2012

Auditing and Attestation

Handout

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2012 - Yaeger CPA Review

Auditing

DVD/USB A1
Introduction 28 Min
Mod 01 Professional Responsibilities
Pt 1 59 min
Pt 2 43 min
DVD/USB A2
Mod 02 Engagement Planning
Pt 1 86 min
Pt. 2 56 min
Mod 03 Internal Control
Pt 1 77 min
DVD/USB A3
Mod 03 Internal Control
Pt 2 46 min
Pt 3 63 min
Mod 04 Evidence
Pt 1 73 min

DVD/USB A4
Mod 04 Evidence
Pt 2 71 min
Pt 3 63 min
Mod 05 Reporting
Pt 1 98 min
DVD/USB A5
Mod 05 Reporting
Pt 2 128 min
Mod 06 Accounting and review services
Pt 1 76 min
DVD/USB A6
Mod 07 Audit Sampling
Pt1 105 min
Mod 08 Auditing with Technology
Pt1 46 Min
Audit Wrap Up
Pt1 75 Min
Total Hours: 19.5

Yaeger CPA Review - Auditing and Attestation

CPA REVIEW AUDITING AND ATTESTATION

MODULE I

PROFESSIONAL RESPONSIBILITIES
PLAYERS

GAAP (Private Sector)

FASB [ASC]
IASB [IFRS] [Previously IAS from IASC]
GASB
AICPA
SAS (NON-ISSUERS)
SSAE
SSARS
ET, QC, PFP, CS

[AU]
[AT]
[AR]

US GOVERNMENT
SEC
SOX -- PCAOB (ISSUERS)
GAO
DOL
IFAC
IAASB [ISA]
IESBA

Independence required -- audits, reviews, attestations

Independence not required -- compilations (must disclose), tax, consulting

Yaeger CPA Review - Auditing and Attestation

MODULE 2

ENGAGEMENT PLANNING, OBTAINING AN UNDERSTANDING

OF THE CLIENT AND ASSESSING RISKS

A. GAAS [Use as a guide for answering questions].

B. New client
1. Decision to accept
a. Evaluate independence and ability to handle
b. Evaluate communications with predecessor auditor - permission of client
2. If accept -- understand client and industry
a. Engagement letter
b. Determine materiality levels [quantitative & qualitative]
c. Evaluate risk AR = IR x CR x DR [RMM x DR]
d. Must do risk assessment procedures and further audit procedures (test of
controls, substantive tests)
C. Auditor's responsibility
1. Errors and fraud - reasonable assurance
2. Direct effect illegal acts - reasonable assurance
3. Indirect effect illegal acts - if they come to your attention

D. Fraud (SAS No. 99) [material misstatement due to fraud]

[Fraudulent financial reporting and misappropriation of assets]
1. Characteristics of fraud:
incentive (pressure)
opportunity
rationalize (attitude)
2. Discussion among engagement personnel (brainstorming)
3. Identify risks that may lead to material misstatement due to fraud:
interviews
brainstorming
fraud risk factors
analytical procedures
client acceptance/continuance
entity's programs and controls
revenue recognition/ mgt estimates/inventory quantities
4. Respond to identified risks
overall (personnel, predictability)
specific (nature, timing, extent)
test journal entries
management override of controls
5. Communicate to management and audit committee
6. Document

Yaeger CPA Review - Auditing and Attestation

E. Management assertions [PERCV]

(Broken down into more details -- see text)
1. Presentation and disclosure
2. Existence and occurrence
3. Rights and obligations
4. Completeness
5. Valuation or allocation
F. Directional testing
- - - - - - - - - - - - - - - - - -> Completeness (understatements)
<- - - - - - - - - - - - - - - - - - Existence (overstatements)

G. Quality control standards -- elements (basis for peer review)

1. Leadership responsibilities
2. Relevant ethical requirements
3. Acceptance and continuance of clients
4. Human resources
5. Engagement performance -- supervising, consulting
6. Monitoring

MODULE 3

UNDERSTANDING INTERNAL CONTROL AND

ASSESSING CONTROL RISK

A. Internal control
1. Definition -- process effected by people to achieve entity's objectives
2. Components-- environment, risk assessment, control activities, information and
communication, monitoring
3. Control activities -- [R I P S] Reviews, Information processing, physical controls,
segregation of duties (authorization, recording, custody)
4. Basic requirements -- Risk assessment procedures [document -- narrative,
questionnaire, flowchart]
5. Tests of controls
a.
To test operating effectiveness of controls
b.
Done ONLY if you wish to rely on controls
c.
Includes -- Inquire Observe Inspect Reperform

Yaeger CPA Review - Auditing and Attestation

B. Cycles
1. Sales/Accounts Receivable/Cash Receipts
Sales order
Credit approval
Ship - bill of lading
Bill/Collect cash
Records - aging schedule, bad debts, sales returns
2. Purchases/Accounts Payable/Cash Disbursements
Requisition
Purchase order
Receive goods
Approve for payment/Pay
3. Personnel/Payroll
Authorization - personnel (human resource management)
Recording - payroll accounting
Custody - paycheck distribution
C. Control deficiencies
1. Required to the extent that they come to your attention
2. Must be written to management and those charged with governance
3. Show significant deficiencies and material weaknesses
4. Not required to give recommendations
5. Cannot write that "no significant deficiencies found" but may write "no material
weaknesses found"
D. Internal auditors
1. Competence
2. Objectivity - To whom do they answer in the client entity?

Yaeger CPA Review - Auditing and Attestation

MODULE 4

RESPONDING TO RISK ASSESSMENT: EVIDENCE ACCUMULATION

AND EVALUATION

A. Evidence
1. Sufficient - quantity
2. Appropriate - quality
observe
external -- directly to auditor or held by client
internal
oral
B. Substantive tests
1. Trace/vouch
2. Reconcile
3. Analytical procedures
4. Confirm
5. Examine
C. Analytical procedures
1. What?
Does the number make sense? Includes comparisons, ratios, budgets,
nonfinancial data
2. When?
Required for planning and overall review. May be used during the audit as
a substantive test.
3. Why?
Usually very efficient (more than effective)
D. Audit procedures
1. Balance sheet accounts
2. Balances -- cash, AR, inventory, AP
3. Transactions -- PPE, LT debt, investments, capital stock
[beg bal + additions - subtractions = end bal]
E. Fair value
1. Review and test management's process
2. Independently develop an estimate
3. Review subsequent events
F.

Subsequent discovery of facts

1. Would it have affected report?
2. Is it addressed with other procedures?
3. Can you get client's permission to do work?
4. Are statements misstated? Encourage client to recall statements and adjust
and reissue.
5. If client refuses, you notify all known users of financial statements that they cannot rely
on your report.

Yaeger CPA Review - Auditing and Attestation

G. Cash flows statement (CFS) - audits

1. Foot
2. Trace to other financial statements
3. Classification -- operating, investing, financing
4. Schedules for various accounts
5. Disclosures
MODULE 5

REPORTING

A. Audit reports (KNOW WHEN THEY' RE ISSUED AND HOW WORDED)

1. Qualified -- "except for"
Major GAAP departure
Major scope limitation
2. Disclaimer -- no opinion
Very major scope limitation
3. Adverse - "not present fairly"
Very major GAAP departure
4. Unqualified explanatory
Emphasis
Inconsistency
Going concern
Share responsibility
B. General parts of a report
1. Title (for audits, reviews, compilations, and AUP)
2. Address
3. Service type
4. What we worked on
5. Date of #4
6. Responsibilities of parties
7. Professional standards followed
8. Description of procedures - general
9. Conclusion
10. Inherent limitations - if any
11. Restrict distribution - if applicable
12. Sign and date

Yaeger CPA Review - Auditing and Attestation

C. Special reports
1. Other comprehensive basis of accounting (OCBOA)
a. Use different names for financial statements than GAAP names
b. Disclosures required
2. Specified elements or accounts of financial statements
3. Compliance with contract or regulations as part of audited financial statements
4. Special-purpose financial presentations
D. Negative assurance
1. Review
2. Comfort letter
3. Compliance with contract as part of audit
E. Restrict distribution
1. Control deficiencies
--------------/ BY2. Specified elements
/ PRODUCT
3. Compliance with contract as part of audit ------------ / REPORT
4. Special-purpose financial presentations
5. Agreed-upon procedures
F. Personal financial statements
1. Statement of financial condition
2. Use market value
3. Estimated liability on difference between market value and book value
G. Government auditing standards (Yellow Book)
1. Must follow all of GAAS and issue report on financial statements
2. Must issue written report on internal controls
3. Must issue written report on compliance with laws and regulations
4. Must issue additional reports for A-I 33 audits

Yaeger CPA Review - Auditing and Attestation

H. Attestations
1. Report on a subject matter, or an assertion about the subject matter that is the
responsibility of another party.
2. Used for anything other than historical financial statement(s) taken as a whole (may be
nonfinancial data)
3. Levels -- examination, review, agreed-upon procedures (AUP)
4. AUP -- CPA, client, and third party agree on procedures to be used. Third party must
assume responsibility for sufficiency of procedures. Report on findings based on
specific procedures performed on subject matter.
5. Forecasts and projections
a. Forecast - based on conditions expected to exist
b. Projection - hypothetical assumptions
c. General use - used by anyone (not projections)
d. Limited use - users deal directly with preparer
e. Accounting services - examination, compilation, AUP
f. "May differ from actual"
g. "No responsibility to update"

MODULE 6

ACCOUNTING AND REVIEW SERVICES

A. Reviews (limited or negative assurance)

1. Do not deal with internal control
2. Inquiry and analytical procedures
3. Cite measurement and/or disclosure GAAP departures in an extra paragraph in report
B. Compilations (no assurance)
1. Do not deal with internal control
2. Look over financial statements for logic
3. May omit substantially all disclosures required by GAAP, but must add an extra
paragraph to the report
4. Cite measurement GAAP departures in an extra paragraph in the report

Yaeger CPA Review - Auditing and Attestation

C. Comparison of audit, review, and compilation:

ITEM
1.
2.
3.
4.
5.
6.

Standards
Independence
Assurance
Rep letter
Engagement letter
Report date

7. Understanding
client/industry
8. Mgt use only
9. Each page marked

AUDIT

REVIEW

SAS
SSARS
Required
Required
Reasonable
Limited (Neg)
Required
Required .
<<--------------- Required -------------->>
Report
Completion of
release date
procedures
<<---------------------

Required -------------->>
----"See inde acct's
review report"

COMPILATION
SSARS
Not required
None
Not required
Completion of
compilation

"Restricted for
mgt use only"
"See acct's
compil report"

MODULE 7 AUDIT SAMPLING

[definitions, internal control, substantive tests]

A. Terminology
1. Risk of assessing control risk too low -- overreliance
2. Risk of assessing control risk too high -- underreliance
3. Incorrect acceptance
4. Incorrect rejection
5. Error, exception, deviation
B Attribute sampling -- sample size factors
1. Tolerable rate -- inverse
2. Expected population error rate -- direct
3. Risk of assessing control risk too low -- inverse (compliment of confidence level)
C Formula: sample error rate + allowance for sampling risk < tolerable error rate

Yaeger CPA Review - Auditing and Attestation

D. Variables sampling -- sample size factors

1. Confidence level (reliability) - direct
2. Precision - direct
3. Variability within the population - direct
4. Tolerable misstatement - inverse
E. Sampling plans
1. Determine objective of test
2. Define population and deviation
3. Determine sample size
4. Select sampling technique
5. Perform sampling plan
6. Evaluate results/Document

MODULE 8
AUDITING WITH TECHNOLOGY
[definitions, internal control, substantive tests]
A. EDP department -- Control clerks, Operator, Programmer, Analyst, Librarian [C 0 P A L]
B. General and application controls
C. Batch vs. on-line real time processing
D. Auditing around the computer (without using the computer)
E. Auditing through the computer
1. Test data
2. Integrated test facility
3. Parallel simulation
F. Microcomputers in auditing
1. Spreadsheet
2. Sampling
3. Audit through computer - computer assisted audit techniques -- CAATS
4. Manage engagement
5. Word processing

Yaeger CPA Review - Auditing and Attestation

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G. Electronic evidence
1. Electronic data interchange (EDI) may reduce or eliminate traditional paper trail
2. Auditor may need more test of controls in these environments
3. Auditor may need to do work at interim dates when electronic evidence exists at a
certain point in time before this evidence may become non-retrievable (affect nature,
timing, extent of tests)
H. IT Advantages
Speed/accuracy
Minimize redundancy
Improve communications
Remain competitive
Facilitate additional analysis of data
Backup/recovery
I.

IT Disadvantages
Cost
Specialized personnel
Backup/recovery
Compatability
Loss of confidentiality
Rely on others
Audit trail
Legal issues

J. Internal control implications

General vs application controls
Access codes/passwords
Backup/recovery
Security over data
Test for accurate processing of data
Documentation

Yaeger CPA Review - Auditing and Attestation

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GENERAL COMMENTS:
A. Internal control
1. May be task-based simulation
2. May be flowcharts or questionnaires
3. To identify weaknesses in internal control or to design a questionnaire, use control
activities [R I P S]

B. Evidence
1. May be task-based simulation
2. Objectives of auditing various accounts developed from assertions [P E R C V]
3. Task-based simulation

Use PERCV and the following table:

P
E
R
C
V

Inquire; Inspect documents

Vouch; Observe; Confirm
Inspect documents; Inquire; Confirm
Cut-off; Analytical procedures; Trace
Reconcile; Recalculate; Analytical procedures

C. Summary

INTERNAL CONTROL
Tests of controls
Attributes
Over/under reliance
CR
Sampling:
Discovery

Yaeger CPA Review - Auditing and Attestation

DOLLAR AMOUNTS
Substantive tests
Variables
Incorrect acceptance/rejection
DR
Sampling:
PPS
Mean per unit
Difference estimation
Ratio estimation

12

PROBLEM
Webb & Weber, CPAs, audited the consolidated financial statements of Quest Co. and all but one of its subsidiaries
for the year ended September 30, 2001, and expressed a qualified opinion because Quest capitalized certain
research and development expenditures that should have been expensed.
Webb & Weber also audited Quest's consolidated financial statements and all but one of its subsidiaries for the year
ended September 30, 2002. These consolidated financial statements are being presented on a comparative basis
with those of the prior year and an unqualified opinion is being expressed.
Webb, the engagement partner, instructed Perry, an assistant on the engagement, to draft the auditor's report on
November 4, 2002, the date of completion of the fieldwork. In drafting the report Perry considered the following:
In preparing its 2002 financial statements, Quest changed its method of accounting for research and development
costs and properly expensed these amounts. Quest also restated its 2001 financial statements to conform with
GAAP. Consequently, Webb & Weber's present opinion on the 2001 financial statements is different (unqualified)
from the opinion expressed on November 5, 2001.
Hill & Hall, CPAs, audited the financial statements of Biotherm, Inc., a consolidated subsidiary of Quest, for the
years ended September 30, 2002 and 2001. The subsidiary's financial statements reflect total assets constituting
23% and 22% at September 30, 2002 and 2001, respectively, and total revenues constituting 21% and 20% in
2002 and 2001, respectively, of the consolidated totals. Hill & Hall expressed an unqualified opinion each year and
furnished Webb & Weber with a copy of each year's auditor's report. Webb & Weber have decided not to assume
responsibility for the work of Hill & Hall insofar as it relates to the expression of an opinion on the consolidated
financial statements taken as a whole because of the materiality of Biotherm's financial statements to the
consolidated financial statements. Hill & Hall's report will not be presented together with that of Webb & Weber.
Quest is the subject of a grand jury investigation into possible violations of federal antitrust laws and possible
related crimes. Related civil class actions are pending. This is adequately disclosed in Note 12 to Quest's
consolidated financial statements. Because of the early stage of the investigation, the ultimate outcome of these
matters cannot presently be determined. Therefore, no provision for any liability that may result has been recorded.
Quest experienced a net loss in 2002 and is currently in default under substantially all of its debt agreements.
Management's plans in regard to these matters are adequately disclosed in Note 14 to Quest's consolidated
financial statements, although the financial statements do not include any adjustments that might result from the
outcome of this uncertainty. These matters raise substantial doubt about Quest's ability to continue as a going
concern.
Webb reviewed Perry's draft and indicated in Webb's Review Notes that there were many deficiencies in Perry's draft

Independent Auditor's Report

We have audited the consolidated financial statements of Quest Co. and subsidiaries as of September 30, 2002 and
2001, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits. We did not audit the
financial statements of Biotherm, Inc., a wholly owned subsidiary, which statements reflect total assets constituting
23% and 22% at September 30, 2002 and 2001, respectively, and total revenues constituting 21% and 20% in 2002
and 2001, respectively, of the consolidated totals. Those statements were audited by Hill & Hall, CPAs, whose
reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Biotherm. Inc., is
based solely on their reports.
We conducted our audits in accordance with US generally accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used, as well as
assessing control risk. We believe that our audits provide a reasonable basis for our opinion.
In our previous report dated November 5, 2001, we expressed a qualified opinion that, except for the effects on the
2001 financial statements of not expensing certain research and development costs, the 2001 financial statements
present fairly, in all material respects, the financial position of Quest Co. and subsidiaries as of September 30, 2001,
and the results of its operations and its cash flows for the year then ended in conformity with US generally accepted
accounting principles. As described in Note 10, the Company has changed its method of accounting for these items
and restated its 2001 financial statements to conform with US generally accepted accounting principles. Accordingly,
our present opinion on the 2001 financial statements, as presented herein, is different from that expressed in our
previous report.

Yaeger CPA Review - Auditing and Attestation

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In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements
referred to above present fairly, in all material respects, the financial position of Quest Co. as of September 30, 2002
and 2001, in conformity with US generally accepted accounting principles, except for the uncertainty, which is
discussed in Note 12 to the consolidated financial statements.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue
in existence for a reasonable period of time. As discussed in Note 14 to the consolidated financial statements, the
Company suffered a net loss in 2002 and is currently in default under substantially all of its debt agreements.
Management's plans in regard to these matters are also described in Note 14. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Webb & Weber, CPAs
November 4, 2002
Required:
Items 1 through 16 represent the deficiencies noted by Webb. For each deficiency, indicate whether
W. Webb's review note is correct.
P.

Perry's draft is correct.

B.

Both Webb's review note and Perry's draft are incorrect.

An answer may be selected once, more than once, or not at all.

Webb's Review Notes
1. The reference to the subsidiary, Biotherm, and the magnitude of its financial statements should be in the scope
paragraph rather than in the opening (introductory) paragraph
2. The other independent auditors, Hill & Hall, should be named in the scope paragraph rather than in the opening
(introductory) paragraph.
3. The reference in the scope paragraph to "the financial statements are free of material misstatement" should be
followed by the phrase "whether caused by error or fraud."
4. The required reference in the scope paragraph to assessing "significant estimates made by management" has
been omitted.
5. The reference in the scope paragraph to "assessing control risk" is inappropriate and should be omitted from the
report.
6. The required reference in the scope paragraph to "evaluating the overall financial statement presentation" has
been omitted.
7. A separate explanatory paragraph describing the grand jury investigation into possible violations of federal antitrust
laws is required to be placed between the scope and opinion paragraphs.
8. The reference in the first explanatory paragraph (between the scope and opinion paragraphs) to the qualified
opinion on the 2001 financial statements is not properly placed. It should be placed in the opinion paragraph.
9. The reference in the first explanatory paragraph (between the scope and opinion paragraphs) to Note 10 does not
express our concurrence with Quest's change in accounting principle. Our concurrence should be specifically
expressed in this paragraph.
10. The reference to the other auditors in the opinion paragraph is incomplete. It should specifically include the words
"unqualified opinion" to describe the type of opinion expressed by Hill & Hall.
11. The opinion paragraph should extend the auditor's opinion beyond financial position to include the results of
Quest's operations and its changes in stockholders' equity.
12. The reference to the uncertainty in the opinion paragraph is incomplete. It should describe the nature of the
uncertainty as pertaining to the grand jury investigation into possible violations of federal antitrust laws.
13. The explanatory paragraph following the opinion paragraph does not include the term "substantial doubt." This
term is required to be used in this paragraph under these circumstances.
14. The explanatory paragraph following the opinion paragraph does not include the term "going concern." This term
is required to be used in this paragraph under these circumstances.
15. The explanatory paragraph following the opinion paragraph includes an inappropriate statement that "the
consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty." This statement is misleading and should be omitted.
16. The auditor's report is not correctly dated. It should be dual dated because of Note 12, the grand jury
investigation, and also because of Note 14, the going concern uncertainty.

Yaeger CPA Review - Auditing and Attestation

14

ANSWER - (Webb) Problem

1. (P) The report correctly includes the reference in the introductory paragraph.
2. (B) Both are incorrect because when the other auditor's report is not being presented that auditor should not be
named (AU 543).
3. (P) The report is correct because the term "whether caused by error or fraud" is not included in the audit report.
4. (W) The reviewer is correct because the scope paragraph should refer to "significant estimates made by
management."
5. (W) The reviewer is correct because the audit report does not refer to "assessing control risk."
6. (W) The reviewer is correct because the scope paragraph should include "evaluating the overall financial statement
presentation."
7. (P) The report is not required to include such a paragraph.
8. (P) The first explanatory paragraph is properly placed prior to the opinion paragraph.
9. (P) The report is correct since auditors do not express concurrence with an accounting change.
10. (P) The opinion paragraph should not specifically include the words "unqualified opinion" to describe the other
auditor's opinion.
11. (B) Both are incorrect since the report should extend to results of operations and cash flows in addition to
financial position.
12. (B) Both are incorrect since any mention of uncertainty should be handled as an "emphasis of a matter
paragraph" as described in AU 508--the opinion paragraph is not qualified for such a matter.
13. (W) The reviewer is correct that the term "substantial doubt" should be included.
14. (W) The reviewer is correct that the term "going concern" should be included.
15. (P) The report is correct in stating that "the consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty."
16. (P) The draft is correctly dated.

Most audit reporting guidance is included in AU 508. Other sources of guidance for this question include
AU 341--Reporting on Going Concern
AU 420--Reporting on Consistency

Yaeger CPA Review - Auditing and Attestation

15

PROBLEM A
Baker, CPA, was engaged to audit Mill Company's financial statements for the year ended September 30, 2001.
After obtaining an understanding of Mill's internal control, Baker decided to obtain evidential matter about the
effectiveness of both the design and operation of the controls that may support a low assessed level of control risk
concerning Mill's shipping and billing functions. During the prior years' audits Baker used nonstatistical sampling, but
for the current year Baker used a statistical sample in the tests of controls to eliminate the need for judgment.
Baker wanted to assess control risk at a low level, so a tolerable rate of deviation or acceptable upper precision limit
(UPL) of 20% was established. To estimate the population deviation rate and the achieved UPL, Baker decided to
apply a discovery sampling technique of attribute sampling that would use a population expected error rate of 3% for
the 8,000 shipping documents, and decided to defer consideration of allowable risk of assessing control risk too low
(risk of overreliance) until evaluating the sample results. Baker used the tolerable rate, the population size, and the
expected population error rate to determine that a sample size of eighty would be sufficient. When it was
subsequently determined that the actual population was about 10,000 shipping documents, Baker increased the
sample size to 100.
Baker's objective was to ascertain whether Mill's shipments had been properly billed. Baker took a sample of 100
invoices by selecting the first twenty-five invoices from the first month of each quarter. Baker then compared the
invoices to the corresponding prenumbered shipping documents.
When Baker tested the sample, eight errors were discovered. Additionally, one shipment that should have been billed
at $10,443 was actually billed at $10,434. Baker considered this $9 to be immaterial and did not count it as an error.
In evaluating the sample results Baker made the initial determination that a reliability level of 95% (risk of assessing
control risk too low 5%) was desired and, using the appropriate statistical sampling table, determined that for eight
observed deviations from a sample size of 100, the achieved UPL was 14%. Baker then calculated the allowance for
sampling risk to be 5%, the difference between the actual sample deviation rate (8%) and the expected error rate
(3%). Baker reasoned that the actual sample deviation rate (8%) plus the allowance for sampling risk (5%) was less
than the achieved UPL (14%); therefore, the sample supported a low level of control risk.
Required:
Describe each incorrect assumption, statement, and inappropriate application of attribute sampling in Baker's
procedures.

Yaeger CPA Review - Auditing and Attestation

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PROBLEM B
Mead, CPA was engaged to audit Jiffy Co.'s financial statements for the year ended August 31, 2001. Mead is
applying sampling procedures.
During the prior years' audits Mead used classical variables sampling in performing tests of controls on Jiffy's
accounts receivable. For the current year Mead decided to use probability-proportional-to-size (PPS) sampling (also
known as dollar-unit sampling) in confirming accounts receivable because PPS sampling uses each account in the
population as a separate sampling unit. Mead expected to discover many overstatements, but presumed that the
PPS sample still would be smaller than the corresponding size for classical variables sampling.
Mead reasoned that the PPS sample would automatically result in a stratified sample because each account would
have an equal chance of being selected for confirmation. Additionally, the selection of negative (credit) balances
would be facilitated without special considerations.
Mead computed the sample size using the risk of incorrect acceptance, the total recorded book amount of the
receivables, and the number of misstated accounts allowed. Mead divided the total recorded book amount of the
receivables by the sample size to determine the sampling interval. Mead then calculated the standard deviation of
the dollar of the accounts selected for evaluation of the receivables."
Mead's calculated sample size was sixty and the sampling interval was determined to be $10,000. However, only
fifty-eight different accounts were selected because two accounts were so large that the sampling interval caused
each of them to be selected twice. Mead proceeded to send confirmation requests to fifty-five of the fifty-eight
customers. Three selected accounts each had insignificant recorded balances under $20. Mead ignored these three
small accounts and substituted the three largest accounts that had not been selected in the sample. Each of these
accounts had balances in excess of $7,000, so Mead sent confirmation requests to those customers.
The confirmation process revealed two differences. One account with an audited amount of $3,000 had been
recorded at $4,000. Mead projected this to be a $1,000 misstatement. Another account with an audited amount of
$2,000 had been recorded at $1,900. Mead did not count the $100 difference because the purpose of the test was to
detect overstatements.
In evaluating the sample results, Mead determined that the accounts receivable balance was not overstated because
the projected misstatement was less than the allowance for sampling risk.
Required:
Describe each incorrect assumption, statement, and inappropriate application of sampling in Mead's procedures.

Yaeger CPA Review - Auditing and Attestation

17

PROBLEM A Answer
Analyze Attributes Sample

1.

Statistical sampling does not eliminate the need for professional judgment.

2.

The tolerable rate of deviation or acceptable upper precision limit (UPL) is too high (20%) if Baker plans to
assess control risk at a low level (substantial reliance).

3.

Discovery sampling is not an appropriate sampling technique in this attribute sampling application.

4.

The sampling technique employed is not discovery sampling.

5.

The increase in the population size has little or no effect on determining sample size.

6.

Baker failed to consider the allowable risk of assessing control risk too low (risk of overreliance) in determining
the sample size.

7.

The population from which the sample was chosen (invoices) was an incorrect population.

8.

The sample selected was not randomly selected.

9.

Baker failed to consider the difference of an immaterial amount to be an error.

10. The allowance for sampling risk was incorrectly calculated.

11. Baker's reasoning concerning the decision that the sample supported a low assessed level of control risk was
erroneous.
* Because the requirements of this question could be answered by lists of items we have not included an outline of the solution.

PROBLEM B - Answer
Analyze Sampling Plan
The incorrect assumptions, statements, and inappropriate applications of sampling are as follows:
1.

Classical variables sampling is not designed for tests of controls.

2.

PPS sampling uses each dollar in the population, not each account, as a separate sampling unit.

3.

PPS sampling is not efficient if many misstatements are expected because the sample size can become larger
than the corresponding sample size for classical variables sampling as the expected amount of misstatement
increases.

4.

Each account does not have an equal chance of being selected; the probability of selection of the accounts is
proportional to the accounts' dollar amounts.

5.

PPS sampling requires special consideration for negative (credit) balances.

6.

Tolerable misstatement was not considered in calculating the sample size.

7.

Expected (anticipated) misstatement was not considered in calculating the sample size.

8.

The standard deviation of the dollar amounts is not required for PPS sampling.

9.

The three selected accounts with insignificant balances should not have been ignored or replaced with other
accounts.

10. The account with the $1,000 difference (recorded amount of $4,000 and audited amount of $3,000) was
incorrectly projected as a $1,000 misstatement; projected misstatement for this difference was actually $2,500
($1,000/$4,000 x $10,000 interval).
11. The difference in the understated account (recorded amount of $1,900 and audited amount of $2,000) should not
have been omitted from the calculation of projected misstatement.
12. The reasoning (the comparison of projected misstatement with the allowance for sampling risk) concerning the
decision that the receivable balance was not overstated was erroneous.

Yaeger CPA Review - Auditing and Attestation

18

AUD 2012
Questions to Do
Module 1: 1 ,3,4,5,7,9,10,12,16,17,19,20,21,14,23,25,26,2,27,28,29,30,33,35,36,37,38,39,40,41,44,45,47
Simulations 1,3,4,6
Module 2:
1,2,3,5,6,8,9,10,11,12,14,16,17,19,20,22,24,26,28,30,31,33,35,36,41,42,44,48,49,51,54,55,56,60,62,66,68,70,72,73,
74,75,81,82,85,86,89,91,92,93,95,96,99,101,102,104,
Simulations 1,3,5,8,9,10,11
Module 3:
1,2,5,8,10,11,14,18,19,20,21,22,23,24,26,27,28,30,31,32,33,35,36,37,39,41,45,47,48,50,53,54,55,56,57,58,59,
63,67,68,70,71,72,73,74,76,78,80,81,82,83,84,87,88,92,93,96,97,98,100,101,104,107,108,111,112,114,117,12
1,125,127,128,130,131,136,138,140,142,143,147,148,149,154,155,156,161,164,165,166,
Simulation 3,5,7,8,
Module 4:
2,4,6,8,9,10,13,14,15,18,19,21,25,26,28,29,30,31,32,33,34,35,36,37,38,41,50,51,52,54,57,58,59,60,61,63,65,
66,68,72,75,77,80,81,82,83,84,85,86,88,89,92,93,95,96,97,98,99,101,103,104,105,106,108,110,113,115,118,119,120,
123,124,125,127,136,137,140, 144,146,147,149,150,153,154,155,159,161,162,164,167,168,
Simulation 1,5,6,7,8,10,13
Module 5:
2,3,4,5,6,7,8,9,10,11,12,13,14,15,16,17,18,19,20,21,24,25,27,29,31,33,35,36,37,38,39,40,41,42,43,44,45,46,47,48,49
,50,51,52,53,54,55,58,59,60,61,62,63,64,65,66,67,68,69,70,71,72,74,75,77,78,79,81,83,86,87,89,91,92,93,94,95,96,
99,102,103,107,108,111,113,114,116,118,120,121,123,125,126,127,128,129,130,132,133,135,139,140,141,144,146,
147,148,150,151,155,157,160,163,
Simulations 2,3,5,
Module 6:
1,3,4,5,6,7,9,10,11,12,14,15,17,18,19,20,21,22,24,27,28,29,30,32,33,34,36,37,38,39,44,45,46,48,
Simulation 1,2
Module 7:
2,3,4,5,7,8,9,10,12,13,14,15,16,17,18,19,20,21,22,23,24,25,26,27,30,31,33,34,37,39,40,41,12,45,46,48,53,55,57,58,
Simulation 2,3
Module 8:2,3,4,5,7,9,11,12,13,14,15,16,18,19,20,21,23,24,25,26,27,30,32,
Simulation 1
Wrap-Up:
Key words; GAAS, Manager Assertion, (Auditors Responsibility-Errors, Fraud) (Attestation Engagementsexaminations, agreed upon procedures, Review, Fraud ,Illegal acts.)
Forecasts & projections, Audit Documentation, reviews, compilations (Internal control definition - Components,
significant deficiencies, material weaknesses.
Evidence- Accounts receivable, Accounts Payable ETC.
Representation Letter, Attorney Letter, Audit Reports- Unqualified- Qualified disclaimers-adverse. (Special reports
- specified element, OCBOA)
Restricted use General use,( Audit sample - definitions - Steps)
Electronic Data Interchange, Government Auditing standards, Quality Control standards.

Yaeger CPA Review - Auditing and Attestation

QTD