5 - substantive tests, sampling and materiality Flashcards
what is the purpose of audit sampling?
aim of external audit is for auditor to give an opinion as to whether the financial statements are free from material misstatement or presented fairly. the auditor does not test everything.
the auditors select items for testing that are effective in meeting purpose of audit procedure - ISA 500.
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 auditor with reasonable bias on which to draw conclusions about the entire population
extremely important that: all units have chance of selection, and can draw conclusions about entire population.
what are the three ways for an auditor to select items for testing?
select all items - 100% testing
population with small number of high volume items
significant risk of material misstatement
electing specific item
high value or key items - suspicions, risky or likely to error
all items over certain amount
the nature of entity’s transactions
stratification - dividing pop into sub-pops, each of which is group of sampling units which have similar characteristics (usually monetary value).
audit sampling
what are the types of audit sampling?
non-statistical - haphazard, block
statistical - random, statistic, value weighted selection.
what are the non-statistical sampling methods?
haphazard selection
auditor selects sample without following structured technique. nonetheless auditor needs to avoid conscious bias or predictability (like avoiding hard to locate items, never picking the first or last thing on the list), and thus attempt to ensure all items in population have chance of selection (ISA 350)
block selection
selection of a block(s) of contiguous items from within pop. cannot ordinarily be used in audit sampling because most population structured such that items in sequence can be expected to have similar characteristics to each other, but different characteristics from items elsewhere. (ISA 530)
what are the statistical audit sampling types?
random - random number tables/generators to select items in sample, ensuring all items have equal chance of selection.
systematic - selecting items using a constant interval between selections, the first interval having a random start. e,g, if auditor has population with 1000 items and requires sample containing 200 items then sampling interval is 5. random starting point within first 5 is determined and auditor tests every 5th item after this.
value weighted selection (or monetary unit sampling MUS) - population randomly ordered and items selected for sampling by weighting items in proportion to value.
most commonly used.
what is sample risk?
risk that auditor’s conclusion based on a sample may be different from conclusion if entire population were subjected to the same audit procedure (i.e. sample isn’t representative)
what are the two types of mistaken conclusions an auditor can have under sample risk?
in the case of a test of controls, that controls are more effective than they actually are, or in the case of test of details, that a material misstatement is missed. auditor primarily concerned with this type of mistaken conclusion bc affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.
in the case of a test of controls, that controls are less effective than they actually are, or in the case of test of details, that a material misstatement exists when in fact it does not. this affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.
what are the factors affecting sample size in an audit sample?
risk of material misstatement
required confidence level
stratification of population when appropriate
number of sampling units in population
how does risk of material misstatement affect sample size?
if inherent risk and control risk is high detection risk must be kept low.
detection risk includes sampling and non-sampling risks
how does the required confidence level effect the sample size?
how confident auditor needs ot be that the sample of results are representative of the population as a whole. greater degree of confidence the auditor requires, larger the sample size needs to be.
expected error - if high then sample size needs to be large to make reasonable estimate of actual amount of error in the population
tolerable error - level of error auditor can accept in population before concerned that there is material misstatement. lower level of tolerable errors = larger sample sizes.
how does stratification of the population help with defining sample sizes?
stratification valuable when dealing w pop containing wide range of monetary values. by stratifying pop into groups based on monetary size, process allows for more organised and effective analysis.
when pop can be can be appropriately stratified, total sample sizes taken from each stratum typically smaller compared to sample size that would have been needed if single sample drawn from entire pop. this reduction helps achieve desired level of sampling accuracy while minimising potential for sampling errors or biases.
how does the number of sampling units in the population affect the audit sample size?
for large pops, actual size of population has little effect on sample size. for small pops audit samplinng often not as efficient as alternative methods of obtaining sufficient appropriate audit evidencee.
when using MUS an increase in monetary value of the pop increases sample size, unless offset by proportional increase in materiality for financial statements as a whole.
what is a tolerable misstatement and a tolerable rate of deviation?
tolerable misstatement - a monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population
tolerable rate of deviation - a rate of deviation from prescribed internal control procedures set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population
what is the general process for evaluating an audit sample’s results?
auditor should determine sample results are satisfactory, if further work is required or if there are errors in the sample. in case of errors, auditor should consider:
nature and cause of error
whether error is one error of a recurrent issue
whether error effects purpose of audit
whether error effects other areas of the audit
