Audit risk, assertions, controls, sampling and audit reports. Endless CPA-style questions with the reasoning shown.
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Audit reference sheet
Audit risk model
Audit risk = Risk of material misstatement × Detection risk. RMM = Inherent risk × Control risk.
Acceptable detection risk = Audit risk ÷ (IR × CR). Higher RMM means lower acceptable detection risk, so more substantive work: more effective procedures, done closer to year-end, with larger samples.
The auditor assesses IR and CR but controls only detection risk.
Vouching vs. tracing
Vouch: start from the recorded entry, go back to the source document. Tests existence or occurrence (overstatement).
Trace: start from the source document, go forward to the records. Tests completeness (understatement).
Which report?
Problem
Material, not pervasive
Material and pervasive
Financial statements are misstated
Qualified
Adverse
Can't get enough evidence (scope limitation)
Qualified
Disclaimer
Substantial doubt about going concern, adequately disclosed: unmodified opinion with a going concern section.
Justified change in accounting principle, properly applied: unmodified opinion with an emphasis-of-matter paragraph.
COSO internal control components
Control environment · Risk assessment · Control activities · Information and communication · Monitoring activities.
Questions follow AICPA standards for nonissuers unless they say otherwise. Firm policies on materiality percentages vary; the question gives the ones to use.