11: Evidence and Sampling Flashcards
The 5 general procedures for obtaining evidence?
Substantive procedures
Computer Assisted Audit Techniques (CAATs)
Analytical Procedures
Directional testing
Accounting estimates
6 types of substantive procedures
- inspection of assets or documents
- inquiry
- external confirmation
- recalculation
- re performance
- analytical procedures
What are CAATs also called? What are the two types?
Automated tools or techniques
TEST DATA
- to test the controls in their system
- our data, their system
AUDIT SOFTWARE
- to perform basic data analysis and substantive testing
- their data, our system
What is data analytics?
Identifies patterns, trends or correlations in ‘big data’.
Can assist with:
- transaction anaylsis
- judgement areas
- analytical procedures
Results may be presented in formats such as bar or pie charts so data is visualised
How does the use of analytical procedures differ in planning and evidence stages?
At planning, enough just to identify risk areas
At evidence, auditor must determine whether unexpected variation are acceptable. If not:
- make enquiries of management
- corroborate management explanations with other evidence
What factors determine if analytical procedures will be efficient?
- strength/comparability of relationships
- reliability of the data
- level of disaggregation
- depth of auditor’s knowledge
How to test for over statement?
Start with financial statements
Agree the balance to the NCA register
Select a sample of assets in the NCA register
Perform procedures such as inspection of the asset and the purchase invoice to confirm that the balance is not overstated
How to test for understatement?
Reciprocal population
Start with the assets that you can see being used
Trace to the NCA register to confirm completeness of accounting records
Figure in the accounts
What is reciprocal population?
A population of accounting entries that are related to the account of interest
To help auditors who are looking for transactions that are unrecorded
What are common estimates that are tested?
Depreciation
Allowance for receivables
Provisions
High due to their subjective nature and because of management bias
Most common audit procedures to test estimates?
- review and test the process that developed the estimate
- use an independent expert
- review subsequent events to test accuracy
- test the operating effectiveness of the controls over how management made the estimate
What is the objective of sampling?
To provide a reasonable basis for the auditor to draw conclusions about the population
ISA 350
What testing procedures do NOT involve sampling?
Testing all items in a population
- used when the pop is a small number of high value or unusual items
Testing all items with a certain characteristic
- high value items for example
What are the 5 steps in the sampling process?
- Identify population
- Identify sampling unit
- Select sample
- Identify errors
- Draw conclusions
Define:
- population
- sampling units
- sampling risks
Population - entire data set
Sampling units - individual items constituting a population
Sampling risk - risk that sample chosen does not represent population
CRITICAL that each sampling unit in the pop has a chance of selection
What are the three statistical sampling methods?
Random selection
- all items have an equal chance of selection by using a random number generator/table
Systematic selection
- items selected using a random start and then constant intervals
Money Unit Sampling
- every £1 in the population has an equal chance of being selected (in relation to materiality)
Two non-statistical sampling methods
Haphazard selection
- auditor selects sample they think will be representative, without using probability theory
Sequence or block selection
- select a block of items
- mainly used for tests of controls
What would increase a sample size?
Increase in RoMM
Increase in assurance level
Increase in expected error
Increase in sample units - no effect
What would decrease sample size?
Increase in tolerable misstatement
Stratification of the population (dividing units into homogeneous subgroups)
What is tolerable error?
The maximum acceptable error that an auditor can accept and still conclude true and fair view
What conclusions need to be drawn about errors found in sampling?
Nature of errors
Cause of errors
Impact on other parts of the audit
Probable misstatement in the population
What should an auditor do if management refuses to correct the misstatements?
- obtain an understanding on why they’re refusing
- determine if misstatements are material
- communicate that audit report will be modified if not corrected to governance, and request again
What misstatements are material in nature, not size?
Misstatements that:
- affect compliance with laws and regs
- affect compliance with debt covenants
- affect ratios used to evaluate finance
- increase management compensation
The key points of remote auditing?
Administration may take longer, and electronic signatures can be used
IT security is critical to remote working, and lack of physical proximity needs to be considered
Audit risk will be assessed as higher
Internal controls will include those from remote working
Even more professional scepticism since businesses are struggling!
