Test Of Detail

Question 1

Test of detail

Answer 1

Let’s break down the concepts of misstatement, deviation, and sample size in the context of ISA 530, along with practical examples to illustrate each point.

Explanation: ISA 530 requires auditors to understand what constitutes a misstatement or deviation to effectively design audit procedures. A misstatement is an error in the financial statements, while a deviation is a departure from prescribed controls or procedures.

Example: If an auditor is testing the accuracy of trade receivables, an error where an invoice is posted to the wrong customer account does not affect the total trade receivables. This error is not a misstatement in the context of the financial position but is a deviation in the accuracy of individual customer accounts.

Explanation: The auditor must determine a sample size that reduces sampling risk to an acceptable level. Sampling risk is the risk that the auditor’s conclusion based on a sample is different from the conclusion they would reach if the entire population were tested.

Factors Influencing Sample Size:
1. Increase in auditor’s assessment of the risk of material misstatement: If the risk of material misstatement is high, the sample size increases.
2. Increase in tolerable misstatement: If the auditor can tolerate a higher level of misstatement, the sample size decreases.
3. Increase in the amount of misstatement the auditor expects in the population: If more misstatements are expected, the sample size increases.
4. Increase in the auditor’s desired level of assurance: If the auditor wants higher assurance that the tolerable misstatement is not exceeded, the sample size increases.
5. Number of sampling units in the population: Generally, this has a negligible effect on sample size.
6. Increase in use of other substantive procedures for the same assertion: If other substantive procedures are used, the sample size decreases.
7. Stratification of population: Stratifying the population can reduce the sample size.

Let’s consider an auditor determining the sample size for testing trade receivables:

1. Risk of Material Misstatement: The auditor assesses a high risk of material misstatement due to past errors in trade receivables.
   
   • Effect: Increase sample size.
2. Tolerable Misstatement: The auditor sets a tolerable misstatement at $10,000.
   
   • Effect: If this amount were higher, the sample size would decrease.
3. Expected Misstatement: The auditor expects a higher number of misstatements based on prior audits.
   
   • Effect: Increase sample size.
4. Desired Level of Assurance: The auditor wants a high level of assurance that the actual misstatement does not exceed the tolerable misstatement.
   
   • Effect: Increase sample size.
5. Number of Sampling Units: The population consists of 1,000 trade receivable accounts.
   
   • Effect: Negligible impact on sample size.
6. Other Substantive Procedures: The auditor also performs analytical procedures on trade receivables.
   
   • Effect: Decrease sample size.
7. Stratification: The auditor stratifies the population by age of receivables, focusing more on older accounts.
   
   • Effect: Decrease sample size due to targeted testing.

By considering these factors, the auditor can determine an appropriate sample size to gather sufficient and appropriate audit evidence.

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