QB Chapter 11: Evidence and sampling

Question 1

Which two of the following statements are correct?
A Inspection of assets confirms rights and obligations
B Inspection of a purchase invoice confirms the cost of inventory
C Observation gives strong ongoing evidence of the matter being observed
D Inquiry of third parties gives better evidence than inquiries of entity insiders

Answer 1

B,D Inspection of assets does not confirm rights and obligations as the asset might be
possessed wrongfully or leased and inspection will not show that. Observation gives
only weak evidence of the matter being observed and only at the moment the matter
was being observed, not the next time it is done, unobserved

Question 2

n which three of the following situations could audit software appropriately be used?
A When checking calculations on a selection of invoices
B When extracting a sample of invoices over a certain value
C When extracting all invoices to specific customers
D When testing controls over invoice processing

Answer 2

A,B,C
Option D is not correct as test data, as opposed to audit software, is used to test
controls over processing.

Question 3

According to ISA (UK) 315, Identifying and Assessing the Risks of Material Misstatement
Through Understanding of the Entity and Its Environment and ISA (UK) 520, Analytical
Procedures which two of the following statements are correct?
A Analytical procedures must be used as risk assessment procedures.
B Analytical procedures must be used as substantive procedures.
C Analytical procedures must be used during the overall review stage of an audit.
D Analytical procedures must be carried out by senior level assurance staff.

Answer 3

A,C While analytical procedures must be used at the risk assessment and overall review
stages, they need not be used as substantive procedures as tests of details and other
procedures may be more appropriate. Although it may be advisable for analytical
procedures to be carried out by senior level assurance staff, this is not a requirement of
ISA 520.

Question 4

Which three of the following statements are correct?
When using analytical procedures, assurance providers should:
A consider whether the information they might require will be available.
B consider the knowledge gained during previous assurance engagements.
C consider the source of the information and whether it is reliable.
D not use information that has been internally generated at the entity.

Answer 4

A,B,C
Option D is not correct as the assurance provider may use information that has been
internally generated at the entity, provided he is satisfied that information has been
properly prepared.

Question 5

Which one of the following procedures would be the most appropriate for verifying the
interest accrued on borrowings?
A Confirming the interest rate with the lender
B Vouching to the interest paid
C Testing internal controls over cash payments
D Recalculating the interest accrued on the basis of outstanding amount, interest rate
and period to which it relates

Answer 5

D Recalculating the interest accrued on the basis of outstanding amount, interest rate
and period to which it relates would be the most appropriate for verification of the
interest accrued on borrowings. Confirming the interest rate with the lender would not
verify the total interest accrued balance (as the interest rate is only one component of
the calculation) nor would vouching the interest payment (as interest paid is not the
same as interest accrued). Testing the internal controls over cash payments would not
lead to direct verification of the interest accrued. SAMPLE PAPE

Question 6

Which two of the following statements are correct?
A When testing for overstatement, the assurance provider will test items from the
accounting records to the supporting documents.
B When testing for understatement, the assurance provider will test items from the
accounting records to the supporting documents.
C When testing for overstatement, the assurance provider will select items from outside
the accounting records and trace to the records.
D When testing for understatement, the assurance provider will select items from outside
the accounting records and trace to the records.

Answer 6

A,D When testing for overstatement (ie, seeking to discover errors), the assurance provider
will test items from the accounting records to the supporting documents. When testing
for understatement (ie, seeking to discover omissions), the assurance provider will
select items from outside the accounting records and trace to the records.

Question 7

Which two of the following constitute sampling?
A Testing 100% of the items in a population
B Testing less than 100% of the items in a population
C Testing all items with a certain characteristic
D Testing items selected randomly from the population

Answer 7

B,D Testing 100% of items in a population and testing all items with a certain characteristic
is not sampling, as in the former case the whole population is tested, and in the latter
case the ‘sample’ is not representative of the whole population.

Question 8

Which two of the following are factors that an assurance provider should take into account
when determining the sample size for a test of details?
A The time available to complete the test
B The skill of the team member assigned to carry out the test
C A decrease in the assurance provider’s assessment of the risk of material misstatement
D An increase in the level of expected misstatement

Answer 8

C,D The time available to complete the test and the skill of the team member assigned to
carry out the test will not affect the number of items to be tested, whereas risk
assessment and expected misstatement will.

Question 9

The assurance provider is using statistical sampling.
Which three of the following methods would be most appropriate to use to select a sample
of accounts receivable?
A Random selection
B Systematic selection
C Haphazard selection
D Sequence selection
E Monetary unit selection

Answer 9

A,B,E
Sequence sampling would more commonly be used in testing controls. Haphazard
selection should not be used when the assurance provider is using statistical sampling

Question 10

Which two of the following misstatements discovered in a sample would not generally be
extrapolated against the total population?
A A misposting between customer accounts
B A misstatement in invoice value
C An invoice omitted in error
D An invoice disputed by a customer
E A timing difference between customer records and client records

Answer 10

A,E A misposting between customer accounts and a timing difference between customer
records and client records are errors which would not generally be extrapolated
against the total value of the population

Question 11

Assurance providers obtain evidence using procedures set out in ISA 500.
For each of the following tests, select the type of procedure which is being used.
The assurance provider writes to a sample of customers asking them to inform him of the
balance they owe the company at the year end.
A Inspection
B Observation
C Confirmation
The assurance provider looks at a share certificate to confirm that the company has an
investment in Company A.
D Inspection
E Observation
F Confirmation
The assurance provider attends the inventory count and ensures that it is being carried out
in accordance with the issued instructions.
G Inspection
H Observation
I Confirmation

Answer 11

C,D,H
Documents and other pieces of evidence are inspected. Processes are observed.
External confirmations involve seeking evidence from a third party.

Question 12

For each of the following statements concerning computer–assisted audit techniques
(CAATs), select whether they are true or false.
CAATs can be used to perform the assurance procedure of ‘reperformance’.
A True
B False
Test data can be used to ensure that controls in the client’s system are operating as the
assurance provider expects them to.
C True
D False
Audit software makes use of the client’s specialised software to run audit procedures.
E True
F False

Answer 12

A,C,F
Audit software makes use of the assurance provider’s own specialised software. It can
extract and analyse information from the client’s system. Test data are used to test
controls by inputting data which should activate a control and checking that it does so.

Question 13

In respect of an assurance engagement, which one of the following is the least persuasive
method of gathering evidence?
A Inspection of a supplier’s invoice
B Reperformance of a client’s supplier statement reconciliation
C Reperformance of a depreciation calculation
D Inspection of a sales invoice

Answer 13

D Inspection of a sales invoice produced by the client would constitute the least
persuasive method of gathering evidence as it is the least reliable of all the options.
The supplier’s invoice is more reliable as it comes from a third party and
reperformance of calculations and reconciliations is also more reliable as this evidence
is generated by the assurance provider/reporting accountant. SAMPLE PAPER

Question 14

When determining a sample size for tests of details there are a number of factors which an
auditor should take into account.
For each of the following factors, select whether it would cause the sample size to increase
or to decrease.
The auditor’s required confidence level increases.
A Increase
B Decrease
The assessed risk of a material misstatement in respect of a balance has been reappraised
and has increased.
C Increase
D Decrease
The population has been stratified.
E Increase
F Decrease

Answer 14

A,C,F
For tests of details:
 When the required confidence level increases the sample size increases (ie, the
auditor needs to do more work to be more confident).
 When the assessed risk of material misstatement for a balance is increased, the
sample size increases (ie, more work is needed for higher risk balances).
 Stratifying the population decreases the sample size (as testing is more efficient)

Question 15

When determining a sample size for tests of controls, there are a number of factors which
an auditor should take into account.
For each of the following factors, select whether it would cause the sample size to increase,
decrease, or to have negligible effect.
An increase in tolerable misstatement
A Increase
B Decrease
C Negligible effect
An increase in the number of invoices in the population
D Increase
E Decrease
F Negligible effect
A decrease in the auditor's required confidence level
G Increase
H Decrease
I Negligible effect

Answer 15

B,F,H
For tests of controls:
 An increase in tolerable misstatement will cause a decrease in sample size as an
increase in the amount of ‘acceptable misstatements’ (or audit risk acceptable) will
reduce the extent of the work necessary to be performed (as there is a
corresponding acceptable increase in detection risk).
 An increase in the population will have a negligible effect on sample size as it is
not a factor that determines the sample size.
 A decrease in the auditor’s required confidence level will lead to a decrease in
sample size.

Question 16

Which two of the following statements are correct regarding factors which influence sample
sizes for tests of controls?
A An increase in the number of sampling units within the population will increase the
sample size.
B A decrease in the expected misstatement will decrease the sample size.
C A decrease in the tolerable misstatement will decrease the sample size.
D An increase in the extent to which the risk of material misstatement is reduced by the
operating effectiveness of controls will decrease the sample size.

Answer 16

B,D Per ISA 530, regarding factors influencing sample sizes for tests of controls:
 An increase in the number of sampling units will have a negligible effect on the
sample size.
 A decrease in the tolerable misstatement will increase sample size.

Question 17

For each of the following statements, select whether they are true or false in respect of
procedures to obtain evidence.
Physical examination of property, plant and equipment confirms ownership.
A True
B False
Recalculation is a strong form of evidence as it is created by the assurance provider.
C True
D False
Inquiry is always an unreliable means of obtaining evidence.
E True
F False

Answer 17

B,C,F
Physical examination of property, plant and equipment confirms existence (it may
belong to a third party). The reliability of inquiry depends on who is providing the
information. A third party eg, a bank would normally be a reliable source.

Question 18

For each of the following pieces of evidence, select whether it is more reliable or less
reliable than the piece of evidence it is paired with.
A sales invoice is more reliable/less reliable than a purchase invoice.
A More reliable
B Less reliable
An original copy of a lease agreement is more reliable/less reliable than a photocopy.
C More reliable
D Less reliable
A bank statement is more reliable/less reliable than a cash book.
E More reliable
F Less reliable

Answer 18

B,C,E
A sales invoice is less reliable than a purchase invoice as it is internally generated.
Original documents are more reliable than copies. A bank statement is more reliable
than a cash book as it is generated by a third party.

Question 19

All methods of obtaining evidence have deficiencies. Examples of these are listed below.
For each deficiency, select the method of obtaining evidence which is most likely to result in
that deficiency.
Limited to the point in time it takes place
A Analytical review
B Observation of a procedure
Limited by the underlying accounting system
C Analytical review
D Observation of a procedure
A balance which is overstated may be agreed because it favours the respondent
E Direct confirmation of a receivables balance
F Direct confirmation of a payables balance

Answer 19

B,C,F
The weakness of observation of a procedure is that the conclusion drawn as a result
only applies to the system at the time the observation took place – hence it is limited to
the point in time it takes place.
The usefulness of analytical review is limited by the underlying accounting system
which generates the balances under review.
A respondent will agree to an overstated balance if that is direct confirmation in
respect of a payables balance (he would disagree if the amount he owed – ie, a
receivables balance – were overstated). SAMPLE PAPER

Question 20

In accordance with ISAs 315 and 520, select whether analytical procedures are compulsory
or optional in each of the following circumstances.
At the risk assessment stage of the audit
A Compulsory
B Optional
As a substantive procedure
C Compulsory
D Optional
At the overall review stage of the audit
E Compulsory
F Optional

Answer 20

A,D,E
Per ISA 315, analytical procedures must be used at the risk assessment stage of an
audit. Per ISA 520, they must also be used at the overall review stages of an audit and
may be used as a substantive procedure.

Question 21

Which two of the following circumstances would reduce the reliability of the results of
analytical procedures?
A Detailed information is available analysed by department
B Budgeted figures in the past have proved to be highly optimistic
C Reliable industry data are available
D Significant deficiencies in the internal control system have been identified in the past

Answer 21

B,D If budgets are not realistic they will not provide a reasonable basis for comparison with
actual. Deficiencies in internal controls reduce the reliability of the basic accounting
information which will be used in the analytical procedures

Question 22

Which two of the following procedures describe tests for understatement?
A Selecting a sample of despatch records and tracing these to a matching sales invoice
and entry in the sales account
B Selecting a sample of sales invoices and tracing these to a matching despatch record
C Selecting a sample of items of plant physically verified by the assurance provider and
tracing these to an entry in the asset register
D Selecting a sample of items of plant from the asset register and physically verifying
their existence

Answer 22

A,C Tests for understatement (ie, omission) cannot start from the source being tested for
understatement/omission. They must start from some other source and trace through
to the accounting records, to prove that nothing has been omitted (ie, the entity’s
transactions or balances are not understated).

Question 23

The auditor of Frost Ltd has carried out a test on a sample of receivables and has
discovered a higher than expected number of misstatements.
Which three of the following steps would be an appropriate response to this?
A Investigate the nature and cause of the misstatements
B Consider the effect of the misstatements on other parts of the audit
C Estimate the probable overall misstatement by extrapolating the results
D Increase the tolerable misstatement

Answer 23

A,B,C
Option D is not correct as tolerable misstatement is related to the auditor’s judgement
about materiality

Question 24

When determining a sample size for tests of details there are a number of factors which an
auditor should take into account.
For each of the following factors, select whether it would cause the sample size to increase
or to decrease.
An increase in the auditor’s assessment of the risk of material misstatement
A Increase
B Decrease
An increase in the use of analytical procedures to test the same assertion
C Increase
D Decrease
An increase in the level of misstatements that the auditor expects to find when testing the
assertion
E Increase
F Decrease

Answer 24

A,D,E
An increase in the auditor’s assessment of the risk of material misstatement would
cause the sample size to increase as an increase in audit risk can only be addressed
and reduced by an increase in the work carried out.
An increase in the use of analytical procedures to test the same assertion would
decrease the sample size, so that the area is not over-audited.
An increase in the expected misstatements would lead to an increase in the sample
size. SAMPLE PAPER

Question 25

For each of the procedures below, select whether the auditor will be testing primarily for overstatement or primarily for understatement. Communicating with the client's legal advisers for details about outstanding legal claims A Primarily for overstatement of provisions B Primarily for understatement of provisions Reviewing the aged inventory analysis to identify old/obsolete inventory C Primarily for overstatement of inventory D Primarily for understatement of inventory The auditor calculating for himself the warranty provision and comparing their figure to the balance stated in the statement of financial position E Primarily for overstatement of warranty provision F Primarily for understatement of warranty provision

Answer 25

B,C,F The auditor's main concern in testing assets is that they might be overstated, whereas he or she will be concerned that liabilities might be understated. Communicating with the company's legal advisers about outstanding legal claims is testing for understatement in liabilities. Reviewing the aged inventory analysis is testing for overstatement in the valuation of inventories, as the existence of old/obsolete inventory may require a write-down to net realisable value. Performing the calculation on the warranty provision and then comparing that figure with the balance stated, is testing a liability and therefore testing for understatement.

Question 26

For each of the following statements, select whether they are true or false in respect of test data. Test data are a type of substantive procedure. A True B False Test data can include real data and dummy data. C True D False Test data can be used to help in the calculation of ratios. E True F False

Answer 26

B,C,F Test data are used to test controls. Audit software (not test data) can be used to help in the calculation of ratios

Question 27

Which one of the following is the definition of an anomaly? A A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population B The misstatement that the auditor expects to be present in the population C Control deviations, when performing tests of control, or misstatements, when performing substantive procedures D The maximum misstatement in the population that the auditor would be willing to accept

Answer 27

A The misstatement that the auditor expects to be present in the population = expected misstatement. Control deviations, when performing tests of control, or misstatements, when performing substantive procedures = misstatement. The maximum error in the population that the auditor would be willing to accept = tolerable misstatement

Question 28

For each of the following descriptions, select whether they describe monetary unit sampling, block selection or systematic selection. Peter is auditing trade accounts receivable. Materiality is £25,000. The sample is selected on the basis of choosing the balances containing each 25,000th £1 on a cumulative basis. A Monetary unit sampling B Block selection C Systematic selection Paul is checking whether purchase invoices have been authorised for payment. He has selected all the November purchase invoices as his sample and has reviewed them for an authorisation signature. D Monetary unit sampling E Block selection F Systematic selection

Answer 28

A,E Systematic selection involves selecting items using a constant interval between selections, the first interval having a random start.

Question 29

In order to gather sufficient, appropriate evidence, the auditor may make use of external confirmation requests. For each of the following statements with regards to external confirmation requests, select whether it is true or false. A positive confirmation request always asks the respondents to reply to the auditor indicating whether or not they agree with the information provided. A True B False A sample of confirmation requests drawn from the client's list of balances is more appropriate for receivables balances than for payables balances. C True D False A positive confirmation request ordinarily provides more reliable audit evidence than a negative confirmation request. E True F False

Answer 29

B,C,E Positive confirmations may request that the respondent provides the balance owing as opposed to simply confirming the balance stated. A sample taken from a list of receivables is more effective than for payables, as in this way testing the balance for overstatement is carried out directly. For payables, the auditor's key concern is that of understatement and testing a sample from the payables listed will not test understatement. A positive confirmation is more reliable than a negative confirmation as in the first case, a response is always sought.

Question 30

Which one of the following procedures would provide the most reliable source of evidence where a company receives an invoice after the year end which relates to a period that straddles the year end? A Confirming the purchase amount to a supplier statement at the year end B Vouching the payment of the invoice C Testing internal controls over accruals D Recalculating the portion of the invoice amount which relates to the reporting period

Answer 30

D A supplier statement would not include this invoice, as it was dated after the year end. Vouching the payment would not help to determine whether the expense and the payable were included correctly. Testing internal controls would provide evidence over accruals in general, but would not be relevant to this invoice specifically. Only by recalculating the prorating of the invoice can the auditor be confident that the correct amount has been included

Question 31

For each of the procedures below, select the option which best describes the auditor's test when performing the procedure. Reviewing post year-end invoices for amounts which relate to the reporting period A Testing primarily for existence of accruals B Testing primarily for completeness of accruals Reviewing the payments made to suppliers after the year end C Not a relevant procedure for payables D Testing primarily for completeness of payables The auditor calculating for herself the amount accrued where an invoice straddles the year end E Testing primarily for cut-off of accruals F Testing primarily for completeness of accruals

Answer 31

B, C, E Reviewing post year-end invoices begins with the invoices and traces them back to the accounting system. This is an attempt to find expenses which have been omitted from the system. Reviewing post year-end supplier payments is a test not often conducted – all it could really tell the auditor is whether the entity has the cash to pay its suppliers. This procedure is not to be confused with post year-end receipts from receivables, which is an important test of debt recoverability. Recalculating the amount accrued is primarily a test of cut-off because it focuses on the split between the period before and after the year end. It does also, therefore, test completeness, but this is not its primary aim.

Question 32

For each of the following statements about audit data analytics, select whether it is true or false. Data analytics allows auditors to investigate complex data using simple visualisation techniques. A True B False Significant time must be always spent tailoring data analytics procedures to the individual audit client to achieve good results. C True D False Data analytics allows auditors to test large quantities of transactions very quickly. E True F False

Answer 32

A, D, E A key element of data analytics is the ability to process very large and complex data into simple visual representations, which can help auditors to spot trends they might otherwise have missed. Data analytics is not about spending time tailoring the procedures to the client (as was the case with the older computer–assisted audit techniques). A major advantage of data analytics is that they are standardised. Data analytics makes it possible not just to test large quantities of transactions very quickly, but also to test whole populations of transactions and so, potentiality and in the future, to revolutionise the whole basis of auditing!

Question 33

Assurance providers obtain evidence using procedures, as set out in ISA (UK) 500, Audit Evidence. For each of the following statements about specific audit procedures, select whether they are true or false. When attempting to verify controls over petty cash, inquiry is likely to be strong evidence when assessing the risk of fraud from poor segregation of duties. A True B False Recalculation of a depreciation expense by the auditor using the client's stated estimation techniques is regarded as strong audit evidence. C True D False Observing an employee of the client re-performing a particular control is usually sufficient to determine that it is operating satisfactorily. E True F False

Answer 33

B,C,F Inquiring about controls over petty cash will not be strong evidence on its own as employees could misrepresent the facts in their responses (especially if attempting to conceal a fraud they may be involved in). Recalculation by the auditor of amounts used by the client do provide strong evidence as there is no influence from the client. Re-performance of an internal control can be strong evidence as long as the auditor has completed some or all of this re-performance – otherwise, it is less likely to be considered strong evidence as the employee may have deliberately avoided certain conditions that would have provided audit evidence of poor operation.

Question 34

Which one of the following is not an example of a specific area where audit data analytics may now be used? A Comparing entity data to externally obtained data B Three-way matching between sales orders, goods despatched records and invoices C Extracting samples of transactions for further examination D Re-performing calculations relevant to the financial statements

Answer 34

C Computer-assisted audit techniques (CAATs) have been used by auditors to extract samples of transactions for many years, but the advent of computers that can handle such 'big data' now means that entire populations can be tested, rather than just samples. The remaining options are all recommended by the FRC (2017) as areas where audit data analytics can be used to streamline the audit.

Question 35

ISA (UK) 450, Evaluation of Misstatements Identified During the Audit requires the auditor to evaluate the effect of any uncorrected misstatements on the financial statements. This includes determining whether any uncorrected misstatements are material. Which three of the following factors will the auditor use to determine whether uncorrected misstatements are material? A The materiality level for the financial statements as a whole B The size of the misstatement C The circumstances of the occurrence of the misstatement D The nature of the misstatement

Answer 35

B,C,D It is possible that a misstatement below the materiality level for the financial statements as a whole may still be considered material if it remains uncorrected – examples of the reasons given include the extent to which the misstatement affects compliance with regulatory requirements or debt covenants, masks a change in earnings or other trends or even increases management compensation and triggers the payment of a bonus. The remaining options (size, nature and circumstances) are all used by the auditor to determine whether an uncorrected misstatement is material.