Audit Evidence and Sampling
Evidence
Audit Evidence and Sampling
Syllabus tag: KASNEB CPA | Advanced Level | CA36 Advanced Auditing and Assurance
1. Sufficient appropriate audit evidence — ISA 500
The auditor must obtain sufficient appropriate audit evidence to form the basis for the opinion. Sufficiency is the quantity of evidence — determined by risk assessment and quality of evidence obtained. Appropriateness is the quality: relevance (does it relate to the assertion being tested?) and reliability.
Reliability hierarchy: external evidence > evidence obtained directly by the auditor > internal evidence. Documentary evidence > oral evidence. Original documents > copies.
2. Financial statement assertions
Transactions: occurrence (recorded transactions actually happened), completeness (all transactions are recorded), accuracy, cut-off (in the correct period), classification. Balances at year-end: existence, rights and obligations, completeness, valuation/allocation. Disclosures: occurrence/rights, completeness, classification/understandability, accuracy/valuation.
3. Types of audit procedures
Inspection: examining records, documents, or physical assets. Observation: watching a process or procedure (e.g. inventory count). External confirmation: obtaining written representations from third parties (bank confirmations, debtor circularisation, legal letters). Recalculation: checking arithmetical computations. Re-performance: independently executing a control procedure. Analytical procedures: evaluating information through plausible relationships. Inquiry: obtaining information from knowledgeable persons — weakest evidence in isolation.
4. Audit sampling — ISA 530
Audit sampling applies procedures to less than 100% of items in a population so that all items have a chance of selection and conclusions can be extended to the whole population.
Statistical sampling: uses probability theory — results can be projected to the population with a known confidence level. Non-statistical (judgemental) sampling: no probability methods — items selected using professional judgement. Both are permissible.
Sample size determinants: tolerable rate of deviation (controls testing) or tolerable misstatement (substantive testing); expected rate of deviation or expected misstatement; acceptable risk of incorrect acceptance.
5. Selection methods
Random selection: every item has an equal chance — requires random number tables or software. Systematic selection: every nth item (e.g. every 50th invoice). Haphazard selection: no structured technique, acceptable only if bias is avoided. Monetary unit sampling (MUS): every monetary unit is a sampling unit — automatically focuses on high-value items.
6. Evaluating results
Controls testing: if sample deviations exceed the tolerable deviation rate, the control cannot be relied upon → increase substantive testing. Substantive testing: project the sample misstatement to the population. If projected misstatement exceeds tolerable misstatement, the balance may be materially misstated → ask management to investigate or restate.