11: Evidence and sampling Flashcards
What are the two types of test?
- Test of controls
- Substansive procedures
What are the procedures to obtain evidence?
AEIOU
Analytical procedures
Enquiry
Inspection
Observation
recalcUation
Explain analytical procedures and give a weakness
Evaluation of financial information by studying information by studying possible relationships among financial and non financial data. e.g. CY & PY
- Validity and accuracy of the benchmark data
Explain enquiry and give a weakness
Ask a relevant person for information e.g. directors, managers
- Integrity of the individual chosen
Explain inspection and give a weakness
Of a document such as an invoice or a physical asset
- Internal paperwork can be altered
Explain Observation and give a weakness
Of a process such as an inventory count
- This only confirms the procedures were followed at the time of observation
Explain recalcUlation and give weakness
Check the mathematical accuracy of a document
- Confirms the sum/cost is correct, not the accuracy, validity, completeness or existence of the data.
What are computer assisted audit techniques?
Test data
Audit software
Data analytics
Explain test data and give example
- Where the auditor tests the integrity of the client’s system by posting data onto the client’s computer system to see if the transactions are posted as they should be.
E.g. password controls - see if unathroised users can access key areas of the system
Explain audit software and give example
Where auditor uses his own computer programmes to substansively test a balance or transaction.
E.g. The spread sheet which can check the correct casting (addition) of numbers or facilitate sample selection and ratio calcs.
Explain data analytics and give example
Using IT to help identify patterns or trends this may allow the auditor to review 100% of the population
e.g.
-Review staff emails to identify risk of fraud via key words
-analyse sale trends by product/region
When should analytical procedures be used
- Planning stages and as part of substansive procedures
What are possible sources of info about the client used at risk assessment stage?
Interim financial information
Previous financial statements
Budgets
Management accounts
Non-financial information
Board minutes
What must an auditor decide when using substansive analytical procedures?
Whether SAPs will be effective and efficient in reducing audit risk to an acceptably low level.
What are the factors an auditor should consider when using APs as substansive procedures?
- Objective of the APs e.g. APs may be good at indicating whether population is complete
- Suitability of APs
- Reliability of data
What are the possibilities of directional testing in final statements
Fairly stated
Misstated - Either overstated (Assets/income) or understated (Liabilities/expenses)
How does the testing approach differ for over vs understatement
Over = Financial statments then source docs (title deeds valuation)
Under = Source docs (Supplier statement) then financial statements
What are common audit procedures used to test estimates
- Review process used by management to develop the estimate for reasonableness
- Use an independent expert to make an estimate for comparison
- Review the accuracy of prior year’s estimates compared to the final actual results
- Review subsequent events for events that help to confirm accuracy of estimate
What is audit sampling?
Application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population. (Representative sample)
What is a population
The entire set of data from which the sample is selected and an auditor wishes to draw conclusions on.
What is statistical sampling
A sampling approach with the following characteristics:
1. Random selection of the sample items and
2. The use of probability theory to evaluate sample results
What is non-statistical sampling
a sampling approach that does not have characteristics 1 and 2
What are auditors required to do when sampling
Select items for a sample in such a way that each sampling unit in the population has a chance of selection.
What is the difference between a misstatement and error
a difference between the amount or disclosure of a reported financial statement item and the amount, classification or disclosure that is required for the item in accordance with applicable reporting framework.
Error is an unintentional misstatement in financial statements including the omission of an amount or a disclosure.
What factors would increase sample size?
- Increase in the auditors assessment of the risk of material misstatement
- Increase in an auditor’s desired level of assurance
- Increase in the amount of misstatement the auditor expects to find in a population
- Decrease in the use of analytical procedures to test the same balance
What is random selection
Ensures each item in population has an equal chance of selection e.g. computer generator
What is systematic sampling
Selecting items using constant intervals between selections e.g. every 10th sales invoice
What is haphazard selection
An alternative to random selection provided assurane providers are satisfied that the sample is representative of the entire population e.g. auditor uses judgement to choose sample, but risk of bias.
What is sequence or block selection
May be used to check whether certain items have particular characteristics. e.g. sample of 50 consecutive cheques to check they have authorised signatories rather than 50 random throughout the year.
What is monetary unit sampling
Selection method that ensures every £1 in a population has an equal chance of being selected for testing. e.g. every cumulative 50000th £1 is selected.
How do auditors estimate probable misstatement in population
Use results from sample onto the relevant population by extrapolating the misstatements found in the sample.
What are the considerations with remote auditing?
- Electronic signatures on documents may be used
- Video-conferencing too
- Pandemic related risk factors must be concidered e.g. would influence going concern
- Impact on possibility of fraud, individuals may act different post pandemic
What happens if the projected population misstatement exceeds or is close to tolerable misstatement?
Consider extending auditing procedures or performing alternative procedures.
What must an auditor consider when evaluating whether a misstatement is material?
Size and nature of misstatements alongside particular circumstances of their occurence.
