A5

Question 1

Only area where auditor does not use judgment in sampling

Answer 1

*deciding which items will be selected

Question 2

Sampling Risk

Answer 2

*risk that the sample is not representative of the population and that the auditor’s conclusion will be different as a result

Question 3

Statistical vs. Nonstatistical Sampling

Answer 3

nonstatistical chooses sample size judgmentally

Question 4

Does statistical sampling eliminate the need for auditing judgment?

Answer 4

No

Question 5

Types of sampling

Answer 5

attribute sampling - I/C
variables sampling - substantive work

*attributes can usually be answered yes or no

Question 6

Sampling Risks in Substantive Testing

Answer 6

1. Risk of Incorrect Acceptance (Beta) (Effectiveness)

2. Risk of Incorrect Rejection (Alpha) (Efficiency)

Question 7

Sampling Risks in Tests of Controls

Answer 7

1. Risk of Assessing Control Risk too Low (Beta) (Effectiveness)
2. Risk of Assessing Control Risk too High (Alpha) (Efficiency)

Question 8

Beta risk is inversely related to

Answer 8

the confidence interval

Question 9

Types of nonsampling risk

Answer 9

1. use inappropriate audit evidence

2. improperly evaluate the results

Question 10

What is used to determine whether or not a sample of internal controls can be accepted?

Answer 10

the UPPER DEVIATION RATE

= sample deviation rate + allowance for sampling risk

Question 11

Formula for upper deviation rate

Answer 11

= sample deviation rate + allowance for sampling risk

Question 12

Does population size have a large impact on sample size?

Answer 12

No

Question 13

I/C: Inversely Related to Sample Size

Answer 13

1. risk of assessing control risk too low

2. tolerable deviation rate

Question 14

I/C: Directly Related to Sample Size

Answer 14

1. expected deviation rate

Question 15

Is block (cluster) sampling allowed?

Answer 15

No

Question 16

UDR <= TDR

Answer 16

accept

Question 17

UDR > TDR

Answer 17

reject

Question 18

Discovery sampling

Answer 18

once you find one instance you reject

*used with fraud/critical items

Question 19

When to use stratification

Answer 19

• when a population has highly variable recorded amounts

* results in a reduced sample size

Question 20

Three Types of Sampling Plans

Answer 20

1. mean-per-unit
2. ratio estimation
3. difference estimation

Question 21

Mean-Per-Unit

Answer 21

1. misstatement per item selected X population

2. 1 standard deviation X population

Question 22

Ratio Estimation

Answer 22

audited amount / recorded amount X population recorded amount

Question 23

Difference Estimation

Answer 23

recorded amount - audited amount / sample size X population size

Question 24

What is a sampling unit?

Answer 24

*one account, dollar, etc.

Question 25

Direct Relationship for Sample Size for Substantive

Answer 25

1. expected misstatement 2. standard deviation 3. assessed level of risk

Question 26

Inverse Relationship for Sample Size for Substantive

Answer 26

1. tolerable misstatement | 2. acceptable level of risk

Question 27

Advantages of PPS (MUS)

Answer 27

1. automatically emphasizes larger items by automatically stratifying the sample 2. generally requires a smaller sample when no errors are expected

Question 28

Disadvantages of PPS (MUS)

Answer 28

1. special procedures for zero balances, negative balances, and understated balances

Question 29

PPS Sample Size Determination

Answer 29

Sampling Interval: Tolerable misstatement/reliability factor Sample size: recorded amount of population/sampling interval

Question 30

Do internal control problems mean that there are necessarily possible misstatements?

Answer 30

No

Question 31

Do ISAs define the term material weakness?

Answer 31

No

Question 32

How must communication of control deficiencies be communicated?

Answer 32

in writing, even if corrected

Question 33

What should an auditor do about previously existing deficiencies?

Answer 33

tell the client again (remind them)

Question 34

When must communication about control deficiencies be communicated?

Answer 34

Preferred: report release date Required: release date + 60 days

Question 35

Does communication to management about control deficiencies need to be restricted?

Answer 35

Yes

Question 36

May an auditor report that there were no significant deficiencies?

Answer 36

No

Question 37

May an auditor issue communication that there were no material deficiencies identified?

Answer 37

Yes

Question 38

What unique items are in written communication about internal controls?

Answer 38

* disclaimer of opinion * describe the terms * restrict use

Question 39

Do PCAOB standards apply to nonissuers, even if they are having an opinion for their internal controls?

Answer 39

No

Question 40

Written representation for internal controls is part of a possible _____ limitation

Answer 40

scope

Question 41

Is fraud risk assessment part of the audit of internal controls?

Answer 41

Yes

Question 42

How to test controls when issuing an opinion on the controls?

Answer 42

* evaluate the design effectiveness | * evaluate the operating effectiveness

Question 43

Can you use the work of others during an audit of internal controls?

Answer 43

Yes, so long as they are not in high-risk areas

Question 44

In order to examine a nonissuer's internal controls, what condition must already be set in place?

Answer 44

the auditor must also have audited the accompanying financial statements

Question 45

What is benchmarking of automated controls?

Answer 45

*if the automated controls have not changed from one year to the next, the auditor may not need to repeat specific testing performed; just needs to verify that the control has not changed

Question 46

Are controls evaluated for a period or as of?

Answer 46

As of the balance sheet date

Question 47

When should communication be made for significant and material weaknesses?

Answer 47

by the report date

Question 48

When should communication be made for control deficiencies (not material or significant)?

Answer 48

within 60 days of the report release date

Question 49

Which types of deficiencies must be communicated in writing?

Answer 49

all of them

Question 50

Unique aspect in separate report for internal controls

Answer 50

*inherent limitations paragraph

Question 51

When auditing internal controls, the auditor can opine on either:

Answer 51

1. the direct internal control or 2. management's assertion

Question 52

Types of reports for internal controls and financial statements

Answer 52

1. combined report | 2. two separate reports

Question 53

When a material weakness exists, what should the auditor express an opinion on

Answer 53

*the internal control, NOT management's assertion

Question 54

Is reporting on whether a previously reported internal control weakness continues to exist required?

Answer 54

it is not required; it would be a voluntary engagement

Question 55

Even in a disclaimer of opinion, an auditor should still mention:

Answer 55

*material weaknesses identified

Question 56

Can an auditor use the work of another auditor in conducting an audit of internal controls?

Answer 56

Private: yes Public: no

Question 57

Would an examination be sufficient to see if an entity is in compliance with the Foreign Corrupt Practices Act (FCPA)?

Answer 57

No

Question 58

Communication of control deficiencies: financial statement audit vs I/C audit

Answer 58

F/S audit: within 60 days | audit I/C: by the report release date

Question 59

How often must an auditor meet with the audit committee with management being present?

Answer 59

at least once per year

Question 60

What should the auditor communicate to those charged with governance?

Answer 60

* overview of the planned scope and timing of the audit | * significant audit findings

Question 61

What special considerations should be taken if those charged with governance are not involved with managing the entity?

Answer 61

*auditor should discuss material, corrected misstatements brought to management's attention as a result of the audit

Question 62

Should communication to those charged with governance be restricted in use?

Answer 62

Yes

Question 63

Form of communication with those charged with governance

Answer 63

must be in writing

Question 64

For audits of issuers, when must communications with those charged with governance happen?

Answer 64

before the audit report release date

Question 65

When must management's representation letter be dated?

Answer 65

the same date as the auditor's report | ISA allows it to be close to

Question 66

What is the final piece of evidential matter?

Answer 66

the management representation letter

Question 67

Contents of the management representation letter

Answer 67

1. financial statements 2. completeness of information 3. fraud (I/C) 4. laws and regulations 5. uncorrected misstatements 6. litigation and claims 7. estimates 8. related party transactions 9. subsequent events 10. additional representations (specific to F/S)