Session 7 - Sampling Flashcards
Materiality
The expression of the relative significance/importance of a particular matter in the context of the financial statement as a whole
Materiality - stages
- Addressee of Financial statement: Shareholder Other stakeholders - Planning stage: Legislations Regulations - court decision
Materiality - if error > 10% of profit
Then it is material
Materiality error between 5-10%
Then review
Problems with profit
Dot comes - making loses not profits
Volatile profits
Manipulated profits (legally)
Family companies - remuneration (profits)
Materiality - other factors
Trend in profits Effects on ratios -profit ratios -cover ratios - bank covenants External influences -profit forecasts -possible takeovers Auditors perception of risks
Planning stage
Materiality is set at start and monitored throughout
At general level and component level:
Importance of heading -large/small
Trend in account balance -ratios/departure
Past experience - errors in particular area
Materiality - at evaluation stage
Size and incidence Does a pattern emerge Are errors a matter of fact/opinion Illegality - cash payment - reporting issue Potential of fraud Balance sheet items only
Materiality - qualitative issues
Whether the item is required to be disclosed
-companies act
Whether accounting policies are improperly disclosed and misleading?
Aggressive / passive ?
Where is improper classification
Discounted actives - short/long term
What is sampling?
Need sufficient appropriate work to be reasonably certain that audit conclusions are soundly based and at a reasonably cost
Selecting an area from s tire set of data
Statistical sampling
Sample from a population that is homogeneous (all items have same characteristics)
Sampling methodology
Random (statistical) - same probability of selection
Systematic/internal - close to statistical
Block/cluster (non-statistical)
Haphazard sampling - non-stat
Level of confidence required
Influence by assessment of:
- inherent risk
- control risk
- evidence from other relevant audit tests
Expected error/amount in population
The greater the expected error rate (or amount) the greater the sample size needed to conclude the actual error rate (or amount) is less than tolerate error rate (or amount)
TER
Tolerable error rate
The max error rate auditors are prepared to accept
When testing controls, TER is the max deviation rate in the sample the auditors are willing to accept and still conclude their initial evaluation of control risk is valid
MUS
Monetary unit sampling
Used to estimate the amount by which an account balance is in error
Statistical sampling
Auditors make explicit their judgments
Justifiably - stat principles
Can evaluate precisely
Non-statistical sampling
Use experience
Quick
Biasing - high risk/unusual
Discovery sampling
Error and test stops
Variable sampling
Mean per unit method
Estimate population from sample - normal distribution
Ratio and difference method
Compare audited value with book value
Extrapolate the results
Ratio method
Error * (population value / sample value)
Difference method
Error * ( no of population/no in sample)
Pre-work
Auditors will have an idea of work to be undertaken based on interim work and subsequent changes - event Need to: - smooth preparation of accounts - agreement of timetable for schedules - agreement of audit timetable - re-appraisal of audit budget
Pre-final work
Potential issues
Issues from interim Stocktaking instructions Deviation from timetable Circularisation Requirements of accounting and reported standards
Circularisation
Technique used by an auditor in which al debtors to a company are asked to confirm the amounts outstanding (positive circ) or reply if the amount stated is incorrect (neg circ)
Analytical procedures
Do figures make sense?
What to check?
- prepared using consistent principles
- info disclosed as required by law
- are figures such that an opinion can be given
- info consistent with auditors knowledge
