Question

Respond to the following in a minimum of 175 words:

As auditors move from the planning phase to the fieldwork phase of an audit, they recognize they will not be able to test all transaction in order to offer their opinion on the financial statements. Therefore, various sampling techniques and principles have been developed to assist the auditor in providing adequate coverage and a reliable opinion using samples of transactions.

Discuss audit sampling for tests of details of balances and for tests of controls and substantive tests of transactions. How do they differ?

Answer 1

Audit sampling means aplication of audit procedures to less than 100% of items in the population in such a way all sampling units have a chance of selection in order to provide the auditor with a reasonable assurance to draw conclusion about the whole population.

Test of controls: These are used by auditors to collect audit evidence that the internal controls are effective in preventing or detecting material mistatement.

Use of audit sampling in test of controls: Look at your audit objectives and describe the control activity which provides assurance that material mistatements will be prevented or detected in a timely fashion. Next define the population & control deviations along with expected number of deviations. Then after determine the planned level of control risk, sample size and sample method that provides assurance about whole population.

Test of details of balances: These are used by auditors to collect audit evidence that the balances, disclosures and underlying transactions associated with a clients financial statements are true.

Use of audit sampling in test of details of balances: First step is determination of test objectives which provides reasonable assurance that material misstatements will be found and be able to correct financial statements. Next define characteristics of population & determine the sample size. Select sample items and perform audit procedures on such sample items and finally draw conclusions from that audit procedures,

Substantive procedures : These procedures are checks of details to verify different assertions ( regarding completeness,existence, disclosure, rights or valuation) in the Financials statements.

Use of audit sampling in substantive procedures: While planning a sample, auditor first determine the audit objective to be achieved and should determine the audit procedures to be applied to achieve such objective. Determine tolerable misstaement and allowable risk of incorrect acceptance.

The most importance difference is for example when statistical sampling is used for test of controls and substantive test of transactions, attributes sampling is ideal because it measures the frequency of occurance whereas in test of details of balances, the concern is determining whether the monetary amount of an account balance is materially misstated