Question

When does an auditor use sampling for tests of details? What are the advantages and disadvantages of this selection method?

Answer 1

Auditors must base conclusion and engagement results on appropriate analyses and conclusions. Audit procedures should be designed and performed with the objective of gathering sufficient and appropriate audit evidence to enable an auditor to drawn a reasonable conclusions on which to base his opinion on financial statements under audit. Here, sufficient refers to the quantum of evidence, and appropriate refers to the quality of audit evidence.

The sufficiency of audit evidence is related to the design, and size of an audit sample. The size of a sample required to provide sufficient evidence depends on the objectives and efficiency of the sample.

Audit procedures relate to the application of audit procedures to less than 100% of items within an account balance or class of transactions for evaluating some characteristic of the balance or class.

The purpose of conducting substantive tests is to detect material mistatements or fraud relating to transactions or account balances. There are two categories of substantive tests, viz.,

1. Analytical procedures; and

2. Test of detail.

Test of details are used by auditors to obtain evidence that balances, disclosures and underlying transactions relating to financial statement under audit are correct.It also pertains to assertions being addressed. Test of detail include : Confirmation of account balances, Inspection and observation (vouching and tracing bills and invoices to ensure posting the the relevant vendor or cusomer account) and re-calculation of debt provisions.

When planning a particular sample for a substative test of details, the auditor should consider:

1. Relationship of sample to the relevant audit objective;

2. Preliminary judgements regarding materiality levels;

3. Allowable risk of incorrect acceptance;

4. Characteristics of the population - items comprising an account balance or class of transactions."

Advantages:

a. Substantive test of detail obtains direct evidence for a sample. This is needed to be performed when risks are assessed to be significant;

b. To enable focus on material or high value transactions;

c. Distinguish between elements of transactions that may be subject to differing internal controls.

d. It identifies specfic errors or misstatements.

Disadvantages:

a. Risk that the sample selected by an auditor may not be respresentative of the population. In this regard, auditors need to determine and accept the risk, and perform other procedures to compensate for the determined risk;

b. Sampling relies on the judgement of the auditor in relation to exceptions, materiality and conclusions.

c. Costly and time consuming;