Week 8/9/10 - Audit And Corporate Governenance (2) Flashcards
When deciding how much audit evidence to collect, what are the 3 stages included in the 1st step and what do they collectively relate to?
The first stage relates to the information system and controls in place within a business.
- Understand the clients information systems
- Assess the internal control system
- Consider is the system effective or ineffective?
If it is established that a firm has a poor internal control system and is therefore ineffective, what does this mean in relation to audit evidence?
Extensive substantive tests are needed.
If it is established that a firm has a good internal control system and is therefore effective, what does this mean in relation to audit evidence?
Limited substantive tests are needed.
What is meant by the term ‘substantive testing’?
Testing the substance of transactions and balances to ensure what has been recorded is in fact correct.
What is the objective of ‘substantive testing’?
To verify the validity, completeness and accuracy of the financial statement transactions and balances.
They’re designed to detect material misstatement at the assertion level.
There are two types of ‘’substantive tests’, what are they?
- Substantive analytical procedures.
2. Tests of details.
What is the definition of a ‘substantive analytical procedure’ and when are they most appropriate?
‘Substantive analytical procedures’ evaluate financial information by studying plausible relationships between financial and non financial data.
‘Substantive analytical procedures’ are most appropriate when auditing large volumes of predictable transactions.
What is the definition of ‘Tests of detail’ and when are they most appropriate?
Tests of detail are used by auditors to collect evidence that the balances, disclosures and underlying transactions associated with a clients F/S are correct.
tests of detail are more appropriate for areas of significant risk, for example “All payments over £1,000,000 need to be tested in detail”.
When deciding how much audit evidence is appropriate, what needs to be considered?
the audit risk model, the higher the risk the more evidence is needed.
What is meant by the term ‘sampling risk’?
Sampling risk is the probability that we conclude that an accounting item is not materially misstated when in fact it is (out of all the items we could have tested, we have only tested the ones without error).
Sampling risk is also a function of colluding that controls are effective when in fact they are not.
What are the two ways to choose samples?
- Judgmental
2. Statistical
In ‘judgemental sampling’ the auditor uses their judgement to decide what three things?
- The sample size
- What items should be selected for testing
- Whether to not to accept the population as reliable based upon the sample.
Give three advantages given for the use of judgemental sampling.
- Cheaper - If we use judgemental sampling for the most high risk things, the overall number of tests will be lower.
- Simpler - we don’t have to do statistical calculations.
- Allows the auditor to use their knowledge of the firm to asses which transactions need testing.
Give two disadvantages of using judgemental sampling.
- No way of reliably measuring sampling risk
2. Auditors can avoid testing items that seem difficult or unusual.
What is meant by the term ‘statistical sampling’?
Statistical sampling uses probability theory to determine the sample size, sample selection and conclusion as to reliability. this is done through the use of a random number generator.
