Chapter 11 Evidence and sampling

Question 1

What is the audit approach in obtaining evidence?

Answer 1

• choose balance of test of controls and substantive testing
• general approach
• management representations
• use general approach for account balances

Question 2

What are the substantive procedures?

Answer 2

• Inspection of assets or docs
• Observation
• Inquiry
• Confirmation
• Recalculation
• Reperformance
• Analytical procedures

Question 3

How is the Computer assisted audit techniques (CAAT) different to testing data (TD) manually in getting evidence and sampling?

Answer 3

• Description
  TD: auditor data put in client system; Data is real or dummy
  CAAT: client data in auditors system
• Use
  TD: test controls
  CAAT: basic analysis/substantive testing
• Examples
  TD: Enters data e.g timesheet hours; valid purchase invoice
  CAAT: reperformance of addition or transa.; cals of ratios; prep of reports

Question 4

How is the audit data analysed for evidence and sampling?

Answer 4

• managing big data; trends; pattterns
• matching purchase order; GRN
• using sensitive analysis to test assumptions
• analysisng revenue trends by product

Question 5

What is the process of analysing data?

Answer 5

• understand business
• develop expectation
• compare to actuals
• unexpected var. = risk

Question 6

What does the ISA 520 tell about evidence and analytical procedures?

Answer 6

Can be used as substantive procedure
still depend on:
1) comparibility
2) reliability
3) disaggregation of data
4) dept of auditor knowledge

Question 7

What are the two stages of determining the evidence and sampling?

Answer 7

• planning stage: identify risk

- evidence stage: unexpected var. are acceptable? if not make enquiry

Question 8

Give two examples of analytical procedures you might carry out to get
evidence as to the accuracy of the current year payroll expense in the profit
and loss accoun

Answer 8

1) Compare this year’s and last year’s figure taking account of starters and
leavers and pay rises in the year.
(2) Comparing payroll with other related figures in the financial statements, e.g.
number of employees, turnover, and profit.

Question 9

What are the tests for an overstatement in finding evidence?

Answer 9

1) Fstat
2) Balance vs NCA
3) test sample from NCA
4) Test for existence i.e purchase invoice

i.e Figure in accounts > Intermediate doc > supp evidence

Question 10

What are the tests for an understatement in finding the evidence?

Answer 10

• test asset used by client
• Check vs NCA for completeness

i.e. reciprocal popu > supp evide > intermediate doc > figure in Acc.

Question 11

Which account for estimates are audited by the ISA 540

Answer 11

• Depreciation
• Allowance for receivables
• Provisions

Question 12

What are the audit procedures for accounting estimates?

Answer 12

• review and test for estimate
• indpt. expert make est. vs company figure
• confirm accuracy of est.
• test management est.

Question 13

What does the ISA 530 tell about the auditor using sampling

Answer 13

provide reasnoable basis to draw conclusion

Question 14

what is the process of sampling testing?

Answer 14

1) Identify popu
2) Identify sample unit
3) select sample
4) Identify errors
5) Draw conclusion

Question 15

What is meant by the population in in evidence and sampling?

Answer 15

the revenue and receivables

Question 16

What is meant by sampling units?

Answer 16

Sales invoices or single receivables balance

Question 17

What are the methods in statistical sampling?

Answer 17

Random selection: equal chance in popu
Systematic selection: random start and then constant interval
Money unit sampling (MUS): every £1 equal chance

Question 18

What are the non-statistical sampling methods?

Answer 18

Haphazard selection: auditor choose one as representative

sequence or block selection: i.e 50 consecutive cheques (test control)

Question 19

Should you increase, decrease or no effect on the following cases to consider sample size?
Increase in the auditor’s assessment of the risk of material
misstatement

Increase in the desired level of assurance (may need less
assurance if other, corroborating procedures are being carried
out)

Increase in the tolerable misstatement (linked to materiality)

Increase in the expected error (linked to risk)

Stratification* of the population Decrease
Increase in the number of sampling units in the population

Answer 19

IC 
IC
DC
DC
negligible effect

Question 20

What type of conclusion can be drawn once the auditor tested samples

Answer 20

• nature of error identified (misstatement or missposting)
• cause of error (common error?)
• impact on other parts of audit (may influence other accounts and Internal control)
• probable misstatement in pop (results should be extrapolated)

Question 21

What does the ISA 450 state of any uncorrected misstatements?

Answer 21

needs to evaluate effect

Question 22

What should auditor do if management does nothing about the misstatement?

Answer 22

• understand why?
• if misstatement material
• check with governance to get it corrected

Question 23

Which factors are considered if they are not material in size for evaluation of misstatement by law?

Answer 23

• compliance with laws
• compliance with debt convenants
• ratios used to evaluate financial position