Audit Exam 2

Revenue recognition

What financial statement portion makes up the largest percentage of fraud?

AR master file

A file that contains the list of customers and their balances in AR

AR trial balance

A file containing a list of all outstanding invoices

Occurence - vouch, completeness - trace

Match the following

A. Occurence
B. Completeness

1. Vouch

2. Trace

Bill of lading

A document between a shipper and carrier detailing the type, quantity, and destination of goods being transported

• Sales

• Cash receipts

• Returns and allowances

• Write off of uncollectibles

• Estimate bad debt expense

What are all the possible transactions in the sales cycle?

1. Order

2. Credit check

3. Packing slip

4. Bill of lading

5. Sales invoice

6. Sales journal

7. General ledger

List all the steps of documentation needed for a sales transaction

Sales transaction

A sales process that includes:

• Processing customer orders

• Granting credit

• Shipping goods

• Billing customers

• Recording sales

and involves the sales and AR accounts

Cash receipts transaction

A sales process that includes processing and recording cash receipts, confirming a client’s payment of an invoice, and involves sales and AR accounts

Occurence

Sampling the sales journal and vouching to the packing slip, shipping document, and customer order would be an example of a substantive test for sales transactions to test for ____________

IR * CR * PDR

What is the formula for acceptable audit risk (AAR)?

Internal control, occurence

Not preparing a sales invoice until a shipping document, packing slip, customer order, and credit approval are on file is an example of an ________ to test for ________

Internal control, completeness

Pre-numbering packing slips and shipping documents is an example of an ________ to test for ________

Valuation

Sampling the sales journal, comparing quantities and prices to supporting documentation, and recalculating totals are all examples of substantive tests to test for ____________

Representative sample

A type of sample where the characteristics of a sample are approximately the same as the population, allowing the sample to be generalized to the population. This can be achieved by meticulously designing the sampling process

Sampling risk

Risk that an auditor reaches an incorrect conclusion because the sample is not representative of the population

Non-sampling risk

Risk that the audit tests do not uncover existing exceptions in the sample. I.e. Misstatements are within the sample, but the tests do not find them

Inversely

Sample size is (directly // inversely) related to sampling risk

Non-statistical sampling

A type of sampling where the auditor selects items they believe to be the most useful to include in the sample using their professional judgement

Statistical sampling

A type of sampling that uses random selection and allows for sampling risk to be quantified during the planning and evaluating steps

Probabilistic

A sample selection method where each item has a known probability of being included in the sample. Ex. random sampling, probability proportional to size, etc.

Non-probabilistic

A sample selection method in which the auditor uses professional judgement

Exception rate

The percentage of items in the population containing deviations of a particular attribute. May speak to the effectiveness of internal controls or policies

Acceptable risk of overreliance (ARO)

The risk that the auditor is willing to say that the control is effective or exception rate is tolerable, when the true population exception rate is greater than the tolerable exception rate

Tolerable exception rate (TER)

The exception rate for the whole population that the auditor will still conclude that controls are operating effectively and/or misstatements are acceptable

Estimated population exception rate (EPER)

The exception rate that the auditor expects to find in the population before testing begins

Sample exception rate (SER)

The number of exceptions in the sample divided by the sample size

Computed upper exception rate (CUER)

The highest estimated exception rate in the population at a given ARO

Lower, higher

For tests of controls using nonstatistical sampling, TER should be (higher // lower) for more significant balances and ARO should be (higher // lower) for higher control risks

Lower, materiality

For tests of transactions using nonstatistical sampling, ARO should be (higher // lower) for higher control risks and TER is based on __________

True

T or F: Planning TER, ARO, and PER may be different between statistical and non-statistical sampling

Down, down, up, up

For each of the following, specify whether the change will make sample size need to go up or down:

• Increased ARO

• Increased TER

• Increased EPER

• Increased population size

Directed

A non-probabilistic sample selection method in which the auditor deliberately selects items based on some criteria

Block

A non-probabilistic sample selection method in which the auditor selects the first block, then the rest come in sequence

Haphazard

A non-probabilistic sample selection method in which the auditor selects items by random without regard to their size, source, or other characteristics

TER - SER

What 2 metrics do we want to be as far apart as possible when generalizing a sample to a population using non-probabilistic sampling? This might be known as the sampling error

Greater than

Auditors may conclude that sample results do not support the preliminary assessment of control risk when SER is (less than // greater than) EPER

• Revise ARO or TER

• Expand sample size

• Revise CR

• Communicate with management

What are some things you might do if a population is not considered acceptable?

Less than

For probabilistic sampling, a population is acceptable if CUER is equal to or (less than // greater than) TER

Sample size & CUER

For probabilistic sampling, tables can be used to find _________________ using TER, EPER, and exceptions found

NS, SS, NS, SS

The main differences between non-statistical and statistical samplings for tests of transactions is:

• In ____, ARO is set to high/med/low and sample size is determined by judgement while in ____ they are set to a number and found by table

• ____ compares SER and TER while ____ compares CUER and TER

(when filling in the blank: NS = non-statistical and SS = statistical sampling)

• Location (may be at many locations)

• Form (chemicals, metals, electronics, WIP)

• Valuation (manufactured vs purchased)

• Estimates

What are some things that might influence inherent risk when it comes to inventory?

False, auditors are responsible for observing inventory count and perform test counts on certain samples

T or F: Auditors must count all inventory

True

T or F: Inventory is carried at lower cost or market value

• Prevent double counting

• Ensure all items are counted

• Identify rights to items (consignment, bill and hold)

• Check counts

• Control movement of goods

When counting inventory, what must procedures ensure?

Inventory schedule

A document prepared by the client after the physical count of inventory which shows the quantities and unit costs of each item. Substantive tests will be performed on this to make sure it agrees with the physical count

Aged trial balance

An trial balance of AR expected to be collected based on the age of AR. Sampled and tested to be compared to the AR master file and to check for detail tie-in (valuation)

B. Confirmation → confirmations sent to customer → cash receipts and shipping documents can be used to confirm non-returned confirmations

Which of the following is a common test to test for the existence of AR?

A. Detail tie-in

B. Confirmation

C. Vouch

False, clients are typically not privy to rights arrangements, documentation and inquiry are better methods

T or F: Confirmation is the best method to determine rights to AR

Detail tie-in

A facet of valuation especially important for AR auditing, making sure that all details from supporting records match the totals in the master file and general ledger

Cutoff

A facet of valuation especially important for AR auditing, ensuring that transactions are recognized in the correct accounting period. The auditor must establish that the client has established adequate procedures to ensure reasonable cutoff

Expected response rate, IR, CR

Confirmations may not be required when ___________, ___________, and ___________ are low

Blank confirmation

A type of confirmation where the auditor does not send the amount within the confirmation, the client must provide it themselves

Positive confirmation

A type of confirmation where the auditor asks a client to confirm that a balance is correct

True

T or F: Assurance is the greatest when confirmations occur closer to the balance sheet date

Test of balances

A test for whether the dollar amounts of account balances are materially misstated

Test of transactions

A test for the monetary correctness of transactions in an accounting system, serving as a measure for the operating effectiveness of controls

Stratified sampling

A method used in sampling for tests of balances where the population is split into sub-populations before applying sampling methods

Acceptable risk of incorrect acceptance (ARIA)

The amount of risk an auditor is willing to take of accepting a balance as correct when true misstatements exceed tolerable misstatement. Kind of like us betting that the balances are properly stated

decreases

When something causes ARIA to increases, sample size _________

Confidence factor

A number that measures the degree of certainty that the sample represents the entire population. Used as a multiplier to find initial sample size based on riskiness and importance of an account

(Recorded population / tolerable misstatement) * confidence factor

What is the formula to determine initial sample size for a non-statistical test of balances?

100, greater than, excluded

When using stratified sampling, you must test _____% of items which are (less than // greater than) tolerable misstatement and that portion will be (excluded / included) in the sample

(Client misstatement - recorded value of sample) * recorded bv of the stratum

What is the formula for point estimate in stratified sampling?

Point estimate

A figure used for non-statistical stratified sampling which extrapolates the total misstatements from the sample to the population to be compared to tolerable misstatement

Monetary unit sampling (MUS)

A type of statistical sampling for tests of balances where:

• Sample is selected based on probability proportional to size

• Sample size is determined via formula

• Per account materiality is used instead of tolerable misstatement

• Uses techniques from sampling tables

1. Find sampling interval by: Total dollar amount / sample size

2. Choose random start point

3. Generate dollar amounts, the count of which should match the sample size by adding the sampling interval to the starting point

4. Determine which buckets each number from step 3 fall into → this is how you choose your items to sample

List the steps to use probability proportional to size with a sampling interval to choose which items to sample

Confidence factor / tolerable misstatement as a percentage of population

What is the formula for sample size using MUS?

Sampling interval * confidence factor

What is the formula for an upper misstatement bound using MUS?

Upper misstatement bound, tolerable misstatement

When using MUS, the auditor can accept that the population is not materially misstated when the _________________ is less than _________________

100, greater than

When using MUS, you must test _____% of items which are (less than // greater than) sampling interval

Variables sampling

A type of statistical sampling for tests of balances which uses a normal distribution with confidence intervals surrounding a point estimate (mean). Best for homogenous populations. Includes:

• Difference estimation

• Ratio estimation

• Mean per unit estimation

1. Purchase requisition

2. Purchase order

3. Receiving report

4. Credit AP

Put the following documents in the correct order for purchasing an asset:

• Purchase order

• Purchase requisition

• Receiving report

• Credit AP

1. Vendor invoice

2. Voucher

3. Check

4. Debit AP

Put the following documents in the correct order for paying off an asset that was has been purchased:

• Check

• Voucher

• Debit AP

• Vendor invoice

• Receiving report

• Purchases journal

When tracing or vouching the purchases account, what 2 documents would you trace/vouch between?

Existence, completeness

Because AR/inventory are assets and AP are liabilities, AR/AP will be more concerned with (completeness // existence) while AP will be more concerned with (completeness // existence). This makes AP a little more difficult to test

• Invoices

• AP trial balance

When tracing or vouching AP, what 2 documents would you trace/vouch between?