What factors are considered when determining the sample size in attribute testing for internal controls?
Attribute sampling is used for internal controls and we focus on determining whether the control is operating effectively or not. Attribute sampling would focus on yes or no type attributes. There are a variety of things to consider when determining the sample size (amount of instances to test) in attribute sampling: Reliance on controls –…
Internal control to test for credit approval?
For the AUD section of the CPA exam, you should understand how the audit team would test whether customer orders were properly approved to purchase on credit. For testing internal controls, we would utilize attribute sampling, which uses yes or no type of attributes. So for this situation, we would look to say “Yes, the…
Audit procedures to identify pending litigation?
The AUD section of the CPA exam will test your understanding of how the audit team would identify pending litigation. Pending litigation needs to be accrued for and/or disclosed if certain requirements are met. There are two main procedures the audit team would perform for every audit: 1) Inquire with Management – Performing inquiry with…
Who does the internal audit team report to?
The internal audit team consists of auditors who are employed by the company and they evaluate the internal controls and processes within the company. The internal audit team should report directly to the audit committee to have proper governance and communication of information.
What’s the main difference between population size and population variability?
Population size refers to volume while population variability refers to composition. For example, if we think about the population of citizens that live in New York City, population size would simply refer to the number of citizens that live in NY. However, if we think about population variability in NYC, we would look at the different characteristics…
What does it mean to reevaluate materiality?
The audit team would determine preliminary materiality during the planning stage of the audit. Preliminary materiality would be based on forecasted or estimated financial results. So if the audit team is calculating materiality based on a percentage of revenue, then revenue would be forecasted. Once the final financial results are available, the audit team would…
Analogy for Incorrect Acceptance and Incorrect Rejection
Basics of Incorrect Acceptance and Incorrect Rejection In an audit, there are two key risks that auditors face when they conclude on sampling results. Incorrect acceptance is when the audit team concludes there is no material misstatement based on their sample testing, however, a material misstatement does actually exist in the population. Incorrect acceptance is…
Does detection risk increase or decrease when confirmation procedures are performed prior to year-end?
Let’s say that the auditors decide to perform cash or accounts receivable confirmations on September 30, Year 2 rather than December 31, Year 2. This means that they are performing substantive confirmation procedures 3 months prior to year-end. By performing substantive procedures prior to the balance sheet date, this increases the risk of material misstatement…
