Audit Procedures And Sampling

Question 1

Substantive procedures

Answer 1

Substantive procedures are particularly important when internal controls do not operate effectively

Substantive procedures are tests to obtain audit evidence to detect material misstatements in the financial statements

Substantive procedures are generally of two types;
Tests of details of transactions, account balances and disclosures
Analytical procedures

Question 2

Directional testing

Answer 2

Tests to discover errors:

They start with accounting records in which transactions are recorded
Such tests should detect any overstatement and understatement through causes than other omission

Tests to discover emissions:
These test must start from outside the accounting records and then matched back to these records
Such tests will only detect understatements through omission

Question 3

Directional testing

Answer 3

The concept of directional testing derived from the principle of double entry bookkeeping, in that for every debit there should be a corresponding credit

Therefore any misstatement of a debit entry will result in either a corresponding misstatement of a credit entry or a misstatement in another debit entry

Directional testing is particularly appropriate when testing assertions of; 
Existence 
Completeness 
Rights and obligations
Valuation

Question 4

Analytical procedures

Answer 4

Analytical procedures can be performed using various techniques, ranging from
Simple comparisons to complex analyses using advanced statistical techniques

Ratio analysis - important to compare against other ratios
Examining related accounts - ie revenue and expenses
Trend analysis
Reasonableness test - calculate expected value of an item and compare it with its actual value ie for deprecation check that

Question 5

ISA 520 states thag when using analytics procedures as substantive tests, the auditor must;

Answer 5

Determine the suitability of particular analytical procedures

Evaluate the reliability of data

Develop an expectation of recorded amounts or ratios and evaluate whether this is sufficiently precise to identity misstatements- processional judgement

Judge whether the amount of any difference found is acceptable without further investigation

Question 6

The need for sampling

Answer 6

Auditors usually seek evidence from less than 100% of items of the balance or transaction being tested by using sampling techniques

They select items by usuifn ISA 500 three methods:

Testing 100% of items in a population

Testing all items with a certain characteristic:
High value item / key item / items over a certain amount

Audit sampling

Question 7

Audit sampling

Answer 7

Audit sampling is the application of audit procedures to less than 100% of items within a population 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

The population is the entire set of data from which a sample is selected

Sampling unit is the individual items constituting a population

Question 8

Statistical and non stat sampling

Answer 8

Audit sampling can be done using either stat sampling or non stat sampling

Statistical sampling is an approach to sampling that has the following characteristics;
Random selection of the sample items
The use of probability theory to evaluate sample results, including measurement of sample risk

Non stat sampling is a sampling approach that does not have these characteristics (ie each item in the population does not have an equal chance of selection)

Question 9

Design of the sample and risks

Answer 9

Main methods of sampling are:

Random selection - equal chance of selection for items
Systematic selection - use of constant intervals between selections
Haphazard selection - alternative to random selection

Sampling risk - the risk that the auditors conclusions based on a sample may be different from his conclusion if the entire population was tested

Non sampling risk - the risk that the auditor reaches to an erroneous conclusion for any reason not related to sampling risk (ie inappropriate audit procedures)

Question 10

Computer assisted audit techniques

Answer 10

Computer assisted audit techniques are applications of audit procedures using the computer as an audit tool

Audit software (which can be generalised or custom) - eg

Perform calculations and comparison in analytical procedures
Sampling program to extract data for audit testing
Scan a file to search for large and unusual items
Compare data elements in different files for agreements
Reperform calculations