Recap D3 - New Senior

1. An audit team is assessing a new, complex provision for litigation, which involves significant management judgment about future legal outcomes. This is categorized as a "higher risk estimate." According to the "bucket analogy" discussed in Challenge 6, what is the primary implication of this categorization on the audit plan?

• The Combined Risk Assessment (CRA) will automatically be "High," requiring a substantive-only approach
• The inherent risk is higher, resulting in a larger evidence "bucket" that requires more persuasive audit evidence, regardless of the controls reliance strategy.
• The evidence "bucket" size is standard for all estimates, but it must be filled more quickly due to the higher risk.
• The team must rely on controls to reduce the "bucket" size, resulting in a "Low" CRA

2. During a walkthrough, a controller explains that she reviews the monthly fixed asset roll-forward and investigates any reconciling items that "look unusual or are over $100,000." When evaluating the design effectiveness and precision of this control, the audit team should primarily assess the $100,000 threshold against:

• Planning Materiality (PM) for the financial statements as a whole
• The de minimis threshold for posting audit differences (SAD).
• Tolerable Error (TE) for the property, plant, and equipment account balance.
• The prior year's average reconciling item amount.

3. The team determines an assertion has a "higher" inherent risk. They subsequently decide on a controls-reliance strategy and conclude the relevant controls are effectively designed and operating. What is the resulting Combined Risk Assessment (CRA) and the implication for the evidence bucket?

• The CRA is "Minimal," and the bucket is small and primarily filled by tests of controls.
• The CRA is "High," and the bucket is large and filled entirely by substantive procedures.
• The CRA is "Moderate," and the bucket is small and filled entirely by substantive procedures.
• The CRA is "Low," and the bucket is large, with a significant portion filled by substantive procedures despite the reliance on controls.

6.When obtaining an understanding of a "lower risk" accounting estimate where the audit strategy is substantive-only, what is the minimum level of documentation required for the estimation SCOT?

• A complete list of all assumptions (significant and non-significant) and the method used.
• An understanding of how management selected the significant assumptions.
• A detailed walkthrough of the IT application controls used in generating the data.
• No documentation is needed as substantive procedures will cover the estimate.

7. An audit senior is interviewing a client to understand a manual control. To begin, the senior asks, "Can you walk me through the steps you take to perform this reconciliation and what you look for when reviewing it?" According to the principles in Challenge 5, is this an effective questioning technique ?

• Yes
• No