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  • Special Audit Techniques

    CA Final Paper 3: Advanced Auditing & Professional Ethics Chapter 5

    CA Arijit Chakraborty

  • Agenda for discussion - Special Audit Techniques

    Audit evidence -Confirmation, inquiry, observation, Analytical review

    Statistical Sampling- concept, types, technique, sampling risk , audit planning

    Risk Based audit

    2

  • Special Audit Techniques

    Inquiry

    Observation

    Confirmation

    Analytical review

    Statistical sampling , risk, error

    Risk based audit

    3

  • Learning Objectives

    1. Understand the concept and purpose of special audit techniques (SAT)

    2. Learn the linkage of SAT with Audit Standards

    4

  • to determine correspondence between

    auditor evidence

    management assertions

    established criteria

    accumulates and evaluates

    Auditor workflow-1

  • then communicates results to

    established criteria

    auditor

    management assertions

    Users

    evidence

    accumulates and evaluates

    to determine correspondence between

    Auditor workflow- 2

  • Sufficient Appropriate Audit Evidence ( SAAE)

    Audit Evidence SA 500 (Revised)

    , Audit EvidenceSpecific Considerations for Selected Items

    SA 501 (Revised)

    External Confirmations SA 505 (Revised),

    Initial Audit Engagements Opening Balances

    SA 510 (Revised)

    Analytical Procedures SA 520 (Revised)

    http://www.icai.org/resource_file/15576sa500revised.pdfhttp://www.icai.org/resource_file/15576sa500revised.pdfhttp://www.icai.org/resource_file/15576sa500revised.pdfhttp://220.227.161.86/18134sa501_rev.pdfhttp://220.227.161.86/18134sa501_rev.pdfhttp://220.227.161.86/18134sa501_rev.pdfhttp://220.227.161.86/18134sa501_rev.pdfhttp://220.227.161.86/18134sa501_rev.pdfhttp://220.227.161.86/18134sa501_rev.pdfhttp://220.227.161.86/18135sa505_rev.pdfhttp://220.227.161.86/18135sa505_rev.pdfhttp://220.227.161.86/18135sa505_rev.pdfhttp://220.227.161.86/15390Link25_510text.pdfhttp://220.227.161.86/15390Link25_510text.pdfhttp://220.227.161.86/15390Link25_510text.pdfhttp://220.227.161.86/15390Link25_510text.pdfhttp://220.227.161.86/15390Link25_510text.pdfhttp://220.227.161.86/15390Link25_510text.pdfhttp://220.227.161.86/18136sa520_rev.pdfhttp://220.227.161.86/18136sa520_rev.pdfhttp://220.227.161.86/18136sa520_rev.pdfhttp://220.227.161.86/18136sa520_rev.pdf

  • Sufficient Appropriate Audit Evidence ( SAAE)

    Audit Sampling SA 530 (Revised)

    Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures SA 540 (Revised)

    Related Parties SA 550

    Subsequent Events SA 560 (Revised)

    Going Concern SA 570 (Revised)

    Written Representations SA 580 (Revised)

    http://220.227.161.86/15393Link28_530text.pdfhttp://220.227.161.86/15393Link28_530text.pdfhttp://220.227.161.86/15395Link30_540text.pdfhttp://220.227.161.86/15395Link30_540text.pdfhttp://220.227.161.86/15395Link30_540text.pdfhttp://220.227.161.86/15397Link32_550text.pdfhttp://220.227.161.86/15397Link32_550text.pdfhttp://220.227.161.86/15399Link34_SA 560_Standard_OKOK.pdfhttp://220.227.161.86/15399Link34_SA 560_Standard_OKOK.pdfhttp://220.227.161.86/15399Link34_SA 560_Standard_OKOK.pdfhttp://220.227.161.86/15401Link36_SA570-final_standard.pdfhttp://220.227.161.86/15401Link36_SA570-final_standard.pdfhttp://220.227.161.86/15403Link38_sa580.pdfhttp://220.227.161.86/15403Link38_sa580.pdf

  • Inspection

    Observation

    Confirmation

    Re-calculation

    Re-performance

    Analytical Procedures

    Inquiry

    Inquiry alone, ordinarily, does not provide SAAE

    Obtaining Audit Evidence - I

  • SA 500 : Audit Evidence

    Evidential matter: Any information that corroborates or refutes an

    assertion

  • Audit Evidence

    Some Relevant Terms used in SA 500:

    Accounting Records

    Appropriateness(of audit evidence)

    Audit Evidence

    Managements Expert

    Sufficiency(of audit evidence)

  • Types of Evidence

    Physical evidence

    Third-party representations

    Documentary evidence

    Computations

    Data Interrelationships

    Client representations

    Accounting records

  • Types of Evidence Physical Evidence

    Evidence that can actually be seen by auditors.

    This type of evidence is generally effective for supporting the existence assertion.

  • Types of Evidence Third Party Representations

    Confirmations

    Lawyers Letters

    Reports of Specialists

  • Types of Evidence Documentary Evidence

    Created by outside parties and transmitted directly to auditor

    Created by outside parties and held by client

    Created and held by client

    Electronic documents

  • Types of Evidence Computations Computations are: performed independently by auditor

  • Types of Evidence Data Interrelationships

    Data interrelationships (i.e., analytical procedures) rely on relationships among financial and non-financial data.

    Effective for testing reasonableness of certain account balances

  • Types of Evidence Oral and Written Client Representations

    Responses to questions and inquiries toclients during an audit constitute auditevidence.

  • Types of Evidence Accounting Records

    Clients accounting records (e.g. ledgers and journals) may provide worthwhile evidence in themselves.

    Depends on the effectiveness of internal controls

  • Audit Procedures

    Physical examination Observation Confirmation Tracing Vouching Inspection Reconciliation Re-performance Analytical procedures Inquiry Comparison

    Physical Evidence

    Third-Party Representations

    Documentary Evidence

    Computations

    Data Interrelationships

    Client Representations

    Accounting Records

  • Reliability of Certain Types of Audit Evidence

    RELIABILITY TYPE EXAMPLE

    High Physical Inventory Observation Documentary External Cutoff Bank Statement External/Internal Purchase Invoice Internal Sales Invoice

    Low Client Representations Management representation Letter

  • Statistical Sampling

    22

    Special audit techniques

  • Statistical Sampling

    Provide guidance regarding the design and selection of an audit sample

    Guide on the use of audit sampling in the audit engagement

    Guidance on use of sample in risk assessment procedures and tests of controls performed by auditor

    23

  • Scope Applies when auditor decides to use audit sampling in

    performing audit procedures Deals with auditors use of statistical and non-statistical

    sampling when-

    Complements SA 500

    Designing and selecting

    audit sample

    Performing tests of controls

    and tests of details Evaluating results

    from sample

  • Objective

    Objective of Auditor when using Audit Sampling are To provide a reasonable basis To draw conclusions About population from which

    sample is selected

  • Sampling design & selection Design of Sample

    The auditor should consider:

    Specific audit objectives Population Sample size

    Selection of Sample Commonly used methods:

    Random selection and Use of CAATs Systematic selection Haphazard selection

    26

  • Sample Design, Size and Selection of Item (A) Sample Design Purpose of audit procedure

    Characteristics of population To design audit sample & determine sample size

    Tests of controls Assessment of expected rate of deviation

    Tests of details Assessment of expected misstatement

    Decision to use statistical or non-statistical is a matter for auditors judgment sample size is not a valid criterion

  • (B) Sample Size

    Auditor to determine sample size sufficient to reduce sampling risk to an acceptably low level Lower the risk auditor willing to accept, greater the

    sample size

    Sample size determined by application of

    Statistically based formula, or Exercise of professional judgment

  • (C) Selection of Items for Testing Auditor to select representative sample Each sampling unit in the population has a chance of selection

    Statistical Sampling

    each unit has known probability

    of being selected

    Non-statistical Sampling

    judgment is used to select items

  • Methods of selecting sample

    Random selection

    Applied through random generators, e.g., random number tables

    Systematic selection

    Number of sampling units/ sample size = sampling interval

    Monetary unit sampling

    Type of value w eighted selection sample size, evaluation results in monetary amounts

    Haphazard selection

    Selection w ithout follow ing structured technique

    Block selection

    Selection of blocks of contiguous items from w ithin the population

  • Nature & Cause of Deviations and Misstatements

    Investigate nature & cause

    of any deviations/ misstatements

    Evaluate their possible effect on

    -Purpose of audit procedure

    -Other areas of audit

    If common feature then identify all such items in a population

    & extend audit procedures

    to those items

  • Projecting Misstatements

    Tests of details project misstatements to population G