Note Ch.8

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Teaching Notes
Chapter 8 – Tools to Gather Audit Evidence

1. LO1: Overview of Tools to Gather Audit Evidence
2. LO2: Overview of Sampling
3. LO3: Selecting a Sampling Approach
4. LO4: Gathering Sample Evidence about Control Effectiveness 5. LO5: Statistical Approach to Test Account Balances and Assertions: Monetary Unit Sampling (MUS) 6. LO6: No Misstatements in the Sample

7. LO7: Using Generalized Audit Software to Obtain Evidence 8. LO8: Analytical Procedures as a Substantive Test

Overview of Tools to Gather Audit Evidence
Substantive Analytical Procedures
Provide evidence on the reasonableness of the account balance Substantive Analytical Procedures
Provide evidence on the reasonableness of the account balance Sampling
Can be used for both tests of controls and direct tests of account balances Sampling
Can be used for both tests of controls and direct tests of account balances Generalized Audit Software
To analyze underlying data and to support tests of controls and direct tests of account balances Generalized Audit Software
To analyze underlying data and to support tests of controls and direct tests of account balances

* Financial Statement Assertions are:
1) Existence
2) Completeness
3) Rights and obligations
4) Valuation or Allocation
5) Presentation and Disclosure
LO2: Overview of Sampling
* Definition of Audit Sampling: applying audit procedures to less than 100 percent of a population in order to estimate some characteristic about that population

* Purpose of Audit Sampling - to gather evidence to:
1. Test controls to express an opinion on the client’s internal controls 2. Test controls to assess control risk
3. Test for compliance
4. Test details in account balances to determine whether material misstatements exist

* Four Important Decisions for a representative sample:
1. Which population should be tested and for what characteristics? (population) 2. How many items should be selected for audit testing? (Sample size) 3. Which items should be included in the sample? (selection) 4. What inferences can be made from the sample? (evaluation)

* Sampling Risk versus Non-sampling Risk
Nonsampling Risk
* The risk that audit tests do not uncover existing exceptions in the sample * Minimize nonsampling risk:
* Proper training
* Adequate supervison
* Carefully designed audit programs
Nonsampling Risk
* The risk that audit tests do not uncover existing exceptions in the sample * Minimize nonsampling risk:
* Proper training
* Adequate supervison
* Carefully designed audit programs
Sampling Risk
* The risk that an auditor reaches an incorrect conclusion because the sample is not representative of the population. * Minimizing sampling risk:
* Adjust sample size
* use appropriate sample selection method
Sampling Risk
* The risk that an auditor reaches an incorrect conclusion because the sample is not representative of the population. * Minimizing sampling risk:
* Adjust sample size
* use appropriate sample selection method

Sampling Risks – Related to Test of Controls Procedures| | | Actual State of Controls|
Auditor’s Assessment of Control Risk| | Not Effective| | Effective| High| | Correct conclusion * no risk| | Incorrect rejection(Type I Error) * Audit inefficiencies| Low| | Incorrect acceptance (Type II Error) * Increase the likelihood that material misstatements not detected| | Correct conclusion * no risk|

Sampling Risks – Related to Substantive Testing|
Auditor’s Conclusion Based on Sample Evidence| | Actual State of the Population| Auditor’s Assessment of Control Risk| | Materially misstated| | Not materially misstated| Conclude that the...
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