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What are the approaches of audit sampling – 18

Audit sampling can be done using two general approaches either
statistical sampling or non-statistical sampling approach. Statistical
sampling is an approach of audit sampling that contains a random
selection of the sample items, and the use of probability theory to
evaluate sample results, including measurement of sampling risk.
While non-statistical sampling is a sampling approach that does not
have the previous characteristics. The two approaches of audit
sampling, whether statistical sampling or non-statistical sampling,
include the same three phases which involve planning the sample,
selecting the sample and performing the test, and evaluating the
results. The aim of sample planning is to make sure that the audit
tests are performed in a manner that provides the desirable
sampling risk and diminishes the likelihood of non-sampling risk.
Selecting the sample includes deciding how a sample is chosen from
the population. The auditor can perform the audit tests only after
the sample items are selected. Evaluating the results is the drawing
of conclusions based on the audit tests. Therefore, in any sampling
approach auditors must evaluate the population that is being
tested, must determine if any stratification should be done, must
evaluate the cause of any exceptions, and must apply the results
from the sample to the remaining portion of the population. In
addition, both approaches involve the use of professional
.judgment
The difference between statistical and non-statistical sampling
approaches is that statistical sampling permits the user to measure
the sampling risk related to the procedure as a 95% confidence
level provides a 5% sampling risk. Additionally, statistical sampling
applies the laws of probability to determine the percent likelihood
that the sample does not precisely reflect the population. In
essence, the laws of probability include that large, relatively
homogeneous populations have similar distributions and other
features. Thus, if a random sample is taken, it will consistently
.reflect the population within certain limits
On the other hand, non-statistical sampling does not enable
auditors to measure sampling risk because auditors pick out sample
items, they believe will provide the most useful information and
reach conclusions about populations on a judgmental basis. For
that cause, the use of non- statistical sampling is often called
judgmental sampling. Auditing standards allow auditors to use
either statistical or non-statistical sampling approaches. However,
it is fundamental that

Using any methodology should be applied with due care. In

general, the decision to apply a statistical or non-statistical
sampling to a particular audit test is a matter of cost-effectiveness.
Statistical sampling helps auditors to design an efficient sample to
measure the sufficiency of the audit evidence obtained and to
evaluate the sample results, in addition, statistical sampling
enables auditors to quantify sampling risk to support them in
limiting sampling risk to a level he considers acceptable. However,
a statistical sampling includes further costs of training auditors,
designing individual samples to meet the statistical requirements,
and choosing the items to be examined. Therefore, it usually
.requires more training for auditors and more time to apply
On the other side, a correctly designed and applied non-statistical
sample can provide results that are precise and effective, but will
not quantify the sampling risk. In conclusion, applying a statistical
approach or non-statistical approach to audit sampling can provide
sufficient audit evidence. Therefore, using one of them depends on
.their relative cost and effectiveness in specific circumstances
Explain the Types of the Auditor's opinion – 19
Auditors must review the client-prepared financial statements
before formulating their opinions. Professional standards provide a
uniform formulation for the auditor’s report to enable users to
understand the auditor’s opinion. The auditor’s opinions are
categorized into five types (: an unqualified opinion, an unqualified
opinion with an explanatory paragraph, a qualified opinion, a
.disclaimer of opinion, and an adverse opinion

An unqualified opinion An unqualified opinion is regarded as a 1

clean bill of health; the auditor makes no exceptions, and inserts
no qualifications in the report. It indicates that the financial
statements fairly present the financial position, the results of
operations, and the cash flows in compliance with the accounting
principles. The unqualified opinion is expressed when the
:following five conditions have been met
.A. All financial statements are included
.B. The ISA have been applied in all respects on the engagement
C. The financial statements are presented in accordance with the
.accounting principles
.D. Financial statements are fairly presented
E. Financial statements are not affected by going-concern
.uncertainties
An unqualified opinion expresses the auditor’s conviction that the
financial statements are fairly presented in compliance with the
accounting principles. The words “fairly presented” mean “free
.”from material misstatement
An unqualified opinion with an explanatory paragraph. An 2
unqualified opinion with an explanatory paragraph indicates that a
complete audit has been done. The results are satisfactory and the
financial statements are fairly presented, but there are
.circumstances requiring additional information
Five circumstances that may require an additional explanatory
.paragraph to the unqualified opinion are discussed below
Lack of consistent application of the accounting principles. .1
Accounting principles require adequate disclosure about changes in
the accounting principles, their methods of application, or the
impact of the changes (Guy et al., 2003). In addition, the changes
that have a material effect on the comparability of the financial
statements require disclosure in the footnotes. Auditors must
report changes in the application of the accounting principles when
they have a material effect on the comparability of the financial
statements (Whittington and Pan, 2003). The SAS 58 states that
immaterial accounting changes among periods should not be
.highlighted in the auditor’s report
Material inconsistency of accounting information in documents and
financial statements must be reported in an explanatory paragraph
.as mentioned in ISA 700 (Wheeler, 1990: IFAC, 2004, 2005)

Going-concern uncertainty. The auditor is responsible for .2

evaluating whether the company has the ability to continue as a
going concern (SAS 59 and ISA 570). If the auditor concludes that
there is a disclosed substantial doubt with respect to the
company’s ability to continue as a going concern, he will express an
.unqualified opinion with an explanatory paragraph

Agreement on departure from accounting principles. A departure .3

from an accounting principle may not require a qualified or adverse
opinion. However, the auditor should explain that the accounting
principles applied would not have produced a misleading statement
.regarding that situation

Emphasis of a special matter. The auditor may have a willingness .4

to emphasize matters regarding the financial statements, although
he intends to express an unqualified opinion. Examples of these
matters include significant party transactions, important
subsequent events, material uncertainties, and additional statutory
.reporting responsibilities

The work of another auditor. When the principal auditor decides .5

to refer to a report of another auditor as a basis, in part, for his
opinion on financial statements, an unqualified opinion with an
.explanatory paragraph should be formulated

A qualified opinion: A qualified opinion should be expressed 3

when the auditor concludes that an unqualified opinion cannot be
expressed, but the effect of the intended scope restriction or any
disagreement with management is immaterial so that it does not
require an adverse opinion or a disclaimer of opinion. A qualified
opinion is formulated when the financial statements present the
company’s financial position, the results of the operations, and the
cash flows in conformity with the accounting principles, except for
the matter of qualification. Collectively, qualifications with respect
to the auditor’s opinion are reported in two cases: (1) a scope
.restriction and (2) a disagreement with management
The scope restriction exists when the auditor is unable to collect )1(
sufficient evidence to conclude that the financial statements are
.prepared in accordance with the accounting principles
The disagreement with management exists when the auditor )2(
disagrees with management about matters such as the
acceptability of the accounting policies selected, the method of
their application, and/or the adequacy of the disclosure of the
financial statements. In both cases, the qualified opinion states that
the financial statements are fairly presented except for the effects
.of scope restriction and/or disagreement with management

A disclaimer of opinion: In a disclaimer of opinion, the auditor is 4

unable to formulate an opinion on the company’s financial
statements. The auditor should disclaim an opinion when he suffers
from a lack of knowledge about the auditee, and there is no way to
.gain more knowledge
A disclaimer of opinion is appropriate in the following three
:circumstances
the auditor is not independent with respect to the company )1(
;under audit (SAS 26)
a material scope restriction exists (inability to obtain sufficient )2(
competent evidential matter) (SAS 58; ISA 700); and/or
a significant uncertainty exists, or when the auditor concludes )3(
that there is an undisclosed substantial doubt about the company’s
.ability to survive (SAS 59; ISA 570)
Auditing standards permit the auditor to express a disclaimer of
opinion instead of adding an explanatory paragraph where there is
substantial doubt regarding the going concern, and in situations
that involve multiple uncertainties. According to SAS 58, the
.auditor’s opinion giving a disclaimer of opinion should be justified
An adverse opinion: In an adverse opinion, the auditor 5
concludes that the financial statements are not fairly presented
and/or are not prepared in accordance with the accounting
principles. According to the ISA 700, this type of opinion is issued
where the financial statements contain a material departure
:regarding
,the accounting policies )1(
the method of their application, or )2(
.the adequacy of disclosure )3(
The auditor should disclose the reasons for his adverse opinion and
state the principal effects of the matters causing his adverse
.opinion on the financial statements

?What are the critical audit matters – 20

A Critical audit matter is any matter arising from the audit of the
financial statements that was required to be communicated to the
:audit committee. The CAM contains two types
CAM relates to material accounts or disclosures in the financial )1(
statements and (2) CAM includes subjective or complex auditor
.judgment

A CAM may relate to a component of a material account or

disclosure and does not essentially need to correspond to the
entire account or disclosure in the financial statements. A CAM may
not essentially relate to a single account or disclosure, but could
have a wide spread effect on the financial statements if it relates to
.many accounts or disclosures
Any matter that will be communicated as a CAM should have been
discussed with the audit committee, and the auditor is required to
provide a draft of the auditor's report to the audit committee and
.discuss the draft with them
.The auditor's assessment of the risks of material misstatements •
The auditor judgment related to areas of significant judgment or •
.estimation by management
The audit judgment related to the nature and timing of significant •
.unusual transactions
The degree of auditor subjectivity in implementing audit •
.procedures to report the CAM
The extent of audit effort required to deal with the CAM including •
.the consultations from external experts
.The nature of audit evidence collected regarding the matter •

:Explain – 21
:Objectives of Management Audit
Verify Efficiency: It aims at increasing productivity at all the levels -
.of management and execution of policies
Give the Recommendation to Increase Efficiency: The -
management audit marks the incapabilities in various levels of
.management and provides suggestions to enhance the efficiencies
Evaluates the Potential of Policies and Planning: It audits and -
evaluates the policies and plannings structured by the management
.and judge if it's appropriately implemented
Increase Profit: It helps to increase the profit margin by providing -
.solutions to maximize the company's resources in a valuable way
Importance of Management Audit: Management Audit is a
valuable tool used to determine the efficiency, functions,
accomplishments and achievements of a company. Thus it's
beneficial to the senior management as a consequence of
identifying errors in management activities and suggesting possible
changes that will contribute to manage the business operations
.most effectively and productively
In the light of what is mentioned above, this actively demonstrates
:that Management audit has an importance to
Analyze and assess the competencies and capabilities of a .1
.company's management that carry out corporate objectives
Ensure that the management at all levels and areas are working .2
.towards the interests of shareholders
Maintain good relations with employees, meet customer .3
.requirements and needs, and uphold reputational standards
Detecting the weaknesses within the managerial structure .4
before the company continues the engagement in some critical
.processes such as mergers, restructurings, and bankruptcies

Scope of Management Audit: A management audit is vast as

compared to a financial review because it not only evaluates
finance but also other features of a company It has an efficiency for
assessing management from top to lower level

:Few main scopes of management audit are described below

Calculate the Effectiveness of the Management It audits the .1
.entire level of management of a company
Execution of Principals and Policies It reviews whether the .2
policies and the principles deployed by the company is effective
.and successful
Locate and Examine the Differences: It helps to identify the .3
differences in productivity and if the pattern set by the company is
.not fulfilled
Suggest for Improvement: The management audit suggests .4
improvement in areas, e.g. purchase, sale, finance, administration,
.human resources, etc

Management Audit plan and execution: Audit planning is

the formulation of the general strategy for audit which sets the
direction for the audit, describes the expected scope and conduct
of the audit and provides guidance for the development of the
.audit program
:The following are the steps for the planning and execution -
Appointment of Proper Personnel: In the audit process, a proper .1
person should be appointed to execute the plan under a
management audit. Proper in the sense that he must be
professionally qualified, knowledgeable, and experienced to
.perform the audit plan without ambiguities

:Drafting Audit Programmed.2

.Collection of required documents•
.Assessment of policies and procedures•
.Monitoring the Strategy•
.Inspection of Books and other supporting documents •
.Investigate with available Information•
.Inquiries with staff/team•
.Observing the internal control•
.Test check of the transactions and their results •
.Scientific method evaluation and review (If necessary) •
.Preparing the reports with solutions•

Training Programmed: Proper training must be provided to the .3

team before executing the audit. Example: Management audits on
Construction industries require specific evaluation skills and
.techniques, which must be provided before the execution
Time Concern: Every plan of the audit program must be executed .4
on a proper timeline to get the exact results of it. Example:
Observing the manufacturing process can identify normal and
.abnormal wastage, which should be executed during the process
Frequencies of Audit: An audit should be conducted frequently .5
to identify the mistakes occurring during the decision-making
process. Frequencies may be decided based on the nature of
business and also to be considered with the duration of
.understanding of business and its transactions
Reports with Solutions: Usually, the audit report consists of .6
errors that interrupt the management from making the proper
decision. The team should provide their findings and the required
solutions to overcome the issues. Every report should provide a
.detailed analysis of its repercussions in the future

The management audit will consist of interviews with management

and employees, an analysis of financial statements and
performance, a study of a company's policies and procedures, an
evaluation of training programs, the hiring process, and many other
.areas within an organization
When the audit is complete, the external audit company will not
only provide its findings but will most often provide an entire plan
for the board of directors to implement so that the company can
.operate at an optimal level
So, upon completion of the management audit, consultants draft a
detailed report about what they observed during the audit. When
management teams receive the report from the third-party
consultant, they can start generating plans to implement the action
items from the audit. implementing these changes might vary
between organizations because company change management
.programs likely differ
Some common steps a company might follow to implement the
:suggested changes from a management audit include
.Validating the suggested changes•
.Defining the projected changes•
.Aligning changes with company goals•
.Determining the effect of projected changes•
.Developing communication strategies•
.Creating comprehensive training programs for the changes •
Implementing a support structure to answer questions and •
.provide guidance
.Evaluating the change process and effectiveness •

:Advantages of Management Audit

Proper Strategy Preparation and formation to achieve the •
.objectives
Proper Placement of Internal Controls for effective decision •
.making
.Improvisation of the management decision-making process •
.To overcome the deficiencies of the management•
.Deployment of proper human resources•
.Rectification of Errors with the least cost or less damage •
Avoid abnormal wastage of resources such as men, materials, •
.money & machines
.Timely results without delay•