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adm 3349 > chap 6 > Flashcards

chap 6 Flashcards

1
Q

audit sampling def

A

the application of audit procedures to less than 100% of items within a pop

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2
Q

Audit sampling and audit plan

A
  1. when creating an audit plan, auditor decides how to select appropriate items for testing
  2. if pop consists of small numbers of large dollar value, audtr will test all the items within the group of transactions or within an account balances.
  3. some cases do not require sampling. Audtr use audit data analytics to examine entire population

4.when too many trsn best use sampling as not possible or appropriate to test entire pop

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3
Q

Audit analytics VS sampling

A
  1. quality of data
    if reliable, accurate and complete data available from effective internal controls, then data analytic appr.
  2. availability of data.
    if data is readily available, more efficient to perform data analytics. otherwise if not readily available or will take time to produce the data, better to use audit sampling.

3.nature of data and account
if pop size is large and dataset available mostly in electronic form, better to data analytics. if pop is small and data not in electronic form, then effective to use audit sampling

  1. Auditing standards
    some components like inventory do require sampling
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4
Q

requirement of sampling

A

need to select a sample that is representative of the entire pop of items available for testing

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5
Q

Audit Risk types of sampling risks

A

Consist of two elements related to sampling

  1. sampling risk
  2. non sampling risk
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6
Q

sampling risk def

A

risk that the sample is not representative of the pop available for testing and thus the auditor draws an inappropriate conclusion

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7
Q

consequences of sampling risk

A
  1. ineffective audit
  2. inefficient audit
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8
Q

sampling risk and test of control def

A

risk that audtr relies on internal control systems when they should not

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9
Q

CASE 1
audtr concludes that controls are effective when they are not

A
  1. adtr concludes that internal controls are more effective than they are , and thus they will rely more on internals controls to identify and correct MM
  2. as a result, control risk is lowered and will reduce reliance on substantive testing.
  3. makes audit ineffective as adtr procedures will not detect MM (risk of misstatement is greater than auditor’s assessment)
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10
Q

CASE 2
audtr concludes that controls are ineffective when they are

A
  1. adtr concludes that internal controls are less effective than they are , and thus they will rely less on internals controls to identify and correct MM
  2. as a result, control risk is set high and will increase reliance on substantive testing.
  3. makes audit inefficient as adtr does more substantive procedure work than necessary
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11
Q

sampling risk and substantive procedures def

A

1risk that audtr concludes that MM does not exist when in fact it exists

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12
Q

CASE 1
audtr concludes that MM does not exist when in fact it exists

A

audit ineffective as adtr will give inappropriate opinion that fs is free from MM

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13
Q

CASE 2
audtr concludes that MM does exists when in fact it does not exist

A

adtr will increase reliance on testing and conduct extensive testing to uncover errors. this reduces audit efficiency

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14
Q

non sampling risk def

A

arises when adtr will reach inappropriate conclusion caused by reason other than sampling risk

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15
Q

causes of non sampling risk

A
  1. spending too less time on areas identified as materially at risk
  2. relying too much on unreliable evidence
  3. using inappropriate audit procedures
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16
Q

non sampling risk when testing controls

A
  1. adtr will use inaappr. tests that do not provide evidence on the effectiveness of the controls
  2. example: when testing for validity of password to restrict unauthorized access, adtr is observing authorised personnel entering password. instead they should try to inout incorrect password to see of access is denied
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17
Q

non sampling risk and substantive procedures

A
  1. rely on less persuasive evidence
  2. spend less time on assertions identified ashaving high MM e.g inventory pf jewels….adtr focussing on completeness rather than existence
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18
Q

Statistical sampling def

A

involves random selection and probability theory to evaluate the results, including sampling risk

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19
Q

Statistical sampling explained

A

1.adtr do not use judgement

  1. adv: can measure sampling risk(risk of not having a representative sample)
  2. disad: too costly
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20
Q

non- Statistical sampling def

A

1.NO characteristics of statistical sampling and allows the audtr to use judgement in choosing the most sample they believe is most appropriate.

  1. More likely used when account is low risk and corroborating evidence available

3.. advs: easy to use, less costly, less training

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21
Q

Statistical sampling technique

  1. random sampling
A
  1. Results free from bias and each item from pop has an equal chance of selection
22
Q

Statistical sampling technique

  1. stratified random sampling
A
  1. AUDTR include stratification. to divide the pop into groups of smaller sampling units with similar characteristics
  2. ensure that audtr include certain items with characteristics like materiality in the testing
23
Q

non statistical technique
Haphazard selection def + explained

A
  1. does not involve methodical technique when selecting sample
  2. non statistical technique as bias in involved as audtr will be prone to avoid including seating items
24
Q

non statistical technique
Block selection

A

1.selecting items that are grouped together within the pop

  1. non statistical as items are sorted in sequence e.g choosing creditors ordered alphabetically
25
Q

non statistical technique
judgement selection

A

selection of sample based on audtr judgement

important when dealing with large or unusual items

26
Q

factors to consider when selecting sample

A
  1. control risk and detection risk assessed
  2. the assertion tested
    e.g testing existence for inventory–> chose inventory listing
    completeness testing–>choose physical inventory
  3. tolerable error (audtr willing to accept the max error within a pop) /MM within a pop
27
Q

Factors that Influence Sample Size – Testing Controls

A

1.extent to which to which internal controls are effective in reducing MM

  1. the level of deviation rate in the prescribed control activity

3.the expected rate of deviation of the pop to be tested

  1. the adtr required confidence level
  2. the number of sampling units in the pop
28
Q

1.extent to which to which internal controls are effective in reducing MM/ Testing Controls

A

if adtr concludes that controls are effective when dealing with MM, then it will rely more in control testing than substantive testing. as a result audit increases sample size

29
Q
  1. the level of deviation rate in the prescribed control activity/ Testing Controls
A

1.deviation is the % of the controls that do not match the clients prescribed control produces ( the abnormal items)

2.inverse relationship between deviation rate and sample size

  1. if adtr relying on controls, tolerable deviation rate set low and thus sample size will be increased to evidence for the effectiveness of the .
  2. if to increase reliance on substantive testing, then tolerable deviation rate is increased, sample size is decreased when testing control///if auditor is willing to tolerate a higher deviation rate for that control then decrease sample size
30
Q

3.the expected rate of deviation of the pop to be tested/ Testing Controls

A

if auditor expects to have a higher rate of deviation compared to previous audit, then increase sample size

31
Q
  1. the adtr required confidence level/ Testing Controls
A

when control risk is assessed low, audtr confidence level is high.

audtr relies on controls to prevent and detect MM, then sample size increases to test effectiveness of the control

32
Q
  1. the number of sampling units in the pop/ Testing Controls
A

when pop is large and homogeneous, increasing sample size does not make any difference

33
Q

Factors that Influence Sample Size - Substantive Testing

A
  1. risk assessment of MM
    2.use of substantive procedures directed to the same assertion
    3.required confidence level of audtr
    4.total tolerable error
    5.Amt of error expected in the pop
    6.stratification of the pop
    7.the number of sampling units in the pop
34
Q

1.risk assessment of MM/Substantive Testing

A

the higher the risk of inherent risk and control risk, audtr will place greater reliance on substantive testing. thus will increase sample size

35
Q

2.use of substantive procedures directed to the same assertion/Substantive Testing

A

when audtr applies more than one audit procedure to the same assertion, does not need much evidence from one testing only. thus reduce sample size

36
Q

3.required confidence level of audtr/Substantive Testing

A

depending on the detection risk set based on the control risk and inherent risk , the adtr will decide on th level of substantive testing. if greater confidence level required, sample size will be needed

37
Q

4.total tolerable error adtr willing to accept/Substantive Testing

A

1.increases tolerable error, then decreases sample size as they are not relying on the testing to provide evidence

38
Q

5.Amt of error expected in the pop/Substantive Testing

A

1.when the likelihood that the MM is high in the pop, increase sample size to gain a better estimate of the actual misstatement. occurs when acc includes complex calculations, estimations and valuation techniques

39
Q

6.stratification of the pop/Substantive Testing

A

increases the efficiency of audit. thus smaller sample size required

40
Q

7.the number of sampling units in the pop/Substantive Testing

A

homogenous and large sample, increasing sample size does not bring significant value to the audit

41
Q

techniques for performing subs tests

A
  1. key item testing
  2. respresentive sampling
42
Q
  1. key item testing exp.
A

Using statistical basis or prof judgement to identify and select key items within a balance. often focus is on largest trsn e.g major supplier A makes 92% of the the creditors balance. thus adtr will test the acc

43
Q
  1. respresentive sampling exp.
A

1.after segregation of key items, large number of trsn which are individually unimportant but have a great significant in total.

2.when key item testing does not help adtr to reach a conclusion abt MM for the pop, then the adtr will use sampling from the remaining pop (after removing the key items).

3.this is called representative sampling . sample should be large enough to attain the audit obj.

  1. has 3 sampling strategies : representative sampling using audit tables, attribute sampling, variable estimations to select items to test
  2. these strategies are dependent on adtr expectation of errors and overall adt obj.
44
Q

Tests of Controls and Substantive Procedures

A

1.adtr will develop adt strategy after gaining understanding of the client internal controls and business.

  1. this helps adtr to determine inherent risk and control risk and the adt risk.

3.when control risk is high, adtr will do limited of no control testing and will rely on extensive detailed substantive procedures. adtr will adopt substantive strategy

4.when control risk is low, adtr will do limited of no control testing and will rely on extensive detailed substantive procedures. adtr will adopt combined strategy. adtr will conduct extensive control testing to evaluate effectiveness of control systems and reduce reliance on detailed substantive testing

45
Q

3 types of substantive procedures

A

1.substantive test of trsn
2. substantive test of account
3. analytical procedures

4.When CR is lower, auditor can rely more on analytical procedures and less on detailed substantive tests of transactions and balances

5.Analytical procedures are more efficient than substantive tests and place greater reliance on client’s accounting records

46
Q

read pg 6-19,6-20,6-21

A
47
Q

Nature, Timing, and Extent of Audit Test

A
  1. nature refers to the purpose of the test (e.g test controls, trsn or balances) and procedures used
  2. timing is the stage of the audit when the audit procedures are performed and the date (within or outside the acc period ) the audit evidence relate to

3.extent is the amt of evidence gathered when testing controls and conducting detailed subs. procedures

48
Q

Nature

A

1.purpose of the test and procedure used

  1. also depend on the assertion being tested
  2. the higher the risk of MM, the greater the use of adt procedures to obtain most persuasive audit evidence
  3. the less risk of MM and the more effective the controls, the less will adtr rely on substantive procedure and the more on analytical procdure. this is because more efficient, less costly.
49
Q

Timing

A

1.Interim testing usually done for:
Control testing
Low-risk accounts

2.Year-end testing usually done for:
High-risk accounts
Accounts affected by high deviations in control tests
Cut-off assertion

50
Q

extent

A

when cr low, adtr increases extent of their testing of controls and if it proves to be effective, adtr will reduce extent of substantive testing and eventually more on analytics.procedures

adm 3349 (9 decks)

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