Audit and Assurance Chapter 3

Question 1

What are some verification techniques?

Answer 1

AEEIOUR

• Analytical procedures
• Enquiry and External confirmation
• Inspection (Vouching)
• Observation
• Recalculation or Reperformance

Question 2

What are analytical procedures?

Answer 2

These are evaluations of financial information made by a study of financial and non-financial data. They involve the following. activities:

• Comparison. Actual budget vs budget
• Calculations. Of ratios
• Credibility checks.

Question 3

Why do auditors use analytical procedures as part of the risk assessment?

Answer 3

Allows them to:

• Identify risk areas
• Determine the nature, timing, and extent of procedures.

Question 4

What are tests of control?

Answer 4

Are tests to obtain evidence about the effective operation of the accounting and internal control systems.

Question 5

What are some examples of tests of controls?

Answer 5

EIOUR

• Enquiry
• Inspection
• Observation
• Recalculation

Question 6

What is substantive testing?

Answer 6

are audit procedures designed to detect material misstatements in the financial statements, so it includes tests of detail of classes of transaction, balances and disclosures, and analytical procedures.

Question 7

Why is substantive testing needed?

Answer 7

• Limitations of internal controls.
• Have to ensure the balances of transactions are trusted, rather than the processes used to generate them.

Question 8

What are some examples of reliable evidence?

Answer 8

• Obtaining information from independent sources outside the entity
• when documents are orginals
• when it is documented, rather than orally

Question 9

What are the assertions about classes of transactions, events, and related disclosures?

Answer 9

• Occurrence
• Completeness
• Accuracy
• Cut-off
• Classification
• Presentation

Question 10

What are the assertions about account balances and related disclosures at the period-end?

Answer 10

• Existence
• Rights and obligations
• Completeness
• Accuracy, valuation, and allocation
• Classification
• Presentation

Question 11

What are automated tools and techniques?

Answer 11

They are audit techniques that are carried out by the auditor using a computer

Question 12

What are the benefits and drawbacks of using automated tools and techniques?

Answer 12

+, allows large volumes of data to be analyzed at great speed= more efficient

-, require quality data for input otherwise the output of the process will not be reliable. Skills and experience are required to both administer and interpret the findings.

Question 13

What is audit software?

Answer 13

software used by the auditor to perform testing on a client’s financial systems and data.

Question 14

What are data analytic tools?

Answer 14

the use of technology to interrogate entire data sets

Question 15

What are some examples of data analytic tools?

Answer 15

• Inspecting journals to see patterns that indicate fraud
• Analyzing data sets for information on specific products, employees, or times for the purpose of identifying fraud or error.

Question 16

What is audit sampling?

Answer 16

is applying audit procedures to less than 100% of items within an account balance or class of transactions in such a way as to draw a conclusion on the account balance or class of transactions as a whole.

Question 17

What is statistical sampling?

Answer 17

an approach to sampling that involves random selection of the sample items and the use of probability theory to evaluate sample results including measurement of sampling risk.

Question 18

What is the key rule of audit sampling?

Answer 18

that all ‘sampling units’ must have an equal chance of being selected for testing.

Question 19

What are sampling units?

Answer 19

are the individual items constituting a ‘population’.

E.g. a single receivable balance within total receivables or an individual sale within total revenue.

Question 20

what is non-statistical sampling?

Answer 20

is the use of judgement to select a sample instead of a statistical technqiue

Question 21

What is stratification?

Answer 21

is dividing a population into smaller sub-populations, each of which is a group of sampling units, usually by value.

Question 22

What are some common methods of sampling?

Answer 22

• Random selection
• Systematic selection
• Haphazard selection
• Monetary unit sampling
• Block selection

Question 23

What is random selection? And what are the pros and cons?

Answer 23

the auditor uses a computer program or table to randomly select a sample.

+ eliminates bias by relying on a mathematically-selected sample

• requires IT expertise or the use of specialist maths tables to generate the sample

Question 24

What is systematic sampling? And what are the pros and cons?

Answer 24

auditor randomly selects the first item and then selects all the others systematically after that.

E.g. auditor might pick the fifth receivable on the list of trade receivables and then every fifth or tenth after that.

+ ignores patterns and treats every item of the population the same way, eliminating bias

• still requires some judgment to determine the starting position and sampling interval so still may not be fully representative

Question 25

What is haphazard selection? And what are the pros and cons?

Answer 25

this approach most likely allows audit bias to kick in. This is a method by which an auditor picks a sample with no structured technique, this is random, however, this increases human bias.

+ is good for targeting your sample

• can still generate a biased and non-representative sample

Question 26

What is MUS sampling?

Answer 26

a value-weighted selection, so every nth £ is selected, rather than every nth receivable.

Question 27

What is block selection? And what are the pros and cons?

Answer 27

involves selecting a block of continuous items (e.g. just selecting April’s invoices). This is rarely an appropriate sample technique, as April’s invoices may have different characteristics from the rest of the year and are not therefore representative of the whole population.

+ useful if interrogating a defined group of data.

• ignores the characteristics of data from outside that block

Question 28

What is meant by confidence level?

Answer 28

when using a sample, the auditor has to be sufficiently confident that the results given by a sample reflect the results that would be given by testing the whole population.