Question

1. Describe the five types of audit tests. Identify which of the five types are substantive tests, and which are used to reduce assessed control risk.

2. Describe the differences between statistical and nonstatistical sampling in terms of (1) the sample selection methods used, and (2) quantification of sampling risk.

3. List the three phases in audit sampling for both statistical and nonstatistical sampling

Answer 1

1.) The five types of audit tests include :-

a.) Test of Controls :- This includes testing the processes and systems within the organization. Every organization might have multiple controls setup within their business in order to ensure smooth functioning of the business and to avoid scope for misconcealment of facts and misappropriation of assets. As part of the risk assessment procedures performed, the auditor might perform a combination of Tests of controls and substantive tests in order to assess the Detection risk that the company has determined.

b.) Risk Assessment Procedures :- The risk assessment procedures of the auditor involving the assessment of risks surrounding a particular account which include a various factors like management estimation, economic conditions, susceptibility of the account to misstatement, etc. The risk assessment procedures will help an auditor understand the risk associated with the account and also provide the first hand information regarding the type of procedures that the auditor plans to perform.

c.) Substantive test of transactions :- These are the tests of audit conducted by the auditor to audit the specific accounts. The substantive tests might include picking a sample of transactions from the detailed listing of all the transactions and verifying the accuracy and authenticity of the transactions by tracing them to the invoices, payment receipts, payment advices, etc.

d.) Substantivte Analytical Procedures :- Analytical procedures involve creating plausible relationships between the balances and comparing the balances between one period to another period to understand if there are any unreasonable or unfavorable variances and trying to investigate the movements of such balances. If the variances are unreasonable, the auditor may investigate the data and if the variances are within the threshold the auditor might not perform any further procedures.

e.) Test of Details - Test of Details are used by auditors to collect evidence that business, disclosures, and underlying data associated with the financial statements reported by the client are correct and accurate. It is directly linked to test of controls by the client. The higher the comfort obtained from the test of controls, the lower the test of details , etc. and lower the comfort obtained from test of controls, the higher the test of details.

The substantive tests primarily include performance of analytical procedures, a test of details of transactions and a test of details of balances. These would generally be accomplished by using a combination of Inquiry, Inspection, Observation, and reperformance. All these tests would have to be performed in combination with the test of internal controls for an auditor to counter the level of detection risk determined. The higher the level of comfort given by test of controls, the lower the detection risk. The lower the level of comfort provided by test of controls, the higher the level of substantive testing. It is to be understood that auditor may or may not perform test of controls, but the performance of substantive tests is mandatory in any audit.

2.) Difference between Statistical and Non statistical sampling :-

Sample selection method :- Statistical sampling requires that the samples be selected at random so that every sample item present in the population has a chance of being selected. It is generally a quantitative test on the samples. Non Statistical sampling involves the use of auditor's judgement in making selections. The auditor may use a variety of judgements like selection of high value balances, balances with high fluctuation, etc in making these selections. It is more leaned towards a qualitative test of the sampling

Quantification of Sampling Risk :- Statistical sampling, since it does not discriminate data , provides the auditor the scope to ensure that the risk is being reduced to an appropriate level. However , for Non statistical sampling, the sampling risk, cannot be quantified. This is because, the auditor is not typically putting to test the entire population and hence the sample results do not support the assessed risk below the maximum if the actual deviation rate exceeds or is close to the expected deviation rate.

3.) Three phases of audit sampling :-

The following are the 3 general phases of the audit sampling process :-

1.) Plan the Sample :- It is under here the auditor needs to make a judgement whether he wants to use the statistical or the non statistical mode of sampling. The auditor ascertains the type of population subjected to sampling in order to decide which sampling method to use. The auditor uses a variety of planning techniques to ensure that he would get the results he desired for

2.) Select the Sample :- Once the sample testing procedures are completed, the auditor then selects the samples using a variety of sampling techniques like random sampling, top stratum sampling, cluster sampling, systematic sampling, etc. The samples selected using these methods will be utilised by the auditor in performing the tests that he/she had intended for.

3.) Evaluate the results :- Once the sample has been selected and the testing procedures have been performed, the auditor would then evaluate the results of the testing procedures and decide the further course of action. If there are any variances noted in the samples, the auditor might investigate the reason for the variances along with auditing the necessary supporting documents and if the auditor is not satisfied, he might extrapolate the balances to the entire population to check if they are above or below the threshold limits.