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 transactions 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

Tests of controls:

Tests of controls are designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. Designing tests of controls to obtain relevant audit evidence includes identifying conditions (characteristics or attributes) that indicate performance of a control, and deviation conditions which indicate departures from adequate performance. The presence or absence of those conditions can then be tested by the auditor
In considering the characteristics of a population, for tests of controls, the auditor makes an assessment of the expected rate of deviation based on the auditor’s understanding of the relevant controls or on the examination of a small number of items from the population. This assessment is made in order to design an audit sample and to determine sample size. For example, if the expected rate of deviation is unacceptably high, the auditor will normally decide not to perform tests of controls. Substantive Test of Transactions :

Substantive procedures including Tests of details are designed to detect material misstatements at the assertion level. They comprise tests of details and substantive analytical procedures. Designing substantive procedures includes identifying conditions relevant to the purpose of the test that constitute a misstatement in the relevant assertion.

Similarly, for tests of details, the auditor makes an assessment of the expected misstatement in the population. If the expected misstatement is high, 100% examination or use of a large sample size may be appropriate when performing tests of details.

Tests of Controls vs Substantive Procedures :

1. Test of control are checks performed to verify whether internal controls are working using for example Enquiry, Observation etc.
2. Substantive procedures are checks of detail to verify different assertions in the Financial statements for example Inspecting the existence of a fixed asset say motor vehicle is a substantive procedure to ascertain existence.
3. Analytical procedures is part of the fives sources of evidence used in substantive procedures under the and Tests of control except that analytical procedures can not be used as a source of evidence to test whether internal controls are working in a client organisation.