11: Evidence and Sampling

Question 1

The 5 general procedures for obtaining evidence?

Answer 1

Substantive procedures
Computer Assisted Audit Techniques (CAATs)
Analytical Procedures
Directional testing
Accounting estimates

Question 2

6 types of substantive procedures

Answer 2

• inspection of assets or documents
• inquiry
• external confirmation
• recalculation
• re performance
• analytical procedures

Question 3

What are CAATs also called? What are the two types?

Answer 3

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

Question 4

What is data analytics?

Answer 4

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

Question 5

How does the use of analytical procedures differ in planning and evidence stages?

Answer 5

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

Question 6

What factors determine if analytical procedures will be efficient?

Answer 6

• strength/comparability of relationships
• reliability of the data
• level of disaggregation
• depth of auditor’s knowledge

Question 7

How to test for over statement?

Answer 7

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

Question 8

How to test for understatement?

Answer 8

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

Question 9

What is reciprocal population?

Answer 9

A population of accounting entries that are related to the account of interest

To help auditors who are looking for transactions that are unrecorded

Question 10

What are comment estimates that are tested?

Answer 10

Depreciation

Allowance for receivables

Provisions

High due to their subjective nature and because of management bias

Question 11

Most common audit procedures to test estimates?

Answer 11

• 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

Question 12

What is the objective of sampling?

Answer 12

To provide a reasonable basis for the auditor to draw conclusions about the population

ISA 350

Question 13

What testing procedures do NOT involve sampling?

Answer 13

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

Question 14

What are the 5 steps in the sampling process?

Answer 14

1. Identify population
2. Identify sampling unit
3. Select sample
4. Identify errors
5. Draw conclusions

Question 15

Define:
- population
- sampling units
- sampling risks

Answer 15

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

Question 16

What are the three statistical sampling methods?

Answer 16

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)

Question 17

Two non-statistical sampling methods

Answer 17

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

Question 18

What would increase a sample size?

Answer 18

Increase in RoMM
Increase in assurance level
Increase in expected error

Increase in sample units - no effect

Question 19

What would decrease sample size?

Answer 19

Increase in tolerable misstatement

Stratification of the population (dividing units into homogeneous subgroups)

Question 20

What is tolerable error?

Answer 20

The maximum acceptable error that an auditor can accept and still conclude true and fair view

Question 21

What conclusions need to be drawn about errors found in sampling?

Answer 21

Nature of errors

Cause of errors

Impact on other parts of the audit

Probable misstatement in the population

Question 22

What should an auditor do if management refuses to correct the misstatements?

Answer 22

• 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

Question 23

What misstatements are material in nature, not size?

Answer 23

Misstatements that:
- affect compliance with laws and regs
- affect compliance with debt covenants
- affect ratios used to evaluate finance
- increase management compensation

Question 24

The key points of remote auditing?

Answer 24

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!