There are a number of key procedures which auditors should perform if they wish to rely on internal controls and reduce the level of substantive testing they perform.
Required:
Briefly explain each of the procedures listed below. (4 marks)
i) Walk-through tests;
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Walk through tests are performed by the auditors to confirm that their recording and understanding of the system is correct. They are often performed as the recording of the system takes place or in conjunction with the tests of controls.
The process involves the tracing of a sample of transactions from the start of the operating cycle to the end and vice versa. For example a sales transaction could be traced from the initial order through to the entry in the nominal ledger accounts.
ii) Audit Sampling;
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Audit sampling involves the application of audit procedures to a selection of transactions with a population (ie, rather than applying the procedures to 100%). The auditor then obtains and evaluates the evidence in order to form a conclusion about the population as a whole.
Sampling is normally adopted for practical reasons as in most cases it would be too time consuming to audit the whole population. A number of different techniques can be used in order to select the sampling including random, systematic or haphazard selection. When designing the size and the structures of the audit sample the auditor will need to consider sampling risk – the risk that the sample is not representative of the population as a whole, meaning that results cannot be extrapolated.