Week 9 - Audit Evidence and Documentation

Audit Evidence

The information used by auditors in arriving at the conclusions on which the auditor’s opinion is based.

Risk assessment procedures
Test of controls
Substantive testing

How can audit evidence be obtained?

Sufficient and appropriate

Under ASA500.5 audit evidence needs to be?

Sufficient

This is measure of evidence quantity. It is affected by the auditor’s assessment of the risks of material misstatement and also the quality of audit evidence.

Appropriate

This is a measure of evidence quality. It relates to relevance and reliability (Where does the evidence come from and can it be trusted?)

More evidence is needed

If inherent risk and control risk is high?

Audit sampling

This is an approach where all sampling units in the population have an equal opportunity of being selected. If the sample is representative of the population, the auditor can make conclusions about the population.

Test of control objective

The objective of this sampling is to identify the rate of deviation from an internal control policy or procedure.

Substantive tests objective

The objective of this sampling is to identify monetary misstatements in the balance.

Sampling risk

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 audit procedure.

Non-sampling risk

The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk

Statistical sampling

This approach to sampling has the following characteristics:
- A random selection of sample items
- Use of probability theory to evaluate sample results
- Major advantage is defensibility

Non-statistical sampling

This approach does not use a random selection of sample items or use probability theory to evaluate sample results. The major advantage of this approach is the greater application of audit experience in selecting sample size and evaluating results based on knowledge of previous client.

Factors that influence sample size for test of controls

• The auditor’s intended reliance on internal control

• The tolerable rate of deviation

• The expected rate of deviation

• The desired level of assurance that the actual deviation rate is not larger than the tolerable deviation rate.

Factors that influence sample size for substantive testing

• The auditor’s assessment of the risk of material misstatement

• Other substantive procedures directed at the same assertion

• The desired level of assurance

• The tolerable misstatement

• The expected misstatement

• Stratification

Random

Systematic

Haphazard

The acceptable approaches for selecting the sample are?

Random

In this sampling approach sample units are determined through a random number generators (e.g. Excel).

Systematic

In this sampling approach sample units in the population are divided by sample size to give sampling interval.

Haphazard

This selection of sample is done without following a structured technique (avoiding any conscious bias or predictability).

Number of items in population/sample size

How is sample interval calculated?

Block selection
Judgmental selection

What are the unacceptable approaches to selecting a sample?

Project misstatements to the population

How do we evaluate results in substantive tests?

Compare with tolerable rate of deviation

How do we evaluate results in test of controls?

Audit documentation

This keeps the record of audit procedures performed, relevant audit evidence obtained and conclusions the auditor reached.

The nature, timing and extent of the audit procedures performed
The results of the audit procedures performed
Significant matters arising during the audit

The auditor should prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit to understand?

A random selection of sample items
Use of probability theory to evaluate sample results
Major advantage is defensibility

Statistical sampling has the following characteristics?

Uses audit experience in selecting sample size and evaluating results

The main characteristic of non statistical sampling is?

Obtained from independent sources
The related controls are effective
Obtained directly by the auditor

What factors will increase the reliability of audit evidence?

Reliable
Relevant

To be considered “appropriate”, evidence must be?