Exam 6: Gaining an Understanding of the Clients System of Internal Controls

Describe the major types of sampling techniques available to auditors.

The risk that the auditor concludes that a material misstatement exists when it does not is likely to result in an increase in audit effort when it is not required.

Substantive audit procedures include:

Stratification of the population will result in less efficient sampling and increase the sample size required.

Explain sampling risk as it relates to both tests of controls and substantive procedures.

When auditors conclude that an internal control is effective, they will rely on the control to prevent and detect a material misstatement and reduce their detailed substantive procedures.

When testing controls, the tolerable error is:

Projected error refers to the extrapolation of the errors detected when testing a sample to the population from which the sample was drawn.

George Melkonian wanted to determine whether his auditing class knew how different factors influence sample size. He made two statements: (i) "An increase in the expected rate of deviation of the population to be tested will decrease sample size." (ii) "An increase in the tolerable rate of deviation will decrease sample size." George asked his class to indicate which of the statements, if any, were false.

Indicate whether you agree or disagree with the following statements and explain your reasoning. a) Karen Elliott was explaining to her group partner that the completeness assertion implies that transactions and events that have been recorded have occurred and pertain to the entity. b) Joseph Cabana was explaining to Carl Metz how sampling risk works for the audit team: "Sampling risk is the risk that as auditors we will arrive at a conclusion that has nothing to do with sampling issues." c) Robert Scardera was vehemently arguing about the benefits of using non-statistical versus statistical sampling methods for a client in the excavation business. Here is what he had to say about non-statistical sampling: "Non-statistical sampling is easier to use than statistical sampling, it requires less staff training, it has lower cost, and it allows an auditor to make a sample choice that they believe is appropriate." d) Elaine Mathers has started her sample selection of sales transactions for a gemstone conglomerate. She believes that she can improve audit efficiency by stratifying the sample.

The timing of audit testing refers to the stage of the audit when procedures are performed and the date that audit evidence relates to.

Vita Zitkauskas, the senior on the audit of Magna International, was explaining how audit strategy and audit plans have an impact on tests of controls and substantive procedures. She made two statements: Audit strategy details the audit procedures to be used when testing controls and when conducting detailed substantive audit procedures. The audit plan provides the basis for developing an audit strategy. Which statements were true, if any?

Control risk is the risk that:

Daniel Beauchamp did not perform a true sample when he went to his client to examine sales invoices. He did not use any specific method for choosing the invoices. He let his eye catch the items he thought might make up his sample. What technique did he use?

An audit plan includes the audit procedures to be used when testing controls and when conducting detailed substantive audit procedures.

Milushka Icaza, who was representing her CGA firm at a conference, made the following statement about assertions: When our auditors conduct substantive procedures, we search for evidence that recorded accounts exist and that all accounts that should have been recorded, indeed have been recorded. Which assertions was she talking about?

For high-risk accounts, the timing of most audit procedures will be:

Explain how auditors evaluate the results of tests of controls conducted on a sample.

Random selection involves:

Block selection involves the selection of items that are grouped together within the population of items available.