MGAD10H3 Chapter Notes - Chapter 9: Regression Analysis, Trend Analysis, Multivac

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amaranthgiraffe723

7 Apr 2013

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Document Summary

Types of substantive tests: analytical procedures, test of key items, representative sampling, tests of underlying transactions and data, use of computers to assist in performing these tests. The nature, timing, and extent of audit procedures are determined in response to the risk assessment for each significant account and assertion using the audit risk formula. Review: inherent risk is a risk that tend to be driven by the nature of the significant account or business that the client is in. Risk assessments must be performed at the assertion level and the f/s level. Occurrence, completeness, cut-off, accuracy, and classification: b/s accounts. Existence, rights and obligations, completeness, and valuation and allocation: disclosures. Occurrence, rights and obligations, completeness, accuracy and valuation, and classification and understandability. When determining substantive procedures to be performed, auditor will consider the nature of the account and the key assertions at risk.

Related Questions

. Generally, how is the inherent risk level for the human resource management process assessed?

A. Inherent risk is normally set high for the human resource management process.

B. Inherent risk for officer compensation is set low.

C. The inherent risk associated with non-officers of the company is generally considered high risk.

D. Inherent risk is normally set low for non-officers.

7. Which of the following procedures are substantive analytical procedures that can be used to provide audit evidence related to the payroll?

A. Compare payroll costs as a percentage of sales with prior yearsâ and industry data.

B. Compare labor utilization rates and statistics with industry data.

C. Compare budgeted payroll expenses with actual payroll expenses.

D. All of the above procedures are substantive analytical procedures

8. Payroll expense properly split between direct and indirect labor would be an example of which assertion?

A. Authorization of Payroll Transactions

B. Occurrence

C. Cutoff

D. Classification

9. Procedures an auditor should perform to test the control activities related to the occurrence assertion would include all of the following, except

A. Observe proper segregation of duties.

B. Compare actual cost of goods sold to budgeted amounts.

C. Review procedures for the transfer of inventory.

D. test procedures for accounting for numerical sequence of material requisitions.

10. Substantive analytical procedures that can test the fairness of inventory and related accounts include all of the following, except:

A. Compare days outstanding in inventory to previous periods and industry data.

B. Trace a sample of payroll checks to the payroll register.

C. Compare gross profit percentage by product line with previous periods' and industry data.

D. Compare actual cost of goods sold to budgeted amounts.

ceruleangoat931

A424

Homework #3

Due Tuesday, February 28

Worth 100 Points

Note: Students are expected to work independently (i.e., on your own) on all homework assignments. Please type and post to Canvas.

Part I. Risk Assessments

1. For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. (10 points, 1 point each).

Components: Inherent Risk (IR), Control risk (CR), or Detection Risk (DR)

a. A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.

b. Cash is more susceptible to theft than an inventory of coal.

c. Confirmation of receivables by an auditor fails to detect a material misstatement.

d. Disbursements have occurred without proper approval.

e. There is inadequate segregation of duties.

f. A necessary substantive audit procedure is omitted.

g. Notes receivable are susceptible to material misstatement, assuming there are no related internal controls.

h. Technological developments make a major product obsolete.

i. The client is very close to violating debt covenants.

j. XYZ Company, a client, lacks sufficient working capital to continue operations.

2. Read Case 1.6, Nextcard, Inc. from our Casebook. Pretend you are the auditor for Nexcard, Inc. in the planning phase of the audit for FY 2000 and perform the following risk assessment procedures. That is, just focus on the information in the case prior to the discovery of the fraud (pages 83-86). (50 points total)

a. Perform a risk assessment as part of your audit plan for fiscal year 2000. Set or assess each component/factor of the audit risk model. Describe in detail how you set or assessed each factor (i.e., include specific risk factors from the case and explain how they influenced your assessment). (25 points)

b. Perform a fraud risk assessment for the risk of material misstatement due to fraudulent financial reporting. That is, identify and briefly describe specific fraud risk factors (i.e., more than 1) for each of the three components of the fraud risk triangle, specific to fraudulent financial reporting. (15 points)

c. Identify and describe one significant pervasive risk present during the Nextcard audit. In doing so, explain how the pervasive risk affects the risk of material misstatement. Then, describe how the auditor could respond to that pervasive risk (how could they change the audit plan to address that risk). (5 points)

d. Identify and describe one significant specific risk present during the Nextcard audit. In doing so, explain how the specific risk affects the risk of material misstatement. Then, describe how the auditor could respond to that specific risk (how could they change the audit plan to address that risk). (5 points)

Part II. Evidence and Management Assertions

1. For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. (10 points, 1 point each)

a. sending a written request to the entityâs customers requesting that they report the amount owed to the entity

b. examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.

c. agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account.

d. discussing the adequacy of the allowance for doubtful accounts with the credit manager.

e. comparing the current-year gross profit percentage with the gross profit percentage for the last four years.

f. examining a new plastic extrusion machine to ensure that this major acquisition was received.

g. watching the entityâs warehouse personnel count the raw materials inventory.

h. performing test counts of the warehouse personnelâs count of the raw material.

i. obtaining a letter from the entityâs attorney indicating that there were no lawsuits in progress against the entity.

j. tracing the prices used by the entityâs billing program for pricing sales invoices to the entityâs approved price list.

2. For each of the audit procedures listed above in Part II. 1. (a-j), identify the category (assertions about classes of transactions and events, or assertions about account balances) and identify the primary management assertion being tested. (30 points, 3 points each)

turquoisesheep410

Which of the following statements is most correct regarding the independent auditor's reliance on the tests of controls performed by the internal auditors to reduce their substantive testing?

1-The independent auditor must obtain assurance of the independence of the internal auditors but need not test their work.

2-It is not acceptable for the independent auditor to rely upon the work of the internal auditors.

3-There are no restrictions in relying upon the work of internal auditors.

4-The independent auditor must evaluate the competency and objectivity of the internal auditors and must test a sample of the work of the internal auditors in order to rely upon their work.

The term "materiality" as used in auditing is best described as the

1-substance of the auditing procedures.

2-amount of misstatement on the financial statements that would influence a decision maker.

3-underlying evidence upon which the audit opinion is based.

4-amount of material the auditor gathers as evidence to support the audit opinion.

Prior to accepting an audit client an auditor has a professional obligation to

1-contact the predecessor auditor.

2-perform preliminary analytical review procedures.