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Please answer such questions

Mahalaxmi (job seeker) (1203 Points)

03 August 2014

1. sampling technique is essentially dependent upon application of compliance procedures alone?

2. if internal control system is sound then auditors choose a larger sample size?

3. sample checking is mandatory for an audit examination?

4. if due to sampling risk the auditors have given inappropriate opinion,they have no defence & they are liable for

their reporting?

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2 Replies

vikas verma (Chartered Accountant) (282 Points)
Replied 04 August 2014

Answer 1: Test effectiveness of sampling technique:

The question you have asked is that if a compliance procedure fails, then whether sampling is to be applied on substantive procedure or not.

The situtation where a compliance procedure fails ( known as a test of control- TOC) can be described by quamtifying the control risk- depending upon the number of TOC samples that failed. Remember a high control risk will lead to a high CRA (combined risk assessment) which will eventually lead to high number of samples for test of details (TOD) also known as substantive procedures.

CONCLUSION:

Therefore the sampling technique or lets precisely say number of samples is TO SOME EXTENT dependent upon TOCs- as control risk is only a component of CRA. Other factors include inherent risk of the significant account ( eg cash) or fraud risk identified during understanding the business environment of the entity (SA315).

Answer 2: Determination of size of samples

Here ur question is a bit unclear. If you are asking for number of TOC samples- that essentially depends upon the frequency of control.Example - A monthly bank reconciliation performed by treasury department of a company will have only 12 items in population. So the sample size will depend accordingly.

If you are asking about the number of samples for substantive procedures (TOD), that will depend upon CRA - refer the text mentioned in answer 1.

Answer 3: Compulsion of sample examination in audit.

See that depends upon the approach the auditor is following. Imagine a first year audit client which is just set up and has practically no controls. Also the population size of transactions would be small. In that case, practically we walkthrough the process, confirm our understanding but we donot look for the controls. We take control risk to be high and then CRA will also be high. So we can test the entire population also. There is no such compulsion to check samples every time.

However, SA200 (revised) mentions about devations from SAs. In this case the approach will deviate from SAs. Therefore the auditor will have to properly document the case.

Answer 4: Liability of auditors due to innapt opinion owing to sample checking.

In this case, the method of sampling and its correctness will be put in question. As the sampling methods are scientific, a correct array of samples will represent the entire population and then the auditor can defend himself by saying that samples were correctly checked. Just have a look at a sample engagement letter and audit report where every auditor clearly mentions that an audit is a REASONABLE ASSURANCE AND NOT AN ABSOLUTE ONE, and it involves test check technique. Therefore, in words of SA 200, if professional skepticism is followed then auditor can definitely defend himself.