Chapter 11 - Evidence and Sampling

Question 1

What are the two types of tests?

Answer 1

1. Test of controls - procedures over the numbers
2. Substantive procedures
   a. Test of detail
   b. Test of analytical procedures

Question 2

What does ISA 500 say? (2)

Answer 2

ISA 500 states that evidence must be sufficient and appropriate.
 Sufficiency is the measure of the QUANTITY (enough) of audit evidence.
 Appropriateness is the measure of the quality or relevance and reliability of the audit evidence.

Reliable = e.g. 3rd party/external better than audit generated, original copy, written

Question 3

What are Computer Assisted Audit Techniques (CAATs)?

Answer 3

Techniques using computers to perform audit procedures, including test data, audit software, and data analytics.

Question 4

What is the purpose of “Test Data” in CAATs?

Answer 4

To test the integrity of the client’s system by posting data onto it to see if transactions are correctly processed.

e.g. Password controls – to see if unauthorised users can access key areas of the system

auditors will try to ‘break’ the client system

Question 5

What is an example of “Audit Software” in CAATs?

Answer 5

Audit software – this is where the auditor uses his own computer programmes to substantively test a balance or transaction.

e.g. The most commonly used form of audit software is the spread sheet, which can check the correct casting (addition) of a set of numbers or facilitate sample selection and ratio calculations.

clients data on audio system/software
install on clients or auditors computer

Question 6

What is the purpose of “Data Analytics” in CAATs?

Answer 6

To identify patterns or trends, helping auditors review 100% of the data population and detect anomalies.

This is the future of auditing

e.g.
Analyse sales trends by product or region
Auditors could also ‘mine’ the client’s systems to identify unusual events, anomalies and red flags
Review staff emails within the entity helping identify risk of fraud via key words
Using external information such as a flurry of ‘Tweets’ on Company X helping identify an environmental issue affecting the company!

Question 7

When should analytical procedures be used according to ISA 520?

Answer 7

MUST be used at the planning stage for risk assessment and as part of substantive procedures. Helps to understand entity and risk.

Question 8

What are some sources of information used in analytical procedures? (6)

Answer 8

 Interim financial information
 Previous financial statements
 Budgets
 Management accounts
 Non-financial information
 Board minutes

Question 9

What factors should auditors consider when using analytical procedures as substantive procedures?

Answer 9

The objective of the analytical procedures, the suitability of the procedures, and the reliability of the data used.

Objectivity e.g. if we are looking at depreciation in SOFP looking at valuation, in SOPL looking at accuracy
Reliability - Because unreliable data may lead to incorrect conclusions, compromising the effectiveness of the audit.

Question 10

Why is the reliability of data important in substantive analytical procedures?

Answer 10

Because unreliable data may lead to incorrect conclusions, compromising the effectiveness of the audit.

Question 11

What should auditors do if analytical procedures identify significant fluctuations or unexpected relationships?

Answer 11

Investigate further to determine the cause of these inconsistencies and assess their impact on the financial statements.

Question 12

What are the two main possibilities when testing items in financial statements?

Answer 12

Fairly stated or Misstated
If misstated: can be overstated or understated.

Question 13

How does the approach differ for testing overstatement versus understatement?

Answer 13

Overstatement tests focus on existence (SOFP) /occurrence (SOPL), while understatement tests focus on completeness (SOFP and SOPL)

Question 14

What is the general order or reliability in terms of sources? (3)

Answer 14

1. 3rd party generated
2. Auditor
3. Client

Question 15

In respect of an assurance engagement, which one of the following is the least persuasive method of gathering evidence?
A Inspection of a purchase invoice
B Inspection of a sales invoice
C Inspection of inventory by the auditor
D Re-performance of a supplier statement reconciliation undertaken by the client

Answer 15

B Inspection of a sales invoice - client generated

Question 16

Why do auditors audit accounting estimates? What are some figures that might be estimated?

Answer 16

Because estimates involve judgement and can significantly impact reported profits.

e.g. those for product warranties, depreciation, inventory or receivables provisions

Question 17

What are common procedures for testing estimates? (4)

Answer 17

Common audit procedures used to test estimates include:
 Review the process used by management to develop the estimate for reasonableness
 Use an independent expert to make an estimate for comparison
 Review the accuracy of prior year’s estimates compared to the final actual results
 Review subsequent events for events that help to confirm the accuracy of the estimate

Question 18

Define Audit sampling

Answer 18

Audit sampling: The 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 the auditor with a reasonable basis on which to draw conclusions about the entire population.

Question 19

Define Population

Answer 19

Population is the entire set of data from which a sample is selected and about which an auditor wishes to draw conclusions.

Question 20

What are the two key features of statistical sampling?

Answer 20

An approach to sampling that has the following characteristics:
(i) RANDOM selection of the sample items; and
(ii) The use of PROBABILITY THEORY to evaluate sample results, including measurement of sampling risk.

Question 21

What is considered as non-statistical sampling?

Answer 21

A sampling approach that does NOT have characteristics of random or probability theory is considered non-statistical sampling.

Question 22

According to ISA 530, how should auditors select items for sampling?

Answer 22

Auditors should select items in such a way that each sampling unit in the population has a chance of selection.

Question 23

Why must the population from which the sample is drawn be appropriate and complete?

Answer 23

To ensure that the sample can accurately reflect the population and meet the specific audit objectives without any misstatement or error.

Question 24

What are “sampling units” in the context of auditing?

Answer 24

Sampling units are the individual items that make up a population for audit sampling purposes.

Question 25

Define Misstatement

Answer 25

Misstatement: a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.

Question 26

Define Error

Answer 26

Error: an unintentional misstatement in financial statements, including the omission of an amount or a disclosure.

Question 27

What 4 factors can increase the sample size required for an audit?

Answer 27

1. Higher risk of material misstatement
2. a higher desired level of assurance
3. greater expected misstatements in the population
4. reduced use of analytical procedures.

Question 28

If I am testing for reasonable assurance how will the impact my sample size?

Answer 28

reasonable assurance = INCREASED sample size

Question 29

If I am testing for limited assurance how will the impact my sample size?

Answer 29

limited assurance = DECREASED sample size

Question 30

What are the 5 main sampling methods? What can it be broken down into?

Answer 30

Can be broken into
1. STATISTICAL
a. Random
b. Systematic
c. Monetary Unit Sampling

2. NON-STATISTICAL
   a. Haphazard
   b. Sequence or block

Question 31

What is “Random Selection” in sampling, and how is it achieved?

Answer 31

STATISTICAL

Random selection ensures that all items in the population have an equal chance of selection. It is often achieved using random number tables or a computerised generator.

Question 32

What is an example of “Systematic Selection” in sampling?

Answer 32

STATISTICAL

Selecting every 10th sales invoice is an example of systematic selection, where items are chosen at a constant interval.

Question 33

How does “Sequence or Block Selection” work, and when might it be used?

Answer 33

NON-STATISTICAL

Sequence or block selection involves selecting consecutive items, like a block of 50 cheques, to check for characteristics such as authorisation. It is useful for detecting patterns within consecutive items.

Question 34

What is “Haphazard Selection” and what is its main drawback?

Answer 34

NON-STATISTICAL

Haphazard selection is an alternative to random selection where the auditor uses judgement to choose samples. However, it carries a risk of bias.

Question 35

What is “Monetary Unit Sampling (MUS)” and why is it used?
How is this calculated?

Answer 35

STATISTICAL

MUS is a sampling method that gives every £1 in the population an equal chance of being selected. It is useful for testing large transactions in monetary terms.

Let’s say we are test my TR account which has a balance of 500k, we are testing materiality at 50k. I would select the balances containing each 50,000th £1 from the TR ledger. I would add up the cumulative total and ensure I test one invoice from 0-50k, 50-100, 100-150 etc. The cumulative column shows me when the next 50,000th £1 has been reached, so I know if I should select a customer/invoice.

In relation to materiality we set a base e.g. all transactions above 50k, we then look at my sample of all above 50k and do random selection of items within this.

Question 36

When determining a sample size for tests of detail there are a number of factors that an auditor should take into account.
For each of the following factors, select whether it would cause the sample size to increase or decrease.

(i) Decrease in the assessed level of tolerable misstatement.
(ii) Increase in the assessed risk level.
(iii) Discovery of more misstatements during testing

Answer 36

(i) Decrease in the assessed level of tolerable misstatement.
INCREASE - tolerable mistake = prepared to accept

(ii) Increase in the assessed risk level.
INCREASE

(iii) Discovery of more misstatements during testing
INCREASE

Question 37

What is the purpose of audit sampling?

Answer 37

The purpose of audit sampling is to enable conclusions to be drawn from an entire population by testing a representative sample.

Question 38

What must auditors do after testing a sample of items?

Answer 38

Auditors must project the misstatement results from the sample onto the relevant population to estimate the probable misstatement.

Question 39

How do auditors estimate probable misstatement in the population?

Answer 39

Auditors estimate probable misstatement by extrapolating the misstatements found in the sample to the entire population.

Question 40

What should auditors do if the projected population misstatement exceeds or is close to the tolerable misstatement?

Answer 40

Auditors should consider extending auditing procedures or performing alternative procedures.

Question 41

Why is it important to compare projected misstatements to tolerable misstatements?

Answer 41

It helps determine if further audit work is required to ensure that financial statements are free from material misstatements.

Question 42

1. What is the purpose of audit sampling?
2. What must auditors do after testing a sample of items?
3. How do auditors estimate probable misstatement in the population?
4. What should auditors do if the projected population misstatement exceeds or is close to the tolerable misstatement?
5. Why is it important to compare projected misstatements to tolerable misstatements?

Answer 42

COMMONLY TESTED

1. The purpose of audit sampling is to enable conclusions to be drawn from an entire population by testing a representative sample.
2. Auditors must project the misstatement results from the sample onto the relevant population to estimate the probable misstatement.
3. Auditors estimate probable misstatement by extrapolating the misstatements found in the sample to the entire population.
4. Auditors should consider extending auditing procedures or performing alternative procedures.
5. It helps determine if further audit work is required to ensure that financial statements are free from material misstatements.

Question 43

What does Tolerable misstatement mean? What impact does this have on sampling

Answer 43

Tolerable misstatement is the maximum amount of misstatement in a financial statement item or account balance that auditors are willing to accept without altering their conclusion on the overall financial statements. It represents a threshold of error that would not affect the fairness or reliability of the financial statements as a whole.

Key Points:
Purpose: Tolerable misstatement helps auditors set boundaries on the acceptable level of error for individual accounts or classes of transactions, ensuring that even if misstatements occur, they won’t materially mislead users of the financial statements.

Determination: Auditors set tolerable misstatement levels based on the overall materiality for the financial statements. Generally, it is a percentage of the materiality amount and is applied to individual accounts or transactions.

Use in Sampling: When auditors project misstatements from sample results, they compare the projected misstatement to the tolerable misstatement. If the projected misstatement exceeds the tolerable limit, additional audit procedures may be needed.

In summary, tolerable misstatement is a safeguard used by auditors to ensure that minor errors do not impact the decision-making of users of financial statements.

Question 44

When auditing trade receivables the following was noted:
Value of population £1,000,000
Sample value £100,000
Errors found £ 10,000
Calculate the expected error in the population

Answer 44

10,000/100,000 × 1,000,000 = 100,000
If tolerable error was £60,000 – this expected error would cause some concern and require the sample size to be increased.

10% error rate, if I extrapolate this to value of population on £1million x 10% = 100k. If 100k is over 60k (the allowed amount of error) I will need to do further investigations = more testing.

Question 45

Danielle has carried out a receivables circularisation on Donothing plc to gain evidence about the receivables balance stated in the draft balance sheet. Identify whether the following conclusions drawn by her are correct or not.

a. An amount disagreed by Lazy Limited because an invoice had been paid two days before the year end and cleared shortly after the year end, did not constitute a misstatement for the purposes of drawing a conclusion for the whole population.

b. An amount disagreed by Sloth Limited because a credit note had been issued by Donothing plc a month before the year end did not constitute a misstatement for the purposes of drawing a conclusion for the whole population.

c. An amount disagreed by Busy Limited because they had paid the balance some time earlier, which further enquiry revealed had been posted to a different customer account, did constitute a misstatement for the purposes of drawing a conclusion for the whole population.

Answer 45

(a) True – this is just a timing difference.

(b) False – this indicates that the credit note may not have been processed to the sales ledger, which would be an error that could also be true of other potential credits due on the ledger.

(c) False – this error does not affect the overall balance on the ledger.

Question 46

What is the auditor’s responsibility regarding identified misstatements according to ISA 450?

Answer 46

The auditor must evaluate the effect of identified misstatements on the audit and consider their impact on the financial statements as a whole

Question 47

What must auditors do with uncorrected misstatements during an audit?

Answer 47

Auditors must accumulate any non-trivial uncorrected misstatements and evaluate whether, in total, they are material to the financial statements.

Question 48

What factors should auditors consider when determining if a misstatement is material?

Answer 48

Auditors should consider the size, nature, and specific circumstances of the misstatement.

Question 49

Can a misstatement be considered material even if it is below the materiality threshold?

Answer 49

Yes, certain circumstances may cause auditors to consider a misstatement material even if it is below the typical materiality threshold.

Question 50

Give examples of circumstances that might make a misstatement material (6)

Answer 50

1. Affects compliance with regulatory requirements e.g. banks needing to have certain amount of capital
2. Affects compliance with debt covenants or other regulatory requirements
3. Masks a change in earnings or other trends
4. Affects ratios used to evaluate the entity’s financial position - affect shareholder ratios
5. Involves management’s compensation
6. Related party transactions

Question 51

What change in auditing practices was enforced due to the pandemic?

Answer 51

The pandemic enforced remote auditing practices due to lockdowns, leading to a shift from traditional in-person audits.

Question 52

Is it permissible to use electronic signatures on audit documents during remote audits?

Answer 52

Yes, it is permissible to use electronic signatures on documents, including the auditor’s report.

Question 53

What precautions should be taken when using video conferencing in remote audits?

Answer 53

Video conferencing should be secure to protect the confidentiality and integrity of the audit process.

Question 54

What additional audit risk factors must be considered during the pandemic?

Answer 54

Auditors need to consider factors like the impact of the pandemic on going concern, as well as other unique risks introduced by the remote working environment.

Question 55

How might client home working arrangements affect internal control systems?

Answer 55

Home working can impact the effectiveness of a client’s internal control systems, requiring auditors to assess these impacts carefully.

Question 56

Why is there an increased need for professional scepticism in remote auditing?

Answer 56

Remote conditions and the pressures of the pandemic may increase the risk of fraud, so auditors must exercise heightened professional scepticism.

Question 57

Which two of the following should be determined as material uncorrected misstatements?
A An isolated misposting between two supplier accounts which is below materiality
B A misstatement which is below materiality and results in director’s bonus targets being met
C An immaterial misstatement of assets which results in a debt covenant not being breached
D The monthly bank reconciliation was not prepared in August as the cashier was on holiday

Answer 57

B A misstatement which is below materiality and results in director’s bonus targets being met
C An immaterial misstatement of assets which results in a debt covenant not being breached

Question 58

1 Which two of the following statements are correct?
A Inspection of assets confirms rights and obligations
B Inspection of a purchase invoice confirms the cost of inventory
C Observation gives strong ongoing evidence of the matter being observed
D Inquiry of third parties gives better evidence than inquiries of entity insiders

Answer 58

B Inspection of a purchase invoice confirms the cost of inventory
D Inquiry of third parties gives better evidence than inquiries of entity insiders
Inspection of assets does not confirm rights and obligations as the asset might be possessed wrongfully or leased and inspection will not show that. Observation gives only weak evidence of the matter being observed and only at the moment the matter was being observed, not the next time it is done, unobserved.

Question 59

In which three of the following situations could audit software appropriately be used?
A When checking calculations on a selection of invoices
B When extracting a sample of invoices over a certain value
C When extracting all invoices to specific customers
D When testing controls over invoice processing

Answer 59

A When checking calculations on a selection of invoices
B When extracting a sample of invoices over a certain value
C When extracting all invoices to specific customers
The fourth option is not correct as test data, as opposed to audit software, is used to test controls over processing.

Question 60

4 Which one of the following procedures would be the most appropriate for verifying the interest accrued on borrowings?
A Confirming the interest rate with the lender
B Vouching to the interest paid
C Testing internal controls over cash payments
D Recalculating the interest accrued on the basis of outstanding amount, interest rate and period to which it relates

Answer 60

D Recalculating the interest accrued on the basis of outstanding amount, interest rate and period to which it relates
Recalculating the interest accrued on the basis of outstanding amount, interest rate and period to which it relates would be the most appropriate for verification of the interest accrued on borrowings. Confirming the interest rate with the lender would not verify the total interest accrued balance (as the interest rate is only one component of the calculation) nor would vouching the interest payment (as interest paid is not the same as interest accrued). Testing the internal controls over cash payments would not lead to direct verification of the interest accrued.

Question 61

Which two of the following statements are correct?
A When testing for overstatement, the assurance provider will test items from the accounting records to the supporting documents.
B When testing for understatement, the assurance provider will test items from the accounting records to the supporting documents.
C When testing for overstatement, the assurance provider will select items from outside the accounting records and trace to the records.
D When testing for understatement, the assurance provider will select items from outside the accounting records and trace to the records.

Answer 61

A When testing for overstatement, the assurance provider will test items from the accounting records to the supporting documents.
D When testing for understatement, the assurance provider will select items from outside the accounting records and trace to the records.
When testing for overstatement (ie, seeking to discover errors), the assurance provider will test items from the accounting records to the supporting documents. When testing for understatement (ie, seeking to discover omissions), the assurance provider will select items from outside the accounting records and trace to the records.

Question 62

7 The assurance provider is using statistical sampling.
Which three of the following methods would be most appropriate to use to select a sample of accounts receivable?
A Random selection
B Systematic selection
C Haphazard selection
D Sequence selection
E Monetary unit selection

Answer 62

7 Correct answer(s):
A Random selection
B Systematic selection
E Monetary unit selection
Sequence sampling would more commonly be used in testing controls. Haphazard selection should not be used when the assurance provider is using statistical sampling.

Question 63

9 For each of the following statements concerning computer–assisted audit techniques (CAATs), select whether they are true or false.
CAATs can be used to perform the assurance procedure of ‘reperformance’.
A True
B False
Test data can be used to ensure that controls in the client’s system are operating as the assurance provider expects them to.
C True
D False
Audit software makes use of the client’s specialised software to run audit procedures.
E True
F False

Answer 63

A True
C True
F False
Audit software makes use of the assurance provider’s own specialised software. It can extract and analyse information from the client’s system. Test data is used to test controls by inputting data which should activate a control and checking that it does so.

Question 64

11 When determining a sample size for tests of controls, there are a number of factors which an auditor should take into account.
For each of the following factors, select whether it would cause the sample size to increase, decrease, or to have negligible effect.
An increase in tolerable misstatement
A Increase
B Decrease
C Negligible effect
An increase in the number of invoices in the population
D Increase
E Decrease
F Negligible effect
A decrease in the auditor’s required confidence level
G Increase
H Decrease
I Negligible effect

Answer 64

B Decrease
F Negligible effect
H Decrease

For tests of controls:
* An increase in tolerable misstatement will cause a decrease in sample size as an increase in the amount of ‘acceptable misstatements’ (or audit risk acceptable) will reduce the extent of the work necessary to be performed (as there is a corresponding acceptable increase in detection risk).
* An increase in the population will have a negligible effect on sample size as it is not a factor that determines the sample size.
* A decrease in the auditor’s required confidence level will lead to a decrease in sample size.

Question 65

12 Which two of the following statements are correct regarding factors which influence sample sizes for tests of controls?
A An increase in the number of sampling units within the population will increase the sample size.
B A decrease in the expected misstatement will decrease the sample size.
C A decrease in the tolerable misstatement will decrease the sample size.
D An increase in the extent to which the risk of material misstatement is reduced by the operating effectiveness of controls will decrease the sample size.

Answer 65

B A decrease in the expected misstatement will decrease the sample size.
D An increase in the extent to which the risk of material misstatement is reduced by the operating effectiveness of controls will decrease the sample size.
Per ISA (UK) 530, regarding factors influencing sample sizes for tests of controls:
* An increase in the number of sampling units will have a negligible effect on the sample size.
* A decrease in the tolerable misstatement will increase sample size.

Question 66

13 For each of the following statements, select whether they are true or false in respect of procedures to obtain evidence.
Physical examination of property, plant and equipment confirms ownership.
A True
B False
Recalculation is a strong form of evidence as it is created by the assurance provider.
C True
D False
Inquiry is always an unreliable means of obtaining evidence.
E True
F False

Answer 66

B False
C True
F False
Physical examination of property, plant and equipment confirms existence (it may belong to a third party). The reliability of inquiry depends on who is providing the information. A third party eg, a bank would normally be a reliable source.

Question 67

15 All methods of obtaining evidence have deficiencies. Examples of these are listed below.
For each deficiency, select the method of obtaining evidence which is most likely to result in that deficiency.
Limited to the point in time it takes place
A Performing analytical procedures
B Observation of a procedure
Limited by the underlying accounting system
C Performing analytical procedures
D Observation of a procedure
A balance which is overstated may be agreed because it favours the respondent E Direct confirmation of a receivables balance
F Direct confirmation of a payables balance

Answer 67

B Observation of a procedure
The weakness of observation of a procedure is that the conclusion drawn as a result only applies to the system at the time the observation took place – hence it is limited to the point in time it takes place.

C Performing analytical procedures
The usefulness of the performance of analytical procedures is limited by the underlying accounting system which generates the balances under review.

F Direct confirmation of a payables balance
A respondent will agree to an overstated balance if that is direct confirmation in respect of a payables balance (they would disagree if the amount they owed – ie, a receivables balance – were overstated).

Question 68

16 In accordance with ISA (UK) 315, (Revised) Identifying and Assessing the Risks of Material Misstatement and ISA (UK) 520, Analytical Procedures, select whether analytical procedures are compulsory or optional in each of the following circumstances.
At the risk assessment stage of the audit
A Compulsory
B Optional
As a substantive procedure
C Compulsory
D Optional
At the overall review stage of the audit
E Compulsory
F Optional

Answer 68

A Compulsory
D Optional
E Compulsory

Per ISA (UK) 315 (Revised), analytical procedures must be used at the risk assessment stage of an audit. Per ISA (UK) 520, they must also be used at the overall review stages of an audit and may be used as a substantive procedure.

Question 69

18 Which two of the following procedures describe tests for understatement?
A Selecting a sample of despatch records and tracing these to a matching sales invoice and entry in the sales account
B Selecting a sample of sales invoices and tracing these to a matching despatch record
C Selecting a sample of items of plant physically verified by the assurance provider and tracing these to an entry in the asset register
D Selecting a sample of items of plant from the asset register and physically verifying their existence

Answer 69

A Selecting a sample of despatch records and tracing these to a matching sales invoice and entry in the sales account
C Selecting a sample of items of plant physically verified by the assurance provider and tracing these to an entry in the asset register
Tests for understatement (ie, omission) cannot start from the source being tested for understatement/omission. They must start from some other source and trace through to the accounting records, to prove that nothing has been omitted (ie, the entity’s transactions or balances are not understated).

Question 70

19 The auditor of Frost Ltd has carried out a test on a sample of receivables and has discovered a higher than expected number of misstatements.
Which three of the following steps would be an appropriate response to this?
A Investigate the nature and cause of the misstatements
B Consider the effect of the misstatements on other parts of the audit
C Estimate the probable overall misstatement by extrapolating the results
D Increase the tolerable misstatement

Answer 70

A Investigate the nature and cause of the misstatements
B Consider the effect of the misstatements on other parts of the audit
C Estimate the probable overall misstatement by extrapolating the results
The fourth option is not correct as tolerable misstatement is related to the auditor’s judgement about materiality.

Question 71

21 For each of the following statements, select whether they are true or false in respect of test data. Test data is a type of substantive procedure.
A True
B False
Test data can include real data and dummy data.
C True
D False
Test data can be used to help in the calculation of ratios.
E True
F False

Answer 71

B False
C True
F False
Test data is used to test controls. Audit software (not test data) can be used to help in the calculation of ratios.

Question 72

22 Which one of the following is the definition of an anomaly?
A A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population
B The misstatement that the auditor expects to be present in the population
C Control deviations, when performing tests of control, or misstatements, when performing substantive procedures
D The maximum misstatement in the population that the auditor would be willing to accept

Answer 72

A A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population

The misstatement that the auditor expects to be present in the population = expected misstatement. Control deviations, when performing tests of control, or misstatements, when performing substantive procedures = misstatement. The maximum error in the population that the auditor would be willing to accept = tolerable misstatement.

Question 73

24 In order to gather sufficient, appropriate evidence, the auditor may make use of external confirmation requests.
For each of the following statements with regards to external confirmation requests, select whether it is true or false.
A positive confirmation request always asks the respondents to reply to the auditor indicating whether or not they agree with the information provided.
A True
B False
A sample of confirmation requests drawn from the client’s list of balances is more appropriate for receivables balances than for payables balances.
C True
D False
A positive confirmation request ordinarily provides more reliable audit evidence than a negative confirmation request.
E True
F False

Answer 73

B False
C True
E True

Positive confirmations may request that the respondent provides the balance owing as opposed to simply confirming the balance stated. A sample taken from a list of receivables is more effective than for payables, as in this way testing the balance for overstatement is carried out directly. For payables, the auditor’s key concern is that of understatement and testing a sample from the payables listed will not test understatement. A positive confirmation is more reliable than a negative confirmation as in the first case, a response is always sought.

Question 74

25 Which one of the following procedures would provide the most reliable source of evidence where a company receives an invoice after the year end which relates to a period that straddles the year end?
A Confirming the purchase amount to a supplier statement at the year end
B Vouching the payment of the invoice
C Testing internal controls over accruals
D Recalculating the portion of the invoice amount which relates to the reporting period

Answer 74

D Recalculating the portion of the invoice amount which relates to the reporting period A supplier statement would not include this invoice, as it was dated after the year end.
Vouching the payment would not help to determine whether the expense and the payable were included correctly.
Testing internal controls would provide evidence over accruals in general, but would not be relevant to this invoice specifically.
Only by recalculating the prorating of the invoice can the auditor be confident that the correct amount has been included.

Question 75

26 For each of the procedures below, select the option which best describes the auditor’s test when performing the procedure.
Reviewing post year-end invoices for amounts which relate to the reporting period
A Testing primarily for existence of accruals
B Testing primarily for completeness of accruals
Reviewing the payments made to suppliers after the year end
C Not a relevant procedure for payables
D Testing primarily for completeness of payables
The auditor calculating for herself the amount accrued where an invoice straddles the year end
E Testing primarily for cut-off of accruals
F Testing primarily for completeness of accruals

Answer 75

B Testing primarily for completeness of accruals
Reviewing post year-end invoices begins with the invoices and traces them back to the accounting system. This is an attempt to find expenses which have been omitted from the system.

C Not a relevant procedure for payables
Reviewing post year-end supplier payments is a test not often conducted – all it could really tell the auditor is whether the entity has the cash to pay its suppliers. This procedure is not to be confused with post year-end receipts from receivables, which is an important test of debt recoverability.

E Testing primarily for cut-off of accruals
Recalculating the amount accrued is primarily a test of cut-off because it focuses on the split between the period before and after the year end. It does also, therefore, test completeness, but this is not its primary aim.

Question 76

28 Assurance providers obtain evidence using procedures, as set out in ISA (UK) 500, Audit Evidence. For each of the following statements about specific audit procedures, select whether they are true or
false.
When attempting to verify controls over petty cash, inquiry is likely to be strong evidence when assessing the risk of fraud from poor segregation of duties.
A True
B False
Recalculation of a depreciation expense by the auditor using the client’s stated estimation techniques is regarded as strong audit evidence.
C True
D False
Observing an employee of the client re-performing a particular control is usually sufficient to determine that it is operating satisfactorily.
E True
F False

Answer 76

B False
Inquiring about controls over petty cash will not be strong evidence on its own as employees could misrepresent the facts in their responses (especially if attempting to conceal a fraud they may be involved in).

C True
Recalculation by the auditor of amounts used by the client does provide strong evidence as there is no influence from the client.

F False
Re-performance of an internal control can be strong evidence as long as the auditor has completed some or all of this re-performance – otherwise, it is less likely to be considered strong evidence as the employee may have deliberately avoided certain conditions that would have provided audit evidence of poor operation.

Question 77

30 ISA (UK) 450, Evaluation of Misstatements Identified During the Audit requires the auditor to evaluate the effect of any uncorrected misstatements on the financial statements. This includes determining whether any uncorrected misstatements are material.
Which three of the following factors will the auditor use to determine whether uncorrected misstatements are material?
A The materiality level for the financial statements as a whole
B The size of the misstatement
C The circumstances of the occurrence of the misstatement
D The nature of the misstatement

Answer 77

B The size of the misstatement
C The circumstances of the occurrence of the misstatement
D The nature of the misstatement

It is possible that a misstatement below the materiality level for the financial statements as a whole may still be considered material if it remains uncorrected – examples of the reasons given include the extent to which the misstatement affects compliance with regulatory requirements or debt covenants, masks a change in earnings or other trends or even increases management compensation and triggers the payment of a bonus.
The remaining options (size, nature and circumstances) are all used by the auditor to determine whether an uncorrected misstatement is material.