Week 8 Flashcards
ISA 500 gives 3 ways of selecting items for testing
- Selecting all items (100%)
- Selecting specific items
- Sampling by applying ISA 530
What is sampling in the context of auditing?
The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.
ISA 530, 2016
What types of items might be selected when choosing all items (100%)?
High value items such as land and buildings, directors’ emoluments and loans, unusual items, and high risk items.
What types of items might be selected when selecting specific items
High value or key items, items to obtain information e.g. to document system (note this is not sampling)
What are the types of sampling according to ISA 530?
a. Judgemental sampling
b. Haphazard sampling
c. Statistical sampling
What are the methods of statistical sampling?
I. Random selection
II. Systematic/Interval selection
III. Cluster or block sampling
IV. Monetary Unit Sampling (MUS)
What are the advantages of judgemental sampling?
- Well refined if used for years.
- Utilizes intuition and judgement (professional scepticism).
- No need for statistics/computer programmes.
- Less time consuming.
- Less costly.
What are the disadvantages of judgemental sampling?
- Unscientific/subjective.
- Biased.
- No logic.
- Not quantifiable.
- Conclusions less specific.
- Wasteful as samples are often very large.
What is haphazard sampling?
No structure to picking the sample but can be used if the sample is representative of the population.
What are the risks associated with haphazard sampling?
Can lead to bias (e.g., only picking those easily located). Must ensure all items in the population have a chance of selection.
What are the advantages of statistical sampling?
- Scientific.
- Defensible.
- Mathematically based.
- Efficient.
- Can use lower grade staff.
- Makes auditors explicitly state their judgements on confidence levels, expected error rates, and tolerable error rates.
What are the disadvantages of statistical sampling?
- Not always understood.
- Audit judgement appears to take second place.
- Inflexible.
- Does not incorporate the fact that several attributes of a transaction/balance/document can be tested at the same time.
- Documents must be held in a manner such that they can be separately identified.
What is the importance of bank reconciliation?
A bank reconciliation is part of the control system of any business, highlighting errors and inconsistencies. It provides assurance to auditors that cash and bank transactions are adequately controlled. ISA 500,200
What does a correctly performed bank reconciliation signify?
It is a powerful tool that helps ensure that cash and bank transactions are properly managed.
What controls trying to ensure
ensuring all cash is received, cash sales properly recorded, and deposited at the bank.
What are suggested controls for cash handling?
Suggested controls include authorisation of cash receivers, use of pre-numbered cash registers, issuing receipts, regular cash collection by a separate person, reconciliation of takings to bank statements, and rotation of duties.
What methods can be used to test a client’s internal controls?
Methods include enquiring of staff, inspecting documents, re-performing procedures, and observing control activities.
What is an example of enquiring of staff to test internal controls?
Discussing with the financial controller and sales ledger clerk the procedures for chasing bad debts.
What does inspection involve in testing internal controls?
Inspection involves checking the sequence of a sample of orders or invoices and verifying authorisation.
What does re-performance of procedures entail?
Re-performance involves conducting a monthly bank reconciliation to verify accuracy.
What does observing control activities mean?
Observing control activities means watching procedures like segregation of duties in the warehouse.
