Question

Prepare a memo to management that explains how and why data analysis is used in the various stages of the audit process, including the risk assessment stage, the determination of sampling method and audit universe, the substantive procedures stage, and the end of the audit.

Specifically, the following critical elements must be addressed:

1. Data Analysis: Risk Assessment Stage: Explain how and why data analysis is used at the risk assessment stage of the audit process.

2. Data Analysis: Determination of sampling method and audit universe: Explain how data analysis is used in the determination of sampling method and audit universe.

3. Data Analysis: Substantive procedures stage: Explain how and why data analysis is used at the substantive procedures stage of the audit.

4. Data Analysis: End of audit: Explain how and why data analysis is used near the end of an audit.

Answer 1

1. Risk Assessment Stage: Function of audit is to check if there is any misrepresentation of facts or not. Risk Assessment stage identifies the company's environment including the internal operating conditions and the external market scenario.

Following data & steps are considered when carrying out a risk assessment:

External environment: Checking if the company is governed by any regulatory body,

market presence of the company --> Clients and the footprint of the company

business strategy of the company --> how does it generate value for the shareholders

Internal Environment:

• Monitoring the company's management quality --> interviewing the employees, measuring statistics such as employee turnover and arbitration rate of the company
• Quality of company's reports --> Company's financial reporting quality can be measured using metrics such Beneish M score. Financial details & notes to the statement are consistent and provided in detail. Its MD&A should also discuss about future direction of the company
• Analyzing processes & paperworks: Analyzing data from the reports to formulate trends, ratio and other metrics

2 Audit Sampling method is picked on the basis that every unit has an equal probabiltiy or chance of getting selected from the sample. Sampling techniques that can be used are:

• Block Sampling: Sequence of samples together are selected. However, this may be grouped based on the likeness of the units and hence may result in not provided a complete picture of the sample.
• Random Sampling: Units are selected randomly based on a random number generator. This method is theoretically consistent of the sampling condition that every unit has an equal probability of selection.
• Stratified Sampling: Based on auditor's judgement, the sample units are classified in to groups and then sample units are selected from each group.
• Systematic Sampling: Sample units are the taken at every fixed interval. For example every 5th unit might considered for audit. While the sequence is fixed but the interval is chosen randomly.

3. Substantive Procedures are performed to detect if any financial misstatements exist.These procedures are performed by an auditor to assist his/her assertion that no material misstatements exist regarding the completeness, validity and accuracy of the data reported by the company.

General procedures include:

• checking different transactions, account balances,etc.
• verifying the journal entries and other financial adjustments
• accepting the financial statements and the accompanying notes

The following actions can be performed as substantive actions:

• Bank confirmation to check the account balances and transactions
• Account receivables confirmation to check if the receivables stated on the reports are true
• Checking the physical inventory count to that of the reported inventory
• Matching purchase order & supplier invoice to the fixed assets and inventory count
• Verifying the fixed assets

4. End of an audit requires a overall review of the entire financial statements. It is done to ascertain that the results obtained by the auditor using the samples are in accordance with his/her understanding of the company. If any irregularity is found the risk assessment needs to be carried out again