Auditors and Sampling Techniques

Describe how you would conduct the audit process, incorporating the analytical procedures you would use to investigate selected business transactions?

Control risk associated with the audit also appears to be moderate based on the findings from interim audit procedures conducted in July and August 2007. The controls in place were found to be effective.

Before conduct testing, we made professional judgment to identify the most risky items in a population for detailed testing. In this process, the sufficiency of population will be addressed because that the risk-based approach will only test the sampled part of population, the remaining part of population will be immaterial or testing in other manners. After imported data file, we must ensure the accurate of data population before conduct testing.

Moreover, the auditor should preform test for effectiveness of internal controls. He may interview management by asking questions on the process of the transactions and operational activities. He may discuss with management the process of some transactions from beginning to end and then test it by using sample testing. Also he/she should make sure that there is proper control of activities; policies and procedures for adequate segregation of duties are met.

Auditors also evaluate the client’s recording of transactions by verifying the monetary amounts of transactions, a process called substantive tests of transactions. For example, the auditor might compare the unit selling price on a duplicate sales invoice with the approved price list as a test of the accuracy objective for sales transactions. Like the test of control in the preceding paragraph, this test satisfies the accuracy transaction-related audit objective for sales. For the sake of efficiency, auditors often perform tests of controls and substantive tests of transactions at the same time.

Stage 2: Test of internal controls - By testing the effectiveness of the internal controls the auditor can determine the control risk that lies within the company. The audit team can perform tests of controls by making inquiries of appropriate client personnel, examining documents, records, and reports maintained by Smackey, observing control-related activities such as the one done for the inventory procedures for returned Best Boy Gourmet dog food, and re-perform the client procedures.

Compare the primary auditor objectives in auditing historical financial statements to auditing internal controls over financial reporting. Identify at least two (2) objectives that are the most significant in reducing the risk of reporting errors or misstatements in financial statements. Provide a rationale for your response.

Discuss the audit risk model, and ascertain which sampling or non-sampling techniques you would use in order to establish your preliminary judgment about materiality. Justify your response.

3. Research auditing standards and describe the typical procedures that an auditor would perform in auditing a fair value estimate such as the

Auditors have the responsibilities as well as management to report internal controls. The auditors must examine closely management’s claim of effectiveness and also physically test the controls. After the examination, the auditors should express their opinion and any recommendations to fix any internal control weaknesses.

Auditors should always evaluate the design and test the operating effectiveness of a company’s internal control. The key procedures of the evaluation of design are fulfilled by inquires, observations, and inspections. The same procedures can be used to test the operating effectiveness as well.

Performing internal tests of controls is intended to assess the operating effectiveness of those internal controls. Here the staff would select an area of control to test, perhaps inventory management and return policy. They would then look at the procedures that help prevent fraud or error, talk to management, and observe activities. They would notice there is very little control in place for this area. There is no management oversight or dock security measures, no direct recording of sales receipts, shipping labels, or matching to accounts receivable. This would be noted as an area of additional concern. The next stage is to perform substantive testing procedures, where the purpose is to collect audit evidence that the management assertions made in the financial statements are reliable and in accordance with GAAP. Since my staff is good, they would have noticed the company’s sales projections are weak in control and are overstated by around 11%. They would perform a substantive test of detail in this area by selecting a sample of items from the account balances and finding bank statements, invoices, and test of details of balances. They would likely see specifically where the over-projections are being made. Lastly, in finalization, they would compile a report to management detailing any important matters, evaluating the audit evidence, and considering the type of audit opinion that should be reported. Specifically here, they would

Quality Associates, Inc., a consulting firm advises its clients about sampling and statistical procedures that can be used to control their manufacturing processes. In one particular application a client gave Quality Associates a sample of 800 observations taken during a time in which the client’s process was operating satisfactorily. The sample standard deviation of this data was 0.21; hence with so much data, the population standard deviation was assumed to be 0.21. Quality Associates then suggested that random samples of size 30 be taken periodically to monitor the process on an ongoing basis. By analyzing the new samples, the client could quickly learn whether the process was operating satisfactorily. When the process was not operating satisfactorily, corrective action could be taken to eliminate the problem. The design specification indicated the mean for the process should be 12. The hypothesis test suggested by Quality Associates follows.

d. “The auditor's reliance on substantive tests to achieve an audit objective related to a particular assertion may be derived from tests of details, from analytical procedures, or from a combination of both. The decision about which procedure or procedures to use to achieve a particular audit objective is based on the auditor's judgment on the expected effectiveness and efficiency of the available procedures. For significant risks of material misstatement, it is unlikely that audit evidence obtained from substantive analytical procedures alone will be sufficient (PCAOB, AS 2305.09).”

• Objective of quality control is to develop a scheme for sampling a process, making a quality measurement of interest on sample items, and then making a decision as to whether