Auditing Theory Salosagcol Summary
AC17&18: ASSURANCE PRINCIPLES,AC17&18:
ASSURANCE PRINCIPLES,
PROFESSIONAL ETHICS AND GOODPROFESSIONAL
ETHICS AND GOOD
GOVERNANCEGOVERNANCE
– – AN OVERVIEW AN OVERVIEW
PROFESSIONAPROFESSIONAL L
STANDARDSTANDARDSS
RESPONSIBILITYLITY
ACCEPTING AN ENGAGEMENTENGAGEMENT
CONTROLINTERNAL CONTROL
– – ACCEPTING AN
F ON OF INTERNAL
ENVIRONMECOMPUTERIZED ENVIRONMENTNT
SUBSTANTIVE TESTS
IT
STATEMEFINANCIAL STATEMENTSNTS
SERVICESSERVICES
9298ETIHICS AND REPUBLIC ACT 9298
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD
GOVERNAAC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND
GOOD GOVERNANCE REVIEWERNCE REVIEWER ALAMO, MARK JOSEPH
S.ALAMO, MARK JOSEPH S.
THE PROFESSIONAL STANDARDSTHE PROFESSIONAL STANDARDS
Generally Accepted Auditing Standards (GAAS)Generally Accepted Auditing
Standards (GAAS)
It representsIt represents measures of the quality of auditor’s
performance.measures of the quality of auditor’s performance. These
standards should be looked as These standards should be looked as
MINIMUMMINIMUM STANDARDSTANDARDof performance that auditors
should follow.of performance that auditors should follow.
PHILIPPPHILIPPINE STANDARDS ON INE STANDARDS ON AUDITING (PSA)AUDITING (PSA)
TheThe Philippine Standard on Auditing (PSA)Philippine Standard on Auditing
(PSA) establishes the independent auditor’s overall responsibestablishes the
independent auditor’s overall responsibilities whenilities when conducting an
audit of financial statements in accordaconducting an audit of financial
statements in accordance with PSAs. These are issued by AASC as
interpretatince with PSAs. These are issued by AASC as interpretations toons
to GAAS.GAAS.
Practice StatementsPractice Statements – – are additions to these standards
to provide practical as are additions to these standards to provide practical
assistance to auditors in implementing thesistance to auditors in
implementing the standards and to promote good practice in the
accountanstandards and to promote good practice in the accountancy
profession.cy profession.
SYSTEM OF QUALITY CONTROLSYSTEM OF QUALITY CONTROL
Quality controlsQuality controls are policies and procedures adopted by CPAs
to providare policies and procedures adopted by CPAs to provide reasonable
assurance of conforming toe reasonable assurance of conforming to
professional standards in performing audit and relateprofessional standards
in performing audit and related services.d services.
Elements of Quality Control (PSA 220)Elements of Quality Control (PSA 220)
1.1. Leadership ResponsibilitieLeadership Responsibilities for Quality s for
Quality on Auditson Audits 2.2. Ethical RequirementsEthical
Requirements(Integrity, Objectivity, Professional Competence & Due
C(Integrity, Objectivity, Professional Competence & Due Care,
Confidentiality, Professionalare, Confidentiality, Professional
Behavior)Behavior) 3.3. IndependenceIndependence 4.4. Acceptance and
Continuance of Client RelationshipsAcceptance and Continuance of Client
Relationships 5.5. Human Resources and AssignmentHuman Resources and
Assignment (Recruitment, Performance evaluation, Capabilities,
Car(Recruitment, Performance evaluation, Capabilities, Career Dev’t,eer
Dev’t, Engagement Team Assignment)Engagement Team Assignment) 6.6.
Engagement PerformanceEngagement Performance(Direction, Supervision,
Review, Consultation, Engagem(Direction, Supervision, Review,
Consultation, Engagement Quality Control Review,ent Quality Control
Review, Differences of Opinion)Differences of Opinion) 7.7.
MonitoringMonitoring
QUALITY CONTROL REVIEWQUALITY CONTROL REVIEW
The government thru the Professional Regulatory BoarThe government thru
the Professional Regulatory Board of Accountancy (BOA) has required all CPA
firms and of Accountancy (BOA) has required all CPA firms and individuald
individual CPA firms and individual CPAs in public practice to oCPA firms and
individual CPAs in public practice to obtain a certificate of accreditation to
practice btain a certificate of accreditation to practice public
accountancy.public accountancy.
Quality Review Committee (QRC)Quality Review Committee (QRC) – –
created by PRC which shall conduct a quality review oncreated by PRC which
shall conduct a quality review on applicants for registration to applicants for
registration to practice public accountancy.practice public accountancy.
General General Standards Standards Standards Standards of of Fieldwork
Fieldwork Standards Standards of of ReportingReporting
TTechnical Training and Proficiencyechnical Training and Proficiency
PPlanninglanning GGAAPAAP
IIndependencendependence IInternal Control Considerationnternal Control
Consideration IInconsistencynconsistency
PProfessional Carerofessional Care EEvidential mattervidential matter
DDisclosureisclosure
OOpinionpinion
ALAMO, MARK JOSEPH S.
AUDITOR’S RESPONSIBILITY
ERROR –refers to unintentional misstatements in the financial statements
Examples: Mathematical or clerical mistakes, incorrect accounting estimates,
mistake in application of accounting policies
FRAUD –refers to intentional act by one or more individuals among
management, employees, or third parties which results in misrepresentation
of financial statements. Types of Fraud: 1. Management Fraud/ Fraudulent
Financial Reporting –involves intentional misstatements or omissions of
amounts or disclosures, usually done by members of management or those
charged with governance. Examples:manipulation of documents or records,
misrepresentation of effects of transactions, recording of transactions w/o
substance, intentional application of accounting policies 2. Employee Fraud/
Misappropriation of assets –fraud that is accompanied by false or misleading
records in order to conceal the fact that assets are missing.
Examples:embezzling receipts, stealing entity’s assets, lapping of AR
RESPONSIBILITY OF MANAGEMENT AND THOSE CHARGED WITH
GOVERNANCE (PSA 240) Management – to establish a control environment
and to implement internal control policies designed to ensure the
DETECTION AND PREVENTION of fraud and error. Individuals charged with
governance –to ensure the integrity of entity’s accounting and financial
reporting systems
AUDITOR’S RESPONSIBILITY:
The auditoris not and cannot be held responsible for theprevention of fraud
and error. The auditor’s responsibility is to design the auditto obtain
reasonable assurance that the FS are free from material misstatements
whether caused by error or fraud.
PLANNING PHASE TESTING PHASE COMPLETION PHASE
The auditor’s responsibility is to design the audit to provide reasonable
assurance of detecting material misstatements in the FSs. These
1.
2.
4.
5.
6.
7.
Laws and Regulations
Make inquiries of
management about possibility of misstatement
Assess the risk that
fraud/error may cause the FS to contain material misstatements.
3.Perform procedures necessary to determine whether material
misstatements exist.
Consider whether such a misstatement resulted from error or fraud. (Errors
will only result to adjustment of FS but fraud may have other implications on
an audit)
The auditor shouldobtain a written representation from the client’s
management
When the auditor believes that material error/fraud exists, he should request
the mgmt. to revise the FS.
If the auditor is unable to evaluate the effect of fraud on FS, the auditor
should eitherqualify or disclaim his opinion on the FS.
ALAMO, MARK JOSEPH S.
THE AUDIT PROCESS – ACEEPTING AN ENGAGEMENT
FINANCIAL STATEMENT ASSERTIONS
Assertions about classes of transactions and events for the period under
audit:
Assertions aboutaccount balances at the period end:
Assertions about presentation and disclosure:
allocation
procedures selected should enable the auditor to gather sufficient
appropriate
–involves
–
Inquiry – consists of seeking information from knowledgeable persons inside
– consists of the response to an
Computation – consists of checking the arithmetical accuracy of source
documents and accounting records or performing independent calculations.
– consist of the analysis of significant ratios and
trends including the resulting investigation of fluctuations and relationships
that are inconsistent with other relevant information or deviate from
particular amounts. Audit evidence –refers to the information obtained by
the auditor in arriving at the conclusions on which the audit opinion is based.
Audit evidence will comprise source documents and accounting records
underlying the financial statements and corroborating information from other
sources.
ISSUING A REPORT
COMPLETING THE AUDIT
PERFORMING SUBSTANTIVE TESTS
CONSIDERING INTERNAL CONTROL
AUDIT PLANNING
ACCEPTING AN ENGAGEMENT
Evaluation of auditor’s qualification and auditability of prospective client’s FS
Obtaining detailed knowledge about the entity and preliminary assessment
of risk and materiality
Obtaining understanding of entity’s control systems and assessing level of
control risk
Examination of documents and evidences supporting the amounts and
disclosures in the FS
Satisfy that the evidence gathered is consistent with auditor’s report.
Forms a conclusion on FS (in OVERVIEW OF THE the form of opinion) AUDIT
PROCESS
ALAMO, MARK JOSEPH S.
ACCEPTING AN ENGAGEMENT In deciding whether to accept or reject an
engagement, the firm should consider: 1. Competence –acquired through a
combination of education, training, and experience. The auditor should
obtain a preliminary knowledge of client’s business and industry to
determine whether the auditor has the degree of competence required by
the engagement. 2. Independence –the auditor should consider whether
there are threats to audit team’s independence and objectivity and, if so,
whether adequate safeguards can be satisfied. 3. Ability to serve the client
properly –An engagement should not be accepted if there are no enough
qualified personnel to perform the audit.PSA 220suggests that the audit
work should be assigned to personnel who have the appropriate capabilities,
competence, and time to perform the audit engagement in accordance with
professional standards. 4. Integrity of the management – PSA 220requires
the firm to conduct a background investigation of the prospective client in
order to minimize the likelihood of association with clients whose mgmt.
year or uponoccurrence of major events such as changes in mgmt.,
would cause the firm toreject the prospective client may also lead to decision
of terminating an audit engagement.
ENGAGE
fact that because oflimitations of the audit, there is an unavoidable risk that
ty of
the client to allow the auditor to haveunrestricted access to whatever
records, documentation, and other information requested in connection with
s concerning the involvement of others
letter – (1)to avoid misunderstanding with respect to the mgmt. and(2)
Recurring audits –the auditor does b=not normally send new engagement
letter every year, unless (1) client misunderstands the objective and scope
of audit, (2) revised or special terms of the engagement (3) recent change
of senior mgmt., (4)significant change in nature or size of business (5) legal
–the auditor will consider
the factors whether they will send a separate letter to component: (1) who
appoints the auditor of component, (2) whether a separate audit report is to
be issued on the component, (3) legal requirements, (4) the extent of any
work performed by other auditor (5) degree of ownership by parent, (6)
degree of independence of the component’s mgmt.
ALAMO, MARK JOSEPH S.
AUDIT RISK
opinion on the FS. This occurs because the auditor believes that the FS are
fairly stated when in fact the FS are materially mis
Model
transactions to a material misstatement assuming that there areno related
internal controls. PSA 315requires the auditor to assess inherent risk at FS
level and account balance/transaction level. Factors that affect therisk of
Operating Characteristics (e.g. profitability of the entity relative to its
no. of business failures) Factors affectinginherent risk at the account balance
of
the auditor should designMORE EFFECTIVE SUBSTANTIVE PROCEDURES.
in an account balance or class of transactionswill not be prevented or
is related to th
internal controlis effective, theassessed level of control risk decreases (and
auditor should designMORE EFFECTIVE SUBSTANTIVE PROCEDURES.
level ofDETECTION RISK DECREASES, theASSURANCE DIRECTLY PROVIDED
FROM SUBSTANTIVE TESTS INCREASES. Hence, the auditor should
designmore effective audit procedures in order to achieve the desired level
CONTROL THE LEVEL OF DETECTION RISKS by performing more effective
thedesired level ofaudit risk.* Step 2. Assess the level ofinherent risk. **
Step 3. Assess the level ofcontrol risk. * Step 4. Determine
theacceptable level ofdetection risk. ** Step 5. Designsubstantive tests.
The auditor uses his judgment in determining the risk that he is willing to
take of accepting an assertion as fairly stated when in fact is materially
misstated. *Consider the specific factors related to client that may affect the
risk of material misstatement for a particular amount. In making this
assessment, the auditor will rely primarily on hisknowledge of the client’s
business and industry, and the results of hispreliminary analytical
procedures. Assessment of control risk would involvestudying and
evaluating the effectiveness of the client’s accounting and internal
control systems. *The acceptable level of detection risk can be determined
as follows:
Audit Risk = Inherent Risk * Control Risk * Detection Risk
AUDIT PLANNING
PERFORMING SUBSTANTIVE TESTS
CONSIDERATION OF INTERNAL CONTROL
Detection risk = Audit Risk Inherent risk *Control Risk Nature Timing Extent
Low Acceptable Level of Detection Risk More effective substantive
procedures year-end procedures larger sample size High Acceptable Level of
Detection Risk Lesseffective substantive procedures Tests atinterim smaller
sample size
ALAMO, MARK JOSEPH S.
RELATIONSHIP BETWEEN MATERIALITY AND RISK
anINVERSE RELATIONSHIP betweenMATERIALITYand theLEVEL
determines that the acceptable materiality level is lower, audit risk is
increased. The auditor would compensate for this by
assessed level of control risk,where this is possible, and supporting the
Reducing detection riskby modifying the nature, timing, and extent
ofplanned substantive procedures.
RISK ASSESSMENT PROCEDURES –the procedures performed by auditors to
obtain an understanding of the entity and its environment including its
internal controland to assess the risks of material misstatements in the
ies of management and others within the entity
ANALYTICAL PROCEDURES –involves analysis of significant ratios and trends
including the resulting investigation of fluctuations and relationships thatare
inconsistent with other relevant information or deviate from particular
amounts. PSA 520requires the auditor to use analytical procedures in the
planning and overall stages of the audit.
s
relationships among FS account balances Step 2.Compare expectations with
the FS under audit. Step 3.Investigate significantunexpected differences
(unusual fluctuations) to determine whether FS contain material
determin
specific risks In using analytical procedures as a planning tool, if
thedifference between recorded balances in FS and expectations
issignificant, the auditor must designmore extensive substantive tests (or
anoverall review of the financial statements in thecompletion phase of the
planning and testing phases of the audit to confirm conclusions reached w/
respect to the fairness of the FS
Documenting the Audit Plan –the final step in planning process is the
–
theoverview of the expected scope and conduct of the audit. It sets out
inbroad terms the nature, timing, and extent of the audit procedures to be
– it sets outin detail the audit procedures to be
–is an estimate of
the time that it will spent in executing the audit procedures listed in the
audit program.
MATERIALITY AUDIT RISK PLANNED AUDIT PROCEDURES Planning
materiality and/or tolerable error Risk of material error occurring and/or Not
being determined LOW HIGH MORE EXTENSIVE HIGH LOW LESS EXTENSIVE
ALAMO, MARK JOSEPH S.
2. DOCUMENT THE UNDERSTANDING OF ACCOUNTING AND INTERNAL
CONTROL SYSTEMS
forms are: narrative description, flowchart and diagrams of flow of
transactions, internal control questionnaire providing mgmt. responses 3.
ASSESS THE LEVEL OF CONTROL RISK
efficient to relyon entity’s IC, the auditor would plan to assess control risk
atless than high level. 4. PERFORM TEST OF CONTROLS
control to support any assessment of control risk at less than high level.
Thelower assessment of control risk, themore support the auditor should
– searching for appropriate information about the
effectiveness of internal control from knowledgeable persons inside or
ou
–refers tolooking at the process being
–involvesexamination of documents and
records to provide evidence of reliability depending on their nature and
source and the effectiveness of IC over t
–
involvesrepeating the activity performed by the client to determine whether
perform tests of controls during aninterim visit, in advance of period end.
However, auditors cannot rely on it w/o considering the need to obtain
further evidence on the remainder of the period. In determining whether or
not to test the remaining period, these must be considered: the results of
the interim tests, the length of the remaining period, and whether changes
have occurred in accounting and internal control systems during the
all transactions related to certain control procedures. In an audit, the
auditorshould examine the size of a sample sufficient to support the
- When obtainingaudit evidence of implementation by performing risk
assessment procedures, the auditor determines that therelevant controls
exist and the entity is using them. - When performing tests of theoperating
effectiveness of controls, the auditor obtains audit evidence that controls
operate effectively. This includes obtaining evidence abouthow controls were
appliedat relevant times during period under audit, the consistency which
Documenting the assessed level of control risk - If the control risk is
assessed athigh level, the auditor should document hisconclusion that the
control risk is at high level. - If the control risk is assessed at less than high
level, the auditor should document hisconclusion that control risk is less than
high level and thebasis for the assessment (basis is actually the results of
- Auditor isrequired
to report the matter to the appropriate level of mgmt. material weaknesses
in the design or operation of the accounting and IC systems. - Auditors
arenot required to search for and/or identify material control weaknesses. Internal control weaknesses are documented in a formalmanagement letter.
TEST OF CONTROLS– are performed to obtain evidence about the
ternal control
ALAMO, MARK JOSEPH S.
AUDITING IN A COMPUTERIZED ENVIRONMENT
5.
6.
2.
3.
4.
5.
6.
Characteristics of Computerized Information Systems (CIS) 1. Lack of Visible
Transaction Trails 2. Consistency of Performance 3. Ease of Access to data
and Computer Programs 4. Concentration of Duties
Systems Generated Transactions
Vulnerability of Data and Program Storage Media
Internal Control in a CIS Environment
A. General Controls –are control policies and procedures that relate to
theoverall computer information system. 1. Organization controls –clear
assignment of authority and responsibility a. Segregation b/w CIS dept. and
user dept. b. Segregation of duties w/in the CIS dept.
Systems development and documentation controls –to facilitate use of
program as well as changes that may be introduced to system
Access controls –adequate security controls, such as use of passwords
Data recovery controls –provides maintenance of back-up files and off-site
storage procedures.
Monitoring controls –to ensure that CIS controls are working effectively as
planned. B. Application Controls –are those policies and procedures that
relate to thespecific use of the system.
Controls overInput – designed to provide reasonable assurance thatdata
submitted for processing are complete, properly authorized and accurately
–this requires data
to be enteredtwice to provide assurance that there are no key entry errors
-this ensures that the input dataagree with
required field format. Ex.: SSS number must contain 10 digits. An input of
–info entered arecompared with valid info in the master file to determine the
authenticity of the input. Ex.:Employees’ master file may contain two valid
codes to indicate the employee’s gender “1” for male and “2” for female. A
code of “3” is invalid and wil
-checking digit –this is
amathematically calculated digit w/c is usually added to a document number
Limit check – orreasonable check is designed to ensure that data submitted
Control totals – these are totals computed based on the data submitted for
processing. Control totals ensure the completeness of data before and after
Financial totals –sum total of the peso amount in the
–sum total of the control numbers in the
-total number of the documents
7. Controls over Processing –designed to provide reasonable assurance that
input data are processed accurately, and that data is not lost, added,
mentioned above are also part of processing controls.
8. Controls over Output –designed to provide reasonable assurance that the
results of processing are complete, accurate, and that these outputs are
distributed only to authorized personnel.
CIS Director(exercises control over the CIS operation)
Systems Development Operations Other Functions - Systems Analyst Computer Operator - Librarian (designs new systems, evaluates and
improves (using the program and instructions by the programmer,
(maintains custody of systems documentation, existing systems, and
prepares specs. for programmers) he operates the computer to process
transaction) programs and files) - Programmer - Data Entry Operator Control Group (guided by the specs of the systems analyst, (prepares and
verifies input data for processing) (reviews all input procedures, monitors he
writes a program, tests and debugs such computer processing, follows-up
data programs, and prepares the computer operating processing errors,
reviews the reasonable- instructions ness of output, and distributes output
to authorized personnel
ALAMO, MARK JOSEPH S.
PERFORMING SUBSTANTIVE TESTS
1.
enable the auditor toobtain corroborative evidence
about a particular account.
auditor should focus on those accounts that arepredictable. The following
generalizations may be helpful in assessing the predictability of those
nts are more predictable compared
are more predictable than those in a dynamic or unstable environment. 2.
T
details of balances –involvesdirect testingof the ending balance of an
account *This will be used when account balances are affected bylarge
- involvestesting the transactions which give rise to the ending balance of
the account. *This is useful if account balances are comprised of asmaller
volume of transactions representing relativelymaterial amounts.
Substantive Tests– are audit procedures designed tosubstantiate the account
balances or todetect material misstatements in the financial statements.
Types of Substantive Tests: 1. Analytical Procedures 2. Test of Details
Thedecision about w/c procedures to use is based on theauditor’s judgment
about the expected effectiveness and efficiency of such [procedures in
satisfying the audit objective.
USING ANALYTICAL PROCEDURES AS SUBSTANTIVE TESTS
Accept the account balance as reasonable.
Compare the FS with the Expectations Developed
Is the difference significant?
Develop Expectations about the FS
Conduct further Investigation
NO
YES
ALAMO, MARK JOSEPH S.
Effectiveness of Substantive Test
of substantive test:relates toquality of evidence; high quality of
test:thehigher the risk of material misstatement, themore likely it is that the
auditor may decide to perform STcloser to yeartest:the auditor ordinarilyincreases the extent of STas therisk of material
misstatement increases.
Relationship between Substantive Test and Test of Control
tatement islikely to
occur. Substantive teston the other hand, provide evidence about
theexistence of misstatement in an account balance.
arriving at the conclusions on which the audit opinion is based. It consists
–refers to accounting records underlying in
the FS. This includes books of accounts, related accounting manuals,
worksheet supporting cost allocations and reconciliations prepared by the
clie
–supporting the underlying
accounting data obtained from client and other sources. This includes
documents such as invoices, bank statements, POs, contracts, checks, etc.
sts of control, audit evidence
performingsubstantive tests, audit evidence must support theacceptable
iency –refers to theamount of evidence that the
auditor should accumulate. The auditor uses his judgment to determine the
amount of evidence needed to support the opinion on the FS. The following
factors may be considered in evaluating the sufficiency of the audit
evidence: competence of evidence, materiality of item being examined,the
risk involved in a particular amount, experience gained during the previous
–is the measure of thequalityof audit evidence and
itsrelevanceto a particular assertion and itsreliability. Relevancerelates the
timeliness of evidence and its ability to satisfy the audit objective.
Reliabilityrelates to the objectivity of evidence and is influenced by its source
and by its nature. While reliability of audit evidence is dependent on
individual circumstance, the following generalizations could help the auditor
fromindependent outside sources ismore reliable than thatgenerated
internally.
evidence obtaineddirectly by the auditor ismore reliable than thatobtained by
cuments and written
necessary to rely on audit evidence that ispersuasive rather than conclusive
in nature. AUDIT DOCUMENTATION/ WORKING PAPERS
230requires the auditor to document matters that are important to support
an opinion on FS, and evidence that the audit was conducted in accordance
with PSA.
ALAMO, MARK JOSEPH S.
approaches: 1. Review and test the process used by mgmt. to develop the
estimate. 2. Make an independent estimate 3. Review subsequent events
which confirm the estimate made.
RELATED PARTIES –refers to persons or entities that may have dealings w/
one another in which one party as the ability to exercise significant influence
or control over the other party in making financial and operating decisions.
Management’s Responsibility:Mgmt. is responsible for theidentification and
disclosure of related parties and transactions with such parties. Auditor’s
responsibility:The auditor shouldobtain and review information provided by
the directors and mgmt. identifying the names of all known related parties
and related party transaction. - An audit cannot be expected to provide
assurance that all related party transactions will be discovered.
USING
possessingspecial skill, knowledge and experience in a particular field other
Auditor’s Expert –an expert, whose work in his/her field of specialization, is
used by the auditor to assist the auditor inobtaining sufficient appropriate
–an expert, whose work in his field
of expertise, is used by the entity to assist in preparing the financial
When determining the need of use of the work of an expert, the auditor
would consider: whether themgmt. has used a mgmt.’s expert in preparing
FS, thenature and significance of the matter, therisk of material
misstatement in the matter, andexpected nature of procedures to respond to
and that responsibility is not reduced bythe auditor’s use of the work of an
expert. Thus, the auditorshould not referto the work of an auditor’s expert in
report contains a modified opinion, the auditor canmake referenceto the
expert’s work if the auditor believes that such reference is necessary in
order for the readers to understand the reason of expressing a modified
opinion. When this happens, the auditor should indicate in his report that
such reference does not reduce the auditor’s responsibilityfor that opinion.
CONSIDERING THE WORK OF INTERNAL AUDITORS Internal auditingis an
appraisal activity established within an entity as a service to the entity.
Considering the work of internal auditor involves two important phases: 1.
Making a preliminary assessment of internal auditing (considering the
competence, objectivity, due professional care, and scope of function of
internal auditors) 2. Evaluating and testing the work of internal auditing –to
confirm its adequacy for the external auditor’s purposes. *The external
auditor may also request the assistance of the internal auditors inperforming
routine or mechanical audit procedures.
ALAMO, MARK JOSEPH S.
AUDIT SAMPLING
Risks in Sampling
1. Sampling risk –refers to the possibility that the auditor’s conclusion, based
on asample may be different from the conclusion reached if the entire
population were subjected to the same audit procedures. This exists
becausethe sample selected for testing may not be truly representative of a
population.
Type Test of Control Substantive Test Alpha Risk –results in an auditor
performing audit proceduresmore than what is necessary, thus affecting
auditefficiency
Risk ofunderreliance Risk ofincorrect rejection
Beta Risk - results in an auditor performing audit proceduresless than what
is necessary, thus affecting auditeffectiveness.
Risk ofoverreliance Risk ofincorrect acceptance
population, yet
selection method
2. Non-sampling risk –refers to the risk that the auditor may drawincorrect
conclusions about the account balance or class of transactions because
-sampling riskis something that cannot be eliminated
-sampling
Risk:This can be done by proper planning,adequate direction, review, and
supervision of the audit team.
General Approaches to Audit Sampling 1. Statistical sampling –is a sampling
approach that uses random based selection of sample and uses the law of
probability to measure sampling risk and evaluate sample results. 2. Nonstatistical sampling - is a sampling approach that purely uses auditor’s
judgment in estimating sampling risks, determining sample size, and
evaluating sample results.
Audit Sampling Plans
Type Used to Used In
1. Attribute Sampling Estimate the frequency ofoccurrence of a certain
characteristic in a population.
Test of Controlsto estimate the rate ofdeviations.
2. Variable Sampling Estimate anumerical measurement of a population such
as peso value.
Substantive Teststo estimate the amount ofmisstatements.
PSA 530definesaudit sampling as,“the application ofaudit procedures to less
than 100% of the items within an account balance or class of transactions
such that all sampling units have a chance of selection.