- 15 Marks
AA – L2 – Q3 – Audit Sampling
Question
a) ISA 530: Audit Sampling indicates that the decision to use statistical sampling or non-statistical sampling is a matter of professional judgment and does not indicate which should be used in any given situation. However, the standard is clear that sample size is not a valid criterion to distinguish between the selection of sampling methods. Therefore, the auditor should not base their decision on whether to use statistical or non-statistical sampling on the outcome of the calculation of sample sizes.
Required: Differentiate between statistical sampling and non-statistical sampling.
b)
A core objective of an audit is to enhance the degree of confidence intended users can place in the financial statements. This is achieved through the expression of an opinion and is governed by key conceptual pillars. Central to this process are the concepts of materiality and the level of assurance provided.
Required: i) Explain the concept of materiality and performance materiality.
ii) Compare and contrast limited assurance and reasonable assurance.
C)
Your client has outsourced their payroll processes to Azara Technologies (Azara), a payroll management company. You have asked the client how they are confident that the payroll that is processed is accurate and appropriate. They have indicated that Azara sends them the final payroll run for review before payment is done. They also mentioned they performed due diligence on Azara before contracting them and noted that they have other high-profile companies as clients and has a reputable audit firm as its Service Auditor who audits the payroll management service. Your client has shared with you the final approved payroll run for each month under review.
Required: State FIVE audit procedures to be performed on the payroll.
Answer
a) Statistical sampling is any sampling approach that involves random selection and applies probability theory to the evaluation of the sample results and the measurement of sampling risk.
Non-statistical sampling (also known as judgmental sampling) on the other hand, is any sampling technique not based on probability theory. Instead, it is based on a judgemental opinion by the auditor about the results of the sample.
bi)
Materiality refers to the significance or importance of an item, transaction, or error in the financial statements. An item is considered material if its omission or misstatement can influence the economic decisions of users of the financial statements.
Materiality is a subjective concept and varies depending on the context. It involves the auditor’s professional judgment and considers both quantitative and qualitative factors. Quantitative factors include the size of the misstatement, while qualitative factors encompass the nature of the item and its potential impact on users’ decisions. Materiality is assessed for the financial statements as a whole and at the individual account balance or transaction level.
Performance materiality is a lower threshold of materiality that auditors use when designing and evaluating the results of audit procedures. It is set at a level lower than the overall materiality to ensure that the audit provides reasonable assurance that material misstatements will be detected.
Auditors use performance materiality as a tool to control the risk of failing to detect material misstatements. It allows for some level of error in audit procedures while still achieving the objective of the audit. Performance materiality is typically expressed as a percentage of overall materiality or as a specific amount. b)
• Obtain an understanding of the end to end payroll process, including the outsourced activities. • Understand and evaluate the controls management has put in place to ensure payroll is not misstated. • Obtain information on the nature of the services provided by Azara Technologies. • Understand the degree of interaction between the activities of Azara Technologies and those of the client. • Obtain the Service Auditor’s Type 1 or Type 2 Report to our Understanding of the Azara Technologies. • Test the effectiveness of management’s controls over the payroll process. • Perform substantive analytical procedures on the monthly payroll. • Inspect evidence supporting the payment of payroll. • Recompute payroll expenses using audit sampling.
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