Evidence and Sampling Flashcards
analytical procedures
using movement and ratios to identify unexpected relationships and errors in the financial statements
the ISA 500 sets out which types of substantive procedures:
- inspection of assets or documents
- inquiry
- external confirmation
- recalculation
- reperformance
- analytical procedures
- observation
inspection
of assets or documents
observation
of procedure being performed
inquiry
of client staff or external sources
external confirmation
from third party
recalculation
checking mathematical accuracy of client accounting records
reperformance
auditor carries out procedures and control
analytical procedures
evaluating/comparing data and investigation unexpected fluctuations
evidence is persuasive not..
conclusive.
May be necessary to perform more than one procedure to address a given risk
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
how does audit software work?
Audit software works on the basis of interrogating the client’s system and extracting and analysing information.
- Speeds up audit and makes it more efficient
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.
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
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
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.h
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.
risk that the sample chosen does not represent the population under examination.
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
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.
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
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