Advance Auditing & Assurance

Quick Revision Notes for CAP III

Chapter 8: Audit Evidence- II

Coverage: NSA 530

NSA 580
NSA 230

CA Sunil Joshi

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 NSA 530
AUDIT SAMPLING

NSA 580
WRITTEN REPRESENTATIONS

NSA 230
AUDIT DOCUMENTATION

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Meaning of Sampling
The application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance
of selection in order to provide the auditor with a reasonable basis on
which to draw conclusions about the entire population.

Why Sampling is required in audit ?

 Due to constraint of time

 The fact that the auditor cannot give guarantee on FS even after
applying audit procedures to 100% of population because of inherent
limitations of audit.

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Sample Design, Size, and Selection of Items for Testing
When designing an audit sample, consider (para 6)

Purpose of the The characteristics of the population

audit procedure from which the sample will be drawn

(A6) Includes clear

understanding of what (A7) For tests of controls,
constitutes a deviation or makes an assessment of the (A8) For test of
misstatement. expected rate of deviation details, the
so that all, and only those, based on: auditor may
conditions that are relevant determine that
- understanding of relevant stratification or
to the purpose of the audit controls
procedure are included in value weighted
the evaluation of deviations or selection is
or projection of - the examination of a small appropriate
misstatements. number of items from the
population

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 Sample Design, Size, and Selection of Items for Testing

• The auditor shall determine a sample size sufficient to reduce sampling risk to an
acceptably low level (para 7)
• Level of sampling risk that the auditor is willing to accept affects the sample size
required  lower the risk the auditor is willing to accept, the greater the sample
size will need to be (A10)
• Sample size can be determined by the application of a statistically based formula
or through the exercise of professional judgment (A11)

• The auditor shall select items for the sample in such a way that each sampling
unit in the population has a chance of selection (para 8)
• With statistical sampling  each sampling unit has a known probability of being
A12
selected
• With nonstatistical sampling  judgment is used to select sample items
• Selecting a representative sample is important, so that bias is avoided, by
choosing sample items which have characteristics typical of the population

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Performing Audit Procedures
Perform audit procedures, appropriate to the purpose, on each
item selected. (para 9)

If the audit procedure is not Unable to apply the

applicable to the selected item designed audit
[for e.g. when a properly voided procedures, or suitable
check(such that it does not alternative procedures,
constitute a deviation) is to a selected item, treat
selected while testing for that item as: (Para 11)
evidence of payment
authorization (A14)] (Para 10)

Deviation from the

Perform the procedure prescribed control, in Misstatement, in the
on a replacement item the case of tests of or case of tests of details
controls

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Nature and Cause of Deviations and Misstatements
Investigate the nature and cause of any deviations or misstatements identified, and
evaluate their possible effect on the purpose of the audit procedure and on other
areas of the audit (para12)
If observe that many deviations or misstatements have a common feature (A17)

• Auditor may decide to identify all items in the population that possess the
common feature, and extend audit procedures to those items
• Additionally such deviations or misstatements may be intentional, and may
indicate the possibility of fraud

In the extremely rare circumstances when the auditor considers a misstatement or

deviation discovered in a sample to be an anomaly (para 13)

Obtain a high degree of certainty that such misstatement or deviation is not
representative of the population by performing additional audit procedures

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 Projecting Misstatements

For tests of details the auditor For tests of controls, no explicit

shall project misstatements projection of deviations is necessary
found in the sample to the since the sample deviation rate is
population (para 14) also the projected deviation rate for
the population as a whole. (A20)

To obtain a broad view Misstatement established NSA 330 provides

of the scale of as an anomaly may be guidance  when
misstatement but this excluded when projecting deviations from
projection may not be misstatements to the controls upon which
sufficient to determine population. the auditor intends to
an amount to be However, if effect of such rely are detected.
recorded. (A18) misstatement is still
uncorrected, needs to be
considered in addition to
the projection (A19)

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 Evaluating Results of Audit Sampling
The auditor shall evaluate: (para 15)
• Results of the sample &
• Whether the use of audit sampling has provided a reasonable basis for
conclusions about the population that has been tested

For tests of controls

• An unexpectedly high sample deviation rate may lead to an increase in
the assessed ROMM, unless further audit evidence substantiating the
initial assessment is obtained
A21 For tests of details
• An unexpectedly high misstatement amount in a sample may cause the
auditor to believe that a class of transactions or account balance is
materially misstated, in the absence of further audit evidence that no
material misstatement exists

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 Evaluating Results of Audit Sampling
Auditor’s best estimate of misstatement in the population
=
Projected misstatement + Anomalous misstatement (if any)

When,
Projected misstatement + Anomalous misstatement (if any) > tolerable misstatement

Sample does not provide a reasonable basis for conclusions about the population that has been
A22 tested

Auditor’s expectations of misstatement

Also Projected misstatement > used to determine sample size

Conclude that there is an unacceptable sampling risk that:

Actual misstatement in the population > Tolerable misstatement

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Evaluating Results of Audit Sampling

If the auditor concludes that audit sampling has not provided a reasonable
basis for conclusions about the population that has been tested, the
auditor may (A23)

Request management to Tailor the nature, timing

investigate misstatements
that have been identified and
the potential for further
misstatements and to make
any necessary adjustments
and extent of those
or
further audit procedures
to best achieve the
required assurance

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 Sampling Risk

In compliance Procedure In Substantive Procedure

Risk of Under- Risk of Over- Risk of Risk of

reliance reliance incorrect incorrect
acceptance
  rejection
 
Less chance of Higher chance
wrong reporting of wrong Less chance of Higher chance
reporting wrong reporting of wrong
reporting

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NSA 580 : WRITTEN REPRESENTATIONS

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IMPORTANT!!! (Para 4)

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Obtaining Specific WR

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Requirements of WR in other NSAs

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Requirements of WR in other NSAs

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Forms of Written Representation (Para 15)

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Date & Period Covered by WR (Para 14)

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Doubt as to reliability of WR (Para 16-19)

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Requested Representations Not Provided (Para 19)

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Disclaimer Opinion (Para 20)

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Questions For Discussion
While asking for certain evidences, Finance Manager of your clients
informs you that he will include the matter in the management
representation. Will you accept management representation as
evidence?

The auditor of Mohan Ltd. was not able to get the confirmation about the
existence and value of certain machineries. However, the management gave
him a certificate to prove the existence and value of the machinery as
appearing in the books of account. The auditor accepted the same without any
further procedure and signed the audit report. Is he right in his approach?

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NSA 230: AUDIT DOCUMENTATION

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 Nature and Purposes of Audit
Documentation (para 2)

Evidence of the Evidence that the audit

auditor’s basis for a
conclusion about the
achievement of the
overall objectives of the
auditor
was planned and
performed in
accordance with NSAs
and applicable legal and
regulatory requirements

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Form, Content and Extent of Audit Documentation

Prepare audit documentation that is sufficient to enable an

experienced auditor, having no previous connection with the
audit, to understand: (para 8)

The nature, timing The results of the Significant matters

and extent of the audit procedures arising during the
audit procedures performed, and the audit, the
performed to comply audit evidence conclusions reached
with the NSAs and obtained thereon, and
applicable legal and significant
regulatory professional
requirements judgments made in
reaching those
conclusions

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Record to be maintained for NTE of Audit Procedures
Performed

In documenting the nature, timing and extent of audit

procedures performed, the auditor shall record: (para 9)

Who reviewed the

The identifying Who performed the
audit work
characteristics of audit work and the
performed and the
the specific items date such work
date and extent of
or matters tested was completed
such review

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 Documentation of Discussion with
TCWG
 The auditor shall document discussions of significant matters
with management, those charged with governance, and
others, including the nature of the significant matters
discussed and when and with whom the discussions took
place (para 10)
 If the auditor identified information that is inconsistent with the
auditor’s final conclusion regarding a significant matter, the
auditor shall document how the auditor addressed the
inconsistency (para 11)

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Departure From Relevant Requirement (para 12)
• If, in exceptional circumstances, the auditor judges it necessary to
depart from a relevant requirement in a NSA, the auditor shall
document how the alternative audit procedures performed achieve the
aim of that requirement, and the reasons for the departure

Matters Arising after the Date of the Auditor’s

Report (para 13)
• If, in exceptional circumstances, the auditor performs new or additional
audit procedures or draws new conclusions after the date of the
auditor’s report, the auditor shall document:
 The circumstances encountered
 The new or additional audit procedures performed, audit evidence
obtained, and conclusions reached, and their effect on the auditor’s
report
 When and by whom the resulting changes to audit documentation
were made and reviewed

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 Types of Audit Files
Permanent Audit Files
•- Legal & organizational structure
•- Legal documents, agreement and
minutes
•- Internal controls related to accounting
system
•- Audited FS of PY
•- Ratios & Trends
•- Management Letters
•- Communication with retiring auditor
•- Accounting Policies
•- Audit Observations of earlier years
Current Audit File
- Acceptance of annual reappointment
- Relevant minutes of Board/General
meetings
- Planning process, audit program
- Analysis of Transactions & Balances
- NTE of audit procedures performed
- Evidence regarding supervision of
assistants work
- Communication with other auditors/parties
- Letter of representation from client
- Financial information being reported
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--------END OF CHAPTER--------

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