11: Evidence and sampling

Question 1

What are the two types of test?

Answer 1

• Test of controls
• Substansive procedures

Question 2

What are the procedures to obtain evidence?

Answer 2

AEIOU

Analytical procedures
Enquiry
Inspection
Observation
recalcUation

Question 3

Explain analytical procedures and give a weakness

Answer 3

Evaluation of financial information by studying information by studying possible relationships among financial and non financial data. e.g. CY & PY

• Validity and accuracy of the benchmark data

Question 4

Explain enquiry and give a weakness

Answer 4

Ask a relevant person for information e.g. directors, managers

• Integrity of the individual chosen

Question 5

Explain inspection and give a weakness

Answer 5

Of a document such as an invoice or a physical asset

• Internal paperwork can be altered

Question 6

Explain Observation and give a weakness

Answer 6

Of a process such as an inventory count

• This only confirms the procedures were followed at the time of observation

Question 7

Explain recalcUlation and give weakness

Answer 7

Check the mathematical accuracy of a document

• Confirms the sum/cost is correct, not the accuracy, validity, completeness or existence of the data.

Question 8

What are computer assisted audit techniques?

Answer 8

Test data
Audit software
Data analytics

Question 9

Explain test data and give example

Answer 9

• Where the auditor tests the integrity of the client’s system by posting data onto the client’s computer system to see if the transactions are posted as they should be.

E.g. password controls - see if unathroised users can access key areas of the system

Question 10

Explain audit software and give example

Answer 10

Where auditor uses his own computer programmes to substansively test a balance or transaction.

E.g. The spread sheet which can check the correct casting (addition) of numbers or facilitate sample selection and ratio calcs.

Question 11

Explain data analytics and give example

Answer 11

Using IT to help identify patterns or trends this may allow the auditor to review 100% of the population

e.g.
-Review staff emails to identify risk of fraud via key words
-analyse sale trends by product/region

Question 12

When should analytical procedures be used

Answer 12

• Planning stages and as part of substansive procedures

Question 13

What are possible sources of info about the client used at risk assessment stage?

Answer 13

 Interim financial information
 Previous financial statements
 Budgets
 Management accounts
 Non-financial information
 Board minutes

Question 14

What must an auditor decide when using substansive analytical procedures?

Answer 14

Whether SAPs will be effective and efficient in reducing audit risk to an acceptably low level.

Question 15

What are the factors an auditor should consider when using APs as substansive procedures?

Answer 15

• Objective of the APs e.g. APs may be good at indicating whether population is complete
• Suitability of APs
• Reliability of data

Question 16

What are the possibilities of directional testing in final statements

Answer 16

Fairly stated

Misstated - Either overstated (Assets/income) or understated (Liabilities/expenses)

Question 17

How does the testing approach differ for over vs understatement

Answer 17

Over = Financial statments then source docs (title deeds valuation)
Under = Source docs (Supplier statement) then financial statements

Question 18

What are common audit procedures used to test estimates

Answer 18

• Review process used by management to develop the estimate for reasonableness
• Use an independent expert to make an estimate for comparison
• Review the accuracy of prior year’s estimates compared to the final actual results
• Review subsequent events for events that help to confirm accuracy of estimate

Question 19

What is audit sampling?

Answer 19

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. (Representative sample)

Question 20

What is a population

Answer 20

The entire set of data from which the sample is selected and an auditor wishes to draw conclusions on.

Question 21

What is statistical sampling

Answer 21

A sampling approach with the following characteristics:
1. Random selection of the sample items and
2. The use of probability theory to evaluate sample results

Question 22

What is non-statistical sampling

Answer 22

a sampling approach that does not have characteristics 1 and 2

Question 23

What are auditors required to do when sampling

Answer 23

Select items for a sample in such a way that each sampling unit in the population has a chance of selection.

Question 24

What is the difference between a misstatement and error

Answer 24

a difference between the amount or disclosure of a reported financial statement item and the amount, classification or disclosure that is required for the item in accordance with applicable reporting framework.

Error is an unintentional misstatement in financial statements including the omission of an amount or a disclosure.

Question 25

What factors would increase sample size?

Answer 25

• Increase in the auditors assessment of the risk of material misstatement
• Increase in an auditor’s desired level of assurance
• Increase in the amount of misstatement the auditor expects to find in a population
• Decrease in the use of analytical procedures to test the same balance

Question 26

What is random selection

Answer 26

Ensures each item in population has an equal chance of selection e.g. computer generator

Question 27

What is systematic sampling

Answer 27

Selecting items using constant intervals between selections e.g. every 10th sales invoice

Question 28

What is haphazard selection

Answer 28

An alternative to random selection provided assurane providers are satisfied that the sample is representative of the entire population e.g. auditor uses judgement to choose sample, but risk of bias.

Question 29

What is sequence or block selection

Answer 29

May be used to check whether certain items have particular characteristics. e.g. sample of 50 consecutive cheques to check they have authorised signatories rather than 50 random throughout the year.

Question 30

What is monetary unit sampling

Answer 30

Selection method that ensures every £1 in a population has an equal chance of being selected for testing. e.g. every cumulative 50000th £1 is selected.

Question 31

How do auditors estimate probable misstatement in population

Answer 31

Use results from sample onto the relevant population by extrapolating the misstatements found in the sample.

Question 32

What are the considerations with remote auditing?

Answer 32

• Electronic signatures on documents may be used
• Video-conferencing too
• Pandemic related risk factors must be concidered e.g. would influence going concern
• Impact on possibility of fraud, individuals may act different post pandemic

Question 32

What happens if the projected population misstatement exceeds or is close to tolerable misstatement?

Answer 32

Consider extending auditing procedures or performing alternative procedures.

Question 32

What must an auditor consider when evaluating whether a misstatement is material?

Answer 32

Size and nature of misstatements alongside particular circumstances of their occurence.