Session 7 - Sampling

Question 1

Materiality

Answer 1

The expression of the relative significance/importance of a particular matter in the context of the financial statement as a whole

Question 2

Materiality - stages

Answer 2

- Addressee of Financial statement:
Shareholder 
Other stakeholders 
- Planning stage: 
Legislations 
Regulations 
- court decision

Question 3

Materiality - if error > 10% of profit

Answer 3

Then it is material

Question 4

Materiality error between 5-10%

Answer 4

Then review

Question 5

Problems with profit

Answer 5

Dot comes - making loses not profits
Volatile profits
Manipulated profits (legally)
Family companies - remuneration (profits)

Question 6

Materiality - other factors

Answer 6

Trend in profits 
Effects on ratios 
-profit ratios 
-cover ratios - bank covenants 
External influences 
-profit forecasts 
-possible takeovers 
Auditors perception of risks

Question 7

Planning stage

Answer 7

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

Question 8

Materiality - at evaluation stage

Answer 8

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

Question 9

Materiality - qualitative issues

Answer 9

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

Question 10

What is sampling?

Answer 10

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

Question 11

Statistical sampling

Answer 11

Sample from a population that is homogeneous (all items have same characteristics)

Question 12

Sampling methodology

Answer 12

Random (statistical) - same probability of selection
Systematic/internal - close to statistical
Block/cluster (non-statistical)
Haphazard sampling - non-stat

Question 13

Level of confidence required

Answer 13

Influence by assessment of:

• inherent risk
• control risk
• evidence from other relevant audit tests

Question 14

Expected error/amount in population

Answer 14

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)

Question 15

TER

Answer 15

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

Question 16

MUS

Answer 16

Monetary unit sampling

Used to estimate the amount by which an account balance is in error

Question 17

Statistical sampling

Answer 17

Auditors make explicit their judgments
Justifiably - stat principles
Can evaluate precisely

Question 18

Non-statistical sampling

Answer 18

Use experience
Quick
Biasing - high risk/unusual

Question 19

Discovery sampling

Answer 19

Error and test stops

Question 20

Variable sampling

Answer 20

Mean per unit method

Estimate population from sample - normal distribution

Question 21

Ratio and difference method

Answer 21

Compare audited value with book value

Extrapolate the results

Question 22

Ratio method

Answer 22

Error * (population value / sample value)

Question 23

Difference method

Answer 23

Error * ( no of population/no in sample)

Question 24

Pre-work

Answer 24

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

Question 25

Pre-final work

Potential issues

Answer 25

Issues from interim 
Stocktaking instructions 
Deviation from timetable 
Circularisation 
Requirements of accounting and reported standards

Question 26

Circularisation

Answer 26

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)

Question 27

Analytical procedures

Answer 27

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