Accounting Materiality and Audit Sampling

Study Notes

Materiality (Topic 8)

Materiality refers to information that is important or significant enough to influence the decisions of users of financial statements.
Applying the materiality concept can be challenging due to subjectivity.
Factors influencing the judgment of materiality include: -Size of the item relative to the overall financial statements. -Nature of the item. -Circumstances surrounding the item.

Audit Sampling (Topic 9)

Audit sampling involves selecting a portion of a population to form a representative sample to make inferences about the entire population.
The sample must be deemed material to ensure trustworthiness of conclusions.

Statistical vs. Non-Statistical Sampling

Feature	Statistical Sampling	Non-Statistical Sampling
Methodology	Uses probability theory and sample selection methods	Relies on the auditor's judgment and experience
Objectivity	More objective and quantifiable	Can be more subjective and less quantifiable
Precision	Allows for quantification of sampling risk	Sampling risk is less easily measured
Efficiency	Often more efficient and can lead to more reasonable sample sizes	Potentially less efficient
Use in situations	Appropriate if the population is large and there are strong reasons to believe it is representative	Ideal in certain situations such as limited resources

Sampling can affect reliability and validity of audit findings. Auditors use sample conclusions to infer the fairness of the entire population.

Audit Evidence (Topic 10)

Audit evidence is all the information used by the auditor in arriving at conclusions on which the audit opinion is based.
Evidence gathering is a reasoned process in forming audit conclusions.
Types of audit evidence and their example procedures:
- Physical examination: Inspecting inventory, observing operations
- Confirmation: Confirming account balances with an external party, sending confirmations to customers(Accounts receivable)
- Inspection of documents: Examining invoices, contracts
- Analytical procedures: Identifying unusual fluctuations or relationships.
- Inquiry: Questioning management, employees
- Recalculation: Verifying mathematical accuracy
- Reperformance: Independently executing a control task

Audit Documentation (Topic 11)

Audit documentation is the written record of the audit procedures performed, evidence obtained, and conclusions reached by the auditor.
Confidential information can be disclosed with appropriate authorization.
Supporting schedules provide details related to the financial statement accounts.

Purchase and Payment Cycle (Topic 13)

Cash disbursements are often the most valuable asset in a business
Internal controls in purchase process:
- Segregation of duties.
- Independent checks and authorizations.
Substantive tests for purchase cycle include:
- Vendor confirmations.
- Observations of materials receiving in warehouse
- Existence of receiving reports
Associated risk: Risk of double payment.
Technology's impact on purchase and payment cycle is also a significant area to cover.

Payroll Cycle (Topic 14)

Requirement 1 (Weakness)	Requirement 2 (Improvement)

Analytical procedures for payroll:
- Comparing the payroll expense for the current period with expenses of previous periods, and to budget, industry averages to identify unusual variances.

Description

This quiz covers essential concepts of materiality and audit sampling in accounting. Explore how materiality impacts financial statements and the methodologies behind statistical and non-statistical sampling. Assess your understanding of these critical topics in the audit process.