Performing Audit Procedures, Investigation, Anomaly,Porjection

Question 1

Performing Audit Procedure

Answer 1

Let’s break down the process of performing audit procedures on a sample, as required by ISA 530, with practical examples to illustrate each step.

Explanation: When designing a sample, the auditor must perform appropriate audit procedures on each selected item. If a procedure is not applicable to a selected item, the auditor must replace it with another item. If the procedure cannot be applied (e.g., due to a lost document), the item is treated as a misstatement or deviation.

Example: An auditor selects a sample of cheques to test for authorization. If one cheque is found to be cancelled, the auditor replaces it with another cheque. If a document is lost, the auditor treats it as a deviation.

Explanation: The auditor must investigate the nature and cause of any misstatements or deviations and evaluate their possible effect. This may involve extending audit procedures to specific periods, types of transactions, or locations if the issue seems isolated.

Example: If an auditor finds that errors occurred only when a temporary staff member was employed, they might extend testing to all transactions processed by that staff member.

Explanation: An anomaly is a misstatement or deviation that is not representative of the population. The auditor must obtain a high degree of certainty that an anomaly does not affect the rest of the population by performing additional procedures.

Example: If an auditor finds a single error that is clearly due to an isolated incident, they perform additional tests to ensure this error does not indicate a broader issue.

Explanation: The auditor projects the misstatements found in the sample to the entire population to estimate the likely misstatement. They then evaluate whether the sample results provide a reasonable basis for conclusions about the population.

Example: If an auditor finds a $1,000 misstatement in a sample of 100 items from a population of 1,000 items, they project the misstatement to the entire population:
- Projected misstatement: (\frac{1,000}{100} \times 1,000 = $10,000)

Let’s consider an auditor testing a company’s sales transactions:

1. Performing Audit Procedures: The auditor selects 50 sales transactions to test for proper authorization. If one transaction is found to be voided, the auditor replaces it with another transaction.
2. Investigating Misstatements/Deviations: The auditor finds that errors occurred only during a specific month when a new system was implemented. They extend testing to all transactions from that month.
3. Anomalies: The auditor finds a single error due to a one-time system glitch. They perform additional tests to ensure this error is not indicative of a broader issue.
4. Projecting Misstatements: The auditor finds a $500 misstatement in a sample of 50 transactions from a population of 500 transactions. They project the misstatement to the entire population:
   • Projected misstatement: (\frac{500}{50} \times 500 = $5,000)

By following these steps, the auditor can effectively perform audit procedures on the sample, investigate any issues, and project misstatements to draw conclusions about the entire population.

Feel free to provide another topic, and I’ll explain it in the same detailed format!