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Sampling and overview of the risk response phase (Substantive procedures…
Sampling and overview of the risk response phase
Audit Sampling
Required when the auditor cannot test every single entry in the financial statement
Sample of items should be representative of the population
Sampling and non-sampling risk
Sampling risk
the risk that the chosen sample is not representative of the population, and causes the auditor to arrive at an inappropriate conclusion
Implications
Auditor assessed control risk: low
Actual control risk: low
Auditor assessment is correct
Actual control risk: high
an increased audit risk
(ineffective)
Auditor assessed control risk: high
Actual control risk: low
An increased audit effort
(inefficient)
Actual control risk: high
auditor assessment is correct
Non - sampling risk
Any risk that doesnt involved sampling
Auditor uses inappropriate audit procedures
rely too heavily on unreliable information
fail to gather evidence on most relevant assertions
spend to little time testing high risk accounts or critical controls
Statistical and non - statistical sampling
Statistical sampling
Involved random selection of sample based off probability
Advantage - allows measurement of sampling risk
Disadvantage - can be costly to use
1. Random selection
Each item has equal chance of being selected
Can be stratified to reduce total sample size required
2. Systematic selection
Choosing event nth interval of transaction, greater risk that items on list are listed every nth way
Non - statistical sampling
allows auditor to use judgment to select sample,
More likely to be used for low risk accounts
3. Haphazard sampling
Auditor simulates random sampling by choosing items at random
4. Block Selection
Select items in a group together
5. Judgmental selection
auditor chooses accounts to sample based purely off judgement, chooses high risk or common misstated accounts
Factors to consider when selecting sample
Assess control risk (CR)
Risk increases, sample size increases
Set detection risk
Set planning materiality
Select appropriate population for testing
Define tolerable error and confidence reqired
Audit Strategy
Perform risk assessment procedures and identify risks
Determine audit strategy
Determine planned audit approach
Controls and substantive approaches
Materiality, timing and team assignments
Understand the entity and significant risks
Test of controls
Done to determine control risk in the understanding phase
Larger sampling size is chosen when
audit needs to rely more heavily on that control
auditor expects population to have higher rate of deviation for that control
Auditor requires greater confidence the control is operating effectively
Smaller or little change in sampling size is required when
auditor is willing to tolerate higher deviation rate for that control
the sample size has more sampling units
Substantive procedures
Substantive test of transactions
Substantive tests on balances
Analytical Procedures
Estimate depreciation
compare inventory balances from this year and last year
Estimate revenue of theatre by number of seats
E.g. Confirmation
Inspecting documents
Recalculation
Sampling size
Larger sampling size is required when:
HIgh IR or CR
REquire greater confidence from results
Auditor is expecting to find greater misstatements within the population
Smaller sampling size is required when
Auditor using other substantive procedures fo the same assertions
Auditor is willing to accept greater total error
Auditor uses stratification of the population
Documentation- audit work papers
Auditor must document each stage of the audit
Provide evidence that work is completed
Permanent file
client information that applies to more than one audit
Copies of previous financial reports
Main accounting policies
Long term contracts, key personel
Currents file
Information that applies just for this audit