inquiries of MGT and others
2. Observation and Inspection - Observation of ops and inspection of documentation.

Question 7

Control Tests - Purpose

Answer 7

Determine the operating effectiveness of I/C - EX. Testing a sample of invoices to determine if they were properly approved.

Question 8

Sustantitive Testing: Analytical Procedures

Answer 8

Identify unexpected relationships between recorded amounts and other data. EX - comparing amounts of sales invoices in current year with previous year’s invoices

Question 9

Substantive Testing: Tests of Details

Answer 9

Determine conclusively if a material mistatement has occured and by how much. Ex. Inspecting a sample of invoices to determine wheter they were properly recorded.

Question 10

Analytical Procedures

Answer 10

Evidence gathering procedures that suggest reasonableness based upon comparison to appropriate expectations or benchmarks. THESE ARE OPTIONAL

Question 11

Test of Details

Answer 11

Evidence gathering procedures consiting of either:
1.** Tests of ending balances **- final balance is assessed by testing the composition of the year end balance.
2. Test of tranasactions - Where the final balance is assessed by examing those debits and credits that caused the balance to change from last year’s audited balance to current year’s balance.

Question 13

6 Account Balance Assertions:

Answer 13

1. Existence - that items exist
2. Completeness - That anything that should have been recorded was.
3. Rights and Obligations - The entity holds or controls the rights to its assets and the liabilities are the obligations of the entity.
4. Accuracy, Valuation, and Allocation - That any interests in the A, L, or E are included in the F/S at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
5. Classification - A, L, and E interests have been recorded in appropriate accounts
6. Presentation - A, L, and E interests are appropriately aggregated or disaggregated and clearly described.