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Risk Response
Short Questions
1. Explain how vouching differs from tracing, and identify the financial statement
assertions each can be used to test.
Vouching and tracing are two types of commonly performed documentation. Vouching involves
the examination of documents that served as a basis for recording the transaction. Vouching
usually starts with a recorded transaction and works back to the documents and addresses
existence. Tracing involves determining whether source documents have been recorded
properly in the accounting records. By tracing, an auditor can obtain evidence that the recording
of the transaction is complete.
2. When may an auditor consider cost in deciding which audit procedures to use?
An auditor may consider cost in deciding which audit procedures to use when equivalent
procedures are available to satisfy the need for evidence.
3. Give an example of an audit procedure that is relevant to an assertion and one that is
not.
Vouching is relevant to testing the existence of sales, while tracing is not. Tracing is relevant to
testing the completeness of sales, but vouching is not.
External documentary evidence means that it is obtained directly from external sources.
Meanwhile external-internal evidence means that material originates outside client, received
and processed by the client. Finally, internal evidence consists of documents produced,
circulated, and finally stored within client's information system. This is considered low in
reliability.
5. How does an auditor determine when sufficient evidence has been obtained?
Sufficiency of audit evidence is a matter of audit judgment. Materiality and the quality of internal
control are important ingredients in determining sufficiency. If internal control produces over
sales processing and cash receipts, for example, are effective, the auditor may elect to confirm
fewer customers’ accounts receivables than under conditions of weak internal control.
Persuasive evidence is when the auditor considers the evidence to be sufficient and competent
enough to afford a reasonable basis for an opinion.
8. Why must an audit sample be representative of the population from which it is drawn?
Audit conclusions can be made only about the population from which the sample was drawn,
and a conclusion can only be valid if the sample on which it is based actually shows the
characteristics of the population. Auditors can attempt to achieve representativeness, but they
cannot guarantee it. Sampling risk – the probability that the sample does not adequately reflect
the population – always exists.
- Audit objectives
- Population and its characteristics
- Risk and assurance
- Tolerable error
- Expected error in the population
- Stratification
10. Explain briefly the different audit sampling plans that an auditor can use.
The following are the different sampling plans that an auditor can use:
- Attributes sampling plan: used to test an entity’s rate of deviation from a prescribed
control procedure
- Variables sampling plan: used to test whether recorded account balances are fairly
stated
- Statistical sampling plan: an auditor use the law of probability to select and evaluate a
sample
- Nonstatistical sampling plan: rely exclusively on subjective judgment to determine
sample size and to evaluate sample results
- Regular or classical attributes sampling: enables the auditor to estimate the rate of
occurrence of certain characteristics in the population
- Discovery sampling: designed to locate at least on deviation in the population
- Sequential sampling: sample is selected in several steps, with the need to perform each
step conditional on the results of the previous steps
- Probability proportional to size: used as an alternative to classical variable sampling
methods for performing substantive tests of transactions or balances
- Classical variables sampling models: provide the auditors with an estimate of numerical
quantity such as the peso balances of each account
- Mean-per-unit estimation: classical variables sampling plan enabling the auditor to
estimate the average peso vale of items in a population
- Difference estimation: uses the difference between the audited values and book values
of items in a sample to calculate the estimated total audited value of the population
- Ratio estimation: uses the ratio of audited values to book values of items in the sample
to calculate the estimated total audited value of the population
- Regression: has the effect of using both the average ratio and the average difference in
calculating an estimate of the total amount for the population
B. Case
Auditors frequently refer to the terms standards and procedures. Standards deal with
measures of the quality of performance. Standards specifically refer to the generally
accepted auditing standards expressed in the Philippine Standards on Auditing.
Procedures relate to the acts performed by auditors to gather evidence. Procedures
specifically refer to the methods or techniques used by auditors in the conduct of the
examination. Procedures are also expressed in the Philippine Standards on Auditing.
List seven different types of procedures auditors can use during an audit of financial
statements and give an example of each.
6. Tracing
select a sample of shipping documents and trace them to sales invoices, sales journal recording
and posting to general ledger
7. Scanning
o scan expense accounts for credit entries
o scan payroll check lists for unusually large checks
8. Analytical procedures – any example that fits one of these:
o compare financial information with prior periods
o compare financial information with budgets and forecasts
o study predictable financial information patterns (e.g., ratio analysis)
o compare financial information to industry statistics
o study financial information in relation to nonfinancial information