ACC 400 Exam Two

What are the first three steps in the auditing process?

1. Plan the audit

2. Obtaining understanding of the client and its environment

3. Assess risks and design audit procedures

What is the purpose of the engagement letter?

Defines the responsibilities of the auditor and client, outlining audit terms

What is materiality in auditing?

Magnitude of an omission/misstatement that could influence the judgement of a reasonable person

What is the fraud triangle?

Incentive/Pressure, Opporunity, and Attitude/Rationalization

What are the three types of further audit procedure?

Tests of controls, substantive procedures, and analytical procedures

What are the five components of internal control?

Control Environment, Risk Assessment, Control Activities, Information & Communication, Monitoring

What are the three types of control activities?

Preventative, Detective, and Corrective

What is segregation of duties?

Separating authorization, recording, and custody of assets to reduce fraud/error risk

What are limitations of internal control?

Human error, collusion, management override, and control deterioration over time

What are the documentation methods for internal controls?

Questionnaires, written narratives, flowcharts, and walk-throughs

What is audit sampling?

Applying procedures to less than 100% of items to draw conclusions about the whole population

What is a representative sample?

A sample with characteristics similar to the population it was drawn from

What are two main types of sampling?

Statistical and Non-statistical

What is tolerable exception rate (TER)?

The maximum exception rate an auditor will accept without changing planned reliance

What is computed upper exception rate (CUER)?

The worst-case projected exception rate based on sample results

What are sampling vs. non-sampling errors?

Sampling errors arise from chance; non-sampling errors arise from auditor mistakes or misjudgments

How can auditors reduce sampling risk?

Increase sample size and use proper selection methods (e.g., random sampling)

What is the decision rule for control testing?

If CUER < TER, accept the control. If CUER > TER, reject it