Hanrick Curran Audit Training - Sampling for Audit Evidence - June 2013

Sampling for Audit Evidence(ASA 530 / ISA 530)

June 2013

Objectives for today

• A look at the requirements for audit evidence (ASA 500 / ISA 500)

• An overview of different types of audit sampling

• Building a conceptual framework for determining sample sizes

• Using the CaseWare workpapers

Audit Training - Sampling - June 2013

Today’s presenters

– Matthew Green CA

Contact details: [email protected] 724 595(07) 3218 3900Twitter: @matthewjgreencaLinkedIn: http://au.linkedin.com/in/matthewjgreencaWeb: www.hanrickcurran.com.au


http://au.linkedin.com/in/matthewjgreenca

AUDIT RISKThe Fundamental Basis of Australian Auditing Standards

Source for this section: GAAP Consulting

Overview of the audit risk model Audit risk is the risk that the auditor will give an inappropriate

audit opinion when the financial report is materially misstated.

Before issuing an opinion on the financial report, the auditor needs to reduce audit risk to an acceptable level to ensure the opinion is reliable.


Reducing audit risk

An auditor reduces audit risk by performing audit procedures until there is sufficient appropriate evidence for each assertion of each significant transaction class or account balance to provide reasonable assurance that the financial reports are not materially misstated

The audit risk model focuses audit effort on those classes of transactions or balances (and the particular assertions) that are likely to contain material misstatements


Components of audit risk (AR)

Inherent risk (IR):

– Susceptibility of an assertion to material misstatement BEFORE consideration of related controls

Control risk (CR):

– Risk that material misstatement might not be prevented or detected and corrected by internal control procedures

Detection risk (DR):

– Risk that auditors’ procedures will not detect a material misstatement


Audit Risk

IR

CR

DR

Client controlled risks

Auditor controlled risksAudit Training - Sampling - June 2013

Audit Risk


Remember the formula?

IR x CR x DR = AR

orLikelihood x Impact = IR x CR = RR

RR x DR = AR


Another way to look at it

IRCR


ICAA Audit Manual on Risk Assessment

Review Chapter 29.3 of the audit manual . . .

Note the risk assessment comments and table on pp. 456 & 457!


AUDIT EVIDENCEUnderstanding the requirements of ASA 500

ASA 500 – Requirements for audit evidence

4. The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.



5(b). Appropriateness means the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.

5(e) Sufficiency means the measure of the quantity of audit evidence. The quantity of the audit evidence is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence.



9. When using information produced by the entity, the auditor shall evaluate whether the information is sufficiently reliable for the auditor’s purposes, including as necessary in the circumstances:(a) Obtaining audit evidence about the accuracy and

completeness of the information; and(b) Evaluating whether the information is sufficiently

precise and detailed for the auditor’s purposes.

“ASIC’s Top 10 issues for auditors includes a failure to apply professional scepticism and document work.



11. if:(a) audit evidence obtained from one source is

inconsistent with that obtained from another; or(b) the auditor has doubts over the reliability of

information to be used as audit evidence,the auditor shall determine what modifications or additional to audit procedures are necessary to resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the audit.



A2. … procedures to obtain audit evidence can include

Inspection Observation Confirmation Re-calculation Re-performance Analytical procedures Enquiry



A52. … The means available to the auditor for selecting items for testing are:(a) selecting all items (100% testing)(b) selecting specific items(c) audit sampling

Test

ing All items

Specific items

Sampling


AUDIT SAMPLINGUnderstanding the requirements of ASA 530

ASA 530 – Requirements for audit sampling

5(a). Audit sampling means 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.

5(b) Population means the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions.



5(c). Sampling risk means the risk that the auditor’s conclusions based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure.

5(d) Non-sampling risk means the risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.



5(e). Anomaly means a misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population.



5(g). Statistical sampling means an approach to sampling that has the following characteristics:(i) Random selection of sample items; and(ii) The use of probability theory to evaluate sample

results, including measurement of sampling risks.A sampling approach that does not have characteristics (i) and (ii) is considered non-statistical sampling.



5(i). Tolerable misstatement means 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.

“Typically this would be the amount determined as

materiality, specifically the performance materiality, or a lower amount.



12. The auditor shall investigate the nature and cause of any deviations or misstatements identified, and evaluate their possible effect on the purpose of the audit procedure and on other areas of the audit

13. In the extremely rare circumstances when the auditor considers a misstatement or deviation discovered in a sample to be an anomaly, the auditor shall obtain a high degree of certainty that such misstatement or deviation is not representative of the population. The auditor shall obtain this degree of certainty by performing additional audit procedures to obtain sufficient appropriate evidence that the misstatement or deviation does not affect the remainder of the population.


Sample selection methods (ASA 530.App 4)

(a) Random selection (applied through random number generators or random number tables)



(b) Systematic selection, in which the number of sampling units in the population is divided by the sample size to give a sampling interval, for example 50, and having determined a starting point within the first 50, each 50th sampling unit thereafter is selected. Although the starting point may be determined haphazardly, the sample is more likely to be truly random if it is determined by use of a computerised random number generator or random number tables. When using systematic selection, the auditor would need to determine that sampling units within the population are not structured in such a way that the sampling interval corresponds with a particular pattern in the population.



(c) Monetary Unit Sampling is a type of value-weighted selection (as described in Appendix 1) in which sample size, selection and evaluation results in a conclusion in monetary amounts.

“Also known as Dollar Unit Sampling (DUS) or

Constant Monetary Amount (CMA) sampling.


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(d) Haphazard selection, in which the auditor selects the sample without following a structured technique. Although no structured technique is used, the auditor would nonetheless avoid any conscious bias or predictability (for example, avoiding difficult to locate items, or always choosing or avoiding the first or last entries on a page) and thus attempt to ensure that all items in the population have a chance of selection. Haphazard selection is not appropriate when using statistical sampling.



(e) Block selection involves selection of a block(s) of contiguous items from within the population. Block selection cannot ordinarily be used in audit sampling because most populations are structured such that items in a sequence can be expected to have similar characteristics to each other, but different characteristics from items elsewhere in the population. Although in some circumstances it may be an appropriate audit procedure to examine a block of items, it would rarely be an appropriate sample selection technique when the auditor intends to draw valid inferences about the entire population based on the sample.


DETERMINING A SAMPLE SIZE

Using the ICAA Audit Manual

Using a confidence factor

Sampling can be completed by using a confidence factor to help set the sample size. Confidence factors are described in the ICAA Australian Audit Manual (p.497)


Determine a selection interval

A selection interval (j) is determined using the following formula:

Also expressed as:


Determine a sample size

A sample size is determined using the following formula:

An example: Population = $177,203Materiality = $15,000Confidence factor = 3

Sample interval = $15,000/3 = $5,000Sample size = $177,203/$5,000 = 35.4 (roundup to 35)



Using CaseWare’s template:


How do I select a confidence factor?

“professional judgement.


Lets discuss some practical questions?

Need more information, see the ICAA Aust. Audit Manual:- Chapter 29- Chapter 31- Chapter 32


About Hanrick Curran

Our client base is mainly located in South East Queensland, but also extends to Northern New South Wales, Western Queensland, Sydney, Melbourne, Darwin, Townsville and Mackay as well as other regional areas.

Hanrick Curran are a member firm of the international Alliott Group, which is a worldwide alliance of independent firms that combine to work on engagements and who refer work where local knowledge is a requirement.

Hanrick Curran’s Client Base

This document contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement. It does not purport to be comprehensive or to render professional advice. The reader should not act on the basis of any matter contained in this publication without first obtaining specific professional advice.

We believe that the statements made by us in this document are accurate but no warranty of accuracy or reliability is given. Our conclusions are based on interpretations of accounting standards and other relevant professional pronouncements and legislation current as at the date of this document. Should the interpretations, accounting standards, other relevant professional pronouncements or legislation change, our conclusions may not be valid. We are under no obligation to update the matters considered in this document after its publication.

© Hanrick Curran, June 2013All rights reserved

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Hanrick Curran Audit Training - Sampling for Audit Evidence - June 2013

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Transcript of Hanrick Curran Audit Training - Sampling for Audit Evidence - June 2013