Module 18. Audit Process: The Use of Statistics

Question 1

Mean

Answer 1

The average of a numerical dataset calculated by summing the values in a population and dividing by the number of items in the dataset.

Question 2

Median

Answer 2

A measure of the central point in a dataset. The numerical dataset

Question 3

Mode

Answer 3

Most frequent occurring number in the dataset

Question 4

Standard Deviation

Answer 4

A measure of the dispersion of a numerical dataset (how wide the dataset is spread from the mean) showing the average distance between the values of the data in the set and the mean. Datasets with a higher spread will have a higher standard deviation.

Question 5

Outlier

Answer 5

An outlier is a data point that significantly differs from the other data points in a dataset. In an audit data analytics visual this may indicate information that is misstated.

Question 6

Benford’s Law

Answer 6

Benford’s Law is a probability distribution for the likelihood of the first digit in a set of numbers. It is found that the first digit in numbers appearing in many natural datasets are arranged in such a way that the number 1 is the most common leading number, followed by 2,3 and up to 9.

Question 7

How can Benford’s Law be applied within the audit process?

Answer 7

It can be used to identify where anomalies (including incidents of fraud) appear in the dataset. Allowing the auditor to identify an increase to the risk of misstatement in relation to error or fraud during the audit process.

Question 8

Regression Analysis

Answer 8

Regression analysis is a statistical method for estimating the relationship among variables based on past relationships. The aim is to understand the relationship between an independent variable and a dependent variable.

Question 9

Dependent Variable:

Independent Variable:

Answer 9

The dependent variable is the variable that you are trying to understand and predict.
The independent variable is the variable that may have an effect on the dependent variable.

Question 10

How can regression analysis be applied within the audit process?

Answer 10

Historical data can be collected from a client’s (financial data and non-financial data) system, allowing the auditor to understand a historical relationship between variables. The variables will be plotted on a scatter chart and a line (regression line) will be drawn through the middle. The current year data can be compared with this line and any outliers that appear may indicate misstatements in the dependent variable being audited (Sales being overstated or cost of sales being understated).

Question 11

Correlation

Answer 11

Correlation is the statistical association or relationship between two variables. Calculated between +1 and -1.
Correlation of 0 indicates no relationship.
Correlation of +1 indicates a strong relationship
Correlation of -1 indicates an inverse relationship.
Important to remember that correlation does not necessarily imply causation.

Question 12

Statistical sampling

Answer 12

Statistical sampling is defined in ISA (UK) 530 Audit sampling.
It is an approach to audit sampling that has the following characteristics:
i. Random selection of sample items
ii. The use of probability theory to evaluate sample results, including the measurement of sampling risk.
A sampling approach that does not have the above characteristics is considered non-statistical sampling

Question 13

Advantages of Statistical sampling

Answer 13

1. Can allow the auditor to select a more targeted and efficient sample
2. It allows a measure of the sufficiency of the audit evidence obtained.
3. The use of statistics can reduce the risk that differences in audit judgement (non-statistical sampling) result in significant differences in sample sizes selected by different auditors.
4. It allows for errors identified in the sample to be quantified and extrapolated to the full population.

Question 14

Disadvantages of statistical sampling

Answer 14

Where data is not available in electronic format, statistical sampling may not be an efficient way of obtaining an appropriate sample.
Statistical sampling requires additional expertise within an audit team, or software provided to an audit firm, to obtain a sample.

Question 15

Random Seed

Answer 15

The starting point when generating a random sample. Random seeds are often produced using a random number generator to ensure the auditor has not influenced the sample by choosing a starting point.