Audit & Assurance

Lê Thị Vân Dung, MSc, IAP

dungltv@ftu.edu.vn

© ACCA INTERNAL
SYLLABUS

A Audit framework and regulation

B Planning and risk assessment

C Internal control

D Audit evidence

E Review and reporting

Chapter 11 • Substantive procedures
Audit procedures and • Accounting estimates
• Audit sampling
sampling • Computer-assisted audit techniques
• Using the work of others
 Syllabus learning outcomes 1

• Discuss the substantive procedures for obtaining audit evidence.

• Discuss and provide examples of how analytical procedures are
used as substantive procedures.
• Discuss the problems associated with the audit and review of
accounting estimates.
 Syllabus learning outcomes 2

• Define audit sampling and explain the need for sampling.

• Identify and discuss the differences between statistical and non-
statistical sampling.
• Discuss and provide relevant examples of the application of the
basic principles of statistical sampling and other selective testing
procedures.
• Discuss the results of statistical sampling, including consideration
of whether additional testing is required.
 Syllabus learning outcomes 3

• Explain the use of computer-assisted audit techniques in the

context of an audit.
• Discuss and provide relevant examples of the use of test data
and audit software.
• Discuss why auditors rely on the work of others.
• Discuss the extent to which external auditors are able to rely on
the work of experts, including the work of internal audit.
• Discuss the audit considerations relating to entities using service
organisations.
• Explain the extent to which reference to the work of others can
be made in audit reports.
 Overview

Audit procedures and

sampling

Computer-assisted Using the work of

Sampling
audit techniques others

Service Internal
Experts
organisations audit

Audit
Test data
software

Audit of accounting Auditing smaller

estimates entities
Chronology of an audit
 Substantive procedures 1

What are substantive procedures?

Substantive procedures are audit tests to obtain audit evidence to
detect material misstatements in the financial statements.
Two types of substantive procedures:
1. Tests of details
2. Substantive analytical procedures
 Substantive procedures 2

Remember!
Analytical procedures must be used during audit planning and audit
completion.
They can also be used as substantive audit procedures during audit
fieldwork.

This article on analytical procedures from the September 2010

edition of Student Accountant will help clarify when and why
analytical procedures are used in an audit:
http://www.accaglobal.com/content/dam/acca/global/pdf/sa_sept
10_audit.pdf
 Substantive procedures 3

This is a useful model for preparing an audit plan:

• Agree opening balances with previous year's working papers

• Review general ledger for unusual records
• Agree client schedules to/from accounting records to ensure
completeness
• Carry out analytical review
• Test transactions in detail
• Test balances in detail
• Review presentation and disclosure in financial statements
 Exam link

• The F8 exam will almost invariably have a question on

substantive audit procedures. Here is a typical requirement:

Describe substantive procedures you would perform to obtain

sufficient appropriate audit evidence in relation to Torres's trade
receivables.
(6 marks)

• When designing audit tests, make sure you distinguish

between substantive audit tests and tests of controls.
• Another issue to consider, which is very important, is the
financial statement assertions you are testing. The examiner
will test whether you understand the assertions and how
different audit tests are used to provide evidence to support
them.
 Question: Substantive audit procedures

You are the audit junior who has been assigned the task of audit
fieldwork on the non-current assets balance on a client's
statement of financial position.

Can you think of some suitable substantive procedures, which

include a mixture of tests of details and substantive analytical
procedures, which you might use?
 Answer: Substantive audit procedures

The table sets out various substantive audit procedures you

might use in the audit of non-current assets. It is not an
Tests of details Substantive analytical procedures
exhaustive list.
Selecting a sample of assets from the asset Performing a proof-in-total test on the
register and physically inspecting them. depreciation charge for the year to confirm its
accuracy and reasonableness.

Selecting a sample of physically inspected Comparing additions in the year to the prior
assets and tracing them back to the non- year and investigating the reasons for any big
current asset register and ledger to test differences.
completeness.

Taking a sample of additions in the year and Comparing ratios of depreciation to non-
tracing them back to the purchase invoices. current assets (by category) with previous
years, depreciation policy rates.

Reconciling the non-current asset register with

the general ledger.
 Accounting estimates 1

We now go on to look at accounting estimates. You need to understand these

key terms:
An accounting estimate is an approximation of a monetary amount in
the absence of a precise means of measurement.
Estimation uncertainty is the susceptibility of an accounting estimate
and related disclosures to an inherent lack of precision in its measurement.
Management's point estimate is the amount selected by management for
recognition or disclosure in the financial statements as an accounting
estimate.
Auditor's point estimate or auditor's range is the amount, or range of
amounts, respectively, derived from audit evidence for use in evaluating
management's point estimate.
ISA 540 Auditing accounting estimates, including fair value accounting
estimates, and related disclosures
 Accounting estimates 2

Examples of accounting estimates

• Allowance for doubtful accounts
• Inventory obsolescence
• Warranty obligations
• Depreciation method or asset useful life
• Outcome of long-term contracts
• Costs arising from litigation settlements and judgements
• Provision against the carrying amount of an investment where th
ere is uncertainty regarding its recoverability
Accounting estimates 3

Nature and reliability of information

affects

Degree of uncertainty

affects

Risk of material misstatement

 Accounting estimates 4

Audit procedures
• Inquiries of management about alternative assumptions
• Assessment of whether assumptions used are reasonable
• Evaluation of whether accounting estimate is either reasonable or
misstated
• Obtain sufficient appropriate audit evidence about whether
disclosures are correct
• For accounting estimates that give rise to significant risks, evaluate
adequacy of disclosure of their estimation uncertainty
• Review judgements and decisions of management in making the
accounting estimates to identify if there are indications of possible
management bias
• Obtain written representations from management whether
they believe significant assumptions used are reasonable
 Exam link: Accounting estimates

• Accounting estimates could be tested in a knowledge

requirement in Section A of the exam.
• However, they could also come up in a scenario context. For
example, you could be presented with a scenario where there
is a warranty provision and be asked for substantive audit
procedures to test it.
• You could also be asked to define some of the terms relating
to accounting estimates from ISA 540 as part of a Section B
question.
 Question: December 2010 Question 5a

Required:
Describe the audit procedures required in respect of accounting
estimates.
(5 marks)
 Approach: December 2010 Question 5a

This is a general question on accounting estimates, worth five

marks which gives you nine minutes to answer it.
Assume that you can score one mark for each well-explained
audit procedure.
Ensure that your audit procedures make sense and have enough
detail in them to enable an auditor to carry them out
independently.
 Answer: December 2010 Question 5a
• Inquire from management how the accounting estimate is made and the data
and assumptions on which it is based.
• Make an assessment as to the reasonableness of the assumptions used by
management in deriving the accounting estimate.
• Review draft disclosure notes to ensure disclosures relating to the accounting
estimate are correct.
• Develop an expectation of the possible estimate (point estimate) or a range of
amounts to evaluate the reasonableness of management's estimate.
• Review the judgements and decisions made by management in the making of
accounting estimates to identify if there are indicators of possible management
bias.
• Obtain written representations from management whether they believe
significant assumptions used in making accounting estimates are reasonable.
 Audit sampling 1

What is audit sampling?

Audit sampling is the application of audit procedures to less than 100%
of items within a population of audit relevance such that all sampling
units have a chance of selection. This will enable the auditor to obtain
and evaluate audit evidence about some characteristic of the items
selected in order to provide the auditor with a reasonable basis on
which to draw conclusions about the entire population. Audit sampling
can use either statistical or non-statistical approaches.

ISA 530 Audit sampling

 Audit sampling 2

Why do auditors need to use audit sampling?

Imagine you are the auditor responsible for audit work on year-end
receivables. This balance is the largest balance on the statement of
financial position for your client and the draft year-end figure is
made up of 355 different amounts, ranging in value from $45 to
$63,250.
You are one person in a total team of four. It just wouldn't be
practical in terms of time and cost to audit every single balance
making up the total receivables figure. After auditing receivables,
you have to do audit work on payables, accruals and non-current
assets too!
That's why auditors use sampling.
 Audit sampling 3

Selecting items to test

100% of items Items with a certain Sampling

characteristic

Not sampling
 Audit sampling 4

Non-sampling methods

1. Testing 100% of a population

This can be used where a population consists of only a few items.

2. Testing items with a certain characteristic

• High value or key items
• All items over a certain amount
• Items to obtain information
• Items to test procedures
 Audit sampling 5

Let's recap from Chapter 6:

• Sampling risk arises from the possibility that the auditor's
conclusion, based on a sample of a certain size, may be different
from the conclusion that would be reached if the entire
population were subjected to the same audit procedure.
• Non-sampling risk arises from factors that cause the auditor to
reach an erroneous conclusion for any reason not related to the
size of the sample. For example, the use of inappropriate audit
procedures, or misinterpretation of audit evidence and failure to
recognise a misstatement or deviation.

Remember!
Detection risk = Sampling risk + Non-sampling risk
 Audit sampling 6

Types of sampling
Statistical
• Uses mathematical number tables to choose a sample free
from bias
• Probability theory used to evaluate results

Non-statistical
• No mathematical basis for selecting a sample or evaluating
results

So if each item in the population does not have an equal chance of

being selected, the sampling technique is non-statistical.
 Audit sampling 7

Selection Methods
• Random (statistical)
• Systematic (statistical)
• Haphazard (non-statistical)
• Block (non-statistical)
• Value weighted selection/monetary unit sampling (statistical)
 Audit sampling 8

Random selection
Ensures that all items in the population have an equal chance of
selection, eg by the use of random number tables or random
number generators.
 Audit sampling 9

Systematic selection
Involves selecting items using a constant interval between selection
s, the first interval having a random start.
When using systematic selection, auditors must ensure that the
population is not structured in such a manner that the sampling
interval corresponds with a particular pattern in the population.
 Audit sampling 10

Haphazard selection
May be an alternative to random selection provided auditors are sat
isfied that the sample is representative of the entire population.
This method requires care to guard against making a selection
which is biased, for example, towards items which are easily
located, as they may not be representative. It should not be used if
auditors are carrying out statistical sampling.
 Audit sampling 11

Block selection
May be used to check whether certain items have particular
characteristics.
For example, an auditor may use a sample of 50 consecutive
cheques to test whether cheques are signed by authorised
signatories rather than picking 50 single cheques throughout the
year.
However, block sampling may produce samples that are not
representative of the population as a whole, particularly if errors
only occurred during a certain part of the period and hence the
errors found cannot be projected onto the rest of the population.
 Audit sampling 12

Monetary unit sampling

This is a type of value weighted selection in which sample size,
selection and evaluation results in a conclusion in monetary
amounts.
 Question: 2014 Specimen Paper (Sec A, Q1)

Which of the following sampling methods correctly describes systematic

sampling?
A A sampling method which is a type of value-weighted
selection in which sample size, selection and evaluation results in a
conclusion in monetary amounts
B A sampling method which involves having a constant
sampling interval, the starting point for testing is determined
randomly
C A sampling method in which the auditor selects a block(s) of
contiguous items from within the population
 Answer: 2014 Specimen Paper (Sec A, Q1)

B A sampling method which involves having a constant

sampling interval, the starting point for testing is determined
randomly

Choice A refers to monetary unit sampling and choice C refers to block

selection.
 Question: June 2014 exam (Sec B, Q2)

ISA 530 Audit Sampling applies when the auditor has decided to use sampling to
obtain sufficient and appropriate audit evidence.
Required
Define what is meant by ‘audit sampling’ and explain the need for this.
(3 marks)
 Answer: June 2014 exam (Sec B, Q2)
Audit sampling is the application of audit procedures to less than 100% of items
within a population of audit relevance, such that all sampling units have a chance of
selection in order to provide the auditor with a reasonable basis on which to draw
conclusions about the entire population.
Audit sampling can be applied using either a statistical or a non-statistical approach.
It involves testing a smaller number of items and using the results to draw a
conclusion about the whole balance or class of transactions.
It is necessary for auditors to sample as it is impossible to select all items for testing
as this would take the audit team too long and it would cost too much.
In addition, auditors do not provide 100% assurance in their audit report about the
financial statements, they only provide reasonable assurance and hence it is not
necessary to test every item within a population.
 Question: Audit sampling

You are the auditor of XYZ Co and are intending to audit

receivables by external confirmation of a sample of the year-end
balances. The trade receivables on the next slide have been
randomly tabulated. At the year-end, trade receivables amount
to $1 million and materiality is $100,000.

State which receivables balances will be selected for sampling

using valued weighted selection (monetary unit sampling).
Question: Audit sampling (cont'd)

Customer Balance ($) Cumulative total Selected (Y/N)

($)
1 60,000
2 70,000
3 90,000
4 105,000
5 28,000
6 100,000
7 46,000
8 1,000
9 84,000
10 94,000
11 108,000
12 34,000
13 160,000
14 20,000
1,000,000
Answer: Audit sampling

Customer Balance ($) Cumulative total Selected (Y/N)

($)
1 60,000 60,000 N
2 70,000 130,000 Y
3 90,000 220,000 Y
4 105,000 325,000 Y
5 28,000 353,000 N
6 100,000 453,000 Y
7 46,000 499,000 N
8 1,000 500,000 Y
9 84,000 584,000 N
10 94,000 678,000 Y
11 108,000 786,000 Y
12 34,000 820,000 Y
13 160,000 980,000 Y
14 20,000 1,000,000 Y
1,000,000
 Audit sampling 13

Evaluation of sample results

• Once the audit procedures have been carried out on the sample,
the auditor should evaluate the sample results to determine
whether they are satisfactory or whether further work is
required.
• Where there are errors, the auditor should consider:
— The nature and cause
— Whether it is a 'one-off' (anomalous) error
— Whether the error affects other audit areas
 Audit sampling 14

Evaluation of sample results

• An anomaly is a misstatement or deviation that is demonstrably
not representative of misstatements or deviations in a
population.
• Deviations: tests of controls
• Misstatements: tests of details
• Tolerable misstatement is a monetary amount set by the auditor
in respect of which the auditor seeks to obtain an appropriate
level of assurance that the monetary amount set by the auditor
is not exceeded by the actual misstatement in the population.
• Tolerable rate of deviation is a rate of deviation from prescribed
internal control procedures set by the auditor in respect of which
the auditor seeks to obtain an appropriate level of assurance
that the rate of deviation set by the auditor is not exceeded by
the actual rate of deviation in the population.
 Audit sampling 15

Evaluation of sample results

Tests
Testsof
ofdetails
details Tests
Testsof
ofcontrols
controls

Project monetary No projection necessary

errors and compare to
Decide if error rate
tolerable
acceptable
misstatement
 Audit sampling 16

Tests of details
• For tests of details, the auditor should project monetary errors
found in the sample to the population and compare this to the
tolerable misstatement.
• Where an error has been established as an anomaly, it may be
excluded when projecting sample errors to the population (but
still needs to be considered overall in addition to the projection
of the non-anomalous errors).
• Where a class of transactions or account balance has been
divided into strata, the error is projected for each stratum
separately.
 Question: Evaluation of results 1

You are auditing trade receivables and have obtained the

following results based on your sample:
Total value of population $1,000,000
Number of items in the population 400
Number of items tested 20
Sample value $200,000
Error in sample $9,000

(a) Assuming the errors are not anomalous ones, calculate the
expected error in the population.
(b) Assuming that tolerable misstatement was set at $40,000,
explain what action should be taken.
Answer: Evaluation of results 1
(a) Error rate in sample x total value of population

$9,000
×$1,000,000=$45,000
$200,000
 Answer: Evaluation of results 1 (cont'd)

(b) The projected error is above the tolerable misstatement limit. This means that
further evidence is needed. This could be done by:
• Extending the sample tested in the procedure and then re-performing the
extrapolation, or
• Designing and performing additional substantive procedures.
If the further evidence allows the auditor to conclude that the actual error in
the population does not exceed tolerable misstatement, then the auditor will
conclude that no adjustment is necessary, although the error of $9,000 will be
noted on a schedule of uncorrected misstatements.
If the further evidence indicates that there is a misstatement that exceeds
tolerable misstatement then the auditor will ask the client to make an
adjustment to the financial statements.
 Audit sampling 17

Tests of controls
• For tests of controls, no explicit projection of errors is necessary
since the sample error rate is also the projected rate of error for
the population as a whole.
• For example, if the auditor has performed tests of controls on a
sample of 20 items and has found 2 deviations, this represents
an error rate of 10% (2/20 × 100). The auditor must then decide
if this error rate is acceptable.
 Question: Evaluation of results 2

You are auditing the internal controls relating to the

authorisation of adjustments made to a client's inventory
system in order to determine the accuracy and validity of the
adjustments. You have obtained the following results based on
your sample:
Total number of adjustments made to inventory records during the 1,500
year

Number of adjustments tested in the sample 225

Number of occasions when adjustments tested were not authorised 18
(a) Assuming the errors are not anomalous ones, calculate the
error rate in the population.
(b) Assuming that the tolerable rate of deviation was set at an
error rate of 13%, explain what action should be taken.
 Answer: Evaluation of results 2

(a) Error rate in sample:

18
= 18%
225
(b) The projected error rate is below the tolerable rate of
deviation limit of 13%.
This means that the internal control is believed to have
operated effectively throughout the period and the auditor
can rely on it when assessing the accuracy and validity of
adjustments made to the inventory system.
No further testing is required, however any monetary errors
resulting from the 18 failures of the internal control should be
noted on the schedule of uncorrected misstatements.
 Audit sampling 18

Key stages in the sampling process

• Determining objectives and characteristics of the population
• Determining sample size
• Choosing method of sample selection
• Projecting errors and evaluating the results
 Exam link: Audit sampling

• Students historically find audit sampling a tricky part of the F8

syllabus and it is an area where your knowledge could easily
be tested by the examiner.
• This article from the August 2011 edition of Student
Accountant will prove very useful:
http://www.accaglobal.com/content/dam/acca/global/PDF-st
udents/2012s/SA_Aug11_auditsampling_F8v2.pdf
 Computer-assisted audit techniques 1

• Computer-assisted audit techniques (CAATs) involve using a

computer to perform audit work.
• Computers can be used to perform either substantive tests (tests
of details or substantive analytical procedures) or tests of
controls.
• Two main types of CAATs:
— Audit software
— Test data
 Computer-assisted audit techniques 2

Audit software
• Consists of computer programs used by the auditor, as part of
his auditing procedures, to process data of audit significance
from the entity's accounting system.
• Can be used to:
— Read and extract data from a client's system and produce a
report in a specified format
— Select information (eg a sample)
— Perform calculations (eg casting)
— Print reports in specified formats
 Computer-assisted audit techniques 3

Test data
• Test data techniques are audit procedures which enter data into
an entity's computer system, and compare the results obtained
with pre-determined results.
• Test data is a fictitious set of test transactions which are input to
the client's system in order to determine whether the internal
controls within the entity's computer systems have operated
effectively throughout the period.
• This will require significant co‑operation from the client,
especially in terms of computer access time.
 Computer-assisted audit techniques 4

Typical uses of test data

• To test specific controls in computer programs
• To test transactions
— Conducted 'live' or 'dead'
— Sometimes using an integrated (embedded) test facility
 Computer-assisted audit techniques 5

Advantages of CAATs
• Auditors can test programme controls as well as general internal
controls associated with computers.
• Auditors can test a greater number of items more quickly and
accurately than would be the case otherwise.
• Auditors can test transactions rather than paper records of
transactions that could be incorrect.
• CAATs are cost-effective in the long-term if the client does not
change its systems.
• Results from CAATs can be compared with results from traditiona
l testing – if the results correlate, overall confidence is increased.
 Computer-assisted audit techniques 6

Disadvantages of CAATs
• Setting up the software needed for CAATs can be time consuming
and expensive.
• Audit staff will need to be trained so they have a sufficient level of IT
knowledge to apply CAATs.
• Not all client systems will be compatible with the software used with
CAATs.
• There is a risk that live client data is corrupted and lost during the us
e of CAATs.
 Exam link: CAATs

• CAATs are a common area of confusion for students.

• Specific questions on this area could be both knowledge-
based and applied, and could come up in either Section A or
Section B.
• Remember, you can also suggest CAATs when asked for tests
of controls or substantive procedures, but simply stating
'Perform CAATs' wont get you many marks!
 Exam link: CAATs

• This article from the January 2011 edition of Student

Accountant may prove useful:
http://www.accaglobal.com/content/dam/acca/global/PDF-st
udents/2012s/sa_jan11_CAATs.pdf
• This article from August 2009 is also worth reading:
http://www.accaglobal.com/content/dam/acca/global/PDF-st
udents/2012s/sa_aug09_byrne.pdf
 Using the work of others 1

• An auditor's expert is an individual or organisation possessing

expertise in a field other than auditing or accounting, whose
work in that field is used by the auditor to assist the auditor in
obtaining sufficient appropriate audit evidence. An auditor's
expert may be either an auditor's internal expert
(partner or staff, including temporary staff, of the auditor's firm
or network firm) or an auditor's external expert.
• A management's expert is an individual or organisation
possessing expertise in a field other than accounting or auditing,
whose work in that field is used by the entity to assist the entity
in preparing the financial statements.
• ISA 620 Using the work of an auditor's expert
 Using the work of others 2

Examples when an auditor's expert may be needed:

• Valuations of land and buildings
• Determination of inventory quantities or physical condition
• Legal opinions concerning interpretations of agreements,
statutes and regulations, or on the outcome of litigation or
disputes
 Using the work of others 3

• Competence, capabilities and objectivity of the auditor's expert

must be considered by the auditor.
• Agree in writing:
— Nature, scope and objectives of the work
— Respective roles and responsibilities of the auditor and the
auditor's expert
— Nature, timing and extent of communication between auditor
and auditor's expert, including the form of any report
— Confidentiality requirements
 Using the work of others 4

Evaluating the work of the auditor's expert

• The relevance and reasonableness of the expert's work and
consistency with other audit evidence
• The relevance and reasonableness of any assumptions and meth
ods used
• The relevance, completeness and accuracy of any source data us
ed
 Using the work of others 5

• Auditors can sometimes rely on the work done by internal

auditors.
• ISA 610 (Revised) Using the work of internal auditors
• Must consider objectivity, competence, and whether a
systematic and disciplined approach is used.
• If internal audit is lacking in any of these areas, the external
auditor must not use their work!
 Using the work of others 6

Evaluation of internal audit work – objectivity

• Status of internal audit function
• Who it reports to
• Restraints or constrictions
• Whether those charged with governance oversee employment
decisions
• Whether management acts on recommendations
• Members of professional bodies
 Using the work of others 7

Evaluation of internal audit work – competence

• Adequacy of resources
• Members of relevant professional bodies
• Adequate technical training and proficiency
• Established policies for hiring and training
• Required knowledge of financial reporting
 Using the work of others 8

Evaluation of internal audit work – systematic and disciplined

approach
• Planning, supervision, reviewing and documenting assignments
• Appropriate quality control procedures
• Existence of audit manuals, work programmes and internal audit
documentation
 Using the work of others 9

• A service organisation is a third party organisation that provides

services to user entities that are part of those entities' information
systems relevant to financial reporting.
• A user entity is an entity that uses a service organisation and whose
financial statements are being audited.
• A user auditor is an auditor who audits and reports on the financial
statements of a user entity.
• A service auditor is an auditor who, at the request of the service
organisation, provides an assurance report on the controls of a
service organisation.
• ISA 402 Audit considerations relating to an entity using a service
organisation
 Using the work of others 10

Service organisations provide a wide variety of services to

businesses:
• Maintenance of accounting records
• Payroll
• Credit control
• Data entry/information processing
 Using the work of others 11

• Where service organisations are relevant to the financial

statements, the auditors (user auditors) are required to gain an
understanding of:
• The nature of services provided and the significance of these to
the user entity, including effect on user entity's internal control
• The nature and materiality of transactions processed or financial
reporting processes affected
• The degree of interaction
• The nature of the relationship, including contractual terms
 Using the work of others 12

Using the work of others and the auditor's report

The external auditor cannot make reference to work done by an
auditor's expert, internal auditor or service auditor in the auditor's
report.
The auditor's report is the sole responsibility of the external auditor.
 Using the work of others 13

Procedures
• Risk assessment procedures and related activities
• Auditor must understand how management identifies the need
for accounting estimates and how these accounting estimates
are calculated, including the underlying accounting assumptions
• Identify and assess the risks of material misstatement
• Evaluate the degree of uncertainty associated with an accounting
estimate
 Exam link: Using the work of others

The following article from the May 2011 edition of Student

Accountant discusses the use of an auditor's expert:
http://www.accaglobal.com/content/dam/acca/global/PDF-stud
ents/2012s/sa_may11_cat8_fau_expert.pdf
Although it is aimed at FAU students, the content of the article is
equally relevant to F8 students.
 • Tangible non-current assets
Chapter 12
• Intangible non-current assets
Non-current assets
 For more information
visit accaglobal.com

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