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AUDIT EVIDENCE ASSERTIONS, AUDIT
TOOLS AND SAMPLING
CHAPTER 5
. Learning outcomes Revision of: Auditing tools Assertions Different sampling concepts are explained in an auditing context. Application of sampling in audit procedures is explained Steps in the sampling exercise are discussed in the audit context. Different sampling selection methods used in the auditing profession are explained. Use of sampling approach in practical scenarios is critiqued. External auditor Express an opinion on the fair presentation of AFS Risk of material misstatement – ISA 315 Need an understanding of the entity and its environment Audit evidence Sufficient (quantity) Appropriate (quality)
* Reliability * Relevance Factors that influence appropriateness
Assessment of inherent and control risk
Materiality
Experience from previous audits
Results of audit procedures already conducted
Source and reliability of information
Persuasiveness of the audit evidence
Financial Statement Assertions (p5/23)
Transactions and events (I/S)
Balances (B/S) Presentation and disclosure Transactions and events Occurrence Completeness
Accuracy
Cut-off
Classification Balance sheet Existence Rights and obligations
Completeness
Accuracy, Valuation and allocation
Classification
Presentation Auditor’s toolbox (p5/25) Inspection Observation External confirmation Recalculation Re-performance Analytical procedures Inquiry Audit Sampling (p5/30) Audit sampling Anomaly Population Sample risk Non-sampling risk Sampling unit Statistical sampling Audit Sampling Stratification Tolerable rate of deviation Tolerable misstatement Steps in the Sampling Exercise Step1: Determine the objective of the procedure Step 2: Determine the procedure to be performed - Attribute (what should be there) - Deviation (Absence of the attribute) Steps in the Sampling Exercise Step 3: Confirm that the population is appropriate and complete Step 4: Define the units of the population/ units of the sample Step 5: Determine the sample size Steps in the Sampling Exercise Step 5: Determine the sample size. How many items should be selected to reduce sampling risk?
Professional Judgement
Statistical, use professional judgement to determine:
- Confidence level: % of how often a sample will correctly
represent the population - Tolerable misstatement/Tolerable rate of deviation: Maximum extent of “error” that the auditor is willing to accept and still feel that the objective of sampling procedure has been achieved. Steps in the Sampling Exercise Step 5: Statistical, use professional judgement to determine
(cont): - Expected misstatement/ rate of deviation: Expected “error” rate to be made because the greater the anticipated misstatement/rate of deviation the larger the sample size. - the population size (number of sampling units) Step 6: Select the sample Steps in the Sampling Exercise Step 6: Select the sample Random: Every unit have an equal chance of selection and
selection can be made manually by using random number
tables or by computer. Systematic: This involves selecting a random starting point
Block: Selecting a block of contiguous items from within the
population (e.g invoice no 125668 to 126000
Steps in the Sampling Exercise Step 7: Perform the audit procedures as determined in step 2. Step 8: Analyse the nature and cause of deviations and misstatements. Step 9: Project the sample results over the population Step 10: Evaluate. Quiz: The auditor’s objective when using sampling is to: a) Keep the cost of the audit within a reasonable but acceptable budget; b) Provide a reasonable basis on which to draw conclusions about the population from which the sample is drawn; c) Address one of the limitations of an audit; d) Identify only those misstatements or deviations which are material. Quiz – Solution: The auditor’s objective when using sampling is to:
a) Keep the cost of the audit within a reasonable but acceptable budget;
b) Provide a reasonable basis on which to draw
conclusions about the population from which the sample is drawn; c) Address one of the limitations of an audit;
d) Identify only those misstatements or deviations which are material.
Quiz: The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same procedure is termed: a) Statistical risk b) Inherent risk
c) Sampling risk d) Non-sampling risk Quiz - Solution The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same procedure is termed: a) Statistical risk b) Inherent risk
c) Sampling risk d) Non-sampling risk Quiz: An approach to sampling which is based on the random selection of the sample items and the use of probability theory to evaluate sample results is termed: a) Monetary unit sampling b) Risk based sampling
c) Audit sampling d) Statistical sampling Quiz - Solution An approach to sampling which is based on the random selection of the sample items and the use of probability theory to evaluate sample results is termed: a) Monetary unit sampling b) Risk based sampling c) Audit sampling
d) Statistical sampling Quiz: A lower level of sampling risk which the auditor is willing to accept will: a) Result in a smaller sample size; b) Result in a greater sample size;
c) Have no effect on the sample size;
d) Have no effect on the sample size, but will increase the audit risk. Quiz - Solution A lower level of sampling risk which the auditor is willing to accept will: a) Result in a smaller sample size;
b) Result in a greater sample size;
c) Have no effect on the sample size; d) Have no effect on the sample size, but will increase the audit risk.
