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Summary AUE3702 Notes
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AUDIT EVIDENCE: Information used by auditor to arrive at a conclusion to base an audit opinion
Cumulative and can be:
- Corroborative
- Contradictionary
- Absence of information
Evidence includes:
- Accounting records
- Supporting documentation
Examples:
- Invoices
- Contracts
- Ledgers
- Reconcilitations
- Journals
- Disclosures
- Bank statements
- Financial statements
OBJECTIVE OF THE AUDITOR:
Design and perform audit procedures
To obtain sufficient appropriate audit evidence
- Right in the circumstances
Understand the entity
- Quality is affected by
Relevance: direction of testing and relating to specific risk
Reliability: nature and source
To draw conclusions
Appropriate – quality
Sufficient – quantity
Which is more reliable evidence?
- Inspection vs observation
- Recalculation vs inquiry
- Documented confirmation vs oral telephone call
- Invoice from supplier vs statement from supplier
- Debtor invoice vs delivery note / order
- Bank confirmation vs bank statement
- Management representation over legal matters vs legal confirmation
- Employment contract vs payslip
Sufficient:
- How much evidence is required
- Quantity is affected by:
Quality
Risk of material misstatements
- The better the quality the less evidence is required
- Materiality of amounts
- Previous experience
, - Sources and reliability
- Previous evidence
HOW TO OBTAIN AUDIT EVIDENCE:
Risk assessment procedure:
- Understand the entity
- Obtain information
- Address the risks identified
Further audit procedures:
- Test of control
- Substantive procedures
Test of detail
Analytical procedure
Other information:
- Previous audit
How to obtain evidence?
- Inspect
- Observe
- Confirm
- Recalculate
- Reperform
- Inquire
- Obtain
- Analytical procedures
Compare
Consider
INCONSISTENCIES:
Perform additional procedures to assess the effect on:
- Other evidence obtained
- Audit opinion
Proper documentation required
Audit opinion affected if:
- Evidence indicated material misstatement
- Sufficient and appropriate evidence wasn’t obtained
ASSERTIONS:
Inventory valued at cost when NRV is lower
Supplier invoices not made out to the entity
VAT 51% instead of 15%
SAMPLING:
Application of audit procedures of less than 100% of items to a population
All items equal change of selection
Allow auditor to draw conclusion on entire population
, Population: set of data from which the sample is selected
Anamoly: difficult to prove in practice
Statistical sampling:
- Random selection
- Probability theory to evaluate results
- Monetary unit samples: randomly select samples, each rand is a monetary
unit, larger items have more chance of selection
Sampling risk:
- Risk that the auditors conclusion would have been different if the entire
population was tested
- Can lead to an inappropriate audit opinion
Non-sampling risk:
- Reaching inappropriate conclusion not related to sampling risk
Stratification:
- Divide population into sub-populations
- Each sub-populations have similar charasteristics
Tolerable misstatement (substantive procedures):
- Amount of misstatement that is acceptable to the auditor
- Margin for possible undetected misstatements
- Consider sampling risk & materiality
Tolerable rate of deviation (controls):
- Times a variation can occur that is acceptable to the auditor
- Margin for possible undetected control weaknesses
- Consider frequency of control & risk
Why sample?
- We cannot test everything
- Efficiency
SAMPLING METHODS:
Select all items:
- Repetitive calculations making 100% testing efficient & effective
Select specific items:
- High value/key items
- All items over a specific amount
- Items to obtain information
Depends on:
- Risk
- Materiality
- Efficiency of different means of testing
, STEPS IN SAMPLING PROCESS:
STEP 1: Determine the objective of the procedure
Purpose of the audit procedure:
- Are the debtors fairly stated
Consider the assertions
Direction of testing is important
- Where it should be selected from
- Existence/occurrence
- Completeness
STEP 2: Determine the procedure to be performed
Clearly specify the procedure
Error conditions
STEP 3: Confirm that the population is appropriate & complete
All the units in the populations from which:
- Sample is selected
- Auditor to reach the conclusion
All units must be available for selection
STEP 4: Define the units of the population
Items
STEP 5: Determine the sample size
Sampling risk must be reduced to an acceptable level
- Professional judgment – factors influencing size:
- Confidence level – how confident does the auditor want to be over the
conclusion drawn from the sample
- Tolerable misstatement / tolerable rate of deviation – maximum error
auditor is willing to accept
- Expected misstatement / rate of deviation – based on experience,
knowledge of the business
- Population size – little effect (main are risk & materiality)
- Assessment of risk of material misstatement
- Other procedures performed directed at same assertion
- Controls over the population
- Stratification
STEP 6: Select the sample
Random
Systematic
- Number of sampling units divided by sample size equals x
- Haphazard starting point then every x unit is selected
Haphazard
- Select a sample without following a structured technique
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