ACC 406 EXAM 2 STUDY GUIDE
Tolerable Difference - Answer -1. How much evidence do we want?
-> More evidence = less tolerable difference
2. Can be expressed in money or percentages
Preliminary Analytical Procedures - Answer -Used to assist the auditor to better
understand the business and to plan the nature, timing, and extent of audit procedures
Substantive Analytical Procedures - Answer -Used to obtain evidential matter about
particular assertions related to account balances or classes of transactions
Final Analytical Procedures - Answer -Used as an overall review of the financial
information in the final review stage of the audit
Limitations of an Entity's Internal Control - Answer -1. Override of Internal Control by
Management
2. Human Errors or Mistakes
3. Collusion
-> Is it really incompatible, even if it violates the ARC framework?
Using the Conceptual Tools to Audit a Cycle - Answer -Phase 3
1. Formalize acceptable audit risk, establish materiality, determine tolerable
misstatement
-> Perform planning analytical procedures and assess IR (by account/assertion)
-> Assess preliminary IR (by acct./assert.)
-> Identify key controls (by acct./assert.)
Phase 4
1. Test controls where control risk is set at less than 100% (i.e., other than High) using
ROID
-> With results, reassess CR (by acct./assert.)
Phase 5
1. If using the reliance strategy, reevaluate the nature, timing, and extent of substantive
tests
-> Sample and perform substantive tests (SAP, TD) using MIRADCOPS
What are some entity-level controls? - Answer -1. Pervasive controls
2. Control environment
-> Tone at the top, policies and procedures, codes of conduct
3. The company's risk assessment process
4. Centralized process controls
-> e.g., IT general controls
5. Monitoring
, -> e.g., Internal audit or audit committee
6. Period end reporting
-> e.g., Policies, reconciliations, top-side journal entries
Deficiencies - Answer -What's the difference between design and operating
deficiencies?
1. Design and Implementation
-> A control necessary to meet the control objective is missing
-> An existing control is not properly designed
-> A control is not implemented correctly
2. Operating
-> A well-designed procedure is not being implemented effectively because:
----> It is not operating as designed
----> Operating personnel are ineffective
Statistical Sampling - Answer -1. Based on statistical theory and mathematical formulas
2. Can quantify sampling risk
3. Attribute sampling, monetary-unit sampling, classical variable sampling
Non-Statistical Sampling - Answer -1. Based on judgement, not formulas
2. Sampling risk is not quantifiable, but still must be considered
3. Haphazard, judgemental, targeted sampling
Revenue Recognition Issues - Answer -1. Sales cutoff
2. Right of return
3. Side agreements
4. Bill and hold sales
5. Channel stuffing
6. Refreshing transactions
7. Related party receivables
Advantages of Statistical Sampling - Answer -1. Design an efficient sample
2. Measure the sufficiency of evidence obtained
3. Quantify sampling risk
Disadvantages of Statistical Sampling - Answer -1. Training auditors in proper use.
2. Cost to design and conduct sampling application.
3. Lack of consistent application across audit teams.
Random Sampling - Answer -1. Means every item in the population has equal
opportunity for being selected
2. Used in statistical sampling
-> Requires the use of a statistical sampling method
-> Eliminates bias in selecting a sample
Tolerable Difference - Answer -1. How much evidence do we want?
-> More evidence = less tolerable difference
2. Can be expressed in money or percentages
Preliminary Analytical Procedures - Answer -Used to assist the auditor to better
understand the business and to plan the nature, timing, and extent of audit procedures
Substantive Analytical Procedures - Answer -Used to obtain evidential matter about
particular assertions related to account balances or classes of transactions
Final Analytical Procedures - Answer -Used as an overall review of the financial
information in the final review stage of the audit
Limitations of an Entity's Internal Control - Answer -1. Override of Internal Control by
Management
2. Human Errors or Mistakes
3. Collusion
-> Is it really incompatible, even if it violates the ARC framework?
Using the Conceptual Tools to Audit a Cycle - Answer -Phase 3
1. Formalize acceptable audit risk, establish materiality, determine tolerable
misstatement
-> Perform planning analytical procedures and assess IR (by account/assertion)
-> Assess preliminary IR (by acct./assert.)
-> Identify key controls (by acct./assert.)
Phase 4
1. Test controls where control risk is set at less than 100% (i.e., other than High) using
ROID
-> With results, reassess CR (by acct./assert.)
Phase 5
1. If using the reliance strategy, reevaluate the nature, timing, and extent of substantive
tests
-> Sample and perform substantive tests (SAP, TD) using MIRADCOPS
What are some entity-level controls? - Answer -1. Pervasive controls
2. Control environment
-> Tone at the top, policies and procedures, codes of conduct
3. The company's risk assessment process
4. Centralized process controls
-> e.g., IT general controls
5. Monitoring
, -> e.g., Internal audit or audit committee
6. Period end reporting
-> e.g., Policies, reconciliations, top-side journal entries
Deficiencies - Answer -What's the difference between design and operating
deficiencies?
1. Design and Implementation
-> A control necessary to meet the control objective is missing
-> An existing control is not properly designed
-> A control is not implemented correctly
2. Operating
-> A well-designed procedure is not being implemented effectively because:
----> It is not operating as designed
----> Operating personnel are ineffective
Statistical Sampling - Answer -1. Based on statistical theory and mathematical formulas
2. Can quantify sampling risk
3. Attribute sampling, monetary-unit sampling, classical variable sampling
Non-Statistical Sampling - Answer -1. Based on judgement, not formulas
2. Sampling risk is not quantifiable, but still must be considered
3. Haphazard, judgemental, targeted sampling
Revenue Recognition Issues - Answer -1. Sales cutoff
2. Right of return
3. Side agreements
4. Bill and hold sales
5. Channel stuffing
6. Refreshing transactions
7. Related party receivables
Advantages of Statistical Sampling - Answer -1. Design an efficient sample
2. Measure the sufficiency of evidence obtained
3. Quantify sampling risk
Disadvantages of Statistical Sampling - Answer -1. Training auditors in proper use.
2. Cost to design and conduct sampling application.
3. Lack of consistent application across audit teams.
Random Sampling - Answer -1. Means every item in the population has equal
opportunity for being selected
2. Used in statistical sampling
-> Requires the use of a statistical sampling method
-> Eliminates bias in selecting a sample
