what are examples of substantive procedures for obtaining evidence set out by the ISA (UK) 500?
- inspection of assets or documents
- inquiry
- external confirmation
- recalculation
- reperformance
- analytical procedures
What are CAATS? What are the 2 main categories?
- computer assisted audit techniques
- technology used to carry out audits
- test data and audit software
what is test data? what is it used for? examples?
- audit data put into client systems (real or dummy)
- to test the system controls
i.e. a time sheet outside normal hours to make sure it gets rejected
what is audit software? what is it used for? examples?
- client data put into auditors systems
- basic data analysis and substantive testing
- i.e. used for sample selection, calculations of ratios, preparation of reports
when would data analytics be used in the audit?
to analyse big data
data analytics can be embedded in the audit plan to assist with:
- transactional analysis e.g. matching purchase orders
- judgemental areas e.g. using sensitivity analysis to test assumptions on the net realisable value of inventory
- analysing procedures e.g. analysing revenue trends by product
What does the analytics procedure depend on as to whether it is a good form of substantive procedure?
- strength/ comparability of relationships
- reliability of data being used in analytics
- level of disaggregation of the data available
- depth of the auditors knowledge of the client
What must the auditor determine at the evidence stage
whether unexpected variations are acceptable (influenced by materiality) and if not seek further evidence:
- make enquiries of management
- corroborate management explanations with other evidence
what is meant by directional testing?
auditors aim is to identify whether the financial statements are free from material misstatement
- a misstated balance could be overstated or understated
- testing for overstated vs understated balances require different approaches
How would an auditor test an overstated balance?
- start with financial statements
- agree the balance to the non-current asset register
- select a sample of assets in the non current asset register
- perform procedures such as inspection of the asset and corresponding purchase invoice to confirm balance is not overstated
How would an auditor test an understated balance?
- start with assets being used by client
- trace to non current asset register and confirm balance is not understated
What are examples of accounting esimates?
- depreciation
- allowance for receivables
- provisions
How are accounting estimates audited?
-review and test process used to develop estimate
- use independent expertise to make estimate and compare
- review subsequent events for confirmation of the accuracy of the estimates
- test operating effectiveness of controls
according to the ISA (UK) 530 what is the objective of the auditor when sampling?
provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected
- auditor must select items so that each sampling unit has a chance of selection
what testing procedures do not involve sampling?
- testing all items in population when population is small but high value
- testing all items when high value
what is the 5 step sampling process?
- identify population
- identify sampling unit
- select sample
- identify errors
- draw conclusions
what are the 2 methods for selecting a sample?
statistical or non-statistical
what are the 3 statistical sampling methods used?
- random selection
- systematic selection- random start constant interval between
- money unit sampling- every £1 has an equal change of being selected
what are the 2 non-statistical sampling methods used?
- Haphazard selection- auditor selects sample they think will be representative without the use of probability theory
- sequence or block selection- select a block of items i.e. 50 consecutive cheques
What factors will increase the need for a larger sample?
- increase in risk of material misstatement
- increased in desired level of assurance
- increase in expected error
What factors will decrease the need for a larger sample?
- increase in the tolerable misstatement
- stratification of the population
What factor will have no effect on the sampling size?
increase in the number of sampling units in the population
once testing has taken place what must be taken into account when drawing conclusions?
- nature of errors identified
- cause of errors identified
- the impact on other parts of the audit
- the probable misstatement in the population
In terms of evaluation what must the auditor do?
- evaluate the effect of any uncorrected misstatements on the financial statements
- quickly communicate misstatements to management and request they correct them
- written statements form management stating they believe the misstatements are immaterial
