Audit Evidence & Audit Sampling

 AI

500 para. 2
“ The auditor should obtain
sufficient appropriate audit
evidence to be able to draw
reasonable conclusion on
which to base the audit
opinion”

“Audit Evidence” means the
information obtained by the
auditor in arriving at the

conclusions on which the audit
opinion is based.

 Source documents  Accounting records underlying the financial statements  Corroborating information from other sources .

to support the same assertion. PERSUASIVE rather than CONCLUSIVE  Auditors will seek audit evidence of ◦ Different sources ◦ Different nature …. .

class of transaction or control by way of using judgmental or statistical sampling procedures.In forming the audit opinion. the auditor does not ordinarily examine all of the information available because conclusions can be reached about an account balance. .

Materiality of the item being examined .  Sufficient Appropriate Influenced by 1. Nature of the accounting and internal control systems and the assessment of control risk 3. Inherent risk at both the financial statement level and account balance or class of transactions level 2.

) 4. Experience gained during previous audits 5. Source and reliability of information available . Influenced by (cont. Results of audit procedures 6.

Audit Evidence Sufficient Appropriate Measure of Quantity Measure of Quality •Sample Size •Corroborative nature of audit evidecne Reliable Relevance •Decide by Nature & Source •Relevant to a particular assertion General Documents Legal •External vs. Oral •Circumstantial . Internal •Direct From Third Party •Primary •Obtain direct by auditor •From Third Party held by entity •Secondary •From the entity •Hearsay •Written vs.

In some circumstances. evidence may be obtained entirely from substantive procedures . Audit evidence is obtained from an appropriate mix of ◦ Test of Control ◦ Substantive Procedures  AI 500 para. 3 .

detecting and correction material misstatements at the assertion level.  Ensure internal controls are operating in the manner intended . The category of procedures aimed specifically to test the operating effectiveness of controls in preventing.

 Test performed to obtain audit evidence to detect material misstatements in the financial statement ◦ Test of detail of transactions and balances ◦ Analytical procedures .

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. The decision whether to use a statistical or non-statistical sampling approach is a matter for the auditor's judgment regarding the most efficient manner to obtain sufficient appropriate audit evidence in the particular circumstances.

1. Audit Sampling . Selecting all items (100% examination) 2. Selecting specific items 3.

 Less likely for test of control  Common for substantive procedures with small number of large value items .

 Judgmental selection base on: ◦ Knowledge of client’s business ◦ Preliminary assessments of inherent and control risks ◦ Characteristics of the population being tested .

    High value or key items All items over a certain amount Items to obtain information Items to test procedures .

the results of procedures applied to items selected in this way cannot be projected to the entire population. However. it does not constitute audit sampling ) . (AI 530.26 …….

 Statistical Sampling Approach ◦ Probability theory  Attribute Sampling (Test of Control)  Monetary Unit Sampling (Substantive Procedures)  Consider the projected error on test objective  Classical Variables Sampling  Non Statistical Sampling Approach  Test of Control  Substantive Procedures .

projection of error and drawing final conclusion on the sample reuslts. . ◦ Should meet the audit objectives ◦ Error analysis. expected and tolerable error ◦ Choosing sample items that all sampling units in the population have a chance of selection. Designing the sample  Determining sample size*  Selecting the sample**  Performing the audit procedures  Evaluation of sample results ◦ This includes consideration of test objectives. population and error attributes ◦ This is affected by the level of sampling risk.

. Sample size is affected by the level of sampling risk that the auditor is willing to accept. the greater the sample size will need to be. The lower the risk the auditor is willing to accept. ISA 530. 40 In determining the sample size. the auditor should consider whether sampling risk is reduced to an acceptably low level.

 ISA 530. .41 The sample size can be determined by the application of a statistically-based formula or through the exercise of professional judgement objectively applied to the circumstances.

an auditor uses professional judgment to select the items for a sample. Because the purpose of sampling is to draw conclusions about the entire population. the auditor endeavors to select a representative sample by choosing sample items which have characteristics typical of the population. Statistical sampling requires that sample items are selected at random so that each sampling unit has a known chance of being selected. The sampling units might be physical items (such as invoices) or monetary units. . With non-statistical sampling. and the sample needs to be selected so that bias is avoided. 42The auditor should select items for the sample with the expectation that all sampling units in the population have a chance of selection. ISA 530.

 ISA 530. systematic selection and haphazard selection.43 The principal methods of selecting samples are the use of random number tables or computer programs. .

 Random Number Selection ◦ Via random number table. .  Systematic Selection ◦ Auditor determines a sampling interval by dividing the physical population by the sample size.  Haphazard Selection ◦ Sampling units are selected without any conscious bias.

    Voided documents (properly voided. not a deviation) Unused or inapplicable documents Missing documents Stopping the test before completion (if large deviation detected at the beginning) .

Designing 1. Determine the acceptable risk of assessing control risk too low Determine the tolerable deviation rate Determine the expected population deviation rate Consider the effect of population size .. 4. per doc. Define the population 4. 3. Determine the objective of the test of controls 2. Define the sampling unit (per entry. 2. Determine the sample size 1. Define the control deviation 3. ) 5.

Calculate the sample results 9. Performing error analysis 10. Draw final conclusion .Performance 6 .Randomly select the sample items 7. Calculate the sample results Evaluation 8.

1. 5. 1. 3. 3. 2. 5. Designing Determine the objective of the tests Define the population Define the sampling unit Choose the audit sampling technique Determine the sample size Consider the variation within the population Determine the acceptable risk of incorrect acceptance Determine the tolerable misstatement Determine the expected amount of misstatement Consider the effect of population size . 4. 4. 2.

10. . 6. 9. Performance Randomly select the sample items Perform the audit procedures Evaluation Calculate the sample results Perform error analysis Draw final conclusions.  8. 7.

 Lower Training Costs  Ease of Implementation  Impracticality of Random Based Selection  Proposed Adjustment Based on Qualitative Analysis .

Auditors have greater confidence about the audit opinion. Auditors believe that their audit work is more objective and defensible. . Auditors are more capable of rendering suggestions to the clients. Auditors save time by eliminating tests of controls that have no influence on substantive audit procedures.     Auditors tend to develop better working paper documentation.

 Enable auditors to make objective statements about the sampled population on the basis of the sample. Allows auditors to calculate sample reliability and the risk of reliance on the sample  Permits auditors to optimize the sample size given the mathematically measured risk they are willing to accept. Avoiding over and under audit.e. The sample findings can be projected to the population and sampling risk can be explicitly considered by using accepted mathematical calculations. i. .

    Select items for the sample with the expectation that all sampling units in the population have a chance of selection. Audit Procedures appropriate to particular test objective Consider Sample results. nature & cause of any errors identified & possible effect on particular test objective & audit Evaluate sample results to confirm preliminary assessment of characteristics of population .

. fail to detect a misstatement when applying and audit procedure or misinterpret an audit result. Sampling Risk ◦ Possibility that the sample drawn is not representative of the population.  Non Sampling Risk ◦ Possibility that the auditor may use inappropriate audit procedures.

Term Statistical Term Relates to Risk of Incorrect Rejection Type I error (Alpha Risk) Audit Efficiency Risk of Incorrect Acceptance Type II error (Beta Risk) Audit Effectiveness .

 Type I and Type II risks ◦ For Test of Control  Type I risk is the risk the auditor will conclude that the control risk is higher than it actually is. (Risk of assessing control risk too high)  Type II risk is the risk the auditor will conclude that control risk is lower than it actually is. (Risk of assessing control risk too low) .

. Type I and Type II risks ◦ For Substantive Procedures  Type I risk is the risk the auditor will conclude that a material error exists when in fact it does not.  Type II risk is the risk the auditor will conclude that a material error does not exist when in fact it does.

Factor Effect on Sample Size An increase in the auditor’s intended reliance on accounting and internal control systems Increase An increase in the rate of deviation from the prescribed control procedure that the auditor is willing to accept Decrease An increase in the rate of deviation from prescribed control procedure that the auditor expects to find in the population Increase An increase in the auditor’s required confidence level Increase .

Factor Effect on Sample Size An increase in the auditor’s assessment of inherent risk Increase An increase in the auditor’s assessment of control risk Increase An increase in the use of other substantive procedures for same assertion Decrease An increase in the auditor’s required confidence level Increase An increase in the total error that the auditor is willing to accept Decrease An increase in the amount of error the auditor expects to find in the population Increase Stratification of the population when appropriate Decrease .

 Stratified Selection ◦ A sampling technique applied by grouping sampling units with similar characteristics into separate strata to reduce the variability among sampling units. Population ◦ All the items in the account or group being audited. .  Confidence level ◦ The probability of being correct in assessing the level of control risk.  Deviation ◦ A failure to comply with a control.

. ◦ The maximum monetary misstatement for an account balance or class of transactions that may exist without causing the financial statement to be materially mistated. ◦ The maximum rate of deviations from a prescribed control that the auditor would be willing to accept without altering his/her planned assessed level of control risk. Expected Deviation Rate  Tolerable Deviation Rate  Tolerable Misstatement ◦ An estimate of a population deviation rate based on prior knowledge.