Chapter 3 Flashcards
Obtaining Audit Evidence
What are the 5 methods for collecting audit evidence?
FYI: AEIOR
- Analytical procedures
- Enquiry and external confirmation
- Inspection
- Observation
- Recalculation/Reperformance
What 3 activities do analytical procedures comprise?
- Comparison
- Calculations and supporting explanations
- Credibility checks and supporting proof
What are tests of control in auditing?
Tests to obtain evidence about the effectiveness of a company’s operations and control systems.
What is substantive testing?
Test of detail - checking actual numbers, balances, and transactions to ensure there is no misstatement
How does the extent of substantive testing depend on the assurance of tests of control?
No assurance on controls leads to high substantive testing
What is the focus of internal control tests?
Prevention – ensuring controls reduce the risk of errors
What does substantive testing focus on?
Detection – finding actual errors or fraud in the accounts
When are substantive analytical procedures most useful?
For large-scale audits where checking every single transaction is impractical
What is meant by ‘sufficient appropriate audit evidence’?
Sufficient
- ‘Enough of’ based on the auditor’s professional judgement Appropriate
- Relevance and reliability
What is 3 things are considered reliable evidence in auditing?
- Obtained from independent sources outside the entity
- Obtained directly by the auditor
- Related controls are strong
What are assertions in auditing and what 3 components must be proven for them to be assertive?
Assertions:
- Characteristics that all items within financial statements belong there
Components that must be proven:
1. Existence
2. Ownership
3. Correct valuation
What are the 7 categories of assertions?
FYI:
ONLY ESSEX
COOL
AUDIT
CHEEKY
CHICKS
PARTY
REGULARLY
- Occurred/Exists
- Relate to the entity - Completeness
- Recorded and included in the financial statements - Accuracy, valuation, and allocation
- Recorded appropriately and related disclosures have been measured and described - Cut-off
- Correct accounting period - Classification
- Recorded in proper accounts - Presentation
- Aggregated or disaggregated and clearly described, overall understandable - Rights and obligations
- Entity holds or controls the rights
What determines the direction of testing in an audit?
Whether the auditor is checking for overstatement or understatement of financial figures.
What are the two sections of automated tools and techniques in auditing?
- Who owns each one?
- Audit software
- Auditors System - Client Owned systems
- Clients System
What 4 things are Client Own systems useful for?
FYI: TESI
- Test data
- Dummy data to check it works - Embedded test facilities
- Small program or test data is built inside a company’s system - Systems control and review file
- Report of how the system is working - Integrated test facilities
- Virtual copy of the system used for testing
What is audit sampling?
Checking only a small part of a company’s records to draw an overall conclusion.
What is statistical sampling?
Random selection of sample items using probability theory.
What are sampling units?
The individual items that constitute a ‘population’ with equal chances of being selected.
What is non-statistical sampling?
Using judgement to select a sample instead of a statistical technique.
What is stratification in sampling?
Dividing a population into smaller subpopulations to create groups of sampling units, usually by value
How can a sample be selected?
- FYI:
HIGH
SCHOOL
MUSICAL’s
REALLY
BAD
- Haphazard selection
- Auditors pick samples randomly but without using a formal method - Systematic selection
- E.g. every 5th item - Money unit sampling (MUS)
- Value-weighted selection
- Every nth $ is selected - Random selection
- Block selection
- Block of continuous items e.g. a particular month, week, person etc.
What is the confidence level in sampling determined by?
Determined by an auditor’s assessment of tolerable misstatement
What is tolerable misstatement?
The largest error an auditor can accept in a financial statement without it being a big problem
What should detection risk be to increase the size of the sample?
Detection risk needs to be low
Advantages and disadvantages of different sampling methods
FYI:
HIGH
SCHOOL’S x2
JUST
REALLY
BAD
Haphazard
+ Good for targeting your sample
- Generate potential bias as its auditors choice
Stratified
+ Allows a broad range of items to be tested within the sample
- Larger more complex which can take longer
Systematic
+ Treats every items the same way, eliminating bias
- Still requires some judgement to determine start position and starting interval may not be fully representative
Judgemental
+ Good for targeting your sample
- Generate potential bias as its auditors choice (can create non-representative samples)
Random
+ Eliminates bias
- Requires IT expertise
Block
+ Useful if interrogating a defined group of data
- Ignores characteristics of data outside the block
Factors and their impact on sample size for test controls:
1️⃣Auditor’s reliance on controls
2️⃣ Increase in the tolerable rate of deviation
3️⃣ Increase in the expected rate of deviation
4️⃣ Increase in the auditor’s belief that the actual deviation rate is lower than the tolerable rate
5️⃣ Increase in the number of sampling unit
Options:
Increase, Decrease or Negligible
1️⃣Increases – More reliance requires a larger sample to confirm controls are effective.
2️⃣ Decreases – A higher tolerance for deviations means less testing is needed.
3️⃣ Increases – Expecting more issues means a larger sample is required.
4️⃣ Increases – More assurance is needed to confirm deviations remain within limits.
5️⃣ Negligible Effect – The total population size alone does not significantly impact sample size.
Factors and their impact on sample size for substantive testing:
1️⃣ Increase in auditor’s assessment of material misstatement
2️⃣ Increase in the use of other procedures at the same assertion
3️⃣ Increase in the auditor’s belief that actual deviation will be lower than the tolerable rate
4️⃣ Increase in tolerable misstatement
5️⃣ Increase in expected misstatement
6️⃣ Stratification of the population
7️⃣ Number of sampling units in the population
Options:
Increase, Decrease or Negligible
1️⃣ Increases – Higher inherent and control risks require a lower detection risk, leading to more testing.
2️⃣ Decreases – The auditor obtains assurance from other procedures, reducing the need for a large sample.
3️⃣ Increases – More assurance is needed, so a larger sample is selected.
4️⃣ Decreases – A higher tolerable misstatement means errors are more acceptable, reducing the sample size.
5️⃣ Increases – More expected misstatements require more testing to detect them.
6️⃣ Decreases – Stratification allows the auditor to focus on key subpopulations, reducing the sample size needed.
7️⃣ Negligible Effect – The total number of sampling units alone does not significantly impact sample size.
