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Studied by 353 peopleNoteStudied by 20 peopleNoteStudied by 11 peopleNoteStudied by 43 peopleNoteStudied by 21 peopleNoteStudied by 20 peopleAudit Sampling and Substantive Procedures Flashcards
Audit Sampling and Tests of Controls
Audit sampling is applying audit procedures to less than 100% of a population, ensuring all units have an opportunity for selection (ISA [NZ] 530.5). The goal is to provide a reasonable basis for auditors to draw conclusions about the entire population.
Why Auditors Use Sampling
Auditors use sampling because it is often impractical or uneconomical to examine every item in a population. Sampling allows auditors to make conclusions and form opinions without checking all items in financial statements. Auditors test selected items (a sample) and infer conclusions about the population.
Sampling Theory
Sampling theory gives auditors a basis for selecting sample items. Understanding sampling theory is crucial to ensure valid procedures and appropriate conclusions.
Sampling Risk
Sampling risk is the risk that the auditor's conclusion based on a sample differs from the conclusion if the entire population were examined (ISA [NZ] 530.5).
Non-Sampling Risk
Non-sampling risk is the risk of reaching an incorrect conclusion for reasons unrelated to sampling risk.
Erroneous Conclusions from Sampling Risk
According to ISA (NZ) 530.5, two incorrect conclusions can arise from sampling risk:
Controls appear more effective than they are, or a material misstatement seems non-existent when it does in fact exist. This affects audit effectiveness and can lead to an inappropriate audit opinion.
Controls appear less effective than they are, or a material misstatement appears to exist when it does not. This affects audit efficiency, leading to additional, unnecessary work.
Table\ 9.1\ -\ Types\ of\ Erroneous\ Conclusions
Type of Erroneous Conclusion | In Tests of Controls | In Tests of Details | Effect on Audit |
|---|---|---|---|
First Type | Controls are more effective than they are | A material misstatement does not exist | Affects audit effectiveness, inappropriate audit opinion |
Second Type | Controls are less effective than they are | A material misstatement exists when it doesn't | Affects audit efficiency, leads to additional work |
Statistical vs. Non-Statistical Sampling
Audit sampling can be statistical or non-statistical. Statistical sampling requires random selection of sample items and mathematical evaluation of results, including quantifying sampling risk. If either random selection or probability theory is not used, it is non-statistical sampling.
Sampling Phases
Audit sampling, whether statistical or non-statistical, involves four phases (Leung et al., 2007):
Planning and Design: Define objectives, population, potential stratification, and sampling unit.
Selecting: Ensure sample items represent the population.
Testing: Test the sample, project results to the population, and consider sampling risk.
Evaluating the Results: Check results; for substantive tests, this would be monetary misstatement, and for tests of controls, the deviation rate.
Table\ 9.2\ -\ Sampling\ Phases
Phase | Step Involves |
|---|---|
1. Planning and Design | Considering audit test objectives, population, stratification, and the definition of the sampling unit. |
2. Selecting | Ensuring selected sample items are representative of the population. |
3. Testing | Testing the sample, projecting results to the population, and considering sampling risk. |
4. Evaluating the Results | Checking the results: monetary misstatement for substantive tests, deviation rate for tests of controls. |
Planning and Design
Auditors consider the test objective and what constitutes a deviation or misstatement. For example, when testing pre-numbering of inventory receiving reports, a gap in the numerical sequence would be a deviation.
Population
The population must be complete and appropriate. Completeness means reconciling the accounts receivable master file to the general ledger balance. Appropriateness includes the direction of testing. When testing for the existence of accounts payable, the population is the accounts payable listing. When testing for completeness, the population includes subsequent disbursements, unpaid invoices, suppliers’ statements, etc.
Stratification
Stratification improves audit efficiency by dividing a population into subpopulations (strata) with a shared characteristic (e.g., dollar value). This directs more audit effort to large-value items that pose the greatest risk. For example, when testing a current assets register:
Balances greater than 1,000,000
Balances of 100,000 to 1,000,000
Balances less than 100,000
Auditors may test 100% of balances greater than 1,000,000 (not a sampling method) and sample 60% of items in strata 2 and twenty items in strata 3.
Sampling Unit
A sampling unit is the individual item constituting a population (ISA [NZ] 530), such as individual transactions. Value-weighted selection (monetary-unit sampling [MUS] or dollar-unit sampling [DUS]) is a common technique where the sampling units are individual dollars rather than transactions or balances.
Substantive Audit Procedures for Inventory
The inherent risk in auditing inventories lies in their valuation. Auditors ensure inventories exist, are owned, and are properly valued, focusing on substantiating the valuation and allocation assertion.
Assertions, Objectives, and Substantive Procedures
Table\ 8.3\ -\ Assertions,\ objectives\ and\ substantive\ procedures\ for\ purchase\ and\ inventory
Financial Report Assertion | Specific Audit Objective | Common Substantive Audit Procedures to Achieve Objectives |
|---|---|---|
Occurrence (Purchases) | The transactions giving rise to purchases occurred during the period | Select transactions from the purchases journal and agree to supporting documentation (e.g., goods received note) |
Completeness (Purchases) | All purchases transactions and events that should have been recorded have been recorded | Test from supporting documentation (purchase invoice, goods received note) to purchases journal or subsidiary ledger |
Accuracy (Purchases) | Purchases amount and other data are recorded appropriately | Check the dollar value of purchases to supporting documentation (purchase invoice) and ensure other data, such as the supplier’s name, is accurately recorded |
Cut-off (Purchases) | Purchases are recorded in the correct period | Check that the last purchases recorded before the balance date and the first purchases recorded after the balance date are recorded in the correct period; consider when received by evidence of goods received note |
Classification (Purchases) | Purchases are recorded in the proper accounts | Enquire and scan to determine that purchases are recorded correctly in accordance with the chart of accounts |
Presentation (Purchases) | Purchases are appropriately aggregated and clearly described, and related disclosures are relevant and understandable | Check that purchases and cost of goods sold (COGS) are in accordance with the accounting framework |
Existence (Inventory) | Inventories included in the statement of financial position physically exist and represent items held for sale in the ordinary course of business | Inspect physical inventory (check from inventory records to physical stock), undertake substantive analytical procedures, confirm stock held at other locations |
Rights and Obligations (Inventory) | Inventory in the statement of financial position is owned by the entity and excludes items billed to customers or owned by others | Enquire about legal ownership of goods being shipped to the entity and any goods on consignment, and inspect supporting documentation |
Completeness (Inventory) | Inventory in the statement of financial position includes all inventories on hand at the balance date, or in transit or at other locations, that are the property of the entity | Inspect physical inventory (check from physical stock to inventory records), undertake substantive analytical procedures, enquire about stock held at other locations, and review purchase documents for shipping terms for inventory in transit |
Accuracy, Valuation and Allocation (Inventory) | Inventory in the statement of financial position is stated at the correct amount with respect to cost, slow-moving items, etc. | Undertake tests of pricing and summarization, undertake substantive analytical procedures, observe physical inventory (look for obsolete or damaged items), etc. |
Classification (Inventory) | Purchases have been recorded in the proper accounts | Check that purchases are correctly classified |
Presentation (Inventory) | Purchases (and COGS) are clearly described and all related disclosures are understandable | Read the draft financial report to ensure clear description and understandable disclosures |
Classification of Audit Procedures
Audit procedures are classified into tests of controls and substantive procedures.
Tests of Controls and Substantive Procedures
Auditors can adopt a predominantly substantive approach (relying on substantive procedures due to ineffective controls) or a lower assessed level of control risk approach (relying on internal controls). Tests of controls gather evidence on the design and implementation of internal control policies. Auditors select the most efficient and effective combination of tests.
Tests of Controls
If the control environment is effective, the auditor has more confidence in internal control. Evidence should be gathered regarding the existence, effectiveness, and continuity of each control. If not relying on controls, more extensive audit evidence from substantive procedures is needed, increasing sample sizes and locations.
Substantive Procedures
The purpose of substantive procedures is to provide direct evidence on the fairness of financial report assertions. They include substantive analytical procedures and substantive tests of details.
Substantive tests of details are key responses to risks of material misstatement, required for relevant assertions related to material:
Classes of transactions: Inspecting documents and testing transaction flows.
Account balances: Substantiating the ending balance (e.g., confirming with customers).
Disclosures: Assessed towards the end of the audit.
Examples:
Vouching: Verifying transactions by tracing from the books of accounts to source documents (tests existence).
Tracing: Tracing from source documents to financial statements (tests completeness).
Confirmations: Sent to third parties to confirm balances.
Reconciliations: E.g., payroll in the general ledger to payroll tax returns.
Inspecting contracts: Verifying and recalculating balances/transactions.
Selected Audit Objectives for Purchases, Payables, and Payroll
Table\ 7.2\ -\ Selected\ specific\ audit\ objectives\ for\ purchases,\ payables\ and\ payroll
Assertion Category | Audit Objectives |
|---|---|
Existence/Occurrence | Recorded transactions represent goods/services received or payments made during the period. |
Completeness | All transactions that should have been recorded have been recorded. |
Rights and Obligations | Accounts payable and accrued payroll liabilities are liabilities of the entity. |
Accuracy, Valuation | Transactions are appropriately recorded in the system and in the correct period; balances are stated at appropriate amounts. |
Presentation/Disclosure | Transaction details support their presentation in the financial statements. Liabilities and expenses are properly identified and classified in the financial statements. |
Dual-Purpose Testing
Tests can provide evidence of both controls and substantive issues. A dual-purpose test examines an invoice to determine if it has been approved and also provides substantive evidence of a transaction (ISA [NZ] 330.A23).
Computer-Assisted Audit Techniques (CAATs)
CAATs (e.g., audit software) increase audit effectiveness and efficiency. They can be used for both controls and substantive procedures. Audit software performs calculations, sampling, duplicate transaction identification, data queries, and statistical analysis. Classifications of CAATs include audit software, test data, and embedded audit facilities (EAFs).
Topic Summary
Substantive procedures detect material misstatements. Auditors link risk factors to assertions and consider the materiality and pervasiveness of potential misstatements. Substantive tests of details are key responses to risks of material misstatement for relevant assertions related to transactions, balances, and disclosures.
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