Evidence and Sampling

Question 1

analytical procedures

Answer 1

using movement and ratios to identify unexpected relationships and errors in the financial statements

Question 2

the ISA 500 sets out which types of substantive procedures:

Answer 2

• inspection of assets or documents
• inquiry
• external confirmation
• recalculation
• reperformance
• analytical procedures
• observation

Question 3

inspection

Answer 3

of assets or documents

Question 4

observation

Answer 4

of procedure being performed

Question 5

inquiry

Answer 5

of client staff or external sources

Question 6

external confirmation

Answer 6

from third party

Question 7

recalculation

Answer 7

checking mathematical accuracy of client accounting records

Question 8

reperformance

Answer 8

auditor carries out procedures and control

Question 9

analytical procedures

Answer 9

evaluating/comparing data and investigation unexpected fluctuations

Question 10

evidence is persuasive not..

Answer 10

conclusive.
May be necessary to perform more than one procedure to address a given risk

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

how does audit software work?

Answer 14

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

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

Are analytical procedures compulsory for substantive procedures?

Answer 17

No, they are optional

Question 18

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

Answer 18

Yes, they are compulsory

Question 19

Are analytical procedures compulsory in planning?

Answer 19

Yes, they are compulsory

Question 20

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

Answer 20

overstated

understated

Question 21

What is the pattern for overstatement testing?

Answer 21

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

Question 22

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

Answer 22

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

Question 23

Define population

Answer 23

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

Question 24

Which two testing procedures do not involve sampling?

Answer 24

testing all items in a population (100% examination)

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

Question 25

Define statistical sampling

Answer 25

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 26

Define non-statistical sampling

Answer 26

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

Question 27

Define misstatement.

Answer 27

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 28

Define error.

Answer 28

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

Question 29

Define sampling units

Answer 29

The individual items constituting a population.

Question 30

Define sampling risk

Answer 30

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.

Question 31

Define non-sampling risk

Answer 31

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 32

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

Answer 32

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 33

Define tolerable misstatement.

Answer 33

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 34

Describe the five selection methods available for sampling.

Answer 34

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 35

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

Answer 35

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