Audit Theory Final

sampling risk

__________ is the possibility that the sample drawn is not representative of the population and, as a result, the auditor will reach an incorrect conclusion based on the sample

detection, audit

Sampling risk is one reason why auditors must accept some _______ and _______ risk

Audit Risk = Risk of Material Misstatement (inherent risk + control risk) x Detection Risk

What is the audit risk model equation?

nonsampling risk

___________ is the risk of auditor error

False

T/F: nonsampling risk can be measured

true

T/F: nonsampling risk can be minimized through training, planning, and supervision

sampling, nonsampling

All types of sampling are subject to _______ and _______ risks

attribute sampling

__________ is used to estimate the proportion of a population that possesses a specified characteristic. Used for testing a control to determine if the control is operating effectively

Was an invoice approved? Does the document have a signature? (always yes/no questions)

Examples of attribute sampling

desired confidence level, tolerable deviation rate, expected population deviation rate

What inputs are needed to determined sample size?

Tolerable Deviation Rate (TDR)

___________ is the maximum deviation rate from a control the auditor will accept and still consider the control effective

attribute sampling (so test of controls)

Tolerable deviation rate is only used in __________

Expected population deviation rate (EDR)

__________ is the rate of deviation expected if the entire population were tested

do not test the control

If EDR > TDR (or really close), _________________

direct

Confidence level and sample size have a ________ relationship

inverse

TDR and sample size have a ________ relationship

direct

EDR and sample size have a ________ relationship

Random number selection and systemic selection

What are the two methods used for selecting a sample in attribute sampling?

cannot rely on control

If UDR > TDR, ___________

can rely on control

If UDR < TDR, __________

allowance for sampling risk

Upper deviation rate – sample deviation rate = _____________

breach of contract

_________ is when there is a failure to complete services agreed to in the contract.

tort

wrongful act (other than breach of contract)

engagement letter

___________ is the contract between an auditor and client

negligence

__________ is a lack of reasonable care

1. Duty owed to client

2. Auditor breached duty by failing to act with care

3. Negligence caused client’s damage

4. Client had actual damages.

What must a client prove for auditor negligence?

1. No duty to client

2. Client was negligent

3. Auditor performed according to standards

4. Client has no loss

5. Loss caused by other events

6. Claim invalid because statue of limitations has expired

What are some defenses an auditor could use against a negligence claim?

negligence, gross negligence, and fraud

Auditors can be held liable to third parties for _______________

privity, near privity, foreseen 3rd party, reasonably foreseeable 3rd party

Four legal standards for determining if auditor had duty to third party if auditor charged with ordinary negligence:

privity

________ means there is a contractual relationship

near privity

_________ means the auditor knows of a specific 3^rd party relying on the financial statements

Foreseen 3^rd party

___________ persons or groups who are or should be foreseen by the auditor as relying on the FS

1. False representation by the auditor

2. Auditor knew representation was false

3. Auditor intended to induce 3^rd party to rely on false representation

4. 3^rd party relied on misrepresentation

5. 3^rd party suffered damages

For gross negligence and fraud, a third party must prove:

pay compensatory damages

If found guilty of ordinary or gross negligence – auditor must ____________

pay punitive damages

If found guilty of fraud – auditor may be ordered to ___________

Securities Act of 1933

___________ regulates the disclosure of information in a registration statement for a new public offering of securities

Section 11 of Securities Act of 1933

______________ states that auditors can be held liable to third parties when false/misleading info is included in registration statements

1. Loss was suffered by investing in the security

2. Audited financial statements contained a material omission or misstmt

When bringing a case against an auditor under the Securities Act of 1933, the plaintiff must prove:

Securities Exchange Act of 1934

_____________ regulates trading of securities after they are issued (Typical forms – 10Q, 10K, 8K)

Section 18 of the Securities Act of 1934

___________ states. the auditor is liable for material false/misleading statements in documents filed with SEC

Section 10B, including Rule 10b-5 of the 1934 Securities Act

_________ states that it is unlawful for auditors to lie, scheme, deceive, defraud

1. A material, factual misrepresentation or omission

2. Reliance on the FS

3. Damages suffered as a result of reliance on FS

4. Scienter – intent to deceive, manipulate, defraud

To bring a case against an auditor under the 1934 Securities Act, a plaintiff must prove ____________