WGU - D251 Advanced Auditing

Performance Materiality is also known as _____________. - answer-Tolerable Error Auditor uses Performance Materiality for ____________. - answer-Determining significant accounts, locations, and audit procedures. Performance Materiality is what percent of Planning Materiality? - answer-75% What happens is Performance Materiality is set too high? - answer-Auditor might not perform sufficient procedures to detect material misstatements. What happens if Performance Materiality is set too low? - answer-Auditor might perform more substantive procedures than needed. Overall Materiality is also known as _________. - answer-Planning Materiality Auditors use Overall Materiality to ___________. - answer-Determine whether financial statements overall are materially correct. What does Posting Materiality signify? - answer-The misstatements identified throughout the audit that will be considered at the end of the audit in determining whether the financial statements are materially correct. What percentage is Posting Materiality commonly set at? - answer-5% of Planning Materiality What is Materiality? - answer-The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. What makes a fact Material? - answer-If there is a substantial likelihood that a reasonable investor would have viewed the fact as having significantly altered the total mix of information made available. What is the materiality level that an auditor uses for determining significant accounts, significant locations, and audit procedures for those accounts and locations? - answer-Performance Materiality An auditor has determined performance materiality has been set too high at the beginning of the audit. Which procedures should this auditor consider to detect misstatements? - answer-The auditor should perform additional substantive audit procedures. Which risk exists at the overall financial statement level and at the assertion level and can be categorized as involving inherent risk and control risk? - answer-Risk of material misstatement What represents an identified and assessed risk of material misstatement that requires special audit consideration? - answer-Significant risk What is the impact on the amount of acceptable audit risk if an auditor believes the chance of financial failure of a client is high? - answer-The acceptable audit risk is reduced. Which factor should lead an auditor to assess inherent risk as high? - answer-The account balance consists of a large number of complex transactions. Which factor would lead an auditor to assess client business risk at a higher level? - answer-The client's use of information technology is incompatible across systems and processes. An auditor determines overall materiality of $500,000 would be material to the income statement and $1,000,000 would be material to the balance sheet. Which amount would an auditor typically assess performance materiality to be for this client? - answer-75% of $500,000 At which percentage do auditors commonly set posting materiality? - answer-5% of planning materiality What is Client Business Risk? - answer-Risks affecting the business operations and potential outcomes of an organization's activities. What does the Risk of Material Misstatement represent? - answer-The Inherent and Control Risks Who controls the Risk of Material Misstatement? - answer-The Client What happens to Detection and Audit Risk when Risk of Material Misstatement is high? - answer-Detection Risk is lowered to reduce the Audit Risk to an acceptable level. What is Inherent Risk? - answer-The likelihood of material misstatement without considering the effects of internal control What is Control Risk? - answer-The risk of a misstatement occurring or not being prevented by internal controls What is audit risk? - answer-The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. What is detection risk? - answer-Risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist. What is the audit risk model? - answer-Audit Risk = Inherent Risk x Control Risk x Detection Risk What is engagement risk? - answer-Risk of potential for loss to the auditor because of being associated with the client. What is the relationship between Audit Risk and Engagement Risk? - answer-Inverse What percentages does Audit Risk use? - answer-1%-5% What amount of evidence is needed as Detection Risk decreases? - answer-More evidence is required with a lower Detection Risk What is a Significant Risk? - answer-An identified and assessed risk of material misstatement that requires special audit consideration Which has a higher Inherent Risk - Cash or Large Equipment - answer-Cash - Easily stolen What are some factors that increase Inherent Risk? - answer-Easily stolen, complex, estimations, high volume and nonroutine What are the 5 Transaction Assertions? - answer-Occurrence, Completeness, Accuracy, Cutoff and Classification What is the Occurrence Assertion? - answer-Transactions and events that have been recorded actually occurred and pertain to the entity. What is the Completeness Transaction Assertion? - answer-All transactions and events that should have been recorded have been recorded. What is the Accuracy Transaction Assertion? - answer-Amounts and other data relating to recorded transactions and events have been recorded appropriately. What is the Cutoff Transaction Assertion? - answer-Transactions and events have been recorded in the correct accounting period. What is the Classification Transaction Assertion? - answer-Transactions and events have been recorded in the proper accounts. What are the 4 Balance Assertions? - answer-Existence, Rights and Obligations, Completeness, and Valuation and Allocation What is the Existence Balance Assertion? - answer-Assets, liabilities, and equity interests exist at a given date. What is the Rights and Obligations Balance Assertion? - answer-The entity holds or controls the rights to assets and liabilities are obligations of the entity What is the Completeness Balance Assertion? - answer-All assets, liabilities, and equity interests that should have been recorded have been recorded. What is the Valuation and Allocation Balance Assertion? - answer-Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. What are the 4 Presentation and Disclosure Assertions? - answer-Occurence, Completeness, Accuracy and Valuation, and Classification What is Occurrence Present and Disclose Assertion? - answer-Disclosed events and transactions that occurred during the period. What is the Completeness Present and Disclose Assertion? - answer-All disclosures that should have been included in the financial statements have been included. What is the Accuracy and Valuation Present and Disclose Assertion? - answer-Financial and other information are disclosed fairly and at appropriate amounts. What is the Classification Present and Disclose Assertion? - answer-Financial information is appropriately presented and described, and disclosures are clearly expressed. What is quantitative evaluation? - answer-Determining whether the upper limit of the possible deviation rate exceeds the tolerable deviation rate In which circumstance would an auditor change an audit objective to estimating the correct value? - answer-When the total estimated misstatement exceeds the tolerable misstatement What describes tainting percentage? - answer-The percentage of misstatement present in a logical unit Which statement reflects a 5% risk of overreliance? - answer-95% confidence level that the actual rate of deviation will not exceed the tolerable deviation What is the objective of sampling when testing controls? - answer-To determine whether controls are operating effectively What is the primary objective of monetary unit sampling? - answer-To identify overstatement errors How can an auditor increase the chances that systematically selected samples are representative of the population? - answer-By using multiple random starts Which sampling method allows an auditor to measure the risk of making an incorrect inference about the population from which the sample is taken? - answer-Statistical What is audit sampling? - answer-Taking part of a population- subjecting it to audit procedures- projecting results to a population How to gather evidence for existence or occurrence assertion? - answer-Take a sample of recorded transactions to examine underlying evidence or send out confirmations How to gather evidence for completeness assertion? - answer-Take a sample of subsequent cash disbursements to search for under-recorded liabilities How to gather evidence for rights or obligations assertion? - answer-Performed in conjunction with existence testing, including examining source documents How to gather evidence for valuation or allocation assertion? - answer-Select items and trace back to source documents, such as purchase agreements or invoices How to gather evidence for presentation and disclosure assertion? - answer-Select items and verify estimates for proper disclosure Do inquiries, observations and analytical procedures involve sampling? - answer-No What is Attributes Sampling? - answer-Sampling for testing the effectiveness of controls What is Monetary Unit Sampling? - answer-A sampling method based on attribute estimation sampling but involving dollar misstatements rather than failure rates What is nonsampling risk? - answer-The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk. What is Sampling Risk? - answer-When the sample does not contain characteristics representative of the sample such that inferences made about that sample are incorrect What is the risk of overreliance also known as? - answer-Risk of incorrect acceptance of internal control reliability or risk of assessing control risk too low What is risk of under reliance also know as? - answer-The risk of incorrect rejection of internal control reliability or risk of assessing control risk too high What is the risk of incorrect acceptance of book value? - answer-Risk that the auditor will conclude that the account balance does not contain a material misstatement when the account balance actually does contain a material misstatement. What is the risk of incorrect rejection of book value? - answer-Risk that the auditor will conclude that the account balance contains a material misstatement when the account balance actually does not contain a material misstatement. What are the 4 questions an auditor needs to ask when Sampling? - answer-1. Which population, sampling units and characteristics (Population)? 2. How many items (Sample Size)? 3. Which items should be included in the sample (Sample selection)? 4. What inferences can be made (Sample evaluation)? What is a Sampling Unit? - answer-Individual units of a population What is Statistical Sampling? - answer-Choosing part of a population of interest for inspection. Is statistical sampling Quantitative or Qualitative? - answer-Quantitative What is Nonstatistical Sampling? - answer-The selection of sample items based on the author's judgement What are the 7 steps in Attribute Sampling? - answer-1. Define the attributes and what constitutes failure 2. Define the population from which the auditor takes the sample 3. Determine the sample size 4. Determine the method of selecting the sample 5. Select the sample items and perform the test of control 6. Evaluate the results and their effect on the substantive procedures and internal controls 7. Document all phases of the sampling process What percentages are Sampling risk often set at? - answer-5%-10% What is the Tolerable Rate of Deviation? - answer-Rate of deviation auditor willing to accept in population or the level at which control's failure to operate would cause the auditor to conclude that the control is not effective and change the auditor's plans What is another term for Tolerable Rate of Deviation? - answer-Tolerable Failure Rate What is another term for Expected Population Deviation Rate? - answer-E