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Audit CH 6 Notes

The document discusses key points from Audit Chapter 6 and 7, focusing on the estimation of total misstatement and the need for larger sample sizes in audits. It outlines the objectives and components of internal controls, emphasizing the importance of testing controls and understanding the client's internal control system. Additionally, it differentiates between tests of controls and substantive tests, highlighting their relevance in auditing processes.

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17 views3 pages

Audit CH 6 Notes

The document discusses key points from Audit Chapter 6 and 7, focusing on the estimation of total misstatement and the need for larger sample sizes in audits. It outlines the objectives and components of internal controls, emphasizing the importance of testing controls and understanding the client's internal control system. Additionally, it differentiates between tests of controls and substantive tests, highlighting their relevance in auditing processes.

Uploaded by

ryan.rumambi94
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Audit ch 6 notes

6.5

Estimated of total misstatement is $133,333 and not 70,000. He was wrong


about his estimate on total misstatement.

We need a bigger sample because the 30 sample does not represent the
whole 20 million as it is too small compared to the total sales. It is likely that
the errors will be bigger with a bigger sample size.

6.6

Case B would require a larger sample size. They have a narrow window of
tolerance and want to be sure so we have to have a bigger population
sample size.

6.9

1. 10,084.7

2. 6,019.78

3. 22,208.9

Total = 38,313.38 which is not material if the tolerable error is set at 40,000.
It would be material if the tolerable error was set at 30,000.

Controls may be weaker during that period which results in more testing
required.

6.10
a.

Test A: is a test of controls since we are testing if the supervisors initials are
there

Test B: it is a substantive test, which is testing a transaction and getting


direct evidence for it. We are looking at specific transactions and we are
looking for completeness accuracy and classification

b.

Test B can as it is looking at the accuracy and is a substantive test where we


are testing dollar figures and can extrapolate it to the rest of the population

c.

no, you cant because it deals with signatures and you cant extrapolate it to
the population

d.

what is the chance that the auditor makes an incorrect audit opinion based
on bad sampling results.

Chapter 7: Understanding and testing the client’s system of


internal controls

Objectives of internal controls:

1. Real
2. Recorded
3. Valued
4. Classified
5. Summarized
6. Posted
7. Timely

5 components of system of internal control entity level controls:


1. The control environment
- Culture, structure, and discipline of an entity
2. The entity’s risk assessment process
- How does the entity identify, analyze, and respond to risk?
3. The information system relevant to financial reporting and
communication
- Designed to capture and exchange information to conduct, manage,
and control entity’s operations. Interest in systems relevant to the
financial statements
4. Control activities
- Policies and procedures that make sure that the entity’s directives
are carried out
5. Monitoring of controls
- Does management monitor controls and modify as required when
conditions change?

Transaction-level controls: controls that affect a particular transaction or a


group of transactions

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