Explain how audit sampling is used in an audit.
- When creating an audit program and designing audit procedures an auditor also decides how to select appropriate items for testing.
- When there are numerous transactions or items within an account balance available for testing, an auditor must decide how best to select a sample that is representative of the entire population of items available for testing.
Recognise the difference between sampling and non-sampling risk.
- Sampling risk is the risk that the sample chosen by the auditor is not representative of the population
- of transactions or items within an account balance available for testing and, as a consequence, the auditor arrives at an inappropriate conclusion. Non-sampling risk is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues, such as an auditor
- using an inappropriate audit procedure.
Discriminate between statistical and non-statistical sampling
- Statistical sampling involves random selection and probability theory to evaluate the results.
- Non-statistical sampling is any sample selection method that does not have these characteristics.
Describe sampling methods.
- Sampling methods include random selection, systematic selection, haphazard selection, block selection
- and judgement selection.
7.5 Describe the factors that influence the sample size when testing controls.
- When testing controls, the factors that influence the sample size include the extent to which the risk of material misstatement is reduced by the operating effectiveness of controls, the rate of deviation from the prescribed control activity that the auditor is willing to accept, the rate of deviation
- from the prescribed control activity that the auditor expects to find in the population, the auditor’s required confidence level and the number of sampling units in the population.
Explain the factors that influence the sample size when conducting substantive testing.
- When conducting substantive testing of transactions and balances, the factors that influence the sample size include the auditor’s assessment of the risk of material misstatement, the use of other
- substantive procedures directed at the same assertion, the auditor’s required confidence level, the
- tolerable error, the amount of error the auditor expects to find in the population, whether the population
- is stratified and the number of sampling units in the population.
Explain how to evaluate the results of tests conducted on a sample.
- When testing controls the auditor will compare the rate of deviation with the tolerable rate of deviation
- and determine whether they believe that the control tested is effective in preventing and/or detecting a material misstatement.
- When testing transactions and balances the error in the sample will be projected to the population and then compared to the tolerable error rate. The auditor will then determine whether the class of transactions or account balance appears to be materially misstated.
Discriminate the difference between tests of controls and substantive tests.
- The purpose of tests of controls is to assess the effectiveness of a client’s system of internal controls throughout the accounting period being audited.
- The purpose of substantive testing is to gather direct evidence that the financial report is free from material misstatement.
Explain the factors that affect the nature, timing and extent of audit testing.
- The nature of audit testing refers to the purpose of the test and the procedure used.
- The timing of audit testing refers to the stage of the audit when procedures are performed and the date, such as
- within or outside the accounting period, that audit evidence relates to.
- The extent of audit testing
- refers to the amount of audit evidence gathered when testing controls and conducting detailed substantive procedures.
Explain how auditors arrive at a conclusion based upon the evidence gathered.
The final audit procedure is to assess the evidence gathered throughout the audit and draw a conclusion on the truth and fairness of a client’s financial report.
Illustrate how auditors document the details of evidence gathered in working papers.
- Audit evidence is documented in an auditor’s working papers.
- Audit working papers include the client’s name, the period under audit, a title describing the contents of the working paper, a file reference indicating where the working paper fits in the audit file, the initials identifying the preparer of the working paper together with the date the working paper was prepared, the initials
- identifying the reviewer(s) of the working paper together with the date(s) the working paper
- was reviewed, and cross-referencing between working papers indicating where further work and
- evidence is summarised elsewhere.
- Working papers are stored in either the permanent file or the current file.
- The permanent file includes client information and documentation that apply to more than one audit.
- The current file includes client information and documentation that apply to the current audit