This document discusses audit evidence and audit sampling. It defines audit evidence as the information obtained by the auditor to draw conclusions and base the audit opinion on. The auditor obtains evidence from sources like documents, records, and third party confirmations, but does not examine all information due to sampling. Sampling allows auditors to reach conclusions about accounts, transactions, or controls through judgmental or statistical sampling procedures rather than a full examination. The document outlines factors that influence sufficient appropriate audit evidence and the design, performance, and evaluation of audit sampling. It compares statistical and non-statistical sampling and explains their uses in tests of controls and substantive procedures.
This document discusses audit evidence and audit sampling. It defines audit evidence as the information obtained by the auditor to draw conclusions and base the audit opinion on. The auditor obtains evidence from sources like documents, records, and third party confirmations, but does not examine all information due to sampling. Sampling allows auditors to reach conclusions about accounts, transactions, or controls through judgmental or statistical sampling procedures rather than a full examination. The document outlines factors that influence sufficient appropriate audit evidence and the design, performance, and evaluation of audit sampling. It compares statistical and non-statistical sampling and explains their uses in tests of controls and substantive procedures.
This document discusses audit evidence and audit sampling. It defines audit evidence as the information obtained by the auditor to draw conclusions and base the audit opinion on. The auditor obtains evidence from sources like documents, records, and third party confirmations, but does not examine all information due to sampling. Sampling allows auditors to reach conclusions about accounts, transactions, or controls through judgmental or statistical sampling procedures rather than a full examination. The document outlines factors that influence sufficient appropriate audit evidence and the design, performance, and evaluation of audit sampling. It compares statistical and non-statistical sampling and explains their uses in tests of controls and substantive procedures.
This document discusses audit evidence and audit sampling. It defines audit evidence as the information obtained by the auditor to draw conclusions and base the audit opinion on. The auditor obtains evidence from sources like documents, records, and third party confirmations, but does not examine all information due to sampling. Sampling allows auditors to reach conclusions about accounts, transactions, or controls through judgmental or statistical sampling procedures rather than a full examination. The document outlines factors that influence sufficient appropriate audit evidence and the design, performance, and evaluation of audit sampling. It compares statistical and non-statistical sampling and explains their uses in tests of controls and substantive procedures.
Download as PPTX, PDF, TXT or read online from Scribd
Download as pptx, pdf, or txt
You are on page 1/ 44
Audit Evidence & Audit Sampling
AI
500 para. 2 The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusion on which to base the audit opinion
Audit Evidence means the
information obtained by the auditor in arriving at the
conclusions on which the audit
opinion is based.
Source
documents Accounting records underlying the financial statements Corroborating information from other sources
PERSUASIVE
rather than CONCLUSIVE Auditors will seek audit evidence of Different sources Different nature . to support the same assertion.
In forming the audit opinion, the auditor does
not ordinarily examine all of the information available because conclusions can be reached about an account balance, class of transaction or control by way of using judgmental or statistical sampling procedures.
Sufficient Appropriate Influenced by
1. Inherent risk at both the financial
statement level and account balance or class of transactions level 2. Nature of the accounting and internal control systems and the assessment of control risk 3. Materiality of the item being examined
Influenced by (cont.) 4. Experience gained during previous audits 5. Results of audit procedures 6. Source and reliability of information available
Audit Evidence Sufficient
Appropriate
Measure of Quantity
Measure of Quality
Sample Size Corroborative nature of audit evidecne
Reliable
Relevance
Decide by Nature & Source
Relevant to a particular assertion
General
Documents
Legal
External vs. Internal
Direct From Third Party
Primary
Obtain direct by auditor
From Third Party held
by entity
Secondary
From the entity
Hearsay
Written vs. Oral
Circumstantial
Audit
evidence is obtained from
an appropriate mix of Test of Control Substantive Procedures
AI
500 para. 3 - In some
circumstances, evidence may be obtained entirely from substantive procedures
The
category of procedures aimed
specifically to test the operating effectiveness of controls in preventing, detecting and correction material misstatements at the assertion level. Ensure internal controls are operating in the manner intended
Test
performed to obtain audit
evidence to detect material misstatements in the financial statement Test of detail of transactions and balances Analytical procedures
The decision whether to use a statistical or
non-statistical sampling approach is a matter for the auditor's judgment regarding the most efficient manner to obtain sufficient appropriate audit evidence in the particular circumstances.
1.
Selecting all items (100% examination)
2.
Selecting specific items
3.
Audit Sampling
Less
likely for test of control
Common
for substantive
procedures with small number
of large value items
Judgmental selection base on:
Knowledge of clients business
Preliminary assessments of inherent
and control risks Characteristics of the population being tested
High value or key items
All items over a certain amount Items to obtain information Items to test procedures
However, the results of procedures applied to
items selected in this way cannot be projected
to the entire population. (AI 530.26 . it
does not constitute audit sampling )
Statistical Sampling Approach
Probability theory Attribute Sampling (Test of Control) Monetary Unit Sampling (Substantive Procedures) Consider the projected error on test objective
Classical Variables Sampling
Non Statistical Sampling Approach
Test of Control Substantive Procedures
Designing the sample
Determining sample size*
Selecting the sample**
Performing the audit procedures
Evaluation of sample results
This includes consideration of test objectives,
population and error attributes This is affected by the level of sampling risk, expected and tolerable error Choosing sample items that all sampling units in the population have a chance of selection. Should meet the audit objectives
Error analysis, projection of error and drawing final
conclusion on the sample reuslts.
ISA 530. 40 In determining the sample size,
the auditor should consider whether sampling risk is reduced to an acceptably low level. Sample size is affected by the level of sampling risk that the auditor is willing to accept. The lower the risk the auditor is willing to accept, the greater the sample size will need to be.
ISA 530.41 The sample size can be
determined by the application of a statistically-based formula or through the exercise of professional judgement objectively applied to the circumstances.
ISA 530. 42The auditor should select items for the sample with the expectation that all sampling units in the population have a chance of selection. Statistical sampling requires that sample items are selected at random so that each sampling unit has a known chance of being selected. The sampling units might be physical items (such as invoices) or monetary units. With non-statistical sampling, an auditor uses professional judgment to select the items for a sample. Because the purpose of sampling is to draw conclusions about the entire population, the auditor endeavors to select a representative sample by choosing sample items which have characteristics typical of the population, and the sample needs to be selected so that bias is avoided.
ISA 530.43 The principal methods of
selecting samples are the use of random number tables or computer programs, systematic selection and haphazard selection.
Random Number Selection
Via random number table.
Systematic Selection
Auditor determines a sampling interval by dividing
the physical population by the sample size.
Haphazard Selection
Sampling units are selected without any conscious
bias.
Voided documents (properly voided, not a
deviation) Unused or inapplicable documents Missing documents Stopping the test before completion (if large deviation detected at the beginning)
Designing 1. Determine the objective of the test of controls 2. Define the control deviation 3. Define the population 4. Define the sampling unit (per entry, per doc.. ) 5. Determine the sample size 1. 2. 3. 4.
Determine the acceptable risk of assessing control
risk too low Determine the tolerable deviation rate Determine the expected population deviation rate Consider the effect of population size
Performance 6 .Randomly select the sample items 7. Calculate the sample results Evaluation 8. Calculate the sample results 9. Performing error analysis 10. Draw final conclusion
1. 2. 3. 4.
5.
1. 2. 3. 4. 5.
Designing Determine the objective of the tests Define the population Define the sampling unit Choose the audit sampling technique Determine the sample size
Consider the variation within the population
Determine the acceptable risk of incorrect acceptance Determine the tolerable misstatement Determine the expected amount of misstatement Consider the effect of population size
6. 7.
8. 9.
10.
Performance Randomly select the sample items Perform the audit procedures Evaluation Calculate the sample results Perform error analysis Draw final conclusions.
Lower Training Costs
Ease of Implementation
Impracticality of Random Based Selection
Proposed Adjustment Based on Qualitative
Analysis
Auditors tend to develop better working paper
documentation. Auditors believe that their audit work is more objective and defensible. Auditors save time by eliminating tests of controls that have no influence on substantive audit procedures. Auditors are more capable of rendering suggestions to the clients. Auditors have greater confidence about the audit opinion.
Allows auditors to calculate sample reliability and the
risk of reliance on the sample
Permits auditors to optimize the sample size given the
mathematically measured risk they are willing to accept. Avoiding over and under audit.
Enable auditors to make objective statements about the
sampled population on the basis of the sample. i.e. The sample findings can be projected to the population and sampling risk can be explicitly considered by using accepted mathematical calculations.
Select items for the sample with the
expectation that all sampling units in the population have a chance of selection. Audit Procedures appropriate to particular test objective Consider Sample results, nature & cause of any errors identified & possible effect on particular test objective & audit Evaluate sample results to confirm preliminary assessment of characteristics of population
Sampling Risk Possibility that the sample drawn is not representative of the population.
Non Sampling Risk
Possibility that the auditor may use inappropriate audit procedures, fail to detect a misstatement when applying and audit procedure or misinterpret an audit
result.
Term
Statistical Term
Relates to
Risk of Incorrect Rejection
Type I error (Alpha Risk)
Audit Efficiency
Risk of Incorrect Acceptance
Type II error (Beta Risk)
Audit Effectiveness
Type I and Type II risks
For Test of Control Type I risk is the risk the auditor will conclude that the control risk is higher than it actually is. (Risk of assessing control risk too high) Type II risk is the risk the auditor will conclude that control risk is lower than it actually is. (Risk of assessing control risk too low)
Type I and Type II risks
For Substantive Procedures Type I risk is the risk the auditor will conclude that a material error exists when in fact it does not. Type II risk is the risk the auditor will conclude that a material error does not exist when in fact it does.
Factor
Effect on Sample Size
An increase in the auditors intended reliance on
accounting and internal control systems
Increase
An increase in the rate of deviation from the
prescribed control procedure that the auditor is willing to accept
Decrease
An increase in the rate of deviation from prescribed
control procedure that the auditor expects to find in the population
Increase
An increase in the auditors required confidence
level
Increase
Factor
Effect on Sample Size
An increase in the auditors assessment of inherent risk
Increase
An increase in the auditors assessment of control risk
Increase
An increase in the use of other substantive procedures
for same assertion
Decrease
An increase in the auditors required confidence level
Increase
An increase in the total error that the auditor is willing to
accept
Decrease
An increase in the amount of error the auditor expects
to find in the population
Increase
Stratification of the population when appropriate
Decrease
Population
All the items in the account or group being audited.
Stratified Selection
A sampling technique applied by grouping sampling
units with similar characteristics into separate strata to reduce the variability among sampling units.
Deviation
A failure to comply with a control.
Confidence level
The probability of being correct in assessing the level
of control risk.
Expected Deviation Rate
Tolerable Deviation Rate
Tolerable Misstatement
An estimate of a population deviation rate based on
prior knowledge.
The maximum rate of deviations from a prescribed
control that the auditor would be willing to accept without altering his/her planned assessed level of control risk. The maximum monetary misstatement for an account balance or class of transactions that may exist without causing the financial statement to be materially mistated.
