Evidence And Sampling Flashcards
ISA (UK) 500 substantive procedures examples
Inspection of assets/documents
Observation
Inquiry
External confirmation
Recalculation
Reperformance
Analytical procedures
Is evidence generally persuasive or conclusive?
Persuasive
So sometimes need to preform more than one substantive procedure to address a given risk
Two traditional categories of Computer Assisted Audit Technique (CAAT)
Test data
Audit software
Test data: Description
Auditor data put into client’s system
Real or dummy data
Live or copy system
E.g. Entering timesheet with hours outside the normal range to check system rejects it
Entering valid purchase invoice to check that it is allocated to the correct account
Audit Software: Description
Client data put into auditor’s system
E.g. Reperformance of addition or ageing of transactions
Preparation of reports
Calculations of ratios
Sample selection
Test data: Use
Test controls in the system
Audit Software: Use
- Basic data analysis
- Substantive testing
Three areas data analytics can assist with
- Transaction analysis
E.g. matching purchase orders, goods received notes, invoices - Judgmental areas
E.g. sensitivity analysis to test assumptions on net realisable value of inventory - Analytical procedures
E.g. analysing revenue trends by product or region
How may data analytics be presented?
Bar or pie charts
IAS (UK) 520 states analytical procedures can be used as substantive procedures. Though it is dependent on what sort of factors
Strength/compatibility of relationships
Reliability of data
Level of disaggregation of the data available
Knowledge of client
What extra step has to be done during ARs in the evidence stage?
Determining whether expected variations are acceptable (based on materiality)
If not, seek further evidence
How can an auditor seek further evidence if an AR doesn’t provide enough evidence?
- Management enquiries
- Corroborate to other evidence
Overstatement direction of testing
- Figure in accounts
- Intermediate documentation
- Supporting evidence
Understatement testing direction
- Reciprocal population
- Supporting evidence
- Intermediate documentation
- Figure in accounts
Examples of accounting estimated
Depreciation
Allowance for receivables
Provisions
Why are estimates more risky?
- Subjective
- Management bias
Common audit procedures for testing accounting estimates
- Review and test the process used by management to develop the estimate
- Use an independent expert to make an estimate for comparison with the company’s figure
- Review subsequent events for confirmation of the accuracy of the estimate
- Test the operating effectiveness of the controls over how management made the estimate
Sampling process
- Identify population
- Identify sampling unit
- Select sample
- Identify errors
- Draw conclusions
Population
Entire set of data from which samples selected
Sampling units
Individual items constituting the population
Statistical sampling methods
- Random selection
- Systematic selection
- Money Unit Sampling (MUS)
Systematic selection
Random start
Constant interval between selections
MUS
Every £ in the population has equal change of being selected
Non-statistical sampling methods
- Haphazard selection
- Sequence/block selection
Haphazard selection
Auditor selects sample believed to be representative, without use of probability
Sequence/block selection
Select a block of consecutive items
Usually for Tests of control
Effect on sample size: increase in risk
Increase
Effect on sample size: increase in desired assurance level.
E.g. need less assurance because other procedures carried out
Increase
Effect on sample size: increase in tolerable misstatement
Decrease
Effect on sample size: increase in expected error
Increase
Effect on sample size: Stratification of population
Decrease
Effect on sample size: Increase in no. sampling units
Negligible effect
What to take into account regarding drawing conclusions from errors
- Nature
- Cause
- Impact
- Probable misstatement in population
Nature or errors identified
Whether errors are true misstatements
E.g. misposting between receivables accounts does not actually reflect an error in the receivables balance
Cause of errors identified
Discover common features
E.g. if all errors arise in the same location
Further testing may be required
(Error?) Impact on other parts of the audit
May influence the auditor’s assessment of the accounting and internal control systems
Probable misstatement in the population
Results should be extrapolated
If projected misstatement exceeds or is close to the tolerable misstatement then additional testing may be required
What must the auditor do about uncorrected misstatements
Evaluate the effect
Communicate to management on a timely basis and request they be corrected
Written representations obtained from management stating that they believe the misstatements to be immaterial
What should the auditor do is management refuses to correct misstatements?
- Obtain understanding of reasons
- Determine whether material
- Communicate misstatements to TCWG and request corrected.
Explaining that audit report will be modified if material misstatements not corrected
Misstatements which are not material in size but are material in nature if they affect…
- Legal/regulatory compliance
- Compliance with debt covenants
- Ratios used to evaluate financial position, results or cash flows
- Increase in management compensation
