Page 120 - DCOM509_ADVANCED_AUDITING

Unit 7: Audit Sampling

Notes

Notes The tax auditors do not use formal compliance testing as frequently as other types
of auditors.
However, tax auditors do make judgments about the level of risk of incorrect records and the
risk of misapplication of the tax law. These are the types of judgments that can be backed up by
compliance tests.
The decision to test controls or the accuracy of records is based on auditor judgement and the
circumstances of the audit. The decision should be documented. Compliance testing may help to
limit the scope of the audit to areas of higher risk or point out problems with records that may
have otherwise appeared reliable.
The main reason for performing compliance tests is to reduce the amount of substantive tests
that need to be performed. Therefore, the decision of whether to perform compliance tests
should weigh the possible compliance tests against the possible substantive tests that could be
performed to determine which test will be most efficient and effective.
For instance, if an auditor decides that he can either test the taxpayer’s summary records or use
them to perform the audit, or, rely on comparing reports to bank statements, then he or she
should determine which method will be more efficient. If a compliance test of the summary
records is performed and the records prove to be unreliable, then the auditor may still have to
rely on bank statements. However, it may be that using the summary records will be much
more efficient than using bank statements. Therefore, testing those records is worth the time
needed and the risk that the test results will be negative.

!

Caution Before relying on the summary records the auditor should perform a test of
transactions to determine the records are reliable.

Substantive Tests

Substantive tests are used to determine the amount, usually the dollar amount, of a specific
group of items. If the auditor seeks to determine the amount of disallowed deductions, for
instance, the result of the sample will be a dollar figure of disallowed deductions found in the
sample. The assumption is that the same proportion of disallowed deductions will exist in the
population. Therefore, the final result of the test will be a dollar amount of disallowed deductions
for the population which will be used as a basis for assessment.
Often, samples can be designed to serve both compliance and substantive tests. When it is likely
that records will be needed for both types of applications, the auditor should strive to pull one
sample. This is called dual purpose testing.



Caselet Ira Icandoit’s Problem

his case study identifies Ira Icandoit’s problem performing and engagement
regarding the attribute sampling approach to selecting an appropriate sample for
Ta manufacturing company in western Kansas. Ira thinks he found 6 deviations,
because the sample invoices returned were not as expected. For instance, He had to call a
Contd....

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