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 eight procedures that assurance providers use to obtain evidence?

Answer 2

Inspection of tangible assets

Inspection of documentation

Observation

Inquiry

External confirmation (a particular form of inquiry)

Recalculation

Reperformance

Analytical procedures

Question 3

Give some details about inspection of tangible assets.

Answer 3

• 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

Question 4

Give some details about inspection of documentation.

Answer 4

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 5

Give some details about observation.

Answer 5

Involves watching a procedure being performed.

Relatively weak

Question 6

Give some details about inquiry.

Answer 6

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

Question 7

Give some details about external confirmation.

Answer 7

Involves seeking confirmation from a third party.

Question 8

Give some details about recalculation.

Answer 8

Checking mathematical accuracy of the client’s records.

Strong evidence because created by assurance provider.

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.

Strong evidence because carried out by assurance provider.

Question 10

Give some details about analytical procedures.

Answer 10

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 11

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

Answer 11

Test data

Audit software

Data Analytics

Question 12

Describe test data.

Answer 12

Under this test of control, the assurance provider supervises the process of running data through
the client’s system.

Question 13

What are the five stages involved in the use of test data?

Answer 13

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

Question 14

On what basis do audit software work?

Answer 14

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

Question 15

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

Answer 15

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 16

Define data analytics

Answer 16

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 17

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

Answer 17

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 18

Are analytical procedures compulsory for substantive procedures?

Answer 18

No, they are optional

Question 19

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

Answer 19

Yes, they are compulsory

Question 20

Are analytical procedures compulsory in planning?

Answer 20

Yes, they are compulsory

Question 21

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

Answer 21

Objective of the analytical procedures

Suitability of analytical procedures

Reliability of the data

Precision

Acceptable difference

Question 22

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

Answer 22

overstated

understated

Question 23

What is the pattern for overstatement testing?

Answer 23

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

Question 24

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

Answer 24

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

Question 25

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

Answer 25

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 26

Define audit sampling.

Answer 26

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 27

Define population

Answer 27

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

Question 28

Which two testing procedures do not involve sampling?

Answer 28

testing all items in a population (100% examination)

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

Question 29

Define statistical sampling

Answer 29

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 30

Define non-statistical sampling

Answer 30

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

Question 31

Define misstatement.

Answer 31

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 32

Define error.

Answer 32

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

Question 33

Define sampling units

Answer 33

The individual items constituting a population.

Question 34

Define sampling risk

Answer 34

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 35

Define non-sampling risk

Answer 35

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 36

Give five examples of factors which influence sample sizes for tests of controls.

Answer 36

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

Question 37

Give seven examples of factors which influence sample sizes for tests of details.

Answer 37

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

Question 38

Define tolerable misstatement.

Answer 38

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.

Question 39

Define tolerable rate of deviation.

Answer 39

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.

Question 40

What should the auditor assess for tests of controls?

Answer 40

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.

Question 41

What should the auditor assess for tests of details?

Answer 41

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.

Question 42

Describe the five selection methods available for sampling.

Answer 42

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 43

Define an anomaly

Answer 43

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

Question 44

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

Answer 44

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 45

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

Answer 45

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