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ACCT 3222 - Wiley - LSU - Ch 9- questions
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Substantive procedures correct answer: audit procedures designed to detect material misstatements at the assertion level and to gather evidence to support management assertions Some risks impact at the F/S level correct answer: Management pressure to not violate debt covenants ex. Some risks impact at the assertion level correct answer: (transactions/accounts) Auditor's response to risk impact at the F/S level correct answer:
- Make changes to the NET (nature, extent, timing), as needed
- More elements of unpredictability
- More experienced staff on higher risk areas
- More supervision of audit work Auditor's response to risk impact at the assertion level correct answer: 2 categories of procedures: substantive analytical procedures (A) and tests of details (FIVE CROTS) Substantive analytical procedures (A) correct answer: Trend analysis Ratio analysis Optional in risk response phase Tests of Details correct answer: FIVE CROTS Footing, cross footing, recalculating
Inquiry Vouching Examination/inspection Confirmation Reperformance Observation Tracing Scanning NET correct answer: Nature (What evidence) Extent (How much evidence) Timing (When to collect evidence) Assertions about classes of transactions and events correct answer: Typically I/S and CFS accounts
- Occurrence and Cutoff
- Completeness and Cutoff
- Accuracy and Classification Assertions about account balances at year-end correct answer: Typically B/S accounts
- Existence and Rights and obligations
- Completeness
- Allocation and valuation Assertions about presentation and disclosure correct answer: Disclosures made in the F/S
- Occurrence and Rights and obligations
- Completeness
- Accuracy and valuation and Classification and understandability
Initial procedures correct answer: 1. Trace the beginning balance to prior year's audit. Should be the same.
- Scan the transactions for unusual items, due to large dollar amount, timing, or source
- Obtain a trial balance or other detailed report for the account and foot for mathematical accuracy After comparing CY balance to PY balance correct answer: follow up with inquiry to management Analytical procedures correct answer: evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from the expected values by a significant amount. Use of analytical procedures correct answer: is required during risk assessment and reporting. Optional, but very common, in risk response phase. Factors that impact the effectiveness and efficiency of using a substantive analytical procedure to respond to risk include correct answer: 1. Nature of the assertion (low risk?)
- Plausibility and predictability of the relationship
- Availability and reliability of the data used to develop the expectation (relies heavily on client data)
- Precision of the expectation (more precision needed = less analytical procedures)
Tests of details are used for correct answer: higher risk assertions Tests of details are correct answer: Footing, cross footing, recalculation Inquiry Vouching Evaluation/inspection Confirmation Reperformance Observation Tracing Scanning When testing an assertion correct answer: one or more tests of details may be used in conjunction with a substantive analytical procedure Most important assertion to focus on for assets correct answer: Existence - prevent overstatement How to test existence of assets (in order) correct answer: Inspection of assets; inspection of docs Allocation/valuation - recalculation; inquiry of management about impairments; inspect impairment docs; inspect invoices for new PPE vs JE Rights and obligations - inspect docs of new assets; management inquiry Completeness - usually lower risk assertion for assets
Timing of lower risk of material misstatement assertions correct answer: May be more efficient for auditors to perform substantive procedures prior to year-end to allow more time for testing higher risk assertions at year-end Substantive procedures at an interim date factors correct answer: IC are effective Assessed RMM is low Little change is expected during period from interim to year-end Additional procedures can be performed during the period after interim to year-end and after year-end if necessary (i.e., not an inventory count only performed at year-end) Roll-forward procedures correct answer: Procedures performed at year-end on transactions occurring between an interim date and year-end (the roll-forward period) to provide sufficient appropriate audit evidence on which to base conclusions at year- end when substantive procedures are performed at an interim date Extremes of IR, CR, DR, and substantive procedures correct answer: Low CR and IR, High DR = Few substantive procedures required High CR and IR, Very low DR = Extensive substantive procedures required Some substantive procedures required when correct answer: Low CR, High IR, and Medium DR Medium CR, Low IR, and Medium DR
Considerable substantive procedures required when correct answer: Medium CR, High IR, Low DR High CR, Low IR, Low DR Extent of substantive procedures refers to correct answer: sample size When determining sample size, auditors will consider correct answer: qualitative factors Some account balances or classes of transactions, it may be appropriate and feasible correct answer: for auditors to test 100% of the population. Some have a small population of transactions but are large dollar value Which items to selection from a population depends on correct answer: auditor judgment, but a common method is selecting high dollar value items or key items. The results CANNOT be projected to the population because they are not really random and considered haphazard Items may be selected because they are correct answer: high dollar value or for another characteristic (i.e., unusual, suspicious, or have a history of error) By using statistical sampling, auditors correct answer: draw conclusions about an entire population based on the results of the sample testing Statistical sampling can be use in correct answer: addition to testing specific items from a population NOT usually done
Accounting estimates that are frequently made and updated because they relate to routing transactions correct answer: Lower estimation uncertainty Method of accounting estimate measurement by the applicable financial reporting framework is simple and easily applied correct answer: Lower estimation uncertainty Accounting estimates made using measurement models well- known or generally accepted correct answer: Lower estimation uncertainty Management Bias correct answer: A lack of neutrality by management in the preparation and fair presentation of information. May be intentional or unintentional Indicators of possible management bias correct answer: Changes in accounting estimate method based on subjective assumptions Using management assumption inconsistent with readily observable market assumptions Selecting or developing significant assumptions more favorable for management objectives Selecting an estimate that indicates a pattern of optimism or pessimism Financial reporting framework may specify conditions or methods for correct answer: making material/key accounting estimates
Some accounting estimate procedures, if necessary correct answer: Inquire about management rationale, consistent with use in industry, if alternative methods considered Inquire about assumptions and if reflect observable market conditions Performing a recalculation procedures (provides evidence model used correctly and estimate is reasonable) Inspect events occurring after year-end and up to date of report For accounting estimates that have been identified as significant risks correct answer: auditors may perform further substantive procedures For very specialized accounting estimates correct answer: auditors have the option of using a specialist to gather sufficient appropriate audit evidence that it is reasonable Misstatement correct answer: A difference between the amount, classification, presentation, or disclosure of a reported financial report item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework Misstatement is the difference value. Auditors document and accumulate the correct answer: misstatements identified during the audit. Material, and in some cases immaterial, are accumulated. Three categories of misstatements correct answer: Factual misstatements Judgmental misstatements
