Evidence

Question 1

Audit evidence

Answer 1

to design and perform audit procedures in such a way to enable the
auditor to obtain sufficient appropriate audit evidence to be able to
draw reasonable conclusions on which to base the auditor’s opinion

Question 2

Sufficiency relates to

Answer 2

the quantity of evidence

Question 3

Appropriateness relates to the

Answer 3

quality or relevance and reliability of
evidence

Question 4

Appropriateness of evidence breaks down into two important concepts

Answer 4

 Reliability
 Relevance

Question 5

Reliability

Answer 5

The auditor should always attempt to obtain evidence from the most trustworthy
and dependable source possible

Question 6

Relevance

Answer 6

Relevance means the evidence relates to the financial statement assertions
being tested

Question 7

Assertions are used by the auditor to

Answer 7

consider the different types of
potential misstatements that may occur when identifying, assessing
and responding to the risks of material misstatement

Question 8

Tests of control

Answer 8

Audit procedures ‘designed to evaluate the operating
effectiveness of controls in preventing, or detecting and correcting
material misstatement

Question 9

Substantive procedures

Answer 9

Audit procedures ‘designed to detect material
misstatements at the assertion level

Question 10

Audit risk =

Answer 10

Inherent risk × Control risk × Detection risk

Question 11

Substantive procedures consist of

Answer 11

 Tests of detail: to verify individual transactions and balances.
 Substantive analytical procedures: involve analysing relationships
between information to identify unusual fluctuations which may indicate
possible misstatement

Question 12

Items with specific characteristics may be chosen for testing such as:

Answer 12

 High value items within a population
 All items over a certain amount
 Items to obtain information

Question 13

Sources of information about the service organisation

Answer 13

Obtaining a type 1 or type 2 report from the service organisation’s auditor.
A Type 1 report provides a description of the design of the controls at the
service organisation prepared by the management of the service
organisation. It includes a report by the service auditor providing an
opinion on the description of the system and the suitability of the controls.
[ISA 402, 8b]
A Type 2 report is a report on the description, design and operating
effectiveness of controls at the service organisation. It contains a report
prepared by management of the service organisation. It includes a report
by the service auditor providing an opinion on the description of the
system, the suitability of the controls, the effectiveness of the controls and
a description of the tests of controls performed by the auditor

Question 14

Stratification

Answer 14

Stratification is used in conjunction with sampling. Stratification is the process of
breaking down a population into smaller subpopulations. Each subpopulation is
a group of items (sampling units) which have similar characteristics.

Question 15

Selecting an appropriate sample

Answer 15

When sampling, the auditor must choose a representative sample.
 If a sample is representative, the same conclusion will be drawn from that
sample as would have been drawn had the whole population been tested.
 For a sample to be representative, it must have the same characteristics
as the other items in the population from which it was chosen.
[ISA 530, A12]
 In order to reduce sampling risk and ensure the sample is representative,
the auditor can increase the size of the sample selected or use

Question 16

The objective of stratification is to

Answer 16

enable the auditor to reduce the variability of
items within the subpopulation and therefore allow sample sizes to be reduced
without increasing sampling risk

Question 17

Statistical sampling means any approach to sampling that uses:

Answer 17

 Random selection of samples, and
 Probability theory to evaluate sample results

Any approach that does not have both of these characteristics is considered to
be non-statistical sampling

Question 18

Statistical sampling methods

Answer 18

 Random selection – this can be achieved through the use of a random
number generator or table.
 Systematic selection – where a constant sampling interval is used
(e.g. every 50th balance) and the first item is selected randomly.
 Monetary unit selection – selecting items based upon monetary values
(usually focusing on higher value items)

Question 19

Non-statistical sampling methods

Answer 19

 Haphazard selection – the auditor does not follow a structured technique
but avoids bias or predictability.
 Block selection – this involves selecting a block of contiguous items from
the population (i.e. next to each other). To reduce sampling risk, many
blocks should be selected as valid references cannot be made beyond the
period or block examined

Question 20

When non-statistical methods (haphazard and block) are used, the auditor uses
judgement to select the items to be tested. Whilst this lends itself to auditor bias
it does support

Answer 20

the risk-based approach, where the auditor focuses on those
areas most susceptible to material misstatement

Question 21

Designing a sample

Answer 21

When designing a sample, the auditor has to consider:
 The purpose of the procedure
 The combination of procedures being performed
 The nature of evidence sought
 Possible misstatement conditions

Question 22

Systematic Sampling

Answer 22

There are 19 customers with balances. The sampling interval is
calculated by taking the total number of balances and dividing it by the
sample size. The sampling interval (to the nearest whole number) is
therefore three. The first item is chosen randomly, in this case item 10.
Every third item after that is then also selected for testing until six items
have been chosen

Question 23

Monetary Unit Sampling

Answer 23

Monetary Unit Sampling can utilise either the random or systematic
selection method.

The sampling interval is calculated by taking the total value of
$2,103,000 (to the nearest $000) and dividing by the sample size of 6.
The sampling interval is therefore $351,000.
The first item is chosen randomly (a number between 1 and 2,103,000),
in this case 233. Each item after that is selected by adding the sampling
interval to the last value until six items have been selected

Question 24

Deviations

Answer 24

Any issues identified during tests of control are called deviations.

The auditor will:
 Determine a level of deviation they are willing to accept – tolerable
deviation rate.
 Test the sample stated in the audit plan.
 Extend the sample if deviations are identified.
 Compare the actual deviation rate to the tolerable deviation rate.
 Increase the level of substantive testing over the balance if the actual
deviation rate exceeds the tolerable deviation rate.
 Communicate the control deficiency causing the deviation with
management and those charged with governance.
Communication of control deficiencies is covered in more detail in the
chapter ‘Systems and controls’

Question 25

Misstatements

Answer 25

Misstatements are differences between the amounts actually recorded and what
should have been recorded in the accounting records. Misstatements are
identified when performing substantive tests of detail.

The auditor will:
 Determine a level of misstatement they are willing to accept – tolerable
misstatement.
 Test the sample stated in the audit plan
 Consider the nature and cause of the misstatement. If the misstatement is
an anomaly (isolated), no further procedures are required as the
misstatement is not representative of further misstatements.
 Project the misstatement found in the sample across the population as a
whole, if the misstatement is not isolated.
 Compare the total projected misstatement to tolerable misstatement.
– If the total projected misstatement in the sample is less than tolerable
misstatement, the auditor may be reasonably confident that the risk
of material misstatement in the whole population is low and no further
testing will be required.
– If the total projected misstatement in the sample exceeds tolerable
misstatement, the auditor will extend the sample in order to
determine the total misstatement in the population.
 Communicate the misstatement with management and ask them to correct
it. Communication of misstatements is covered in more detail in the
chapter ‘Completion and review

Question 26

Test data

Answer 26

Test data involves the auditor submitting ‘dummy’ data into the client’s system
to ensure that the system correctly processes it and that it prevents or detects
and corrects misstatements. The objective of this is to test the operation of
information processing controls within the system

To be successful test data should include both data with errors built into it and
data without errors. Examples of errors include:
 Codes that do not exist, e.g. customer, supplier and employee.
 Transactions above predetermined limits, e.g. salaries above contracted
amounts, credit above limits agreed with customer.
 Invoices with arithmetical errors.
 Submitting data with incorrect batch control totals

Question 27

Audit software

Answer 27

Audit software is used to interrogate a client’s system. It can be either
packaged, off-the-shelf software or it can be purpose written to work on a
client’s system. The main advantage of these programs is that they can be used
to scrutinise large volumes of data, which would be inefficient to do manually. The programs can then present the results so that they can be investigated
further

Question 28

Integrated test facilities

Answer 28

this involves the creation of dummy ledgers
and records to which test data can be sent. This enables more frequent
and efficient test data procedures to be performed live and the
information can simply be ignored by the client when printing out their
internal records

Question 29

Embedded audit software

Answer 29

this requires a purpose written audit
program to be embedded into the client’s accounting system. The
program will be designed to perform certain tasks (similar to audit
software) with the advantage that it can be turned on and off at the
auditor’s wish throughout the accounting year. This allows the auditor to
gather information on certain transactions (perhaps material ones) for
later testing, and can identify peculiarities that require attention

Question 30

Data analytics (DA)

Answer 30

the science and art of discovering and analysing
patterns, deviations and inconsistencies, and extracting other useful
information in the data of underlying or related subject matter of an audit
through analysis, modelling, visualisation for the purpose of planning and
performing the audit.

Question 31

Big data

Answer 31

data sets that are large or complex