Chapter 11 - Evidence and sampling

Question 1

What does ISA 500 state about evidence?

Answer 1

Evidence must be sufficient (quantity) and appropriate (quality and reliability).

Question 2

What are the seven ways evidence can be obtained by an auditor? Outline the helpful mnemonic

Answer 2

AEIOU RC

Analytical Procedures – evaluation of financial information by studying possible relationships among financial and non-financial data

Enquiry – ask a relevant person for information

Inspection – of a document such as an invoice

Observation – of a process such as an inventory count

RecalcUlation – check the mathematical accuracy of a document

Reperformance – verification managements approach by the auditor

Confirmation – relates to evidence from a third party source

Question 3

Give some details about analytical procedures.

Answer 3

Evaluating and comparing financial and/or non-financial data for plausible relationships and investigating unexpected fluctuations.

Evidence limited by the strengths and weaknesses of the underlying accounting system.

Question 4

Give some details about enquiry.

Answer 4

Involves seeking information from client management or staff or external sources and evaluating responses.

Question 5

Give some details about inspection of tangible assets

Answer 5

• Confirms existence
• Does not confirm rights and obligations or valuation.
• Gives evidence for completeness only for assets the assurance providers can see.

Question 6

Give some details about inspection of documentation.

Answer 6

Depends on nature but can:

• Confirm existence (example share certificate)
• Confirm completeness (tracing source documents to financial statements)
• Confirm valuation (example purchase invoice of inventory)
• Confirm rights and obligations (example hire purchase agreement)

Question 7

Give some details about observation.

Answer 7

Involves watching a procedure being performed.

Question 8

Give some details about recalculation.

Answer 8

Checking mathematical accuracy of the client’s records.

Question 9

Give some details about reperformance.

Answer 9

Independently executing procedures or controls, either manually or through the use of computer-assisted audit techniques.

Question 10

Give some details about confirmation.

Answer 10

Confirmations with third parties to attest to client data

Question 11

Outline the weaknesses of the following ways of obtaining evidence; Analytical Procedures, Enquiry, Inspection, Observation, Recalculation

Answer 11

Question 12

What are the three main computer assisted audit techniques (CAATs) that can be used?

Answer 12

Test data

Audit software

Data Analytics

Question 13

Describe test data.

Answer 13

This is where the auditor tests the integrity of the client’s system by posting data onto the client’s computer system to see if the transactions are posted as they should be.

Question 14

Describe audit data.

Answer 14

This is where the auditor uses their own computer programmes to substantively test a balance or transaction.

Question 15

On what basis do audit software work?

Answer 15

Audit software works on the basis of interrogating the client’s system and extracting and analysing information.

Question 16

What are five examples of tasks that audit software can do?

Answer 16

Extract a sample according to specified criteria (random, below/over a certain amount, at certain dates)

Calculate ratios and select those outside set criteria

Check calculations and casts performed by the system

Prepare reports

Follow items through a system and flag where they are posted

Question 17

Define data analytics

Answer 17

When used to obtain audit evidence in a financial statement audit, data analytics is the science and art of discovering and analysing patterns, deviations and inconsistencies, and extracting other useful information in the data underlying or related to the subject matter of an audit through analysis, modelling and visualisation for the purpose of planning and performing the audit.

Question 18

What are ten examples of specific areas where Audit Data Analytics (ADA) may be useful?

Answer 18

Analyse all transactions in a population, stratify that population and identify outliers

Reperform calculations relevant to the financial statements

Match transactions as they pass through a processing cycle

Assist in segregation of duties testing

Compare entity data to externally obtained data

Manipulate data to assess the impact of different assumptions.

Analyses of revenue trends split by product or region

Matches of orders to cash and purchases to payments

Three-way matches between purchase/sales orders, goods received/despatched documentation and invoices

‘Can do, did do testing’ of user codes to test whether segregation of duties is appropriate, and whether any inappropriate combinations of users have been involved in processing transactions.

Question 19

Are analytical procedures compulsory for substantive procedures?

Answer 19

No, they are optional

Question 20

Are analytical procedures compulsory at the overall review stage of an audit?

Answer 20

Yes, they are compulsory

Question 21

Are analytical procedures compulsory in planning?

Answer 21

Yes, they are compulsory

Question 22

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

Answer 22

Objective of the analytical procedures

Suitability of analytical procedures

Reliability of the data

Precision

Acceptable difference

Question 23

If there is a misstatement for an item, what are the two possibilities?

Answer 23

overstated

understated

Question 24

What is the pattern for overstatement testing?

Answer 24

Figure in the accounts –> Intermediate documentation –> Supporting evidence

Question 25

What is the patter for understatement (or completeness) testing?

Answer 25

Reciprocal population –> Supporting evidence –> Intermediate documentation –> Figure in the accounts

Question 26

Regarding auditing accounting estimates, which methods can an auditor use?

Answer 26

Test the process that management used to estimate the figure and the data on which it is based

Use a point estimate

Review events occurring up to the date of the auditor’s report

Test the operating effectiveness of controls over how management made the accounting estimate, with
associated substantive procedures

Question 27

Define audit sampling.

Answer 27

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 28

Define population

Answer 28

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

Question 29

Which two testing procedures do not involve sampling?

Answer 29

testing all items in a population (100% examination)

testing all items with a certain characteristic, as selection is not representative

Question 30

Define statistical sampling

Answer 30

An approach to sampling that has the following characteristics:

(a) Random selection of the sample items; and
(b) The use of probability theory to evaluate sample results, including measurement of sampling risk.

Question 31

Define non-statistical sampling

Answer 31

A sampling approach that does not have characteristics (a) and (b) of statistical sampling is
considered non-statistical sampling.

Question 32

Define misstatement.

Answer 32

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 33

Define error.

Answer 33

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

Question 34

Define sampling units

Answer 34

The individual items constituting a population.

Question 35

Define sampling risk

Answer 35

The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure.

Question 36

Define non-sampling risk

Answer 36

The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk. For example, the use of inappropriate procedures, or misinterpretation of audit evidence and failure to recognise a misstatement or deviation.

Question 37

Give four examples of factors which will influence sample size

Answer 37

The follwoing will increase sample size, the opposite will decrease sample size:

• An increase in the auditor’s assessment of the risk of material misstatement
• An increase in an auditor’s desired level of assurance
• An increase in the amount of misstatement the auditor expects to find in a population
• A decrease in the use of analytical procedures to test the same balance.

Question 38

Does the population size have an effect on sample size?

Answer 38

An increase in the number of sampling units in the population will have a negligible effect on sample size

Question 39

Define tolerable misstatement.

Answer 39

Tolerable misstatement is 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.

The maximum amount of errors that an auditor can accept in a test sample while still concluding that the audit objectives have been met

Question 40

Describe the five selection methods available for sampling.

Answer 40

Random selection - All items have an equal chance of selection

Systematic selection - Involves selecting items using a constant interval between selections, the first interval having a random start.

Haphazard selection - Alternative to random selection. Should not be used if assurance providers are carrying out statistical sampling.

Sequence or block selection - Sequence sampling may be used to check whether certain items have particular characteristics.

Monetary Unit Sampling (MUS) - This is a selection method that ensures that every £1 in a population has an equal chance of being selected for testing

Question 41

Define an anomaly

Answer 41

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

Question 42

What does ISA (UK) 450, Evaluation of Misstatements Identified During the Audit require?

Answer 42

ISA (UK) 450, Evaluation of Misstatements Identified During the Audit requires the auditor to evaluate the effect of identified misstatements on the audit and evaluate the effect of any uncorrected misstatements on the financial statements.

Question 43

What should the auditor do if management refuses to correct some or all of the misstatements?

Answer 43

obtain an understanding of management’s reasons for not making the corrections

determine whether uncorrected misstatements are material individually or in aggregate

communicate individual uncorrected misstatements to those charged with governance and request that these be corrected, mentioning any effect on the opinion in the auditor’s report

request a written representation from management (and if appropriate those charged with governance) that they believe the effects of the uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole