Final Exam Flashcards
Statistical sampling
an approach to sampling where random selection is used to select a sample and probability theory is used to evaluate the sample results
Non-statistical sampling
any sample selection method that does not have the characteristics of statistical sampling
Statistical sampling
Advantage and Disadvantage
An advantage of statistical sampling is that it allows an auditor to measure sampling risk; that is, the risk that the sample chosen by the auditor is not representative. Sometimes a disadvantage of statistical sampling is the cost involved in using this technique.
Non-statistical sampling
Advantage and Disadvantage
An advantage is that it is easier to use than statistical sampling, is lower cost, and allows an auditor to select a sample that they believe is appropriate
Disadvantge is that it is a not a random sample so it can be scewed
Most audit firms use a combination of _______ and ____________ as both methods provide appropriate audit evidence and allow the auditor to form a conclusion on the items being tested
statistical, non-statistical sampling
Examples of Non-statistical sampling
Haphazard selection
the selection of a sample without use of a methodical technique
Judgemental selection
the selection of items that an auditor believes should be included in the sample for testing
Examples of Statistical sampling
Random selection
process whereby a sample is selected free from bias and each item in a population has an equal chance of selection
Systematic selection (Inerval) the selection of a sample for testing by dividing the number of items in a population by the sample size, giving the sampling interval (n) and then selecting every nth item in the population
Block selection
the selection of items that are grouped together within the population of items available
Tests of controls (controls testing)
the audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level
Preventive Control
Sales occur that are not collectable.
The computerized accounting program will not allow a sale to be processed if a customer has exceeded its credit limit.
Preventive Control
Fictitious employees are paid.
Amounts cannot be paid to employees without first matching a valid social insurance number to the employee master file.
Preventive Control
Sales are recorded at the wrong amount.
Sales invoices are automatically priced using a master pricing file
Preventive Control
Transactions are classified and coded to incorrect accounts.
The account coding on each purchase order is checked by the computer using a table of valid account numbers, and then various logic tests are performed by the computer.
Testing Controls
Enquiry
Observation
Inspection of physical evidence
Re-performance
Enquiry
This technique involves the auditor asking questions to determine how the control is performed and whether it appears to have been carried out properly and on a timely basis. For example, the auditor may ask the employees who prepare the sales invoices how they determine when to prepare the invoice and how they ensure that the revenue is recorded on a timely basis.
Observation
This technique involves the auditor observing the actual control being performed. For example, they may observe the preparation of an invoice to determine if the related shipping report has been received.
Inspection of physical evidence
This technique relies on the auditor testing the physical evidence to verify that a control has been performed properly. For example, the auditor may select a sample of invoices to determine if the related shipping document is attached.
Re-performance
This technique involves the auditor re-performing the control to test its effectiveness. For example, the auditor may test the application controls for accessing the billing module to ensure an unauthorized employee is unable to generate invoices (and that an unauthorized attempt to do so is recorded on an exception report).
Understand how to interpret the results of testing of controls
If the controls tested are considered to be effective and can be relied on for the purposes of reducing overall audit risk for a particular significant account and assertion, the level of additional substantive testing required is reduced. If the controls tested are considered to be ineffective and are not able to provide any audit evidence that reduces overall audit risk for a particular significant account and assertion, the level of additional substantive testing that is required is increased
EXAMPLE TESTS ALWAYS PERFORMED - AUDITING CASH
Confirm cash held by others (for example, bank balances and/or overdrafts) and cash on hand, if significant. (E, R&O)
Examine the client’s bank reconciliations. (C, V&A)
• Foot the bank reconciliation to ensure mathematical accuracy.
• Trace the book balance to the general ledger.
• Agree confirmed balance with the bank balance per the reconciliation.
• Obtain cut-off bank statement.
• Determine whether outstanding cheques have subsequently cleared and whether deposits in transit have been recorded by the bank.
• Verify the appropriateness of reconciling items.
Test cut-off of cash receipts, cash payments, and transfers as at year end. (C, V&A)
EXAMPLE ANALYTICAL PROCEDURES - AUDITING CASH
Compare the listing of cash accounts with the prior period’s and investigate any unexpected changes (for example, credit balances, unusually large balances, new accounts, closed accounts) or the absence of expected changes. (E, C, V&A, Cl)
Review interest received and/or paid in relation to the average cash balances and/or bank overdrafts (accuracy of interest income in the income statement). (O, A)
EXAMPLE OTHER GENERAL PROCEDURES - AUDITING CASH
Review the cash accounts in the general ledger for unusual items. (C, V&A)
Review bank confirmations, minutes of meetings, loan agreements, and other documents for evidence of restrictions on the use of cash or liens on cash. (C&U)
Recalculate any foreign currency–denominated bank accounts using the appropriate foreign exchange rate. (V)
Prepare a schedule of cash transfers between accounts before and after year end, ensuring that transfers are recorded in the correct period. (E, C)
Count cash on hand. (E)
Example substantive tests of transactions—cash
CASH RECEIPTS PROCESS
Perform a proof of cash by reconciling activity per the client records to activity per the bank. Also, correlate these transactions to the activity in the sales and trade receivables ledgers. This procedure is limited to less complex engagements that have a limited number of transactions. (C, A)
Test the mathematical accuracy of the cash receipts journal. (A)
Test the recording of miscellaneous receipts (that is, receipts not usually recorded in trade receivables, such as proceeds on disposal of assets or royalties); consider whether the recorded amounts are reasonable. (A)
Compare the total amounts of daily deposits shown on the bank statement with the totals of the daily cash receipts shown in the cash receipts journal. Investigate unusual delays in depositing cash receipts and any splitting of daily cash receipts into separate deposits. (C)
Example substantive tests of transactions—cash
CASH PAYMENTS PROCESS
Account for the numerical sequence of cheques issued during a specified period. (CO, C)
Compare paid cheques and supporting documents with the cash disbursement journal as to date, payee, amount, and account classification; determine whether supporting documents indicate the item has been paid. (C)
Determine whether the signatures on paid cheques are authorized. (A)
Test the postings of the totals in the cash disbursement journal to the general ledger and subsidiary ledgers. (C)
Example substantive tests of transactions—trade receivables
SALES PROCESS
Account for the numerical sequence of sales invoices, sales orders, and shipping documents during a specified period. Reconcile billings with shipping documents for substantial portion of the period.
(C, CO)
Test the records of products ordered and shipped to the sales records; agree dates, customers, products, quantities, prices, and amounts.
(O)
Trace individual sales invoices to the sales journal and to the trade receivables sub-ledger.
(Cl)
Test recorded sales to the records of products ordered and shipped; agree dates, customer, products, quantities, and amounts.
(O)
Review the listing of accounts receivable and investigate unusual balances, credit balances, and accounts that may not be properly classified as accounts receivable.
(V&A, Cl)
Investigate large or unusual credit memos issued subsequent to year end.
(V&A)
Test the pricing and mathematical accuracy of sales invoices.
(A)
Test the accounting classification of sales transactions.