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MAC 830 Final Exam With 100% Correct
Answers
In which of the following situations would the use of sampling be most appropriate? -The use of sampling would be appropriate in all of these situations. -The likelihood of selecting a representative sample is relatively low. -The number of items comprising the population is smaller. -The need for precise information is less important. - correct answers ✔✔-The need for precise information is less important. Which of the following types of sampling applications can appropriately be used under generally accepted auditing standards? Statistical sampling: No; Nonstatistical sampling: Yes Statistical sampling: Yes; Nonstatistical sampling: Yes Statistical sampling: No; Nonstatistical sampling: No Statistical sampling: Yes; Nonstatistical sampling: No - correct answers ✔✔Statistical sampling: Yes; Nonstatistical sampling: Yes What is the primary drawback with respect to the use of sampling? -The conclusion reached by examining a sample of items may differ from the conclusion that would be reached if the entire population were examined. -The time spent in planning and selecting the sample may exceed the time savings from examining only a subset of the items.
-Individuals may fail to obtain a true understanding of the question they are examining. -Sampling cannot be used to examine account balances that are material to the financial statements. - correct answers ✔✔The conclusion reached by examining a sample of items may differ from the conclusion that would be reached if the entire population were examined. Which of the following components of the audit risk model is most closely associated with variables sampling? Analytical procedures risk. Audit risk. Risk of material misstatement. Detection risk. - correct answers ✔✔Detection Risk The probability that an auditor's conclusion based on a sample might be different from the conclusion based on the entire population identifies the concept of: nonstatistical sampling. sampling risk. confidence levels. nonsampling risk. - correct answers ✔✔sampling risk. Which of the following would not be estimated using variables sampling? -The extent to which an internal control procedure is not functioning as intended. -he amount of misstatement in a client's inventory. -The balance in the client's accounts receivable
With reference to the CPA Journal Article "How Reliable is Haphazard Sampling" which of the following is true? Auditors who use haphazard selection should utilize 1 specific debiasing procedure. When a large percentage (eg 30%) of the population is examined, haphazard selection will yield samples with significant selection bias. Haphazard sample selection is not allowed as per SAS 39. Haphazard sample selection tends to yield biased selections because of subconscious human behavior in the areas of visual perception and the performance of tasks requiring physical effort. - correct answers ✔✔Haphazard sample selection tends to yield biased selections because of subconscious human behavior in the areas of visual perception and the performance of tasks requiring physical effort. A review service engagement involving unaudited financial statements involves Less work than an audit but more work than a compilation. More work than a compilation and an audit Less work than a compilation but more work than an audit. More work than an audit but less work than a compilation - correct answers ✔✔Less work than an audit but more work than a compilation. When accountants are not independent, which of the following reports can they nevertheless issue Compilation report
Examination report on a forecast Standard unmodified audit report Examination of internal control over financial reporting - correct answers ✔✔Compilation report Accountants are permitted to express "negative assurance" in which of the following reports? Compilation reports on unaudited financial statements Standard unmodified audit reports on financial statements When an adverse opinion is issued on audited financial statements Review reports on unaudited financial statements - correct answers ✔✔Review reports on unaudited financial statements Which of the following statements is not true? An accountant must assess independence for both compilation and preparation engagements Trust Services & CSR engagements are both examples of assurance services An assurance service improves the quality of information for decision makers
Review - correct answers ✔✔an engagement in which a practitioner provides limited assurance about financial information confirmation bias - correct answers ✔✔the tendency to search for and favor evidence that confirms one's beliefs, research hypotheses, or other expectations availability bias - correct answers ✔✔a phenomenon that causes decision makers to estimate or forecast the likelihood of an event based upon how readily they can recall an example or instance of that event anchoring and adjustment bias - correct answers ✔✔Applies to situations in which an individual must arrive at a numerical estimate by starting from an initial value that is subsequently adjusted to arrive at the final estimated value. Adjustments from the initial "anchor" tend to be insufficient *often comes from management's original report (jar of pennies) uncertainty aversion - correct answers ✔✔the tendency for decision makers to be averse to circumstances and decision alternatives involving uncertainty framing bias - correct answers ✔✔the format used to present information relevant to a decision might influence the decision alternative that is chosen Halo Bias - correct answers ✔✔Tendency for one observed or known trait of a person or object to positively (or negatively) influence a person's perception of other traits of that individual irrational escalation - correct answers ✔✔a decision maker's inclination to make irrational decisions to justify rational decisions made in the past
False Consensus Bias - correct answers ✔✔Tendency for decision makers to overestimate the degree to which other individuals agree with them incentive bias - correct answers ✔✔can occur if the auditor wants to avoid giving an adverse opinion What is Cognitive Bias? - correct answers ✔✔Cognitive bias is "the tendency of individuals to make systematic judgement errors when making decisions, especially in complex and pressure- packed environments" familiarity bias - correct answers ✔✔the tendency to search for evidence that confirms their expectations or beliefs What are some de-biasing techniques? - correct answers ✔✔-Use of structured decision aids -use of tutorials to demonstrate the impact of biases (increase awareness -Conversion of large tasks into smaller, discrete tasks -Development of alternative explanations by decision makers Consider an outside perspective/consultation with others -Consideration by decision makers of the impact of their decisions on 3rd Parties What is reframing? - correct answers ✔✔the process of changing the way an issue is presented. Can be a useful technique to minimize the effect of many forms of bias. variables sampling - correct answers ✔✔A form of sampling used to examine a population to estimate the amount or value of some characteristic of that population; used by auditors during their substantive procedures
Procedures include a mix of inquiry of appropriate personnel, observation of the company's operations, and inspection of relevant documentation How to test operating effectiveness? - correct answers ✔✔Determine whether control operating as designed and whether the person performing the control possesses the necessary authority and competence to perform the control effectively Procedures include a mix of inquiry of appropriate personnel, observation of operations, inspection of relevant documentation, and re-performance of the control What is IPE? - correct answers ✔✔Using computing tools (IT or other) to collect info, process, store, and report it, and to transform info by an end user who is not a software programmer -- used in audit process In order for IPE to be reliable audit evidence, it has to be: - correct answers ✔✔complete and accurate What factors should you consider when testing Operating effectiveness of controls? - correct answers ✔✔Nature- reperformance is strongest test; inquiry is the weakest Extent- A control must be extensively tested in order to increase reliance Timing- Evidence must be obtained for the entire period of reliance (want to test as cose to timing of mgmt assessment as possible) What are 4 ways estimates are likely to be misstated? - correct answers ✔✔-misunderstood/misapplication of GAAP
- Poor data used to calculate estimate -Poor controls over the process of calclating estimates -susceptibility to mgmt bias
What is the auditors responsibility when it comes to estimates? - correct answers ✔✔Obtain SUFFICIENT, APPROPRIATE evidence on whether 1) accounting estimates are reasonable and 2) related disclosures in F/S are adequate What are 3 approaches to test the reasonableness of management estimates? - correct answers ✔✔1) review and test client's process
- develop independent expectation for estimate 3)consider subsequent events & transactions What 4 cognitive biases are most dangerous to auditors? - correct answers ✔✔Anchoring, framing, halo, familiarity/availability what is haphazard selection? - correct answers ✔✔the auditor selects the sample items without intentional bias to include or exclude certain items in the population. It represents the auditor's best estimate of a representative sample -- and may, in fact, be representative. Defined probability concepts are not employed. What is the risk of Incorrect Acceptance? - correct answers ✔✔The likelihood that the audit team will conclude that the client's account balance is fairly stated when it is materially misstated (Worst) What is the risk of incorrect rejection? - correct answers ✔✔Likelihood the audit team will conclude that the client's account balance is materially misstated when it is fairly stated What are the two approaches for variables sampling and how are they executed? - correct answers ✔✔1) Monetary unit sampling (MUS)- provides an estimate of the amount of misstatement in the account balance or class of transactions. Tends to select higher dollar transactions or components within an account balance examination. (more concerned with
What is audit sampling? - correct answers ✔✔Applying audit procedures (vouching, confirming, examining) to less than 100% of a population in order to estimate some characteristic about that population What are the two types of sampling risk? - correct answers ✔✔1) risk of incorrect rejection(type 1)- risk that sample supports a conclusion that the balance is not fairly stated when in fact it is (effects efficiency of audit)
- Risk of incorrect acceptance (type II) - risk that the sample supports a conclusion that the balance is fairly stated when it contains material misstatements- concluding ICFR are effective when they are not (affects effectiveness of audit) What is non-sampling risk? - correct answers ✔✔Risk of human (auditor) missing an error Also called exception- error or deviation. incorrect conclusion is reached but it is unrelated to the nature of the sample What is non-statistical sampling? - correct answers ✔✔key decisions in the sampling process are made using the auditor's professional judgement (sampling risk cannot be calculated) evaluate judgementally What is statistical sampling? - correct answers ✔✔the auditor still uses judgement, but is able to quantify the "sufficiency" of the audit evidence, Randomly select a representative sample, evaluate statistically Attributes sampling - correct answers ✔✔used to estimate the extent to which a characteristic exists within a population
What are the 4 key factors when determining sample size? - correct answers ✔✔tolerable rate of deviation, sampling risk, expected population deviation rate, population size When you make the decision to rely on controls as planned, upper limit rate of deviation is... - correct answers ✔✔less than or equal to tolerable rate of deviation. If it is greater, reduce planned reliance on controls What are some substantive tests for the valuation assertion for investments? - correct answers ✔✔Vouch market values of marketable investment securities to published mkt quotes, obtain financial statements of investments accounted for by the equity method and recalculate recorded amounts Inspect client documentation for calculations of possible impairments and test What are some tests of internal controls for valuation in investments? - correct answers ✔✔Inquire about estimation process and observe evidence that this is being followed, inspect documentation for evidence of management review of investment valuation, inquire about impairment process What is fair value accounting? - correct answers ✔✔the practice of measuring assets & liabilities at estimates of their current value How is Fair Value (FV) defined? What is this price? - correct answers ✔✔the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants Price is defined as the "exit price" that would be received when sold If upper limit on misstatements is calculated as $50000 and risk of incorrect acceptance is 5%, ...
- correct answers ✔✔There is a 5% risk that the misstatement exceeds $50,000. Also we are 95% confident that the true misstatement is less than or equal to $50,
What is FV level 3? - correct answers ✔✔Active market does not exist Which engagements does SSARS apply to? - correct answers ✔✔reviews of F/S, compilation of F/S, preparation of F/S (no assurance given for compilation or preparation) What engagements does SSAE apply to? - correct answers ✔✔examination, review, or agreed upon procedures for other than historical financial statements - need to be independent or disclose lack of independence What is an examination attest engagement? - correct answers ✔✔Similar to an audit with a high level of assurance- deals with financial forecasts, projections, pro forma, internal control, compliance, SOC reports, Md&A What is a review? - correct answers ✔✔Provides moderate ("negative") level of assurance What is an agreed upon procedures attest engagement? - correct answers ✔✔No opinion or negative assurance provided; accountant reports procedures and findings and distribution of report is restricted
