Auditing & Assurance Standards

2 & 15

AAS 2- Objective and scope of audit of financial statements Describes the overall scope & objective of audit Describes the overall scope & objective of audit

by an independent auditor.by an independent auditor. The objective is to express an opinion on financial The objective is to express an opinion on financial

statements.statements. The auditor’s opinion helps in determination of The auditor’s opinion helps in determination of

“true and fair view” of financial position & “true and fair view” of financial position & operating results of an organisation.operating results of an organisation.

Effective date – audits relating to accounting Effective date – audits relating to accounting periods after 1-4-1985.periods after 1-4-1985.

Scope of an Audit Will be determined by terms of engagement, Will be determined by terms of engagement,

requirements of statute and ICAI’s requirements of statute and ICAI’s pronouncements.pronouncements.

Assessing the reliability & sufficiency of Assessing the reliability & sufficiency of underlying accounting records.underlying accounting records.

Determination of whether relevant info is properly Determination of whether relevant info is properly disclosed by :disclosed by : - Comparing financial statements with - Comparing financial statements with

underlying records. underlying records.- Judgements ,estimates,consistent - Judgements ,estimates,consistent

application application of policies,adequacy of disclosure.of policies,adequacy of disclosure.

Exercise of judgementExercise of judgement – deciding extent of – deciding extent of audit procedures and drawing conclusions audit procedures and drawing conclusions from audit evidence.from audit evidence.

Conducting audit procedures, substantive Conducting audit procedures, substantive and compliance tests.and compliance tests.

Judgement on materiality and disclosure of Judgement on materiality and disclosure of material items in financial statements.material items in financial statements.

Not expected to perform duties outside the Not expected to perform duties outside the scope of his competence.scope of his competence.

Constraints on the scope of audit should be Constraints on the scope of audit should be expressed.expressed.

AAS 15-Audit Sampling Purpose-Purpose- establish standards on the design establish standards on the design

& selection of audit samples & evaluation.& selection of audit samples & evaluation. The auditor can use either statistical or non-The auditor can use either statistical or non-

statistical sampling methods to evaluate statistical sampling methods to evaluate sample results to provide sufficient audit sample results to provide sufficient audit evidence.evidence.

Audit sampling means the application of Audit sampling means the application of audit procedures to less than 100% of items audit procedures to less than 100% of items within a class of transactions.within a class of transactions.

Design of the sampleDesign of the sample: When designing the audit : When designing the audit sample,the auditor should consider the specific sample,the auditor should consider the specific audit objectives,the population & sample size.audit objectives,the population & sample size.

PopulationPopulation:: It refers to the entire set of data from It refers to the entire set of data from which the auditor wishes to sample.which the auditor wishes to sample.

The individual items making up the population are The individual items making up the population are known as sampling units.Division into units can known as sampling units.Division into units can be done in many ways.be done in many ways.

Stratification

StratificationStratification: Process of dividing the population : Process of dividing the population into sub-populations,which have similar into sub-populations,which have similar characteristics.characteristics.

Strata need to be defined in order that each Strata need to be defined in order that each sampling unit can belong to only one stratum.sampling unit can belong to only one stratum.

It enables the auditor to direct efforts towards It enables the auditor to direct efforts towards items which contain, for eg, the greatest potential items which contain, for eg, the greatest potential monetary error.monetary error.

Sampling risk While determining sample size, the auditor should While determining sample size, the auditor should

consider sampling risk,tolerable error and consider sampling risk,tolerable error and expected error.expected error.

It arises from the possibility that the auditor’s It arises from the possibility that the auditor’s conclusion based on a sample may be different if conclusion based on a sample may be different if the whole population had been considered.the whole population had been considered.

The auditor is faced with sampling risk in both The auditor is faced with sampling risk in both compliance and substantive procedures.compliance and substantive procedures.

Sample size is affected by the level of sampling Sample size is affected by the level of sampling risk the auditor is willing to accept.risk the auditor is willing to accept.

Tests of control:Tests of control:• Risk of under relianceRisk of under reliance• Risk of over relianceRisk of over reliance

Substantive procedures:Substantive procedures:• Risk of incorrect rejectionRisk of incorrect rejection• Risk of incorrect acceptanceRisk of incorrect acceptance

Tolerable error

Maximum error in the population that the Maximum error in the population that the auditor would be willing to accept & still auditor would be willing to accept & still conclude that the sample has achieved audit conclude that the sample has achieved audit objective.objective.

The smaller the tolerable error,the greater The smaller the tolerable error,the greater the sample size.the sample size.

Selection of the Sample The sample should be selected such that it The sample should be selected such that it

is expected to be representative of the is expected to be representative of the population.population.

Random selectionRandom selection Systematic selectionSystematic selection Haphazard selectionHaphazard selection

Evaluation of Sample Results

Having carried out audit procedures on the Having carried out audit procedures on the sample,the auditor should:sample,the auditor should:

Analyse errors detected in the sampleAnalyse errors detected in the sample Project errors found in the sample to the Project errors found in the sample to the

populationpopulation Reassess sampling riskReassess sampling risk