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CHAPTER 11

Evidence and sampling

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 2 Learning outcomes

Students will be able to:

- Understand the procedures for obtaining evidence
- Identify when test of controls and substantive procedures will be
used
- Recognise the strengths and weaknesses of particular forms of
evidence
- Understand how much evidence to obtain
- Recognise when sufficient appropriate evidence has been
obtained such that a conclusion
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Topic list
1. Evidence
2. Selecting items to test
3. Drawing conclusions from sampling
4. Evaluation of misstatements

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 1. Evidence
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 1. Evidence
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Procedures to obtain evidence:

• Assurance providers obtain evidence by one or
more of the following procedures in ISA 500:

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 Procedures to obtain evidence:
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 Procedures to obtain evidence:
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 Procedures to obtain evidence:
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 Procedures to obtain evidence (cont.)
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Procedures Explanation Strengths and weaknesses
External This involves This can be a very strong
confirmation seeking procedure but third party is
(a particular confirmatio motivated to misrepresent.
form of n from a
inquiry) third parties For example, an understated
e.g. the receivables balance might be
confirmatio confirmed because it favoured
n from bank the customer.
of bank Overstated payables balance
balances. might be confirmed because it
favoured the respondent.
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 Procedures to obtain evidence (cont.)
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Procedures Explanation Strengths and weaknesses

Reperformance Independently executing The assurance provider

procedures or controls, carried out the performance
either manually or through of a control himself makes it
the use of computer assisted strong evidence.
audit techniques (CAATs)

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Quiz

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 1.3 Evidence collection techniques
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1.3.1 Test data

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 1.3 Evidence collection techniques
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1.3.2 Audit software

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1.3 Evidence collection techniques

1.3.3 Data analytics

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 1.4 Analytical procedures
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ISA 520, Analytical Procedures give more detail on the use

of analytical procedures as substantive procedures
(optional), at the overall review stage (compulsory) and at
the risk assessment stage of the audit (compulsory) of an
audit.

Analytical procedures should be used at the risk

assessment stage.

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 1.4 Analytical procedures (cont.)
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There are a number of factors that the auditors should consider:

Factor Issue to consider

Suitability The auditor must decide if analytical procedures are
suitable given the nature of the assertion and the
assessment of risk associated with it.
Reliability of the The source of the information used
data
Precision Availability of required information

Acceptable This is influenced by materiality and the desired level of

difference assurance.

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 1.5 Directional testing
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When testing for overstatement (or existence/occurrence) a

different approach is used from testing for understatement (or
completeness).
When testing for overstatement, the auditor should start with the
figures given, and follow the audit trail until coming to the
supporting documentation.

Figure in the Supporting

accounts Intermediate evidence
(Accounting documentation (Supporting
records) documents)
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 1.5 Directional testing (cont.)
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The pattern for understatement (or completeness) testing can be
summarised as follow:

Reciprocal
population (Outside
the accounting
records)

Figure in the
Supporting Intermediate accounts
evidence documentation (Accounting
records)
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1.5 Directional testing (cont.)

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 2. Selecting items to test
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The concept of audit sampling:

 Assurance providers usually seek evidence from less than
100% of items (in a population) of the balance or transaction
being tested.
 Every item in the population of items being sampled must
have an equal chance (randomly) of being selected in the
sample.
Some testing procedures do not involve sampling, such as:
 Testing all items in a population (100% examination)
 Testing all items with a certain characteristic, as selection is
not representative.
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 2. Selecting items to test (cont.)
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2.2.1 Factors influencing sample sizes:
ISA 530, Audit Sampling gives examples of factors which influence
sample sizes for tests of controls and tests of details:
Tests of controls
Factor Effect on sample
size
An increase in the extent to which the auditor’s risk Increase
assessment takes into account relevant controls

An increase in the tolerable rate of deviation Decrease

An increase in the auditor’s desired level of assurance Increase
(confident level)

An increase in the number of sampling units in the Negligible effect

30population (the number of invoices)
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 2. Selecting items to test (cont.)
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Tests of details
Factor Effect on sample
size
An increase in the auditor’s assessment of the risk of Increase
material misstatement
An increase in the use of other substantive Decrease
procedures directed at the same assertion
An increase in the auditor’s desired level of Increase
assurance (confident level)
An increase in tolerable misstatement Decrease
An increase in the amount of misstatement the Increase
auditor expects to find in the population

Stratification of the population when appropriate Decrease

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 2. Selecting items to test (cont.)
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2.2.1 Factors influencing sample sizes: (cont.)

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 2. Selecting items to test (cont.)
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2.3 Selecting the sample

There are a number of selection methods available
a) Random selection ensures that all items in the population
have an equal chance of selection.
b) Systematic selection involves selecting items using a
constant interval between selections, the first interval
having a random start.
c) Haphazard selection may be an alterative to random
selection provided assurance provides are satisfied that
the sample is representative of the entire population.

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 2. Selecting items to test (cont.)
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2.3 Selecting the sample (cont.)

d) Sequence or block selection: sequence sampling may be
used to check whether certain items have particular
characteristics.
e) Monetary Unit Sampling (MUS): this is a selection method
that ensures that every £1 in a population has an equal
chance of being for testing.

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 2. Selecting items to test (cont.)
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 2. Selecting items to test (cont.)
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 3. Drawing conclusions from sampling
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The purpose of audit sampling is to enable the auditors to draw

conclusions (to extrapolate) to the whole population.
 The auditor must consider whether the items in question are
true misstatements.
 A misposting between customer accounts and a timing
difference between customer records and client records
which would not generally be extrapolated against the total
value of the population.
Anomaly: A misstatement or deviation that is demonstrably
not representative of misstatements or deviations in a
population.
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 3. Drawing conclusions from sampling
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The qualitative aspects of misstatement are also considered,

including:
 Auditors must investigate the nature and cause of the
misstatements.
 The auditors must also consider any possible effects the
misstatement on other parts of the audit.
 The auditors will estimate the probable misstatement in the
population by extrapolating the misstatements found in the
sample.

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 4. Evaluation of misstatements
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In ISA 450, Evaluation of Misstatements Identified during the

Audit, the auditor is required to evaluate the effect of
identified misstatements on the audit.
Under this ISA, the auditor must also evaluate the effect of
any uncorrected misstatements on the financial statements.
In determining whether uncorrected misstatements are
material, the auditor must consider the size and nature of
the misstatements, along with the particular circumstances
of their occurrence.

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END OF CHAPTER 11

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