ACCT460 Principles of Auditing Final Exam Tips and Sample Questions, Exams of Principles of Accounting

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ACCT460 Principles of Auditing final exam tips sample possible questions and answers 2024 Athabasca University

ACCT460 AUDIT final exam tips sample possible questions and answers 2024 Athabasca University Assessment of control risk - -- a measure of the auditor's expectations that internal controls will neither prevent material misstatement from occurring nor detect and correct them if they have occurred Auditing through the computer - -- auditing by testing automated internal controls and account balances electronically, generally because effective general controls exist Compensating control - -- a control elsewhere in the system that offsets the absence of a key control Control deficiency - -- a deficiency in the design or operation of controls that does not permit company personnel to prevent or detect and correct misstatements on a timely basis Control risk matrix - -- a methodology used to help the auditor assess control risk by matching key internal controls and internal control deficiencies with transaction-related audit objectives Embedded audit module approach - -- a method of auditing transactions processed by IT whereby the auditor embeds a module in the client's application software to identify transactions with characteristics that are of interest to the auditor; the auditor is then able to analyze these transactions on a real-time, continuous basis as client transactions are processed Flowchart - -- a diagrammatic representation of the client's documents and records and the sequence in which they are processed

Generalized audit software (GAS) - -- computer programs used by auditors that provide data retrieval, data manipulation, and reporting capabilities specifically oriented to the needs of auditors Internal control questionnaire - -- a series of questions about the controls in each audit area used as a means of indicating to the auditor aspects of internal control that may be inadequate Key controls - -- controls that are expected to have the greatest effect on meeting audit objectives Management letter - -- an optional letter written by the auditor to a client's management containing the auditor's recommendations for improving any aspect of the client's business Material weakness - -- a significant deficiency in internal control that, by itself or in combination with other significant deficiencies, results in a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected Narrative - -- a written description of a client's internal controls, including the origin, processing, and disposition of documents and records, and the relevant control procedures Parallel simulation testing - -- an audit testing approach that involves the auditor's use of audit software, either purchased or programmed by the auditor, to replicate some part of a client's application system Procedures to obtain an understanding - -- procedures used by the auditor to gather evidence about the design and implementation of specific controls

Significant deficiency - -- a control deficiency, or a combination of control deficiencies, that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting Test data approach - -- a method of auditing an IT system that uses the auditor's test data to determine whether the clients computer program correctly processes valid and invalid transactions Tests of controls - -- audit procedures to test the operating effectiveness of controls in support of reduced assessed control risk Walkthrough - -- the tracing of selected transactions through the accounting system to determine that controls are in place Analytical procedures - -- evaluations of financial information through analysis of plausible relationships among financial and non financial data Evidence mix - -- the combination of the types of tests to obtain sufficient appropriate evidence for a cycle; there are likely to be variations in the mix from cycle to cycle depending on the circumstances of the audit Further audit procedures - -- combination of tests of controls, substantive tests of transactions, substantive analytical procedures, and tests of details of balances performed in response to risks of material misstatement identified by the auditor's risk assessment procedures Phases of the audit process - -- the four aspects of a complete audit: (1) plan and design an audit approach, (2) perform tests of controls and substantive tests of transactions, (3) perform substantive analytical procedures and tests of details of balances, and (4) complete the audit and issue an audit report

Procedures to obtain an understanding of internal control - -- procedures used by the auditor to gather evidence about the design and implementation of specific controls Substantive analytical procedure - -- an analytical procedure in which the auditor develops an expectation of recorded amounts or ratios to provide evidence supporting an account balance Substantive tests - -- audit procedures designed to test for dollar (monetary) misstatements of financial statements balances Substantive tests of transactions - -- audit procedures teting for monetary misstatements to determine whether the six transaction-related audit objectives have been satisfied for each class of transactions Tests of details of balances - -- audit procedures testing for monetary misstatements to determine whether the eight balance related audit objectives have been satisfied for each significant account balance Types of tests - -- the five categories of audit tests auditors use to determine whether financial statements are fairly stated: risk assessment procedures, tests of controls, substantive tests of transactions, substantive tests of analytical procedures, and tests of details of balances Business functions for the sales and collection cycle - -- the key activities that an organization must complete to execute and record business transactions for sales, cash receipts, sales return and allowances, write-off of uncollectible accounts, and bad debt expense

Classes of transactions in the sales and collection cycle - -- the categories of transactions for the sales and collection cycle in a typical company: sales, cash receipts, sales return and allowances, write-off of uncollectible accounts, and bad debt expense Design format audit program - -- the audit procedures resulting from the auditor's decisions about the appropriate audit procedures for each audit objective; this audit program is used to prepare a performance format audit program Direction of tests - -- The starting point for testing the occurrence and completeness transaction-related audit objectives; vouching from journals to source documents tests for occurrence and tracing from source documents to journals tests for completeness Lapping of accounts receivable - -- The postponement of entries for the collection of receivables to conceal an existing cash shortage Performance format audit program - -- the audit procedures for a class of transactions organized in the format in which they will be performed; this audit program is prepared from a design format audit program Proof of cash receipts - -- an audit procedure to test whether all recorded cash receipts have been deposited in the bank account by reconciling the total cash receipts recorded in the cash receipts journal for a given period with the actual deposits made to the bank Sales and collection cycle - -- involves the decision and processes necessary for the transfer of the ownership of goods and services to customers after they are made available for sale; it begins with a request by a customer and ends with the conversion of material or service into an account receivable, and ultimately into cash

Acceptable risk of overreliance (ARO) - -- the risk that the auditor is willing to take of accepting a control as effective or a rate of misstatements as tolerable when the true population exception rate is greater than the tolerable exception rate Attribute - -- the characteristic being tested for in the population Attributes Sampling - -- a statistical, probabilistic method of sample evaluation that results in an estimate of the proportion of items in a population containing a characteristic or attribute of interest Audit Sampling - -- testing less than 100 percent of a population for the purpose of making inferences about that population Block sample selection - -- a non-probabilistic method of sample selection in which items are selected in measured sequences Computed upper exception rate (CUER) - -- the upper limit of the probable population exception rate, the highest exception rate in the population at a given ARO Estimated population exception rate (EPER) - -- exception rate the auditor expects to find in the population before testing begins Exception rate - -- the percent of items in a population that include deviations in prescribed controls or exceptions in monetary correctness Haphazard sample selection - -- a non-probabilistic method of sample selection in which items are chosen without regard to their size, source, or other distinguishing characteristics

Initial sample size - -- sample size determined by professional judgement (non-statistical sampling) or by statistical tables (attributes sampling) Non-probabilistic sample selection - -- a method of sample selection in which the auditor uses professional judgement to select items from the population Non-sampling risk - -- the risk that the auditor fails to identify existing exceptions in the sample; non-sampling risk (non-sampling error) is caused by failure to recognize exceptions and by inappropriate or ineffective audit procedures Non-statistical sampling - -- a sampling procedure that does not permit the numerical measurement of the sampling risk Occurrence rate - -- see exception rate Probabilistic sample selection - -- a method of selecting a sample such that each population item has a known probability of being included in the sample and the sample is selected by a random process Random sample - -- a sample in which every possible combination of elements in the population has an equal chance of constituting the sample Representative sample - -- a sample with characteristics the same as those of the population Sample exception rate (SER) - -- number of exceptions in the sample divided by the sample size

Sampling distribution - -- a frequency distribution of the results of all possible samples of a specified size that could be obtained from a population containing some specific parameters Sampling risk - -- risk of reaching an incorrect conclusion inherent in tests of less than the entire population because the sample is not representative of the population; sampling risk may be reduced by using an increased sample size and an appropriate method of selecting sample items from the population Statistical sampling - -- the use of mathematical measurement techniques to calculate formal statistical results and quantify sampling risk Systematic sample selection - -- a probabilistic method of sampling in which the auditor calculates an interval (the population size divided by the number of sample items desired) and selects the items for the sample based on the size of the interval and a randomly selected starting point between zero and the length of the interval Tolerable exception rate (TER) - -- the exception rate that the auditor will permit in the population and still be willing to conclude the control is operating effectively and/or the amount of monetary misstatements in the transactions established during planning is acceptable Accounts receivable balance-related audit objectives - -- the eight specific audit objectives used by the auditor to decide the appropriate audit evidence for accounts receivable Aged trial balance - -- a listing of the balances in the accounts receivable master file at the balance sheet date broken down according to the amount of time passed between the date of sale and the balance sheet date

Alternative Procedures - -- the follow-up of a positive confirmation not returned by the debtor with the use of documentation evidence to determine whether the recorded receivable exists Blank confirmation form - -- a letter, addressed to the debtor, requesting the recipient to fill in the amount of the accounts receivable balance; it is considered a positive confirmation Cutoff misstatements - -- misstatements that take place as a result of current period transactions being recorded in a subsequent period, or subsequent period transactions being recorded in the current period Invoice confirmation - -- a type of positive confirmation in which an individual invoice is confirmed, rather than the customer's entire accounts receivable balance Negative confirmation - -- a letter, addressed to the debtor, requesting a response only if the recipient disagrees with the amount of the stated account balance Positive confirmation - -- a letter, addressed to the debtor, requesting that the recipient indicate directly on the letter whether the stated account balance is correct or incorrect and, if incorrect, by what amount Realizable value of accounts receivable - -- the amount of the outstanding balances in accounts receivable that will ultimately be collected Timing difference - -- a reported difference in a confirmation from a debtor that is determined to be a timing difference between the client's and debtor's records and therefore not a misstatement

Acceptable risk of incorrect acceptance (ARIA) - -- the risk that the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance exceeds tolerable misstatement Acceptable risk of incorrect rejection (ARIR) - -- the risk that the auditor is willing to take of rejecting a balance as incorrect when it is not misstated by a material amount Basic precision - -- the minimum allowance for sampling risk inherent in the sample for MUS; it is equal to the allowance for sampling risk when no misstatements are found in the sample Difference estimation - -- a method of variables sampling in which the auditor estimates the population misstatement by multiplying the average misstatement in the sample by the total number of population items and also calculates sampling risk Mean-per-unit estimation - -- a method of variables sampling in which the auditor estimates the audited value of a population by multiplying the average audited value of the sample by the population size and also calculates sampling risk Misstatement bound - -- an estimate of the largest likely overstatement in a population at a given ARIA, using monetary unit sampling Monetary unit sampling (MUS) - -- a statistical sampling method that provides misstatement bounds expressed in monetary amounts; also referred to as dollar unit sampling, cumulative monetary amount sampling, and sampling with probability proportional to size Point estimate - -- a method of projecting from the sample to the population to estimate the population misstatement, commonly by assuming that misstatements in the unaudited population are proportional to the misstatements found in the sample

Probability proportional to size sample selection (PPS) - -- sample selection of individual dollars in a population by the use of random or systematic sample selection Ratio estimation - -- a method of variables sampling in which the auditor estimates the population misstatement by multiplying the portion of sample dollars misstated by the total recorded population book value and also calculates sampling risk Statistical inferences - -- conclusions that the auditor draws from sample results based on knowledge of sampling distributions Stratified sampling - -- a method of sampling in which all the elements in the total population are divided into two or more subpopulations that are independently tested and evaluated Tolerable misstatement - -- the application of performance materiality to a particular sampling procedure Variables sampling - -- sampling techniques for tests of details of balances that use the statistical inference process Cutoff tests - -- tests to determine whether transactions recorded a few days before and after the balance sheet date are included in the correct period Debit memo - -- a document indicating a reduction in the amount owed to a vendor because of returned goods or an allowance granted FOB destination - -- shipping contract in which title to the goods passes to the buyer when the goods are received

FOB origin - -- shipping contract in which the title to the goods passes to the buyer at the time that the goods are shipped Purchase order - -- a document prepared or electronically issued by the purchasing department indicating the description, quantity, and related information for goods and services that the company intends to purchase Purhcase requisition - -- request by an authorized employee to the purchasing department to place an order for inventory and other items used by an entity Receiving report - -- a document prepared by the receiving department at the time tangible goods are received, indicating the description of the goods, the quantity received, the data received, and other relevant data; it is part of the documentation necessary for payment to be made Vendor's invoice - -- a document or record that specifies the details of an acquisition transaction and amount of money owed to the vendor for an acquisition Vendor's statement - -- a statement prepared monthly by the vendor that indicates the customer's beginning balance, acquisitions, payments, and ending balance Voucher - -- a document used to establish a formal means of recording and controlling acquisitions, primarily by enabling each acquisition transaction to be sequentially numbered