Evidence and Sampling

1. EVIDENCE
AND
SAMPLING

2. Amin Siddiki FCA
Evidence

3. Amin Siddiki FCA
Definition All of the information used by the auditor in
arriving at the conclusions on which audit
opinion is based.
Evidence
includes
- all the information contained within the
accounting records underlying the financial
statements and
- other information gathered by the auditors

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Sufficient
Sufficiency is the measure of
the quantity of audit
evidence
Appropriate
Appropriateness is the
measure of the quality or
reliability of the audit
evidence
Attributes of Audit Evidence

5. Amin Siddiki FCA
General Principles regarding quality of Audit Evidence
External Evidence from External sources is more reliable
than internal
Obtained
by
Directly by Assurance provider is more reliable
than indirectly
Entity Evidence from entity’s record is more reliable
where Control systems operate effectively
Original Original documents is more reliable than
photocopy

6. Amin Siddiki FCA
How to obtain Audit Evidence
Inspection
of Tangible
Assets
Physical verification of assets but not
confirmation of rights and obligation
Inspection
of
Documents
Examination of records or documents like:
share certificates, valuation , lease agreement
etc
Observation Watching the procedure whether correctly
performed or not.
Inquiry Seeking information from
management/staff/external sources etc

7. Amin Siddiki FCA
How to obtain Audit Evidence
Confirmmation Seeking confirmation from third party ie:
receivable, bank balance
Recalculation Checking mathematical accuracy of subject
matter
Reperformance Independently executing procedures or
control either manually or CAAT
Analytical
procedures
Evaluating and comparing data

8. Amin Siddiki FCA
Analytical Procedures
BSA 520: Analytical Procedures gives more detail on the use
of analytical procedures as substantive procedures.
Auditor decides whether using available analytical
procedures as substantive procedures will be effective and
efficient in reducing detection risk for specific financial
statement assertion.

9. Amin Siddiki FCA
Factors to consider using analytical procedures
• Objective of analytical procedures
• Suitability of analytical procedures
• Auditor should not solely rely on analytical procedures when
issues are material
• Reliability of analytical procedures
• Reliability of financial information
• Strong relationship ie: Sales vs Sales Commission

10. Amin Siddiki FCA
Directional Test
Tests to discover errors
Tests to discover errors will
start from accounting
records to supporting
documents or other
evidence. (under/over
recorded)
Tests to discover omissions
Tests for omission must
start from outside the
accounting records and
then check back to those
records. (unrecorded assets)

11. Amin Siddiki FCA
Directional testing also may use to identify
over/under statements. Any misstatement of a debit
entry will result in either a corresponding
misstatement of credit entry or opposite direction.

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Example: overstated non current asset
Non current asset sold tk. 100,000 but not recorded.
As a result:
a. Cash understated by tk. 100,000
b. Assets overstated by tk. 100,000
c. Depreciation charged excess by tk. (rate)
d. Acc. Depreciation excess by tk. (rate)

13. Amin Siddiki FCA
Audit of Accounting Estimates: BSA 540
The auditor often has to audit estimated figures, such as those
for product warranties, depreciation, inventory or
receivable provisions. These figures can have a significant
effect on reported profits.

14. Amin Siddiki FCA
Method use to Audit of Accounting Estimates:
Test the process
that
management
used to estimate
the figure
Management may use a formula to
calculate the provision for doubtful
accounts receivable. The auditor can
test this by:
• Looking at past experience
• Checking the calculation
• Considering if anything this year is
likely to have changed the
estimate
Method
Example

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Method use to Audit of Accounting Estimates:
Use an
independent
estimate
If a provision is required in respect of
legal action against the company,
the auditor can use evidence from
the company’s legal advisors.
Method
Example

16. Amin Siddiki FCA
Method use to Audit of Accounting Estimates:
Review
subsequent
events
If a settlement is reached after the
year end regarding a claim against
the company which requires a
provision, the auditor can use the
evidence of the agreement to
establish the correct figure
Method
Example

17. Amin Siddiki FCA
Sampling

18. Amin Siddiki FCA
BSA 530 Audit Sampling and Other Means of
Testing states that “ when designing audit
procedures, the auditor should determine
appropriate means for selecting items for testing so as
to gather sufficient appropriate audit evidence to
meet the objectives of the audit procedures.”

19. Amin Siddiki FCA
Audit sampling involves the application of audit
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

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In devising their samples, auditors must ensure that
the sample selected is representative of the
population. If the sample is not representative of
the population, the auditor will be unable to form a
conclusion on the entire population.

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The auditor may alternatively select certain items from a
population because of specific characteristics they possess. The
results of items in this way cannot be projected onto the whole
population but may be used in conjunction with other audit
evidence concerning the rest of the population.

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 High Value or Key Items: The auditor may select high value items or
items that are suspicious, unusual or prone to error.
 All Items over a Certain Amount: Selecting items this way may mean a
large proportion of the population can be verified by testing a few
items.
 Items to obtain information about the client’s business, the nature of
transactions, or the client’s accounting and control systems.
 Items to test procedures, to see whether particular procedures are
being performed.

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Population Population is the entire set of data from
which a sample is selected and about which an
auditor wishes to draw conclusions
Expected
Error
Expected error is the error that the auditor
expects to be present in the population.

24. Amin Siddiki FCA
Statistical
Sampling
Statistical sampling is any approach to
sampling that involves random selection of a
sample, and use of probability theory to
evaluate sample results
Non
Statistical
Sampling
Non-statistical sampling is a subject approach to
inference, in that mathematical techniques
are not used consistently in determining
sample size, selecting the sample, or
evaluating sample results.

25. Amin Siddiki FCA
Tolerable Error:
Tolerable error is the maximum error in the population that
the auditor would be willing to accept.
The smaller the tolerable error, the greater the sample size will
need to be.
Sample Size
Tolerable Error

26. Amin Siddiki FCA
Sampling risk :
Sampling risk is the risk that the auditor’s conclusions based
on a sample may be different from the conclusion if the entire
population were the subject of the same audit procedure.

27. Amin Siddiki FCA
Non-sampling risk :
Non-sampling risk is the risk that the auditor forms the
wrong conclusion, which is unrelated to sampling issue.
An example of such a situation would be where the auditor
adopts inappropriate audit procedures, or misinterpret
evidence

28. Amin Siddiki FCA
Sample Unit Sampling units are the individual items
constituting a population.
Example: Sampling Units
• Cheques listed on the deposit slip
• Credit entries on bank statements
• Sales invoices
• Receivables’ balances

29. Amin Siddiki FCA
METHODS OF SAMPLING
ISA 530 recognizes that there are many methods of selecting a
sample, but it considers five principal methods of audit
sampling as follows:
a. random selection
b. systematic selection
c. monetary unit sampling
d. haphazard selection, and
e. block selection.

30. Amin Siddiki FCA
Random selection
This method of sampling ensures that all items within a
population stand an equal chance of selection.
the use of random number tables or random number
generators.

31. Amin Siddiki FCA
Systematic selection
Systematic selection involves selecting items using a constant
interval between selections, the first interval having a
random start. When using systematic selection assurance
providers must ensure that the population is not structured
in such a manner that the sampling interval corresponds
with a particular pattern in the population.

32. Amin Siddiki FCA
Monetary Unit Sampling (MUS)
This is a selection method that ensures that every amount in a
population has an equal chance of being selected for testing.
The advantages of this selection method are that it is easy when
computers are used, and that every material item will
automatically be sampled.
Disadvantages include the fact that if computers are not used, it
can be time consuming to pick the sample, and that MUS does not
cope well with errors of understatement or negative balances.

33. Amin Siddiki FCA
Haphazard Selection
Haphazard selection may be an alternative to random selection
provided assurance providers are satisfied that the sample is
representative of the entire population. This method
requires care to guard against making a selection that is
biased, for example towards items that are easily located, as
they may not be representative. It should not be used if
assurance providers are carrying out statistical sampling.

34. Amin Siddiki FCA
Sequence or Block Selection
Sequence sampling may be used to check whether certain items
have particular characteristics. For example, an auditor may use
a sample of 50 consecutive cheques to check whether cheques
are signed by authorized signatories rather than picking 50
single cheques throughout the year. Sequence sampling may,
however, produce samples that are not representative of the
population as a whole, particularly if errors only occurred
during a certain part of the period, and hence the errors found
cannot be projected onto the rest of the population

35. Amin Siddiki FCA
Considerations to design of the Sample
When designing the sample, the BSA requires the auditor to
consider
o the objectives of the audit procedures
o the attributes of the population from which the sample will
be drawn
o the sampling and selection methods.

36. Amin Siddiki FCA