ACCT3014_lecture Topic Week 11

8/22/2019 ACCT3014_lecture Topic Week 11

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Business School

Auditing and Assurance

The University of Sydney

Business SchoolACCT3014 - Auditing and Assurance

Semester 1, 2013

Eric Clubb

Lecture Topic Week 11

Substantive Tests:Audit SamplingUsing Analytical Procedures as a Substantive

TestOther Substantive tests


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Definition and features

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Audit sampling: the application of an auditprocedure to less than 100% of the items withina population to obtain audit evidence aboutparticular characteristics of the population.

Audit sampling is important because it provides information on:

- How many items to examine

- Which items to select

- How sample results are evaluated and extrapolatedto the population in order to tell us something about

the population (e.g. level of misstatement).


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Non-sampling and sampling risk defined

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Sampling risk: the probability that the auditorhas reached an incorrect conclusion becauseaudit sampling was used rather than 100% examination(ASA/ISA 530.05).

Non-sampling risk: arises from factors,

other than sample size, that cause an auditorto reach an incorrect conclusion, such as the possibility that:

The auditor will fail to recognise misstatements included inexamined items

The auditor applies a procedure that is not effective in achieving aspecific objective.


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Various means of gathering audit evidence

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100% examination: this is not a samplingmethod.

Selecting specific items: e.g. high valueor high risk this is not a sampling method.Items selected will not necessarily be representative of thepopulation.

Audit sampling, reviewed in this lecture


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Statistical and non-sampling sampling

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Statistical sampling: an approach to samplingthat has the following characteristics:

Random sample selection

Use of probability theory to evaluate sample results

Major advantage is defensibility, thorough quantification of sampling risk

Refer ASA/ISA 530.5(g) Non-statistical sampling: sampling approaches that do not have all

the characteristics of statistical sampling.

Major advantage is greater application of audit experience or judgement

The basic principles and essential procedures identified in ASA/ISA 530

apply equally to both statistical and non-statistical sampling.


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Basic requirements of all audit samples

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Whenever an auditor uses audit sampling (statisticalor non-statistical) the following requirements apply:

- Planning and design:

- The auditor considers the relationship of the sample to the relevant specific auditobjective or control objective and considers certain other factors that should

influence sample size.

- Selection:

- Sample items are selected in such a way that the sample can be expected to berepresentative of the population.

- The key here is that any item in the population has an equal probability of beingselected for audit testing.

- Performing the procedure and evaluating results:

- The auditor performs the required audit procedures on the items selected,projects the results of the audit procedures undertaken on the sample to the

population and considers sampling risk.


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Planning and designing the sample

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Auditor must consider:

- Objectives of the audit test (usually relatedto an audit assertion)

- Population from which to sample

- Possible use of stratification

- Definition of the sampling unit.


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Defining the audit objective and population

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Once the audit objective is specified, such as reliance oncontrols or misstatement of account balance, the auditor mustconsider what conditions would constitute an error.

The auditor must ensure that the population from which thesample is to be selected is complete and appropriate to theaudit objective.


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Stratification

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Stratification:- occurs when the auditor divides the population into a series of sub-

populations, each of which has an identifying characteristic, such as dollarvalue (ASA 530/ISA 530).

- We will use accounts receivable as an example

Can assist with audit efficiency as it allows the auditor to reduce thesample size by reducing variability without increasing the sampling risk.

Can direct auditors attention to areas of audit interest, especially risky

or material items.


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Determining sample size

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Sample size is affected by the degree of sampling risk the auditor iswilling to accept.

Auditor's major consideration in determining sample size is whether,

given expected results from examining sample, sampling risk will bereduced to an acceptably low level (ASA/ISA 530.07).

If errors are found in the sample and the quantity exceeds the auditorsexpectations, then more of the population will need to be tested.


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Selecting the sample

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To draw conclusions about population or stratum,the sample needs to be typical of characteristicsof population or stratum.

Sample needs to be selected without bias sothat all sampling units in the population or stratum have a

chance of selection.

Common sampling techniques are:

Random selection random number generation

Systematic selection

Haphazard selection select without conscious bias.


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Random selection:random number generation: an example

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RANDOM.ORG - Sequence Generator
http://www.random.org/sequences/http://www.random.org/sequences/http://www.random.org/sequences/http://www.random.org/sequences/http://www.random.org/sequences/


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Steps in systematic selection

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For example, suppose the sample size is 20 and the number of

items in the population is 10 000: Step 1: Calculate the sample interval:

Step 2: Give every item in population chance of selectionby choosing a random number (random start)within range of 1 and sampling interval (in thisexample, 500), e.g. 217.

Step 3: Continue to add sampling interval to random start,and identify items to be sampled,

e.g. item nos. 217, 717, 1217. . . 9217, 9717.

50020

00010

sizeSample

populationinitemsofNo.


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Biases from haphazard sampling

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Unacceptable sample selection methods

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Block selection: the auditor selects all items of a specified typeprocessed on a particular day, week or month.

- This is not objectively testing the population and is only proving that forthe limited time period that data was satisfactory.

Judgmental selection (based on sample item characteristics): theauditor selects large or unusual items from the population or uses someother judgmental criterion for selection.

- This method has a conscious bias and cannot be considered representative.


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Evaluating sample results

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To evaluate sample results, the auditor determinesthe level of misstatement found in sample and directly projects thismisstatement to relevant population.

For example: sample 20%, find misstatement of $10 000.

Therefore projected misstatement =

$50 000 ($10 000/20%) Projected misstatement is then compared with tolerable misstatement for

the audit procedure to determine if characteristic of interest can beaccepted or rejected.

This links to the concept of materiality.

Auditor should consider both the nature andcause of any misstatement or deviations identified.


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Sampling for tests of controls, attribute sampling

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Audit sampling is useful for tests of controls, especially involvinginspection of source documentation for specific attributes suchas evidence of authorisation (attribute sampling).

Involves examination of documents for particular attributesrelated to controls (e.g. authorisation).

Results of attribute sampling can be usedto support or refute an initial assessment ofcontrol risk.


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Analytical Procedures as a Substantive Test

Key opening point:- The auditor can only use analytical procedures to undertake substantive testing if

the auditor has first proved the Internal controls are working effectively:

- Why?

- If the internal controls are not effective then there is a high probability that the

data to be tested is corrupt. If this is the case then the result of the analytical testcan lead to an incorrect audit assessment of the key account.

A working example:

- The key accounts

- Sales Commission expense, (accuracy assertion), and- Sales Commission Payable, (valuation assertion)

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Month CommissionableSales : (5% to8%)

NonCommissionableSales

Total Sales

July 100,000 250,000 350,000

August 150,000 150,000 300,000

September 120,000 180,000 300,000

October 90,000 200,000 290,000

November 140,000 130,000 270,000

December 190,000 290,000 480,000

Avg. Rate = 6.5%

Total sales subject to commission = 790,000 X 6.5 % = $51,350 (estimated value of expense account)

Value in Expense account = $ 53,373

Audit test proved satisfactory

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Sales Commission Payable

Commissionable sales for June 2014 = 185,000

Avg commission rate = 6.5%

Expected Commission Payable = $12,025

Liability in Balance Sheet = $12,736

Test proved to be satisfactory.

Note that the audit would need to have satisfied him / herself, that the

normal commission payable was for a 1 month period. Other audit testswould be adopted to do this

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Designing other Substantive Tests

Must have identified the Key account.

Must have decided as to whether the audit test is a test of a balance or a testof transaction.

Must have identified the particular assertion to be examined

Must be practical and the data available.

Example 1

- Auditor wishes to test that sales at a supermarket checkout occurred (transaction)

1. Select a sample of sales from the population (audit sampling)

2. Agree the total sale value to the cash register log, Is it Cash, EFTPOS, Creditcard?

3. Agree sale value to banking reports, and agree control total for register for the dayto sales for the day.

Note that trying to do a positive confirmation to customer would be impractical !

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Example 2

Test of Balance The key Account is Short Term Investments in listedPublic securities, and the assertion is valuation

1. Select a Sample (audit sampling)

2. Note: Name, Total No. of Shares, Cost Value Total, Market Value Total

and Balance date (per unit $ market value), a GAS report creates thisfor you.

3. Agree the unit $ to ASX reports or Web site.

4. Re-perform Calculation of No. X $

5. Ensure value $ in final balance is the lower of the cost or market value6. Now use exception report GAS to print out the same details where

Market value $ (total )< Cost Value (total)

7. Select a sample of these balances and check that the lower value is the$ used for the balance sheet

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Important to note the auditor will have already designed and completedsubstantive tests to validate the existence of the shares and the number ofshares held at balance date.

The auditor will then need to document the audit tests to validate theRights and Obligations assertion and the presentation / classification

assertion. With any audit procedure and regardless of the timing and focus of the

audit procedure, there is one golden rule:

If it is not documented, then the auditor can not prove the procedurewas carried out.

Think about the legal liability of auditors.

ACCT3014_lecture Topic Week 11

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