Chapter 11 - Evidence and sampling Flashcards
What does ISA 500 state about evidence?
Evidence must be sufficient (quantity) and appropriate (quality and reliability).
What are eight procedures that assurance providers use to obtain evidence?
Inspection of tangible assets
Inspection of documentation
Observation
Inquiry
External confirmation (a particular form of inquiry)
Recalculation
Reperformance
Analytical procedures
Give some details about inspection of tangible assets.
- Confirms existence
- Does not confirm rights and obligations or valuation.
- Gives evidence for completeness only for assets the assurance providers can see.
Good procedure.
Weakness: Assets could be hidden from assurance providers
Give some details about inspection of documentation.
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)
Give some details about observation.
Involves watching a procedure being performed.
Relatively weak
Give some details about inquiry.
Involves seeking information from client management or staff or external sources and evaluating responses.
Give some details about external confirmation.
Involves seeking confirmation from a third party.
Give some details about recalculation.
Checking mathematical accuracy of the client’s records.
Strong evidence because created by assurance provider.
Give some details about reperformance.
Independently executing procedures or controls, either manually or through the use of computer-assisted audit techniques.
Strong evidence because carried out by assurance provider.
Give some details about analytical procedures.
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.
What are the three main computer assisted audit techniques (CAATs) that can be used?
Test data
Audit software
Data Analytics
Describe test data.
Under this test of control, the assurance provider supervises the process of running data through
the client’s system.
What are the five stages involved in the use of test data?
Note controls in client’s system
Decide upon test data (dummy data, real data)
Run the test data
Compare results with those expected
Conclude on whether the controls are operating properly
On what basis do audit software work?
Audit software works on the basis of interrogating the client’s system and extracting and analysing information.
What are five examples of tasks that audit software can do?
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
Define data analytics
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.
What are ten examples of specific areas where Audit Data Analytics (ADA) may be useful?
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.
Are analytical procedures compulsory for substantive procedures?
No, they are optional
Are analytical procedures compulsory at the overall review stage of an audit?
Yes, they are compulsory
Are analytical procedures compulsory in planning?
Yes, they are compulsory
What are three factors that auditors should consider when using analytical procedures as substantive procedures?
Objective of the analytical procedures
Suitability of analytical procedures
Reliability of the data
Precision
Acceptable difference
If there is a misstatement for an item, what are the two possibilities?
overstated
understated
What is the pattern for overstatement testing?
Figure in the accounts –> Intermediate documentation –> Supporting evidence
What is the patter for understatement (or completeness) testing?
Reciprocal population –> Supporting evidence –> Intermediate documentation –> Figure in the accounts
Regarding auditing accounting estimates, which methods can an auditor use?
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
Define 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.
Define population
The entire set of data from which a sample is selected and about which an auditor wishes to draw conclusions.
Which two testing procedures do not involve sampling?
testing all items in a population (100% examination)
testing all items with a certain characteristic, as selection is not representative
Define statistical sampling
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.
Define non-statistical sampling
A sampling approach that does not have characteristics (a) and (b) of statistical sampling is
considered non-statistical sampling.
Define 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.
Define error.
An unintentional misstatement in financial statements, including the omission of an amount or a disclosure.
Define sampling units
The individual items constituting a population.
Define sampling risk
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.
Define non-sampling risk
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.
Give five examples of factors which influence sample sizes for tests of controls.
An increase in the extent to which the auditor’s risk assessment takes into account relevant controls - Increase sample size
An increase in the tolerable rate of deviation - Decrease sample size
An increase in the expected rate of deviation of the population to be tested - Increase sample size
An increase in the auditor’s desired level of assurance that the tolerable rate of deviation is not exceeded by the actual rate of deviation in the population - Increase sample size
An increase in the number of sampling units in the population - Negligible effect
Give seven examples of factors which influence sample sizes for tests of details.
An increase in the auditor’s assessment of the risk of material misstatement - Increase in sample size
An increase in the use of other substantive procedures directed at the same assertion - Decrease in sample size
An increase in the auditor’s desired level of assurance that tolerable misstatement is not exceeded by actual misstatement in the population - Increase in sample size
An increase in tolerable misstatement - Decrease in sample size
An increase in the amount of misstatement the auditor expects to find in the population - Increase in sample size
Stratification of the population when appropriate - Decrease in sample size
The number of sampling units in the population - Negligible effect on the sample size
Define tolerable misstatement.
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.
Define tolerable rate of deviation.
Tolerable rate of deviation is a rate of deviation from prescribed internal control procedures set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population.
What should the auditor assess for tests of controls?
For tests of controls, the auditor makes an assessment of the expected rate of deviation based on the auditor’s understanding of the relevant controls or on the examination of a small number of items from the population. If the expected rate of deviation is unacceptably high, the auditor will normally decide not to perform tests of controls.
What should the auditor assess for tests of details?
For tests of details, the auditor makes an assessment of the expected misstatement in the population, If the expected misstatement is high, 100% examination or use of a large sample size may be appropriate when performing tests of details.
Describe the five selection methods available for sampling.
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
Define an anomaly
A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population.
What does ISA (UK) 450, Evaluation of Misstatements Identified During the Audit require?
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.
What should the auditor do if management refuses to correct some or all of the misstatements?
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
