Statistical Method in Professional Auditing

DEFINITIONS OF AUDITING

Different experts and association have defined Auditing varyingly. Let us discuss and
understand some of the important definitions:

The International Auditing Practices Committee defines Auditing as “The independent

examination of financial information of any entity, whether profit oriented or not and
irrespective of its size, or legal form, when such an examination is conducted with a view to
expressing an opinion thereon.”
Auditing and Assurance Standard (AAS1) by ICAI: “Auditing is the independent

examination of financial information of any entity, whether profit oriented or not, and
irrespective of its size or legal form, when such an examination is conducted with a view to
expression an opinion thereon”
According to Ronald Irish: “Auditing in its modern concept, is a scientific and systematic
examination of books, vouchers and other financial and legal records in order to verify and
report upon the facts regarding the financial condition disclosed by the balance sheet and the
net income revealed by the profit and loss account.”
FEATURES OF AUDITING
a. Audit is a systematic and scientific examination of the books of accounts of a business;

b. Audit is undertaken by an independent person or body of persons who are duly qualified
for the job.
c Audit is a verification of the results shown by the profit and loss account and the state of
affairs as shown by the balance sheet.
d. Audit is a critical review of the system of accounting and internal control.
e. Audit is done with the help of vouchers, documents, information and explanations received
from the authorities.
The main differences between audit and auditing are:
1. Definition: Audit refers to the process of examining and verifying the financial statements,
records, and operations of an organization to ensure their accuracy, completeness, and
compliance with relevant standards and regulations. Auditing is the professional practice or
methodology employed by auditors to conduct the audit process.
2. Scope: Audit is the end result or output of the auditing process, which involves the
evaluation, verification, and reporting on the financial statements and overall operations of
the organization.
Auditing encompasses the entire set of procedures, techniques, and methodologies used by
auditors to gather and evaluate evidence, assess risks, and form conclusions about the
organization's financial and operational activities.
3. Objective: The primary objective of an audit is to provide an independent opinion on the

accuracy, fairness, and reliability of the organization's financial statements and related
PREPARED BY OSMAN BARRIE B.Sc. HONS. ACCOUNTING AND FINANCE-2024 1
information. The objective of auditing is to establish a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, control, and governance
processes within the organization.
4. Responsibility: The responsibility for the audit lies with the auditor, who is tasked with
conducting the examination, gathering evidence, and forming an opinion on the financial
statements and overall operations. The responsibility for auditing lies with the auditor, but the
organization being audited also has a responsibility to cooperate, provide access to
information, and implement corrective measures based on the auditor's findings and
recommendations.
5. Outcome: The outcome of an audit is the auditor's report, which expresses an opinion on
the financial statements and other aspects of the organization's operations. The outcome of
auditing is the continuous improvement of the organization's risk management, control, and
governance processes, as well as the identification and mitigation of potential issues or risks.
OBJECTIVE OF AUDITING
“The main object of an audit is to ascertain that the Balance Sheet and Profit & Loss Account
of an undertaking is showing true and fair view of its financial positions and earnings.”
However objectives of audit can be divided into two different parts:
1. Primary objectives
2. Secondary objectives
PRIMARY OBJECTIVES / BASIC OBJECTIVES
The main or primary objective of Auditing is to find out the reliability and validity of the
financial statements so as to render opinion on the truthfulness and fairness of the
presentations in those statements. The auditor has to give an opinion on financial statements
whether they are True and Fair view i.e. whether
a) Balance sheet shows true and fair view of the concern,

b)the profit and loss accounts give a true and fair view of the profit or loss of the concern,
c)all the material facts has been disclosed, d) the organization has followed all the
compliance with regarding to legal requirement and
e) Final accounts are made according to the recognized accounting principles and auditing
standards laid down by professional bodies, like ICAI.
SECONDARY OBJECTIVES / INCIDENTAL OBJECTIVES
The secondary objective of audit is to detect and prevent the errors and frauds. An error is
generally taken to be innocent and not deliberate. Where it appears to be wilfully made, it
assumes the character of a fraud.

The term “fraud” refers to an intentional act by one or more individuals of management,
employees or outsiders, severally or jointly, involving the use of deception to obtain an unjust
or illegal advantage.
It’s not an objective of an audit to give a guarantee that all is well with the concern. A clean
audit report does not imply that the management has efficient.
THE IMPORTANCE OF AUDITING
The importance of auditing can be summarized as follows:
1. Enhancing Financial Reporting Reliability: Audits provide an independent and

objective evaluation of an organization's financial statements, ensuring that they are prepared
in accordance with applicable accounting standards and provide a true and fair representation
of the entity's financial position and performance.
2. Improving Internal Controls: Audits assess the effectiveness and efficiency of an

organization's internal control systems, identifying weaknesses and recommending
improvements to mitigate risks and enhance operational effectiveness.
3. Ensuring Compliance: Audits verify an organization's compliance with relevant laws,

regulations, and contractual obligations, helping to prevent legal and regulatory violations
and maintain the entity's reputation.
4. Detecting Fraud and Errors: Audits can help detect and prevent fraud, misappropriation
of assets, and unintentional errors, thereby protecting the organization's resources and
safeguarding its interests.
5. Providing Assurance to Stakeholders: Audited financial statements and reports give

stakeholders, such as investors, creditors, and regulatory authorities, confidence in the
reliability and integrity of the organization's financial information and operations.
6. Supporting Decision-Making: Audit findings and recommendations provide valuable

insights to management, enabling them to make informed decisions and improve the
organization's overall performance.
7. Enhancing Corporate Governance: Audits contribute to effective corporate governance

by promoting accountability, transparency, and ethical practices within the organization.
8. Identifying Opportunities for Improvement: Audits can uncover areas for operational,
financial, or managerial improvements, leading to increased efficiency, cost savings, and
enhanced organizational performance.
9. Ensuring Accountability: Audits hold management and employees accountable for their
actions and the use of the organization's resources, fostering a culture of responsibility and
stewardship.

10. Fulfilling Legal and Regulatory Requirements: In many jurisdictions, certain
organizations are legally required to undergo periodic audits to comply with statutory and
regulatory requirements.
ADVANTAGE OF AUDIT
The advantages of Audit are as follow:
1. True and Fair Balance Sheet: Once the Balance sheet are audited user of balance sheet
are sure that assets and liabilities shown in the audited balance sheet show the true financial
position of the concern.
2. True and Fair Profit and Loss Account: The user of the profit and loss account is
assured that profit or loss in the profit and loss account is true and fair.
3. As per the Legal Requirements: audited Balance sheet means all the law applicable to
the concern have been complied.
4. Disclose all the Material Fact: The audited financial accounts disclose all the material
fact which is required by the investor for investment purpose.
5. As per Standards of Accounting and Auditing Practice: The ICAI has issued some
standards of auditing and accounting, audited financial statement means all the standards are
properly followed. This make audited balance sheet more reliable.
TRUE AND FAIR VIEW.
An audit of accounts by an independent expert assures the outside users that the accounts are
proper and reliable. The outsiders can rely on the accounts if the auditor reports that the
accounts are true and fair. The accounts are said to be true and fair:
1. When the profit and loss shown in the profit and loss account is true and fair, and
2. Also when the value of assets and liabilities shown in the balance sheet is true and
fair. What constitutes true and fair is not defined under any law. However the following
general guidelines may be laid down in connection with true and fair.
a) Conform to accounting principles: The books of accounts must be kept according to the
normally accepted accounting principles such as the concept of entity, continuity, periodical
matching of costs and revenue, accrual and double entry system etc.
b) No window dressing or secret reserves: The accounts must show the financial position
and the profit or loss as they are. I.e. there is neither an overstatement nor an understatement.
The accounts are said to show true and fair view when the accounts show only the actual
conditions as it is. i.e. the profit and the net worth are shown as they are.
3. Disclose all material facts: The books of accounts must disclose all material facts
regarding revenue, expenses, assets and liabilities. Material means important and essential.

The disclosure of important matters in the accounts helps the users in taking business
decisions. There should be neither suppressing of vital facts nor miss-statements.
4. Legal requirements: In case of limited company the account must disclose the matters
required to be disclosed under the Companies Act.
AUDITING THEORIES
Auditing theories refer to the different conceptual frameworks and models that provide the
foundation for the audit process and guide auditors in conducting their work. These theories
help explain the purpose, objectives, and approaches of auditing. Here are some of the key
auditing theories:
TYPES OF AUDITING THEORIES
1. Agency theory: This theory focuses on the relationship between the principal (e.g.,
shareholders) and the agent (e.g., management) and the potential conflicts of interest that can
arise. Auditing is seen as a mechanism to monitor the agent's actions and ensure they are
aligned with the principal's interests.
2. Signalling theory: This theory suggests that auditing serves as a signal to external
stakeholders about the reliability and credibility of the financial information provided by the
organization. The audit report is seen as a means of conveying information about the
company's financial health and performance.
3. Policeman theory: This traditional view of auditing sees the auditor as a detective,
responsible for discovering and reporting any errors, irregularities, or fraud within the
organization.
4. Lending credibility theory: This theory posits that the primary purpose of auditing is to
lend credibility to the financial information presented by the organization, thereby enhancing
the confidence of users, such as investors and creditors, in the reported data.
5. Theory of inspired confidence: This theory suggests that auditing is a response to the
public's need for reliable financial information and the auditor's role is to inspire confidence
in the information provided by the organization.
6. Theory of communicative action: This theory views auditing as a form of communication

between the auditor and the organization, where the auditor aims to understand the
organization's actions and provide an independent assessment of its financial reporting.
7. Theory of motivated reasoning: This theory suggests that auditors may be influenced by
their own biases and motivations, which can affect their judgments and the audit process.
These theories provide a conceptual foundation for understanding the role and purpose of
auditing, the responsibilities of auditors, and the potential factors that can influence the audit
process. They help shape audit practices and the development of auditing standards and
regulations.

CONCEPTS IN AUDITING
There are four main concepts in auditing:
1. CREDIBILITY CONCEPT
2. PROCESS CONCEPT
3. PERFORMANCE CONCEPT
4. COMMUNICATION CONCEPT
CREDIBILITY CONCEPT
Definition of Credibility: Credibility in auditing refers to the trustworthiness, reliability, and

believability of the information presented in the financial statements or other audit evidence.
It is a fundamental requirement for the audit process to be effective and for the audit report to
be considered valid and reliable.
Importance of Credibility concept: Credibility is essential in auditing because it ensures

that the financial information provided by the organization being audited is accurate,
complete, and free from material misstatements. This allows users of the financial statements,
such as investors, creditors, and regulatory authorities, to make informed decisions based on
the information presented.
FACTORS AFFECTING CREDIBILITY:
Several factors can influence the credibility of audit evidence and the overall audit process,
including:
 Independence and objectivity of the auditor

 Competence and expertise of the auditor
 Compliance with professional standards and ethical guidelines
 Reliability and validity of audit procedures and techniques
 Adequate documentation and support for audit findings
 Timeliness and relevance of the audit information
Enhancing Credibility: Auditors employ various strategies to enhance the credibility of the
audit process and the information presented in the audit report, such as:
 Maintaining independence and objectivity throughout the audit

 Applying professional skepticism and critical thinking
 Gathering sufficient and appropriate audit evidence
 Adhering to recognized auditing standards and guidelines
 Ensuring effective communication with the client and other stakeholders
 Providing clear and transparent reporting of audit findings and conclusions
Consequences of Lack of Credibility:

If the credibility of the audit process or the information presented in the financial
statements is called into question, it can have serious consequences, such as:
 Loss of trust and confidence in the organization and its financial reporting
 Potential legal and regulatory actions against the organization or the auditor
 Difficulty in securing financing or investment due to the perceived risk
 Reputational damage to the organization and the auditing profession
DEFINITION OF PROCESS CONCEPT:
The process concept in auditing refers to the structured and systematic approach followed by
auditors to gather, evaluate, and document audit evidence in order to form an opinion on the
financial statements or the subject matter being audited.
ELEMENTS OF THE AUDIT PROCESS:
The audit process typically includes the following key elements:
1. Planning and risk assessment: Identifying the audit objectives, understanding the
client's business and industry, and assessing the risks of material misstatement.
2. Gathering audit evidence: Designing and implementing appropriate audit
procedures to collect sufficient and appropriate evidence to support the audit
conclusions.
3. Evaluating audit findings: Analyzing the gathered audit evidence, identifying any
discrepancies or issues, and evaluating their significance.
4. Forming audit opinions: Reaching a conclusion on the fairness and reliability of the
financial statements or the subject matter being audited.
5. Reporting and communication: Presenting the audit findings, conclusions, and
recommendations in the form of an audit report.
IMPORTANCE OF THE PROCESS CONCEPT:
The process concept is crucial in auditing for several reasons:
1. It ensures a structured and consistent approach to the audit, enhancing the reliability
and quality of the audit work.
2. It helps auditors to identify and address risks, gather relevant evidence, and draw
appropriate conclusions.
3. It provides a framework for auditors to comply with professional standards and
regulatory requirements.
4. It enhances the credibility and acceptance of the audit report by stakeholders.
APPLICATION OF THE PROCESS CONCEPT:
The process concept is applied throughout the various stages of the audit, including:
 Engagement acceptance and planning

 Performing audit procedures and substantive testing

 Evaluating audit findings and forming audit opinions
 Communicating the audit results and issuing the audit report
Continuous Improvement of the Audit Process: Auditors continuously seek to improve the
audit process by:
 Reviewing and updating audit methodologies and techniques

 Incorporating technological advancements and data analytics
 Enhancing risk assessment and audit planning
 Improving communication and feedback mechanisms with clients
DEFINITION OF THE PERFORMANCE CONCEPT:
The performance concept in auditing refers to the evaluation of an entity's or organization's

ability to achieve its objectives, make efficient use of resources, and fulfill its responsibilities
effectively.
ELEMENTS OF THE PERFORMANCE CONCEPT:
The performance concept in auditing typically includes the assessment of the following
elements:
 Efficiency: The extent to which the entity or organization is using its resources
(financial, human, and physical) in the most optimal and cost-effective manner.
 Effectiveness: The degree to which the entity or organization is achieving its stated
goals and objectives.
 Economy: The extent to which the entity or organization is minimizing the cost of its
operations and acquiring resources at the lowest possible price.
 Compliance: The degree to which the entity or organization is adhering to relevant
laws, regulations, policies, and procedures.
IMPORTANCE OF THE PERFORMANCE CONCEPT
The performance concept is crucial in auditing for several reasons:
1. It provides a comprehensive evaluation of an entity's or organization's operations and

management practices.
2. It helps identify areas for improvement and opportunities to enhance the
organization's overall performance.
3. It ensures accountability and transparency in the use of resources and the achievement
of objectives.
4. It supports decision-making by management, stakeholders, and regulatory authorities.
Application of the Performance Concept:
The performance concept is typically applied in the following types of audits:

 Operational audits: Focusing on the efficiency and effectiveness of an entity's or
organization's operations and management practices.
 Compliance audits: Evaluating the organization's adherence to relevant laws,
regulations, policies, and procedures.
 Value-for-money audits: Assessing the economy, efficiency, and effectiveness of the
use of resources to achieve desired outcomes.
 Environmental audits: Evaluating the entity's or organization's environmental
performance and compliance with environmental regulations.
Reporting and Communication: The findings and conclusions of the performance audit are
typically communicated through a performance audit report. This report may include
recommendations for improving the entity's or organization's performance and enhancing its
overall effectiveness and efficiency.
DEFINITION OF THE COMMUNICATION CONCEPT:
The communication concept in auditing encompasses the various methods and channels
through which auditors convey information, share findings, and facilitate dialogue throughout
the audit engagement.
IMPORTANCE OF COMMUNICATION IN AUDITING
Effective communication is crucial in auditing for several reasons:
1. Facilitates the exchange of information and understanding between the auditor and the
audited entity.
2. Enables the auditor to gather relevant information, clarify issues, and obtain necessary
explanations.
3. Allows the auditor to effectively communicate audit findings, conclusions, and
recommendations.
4. Promotes transparency and builds trust between the auditor and the audited entity.
5. Ensures that audit reports and recommendations are understood and acted upon by the
appropriate stakeholders.
Elements of the Communication Concept:
The communication concept in auditing includes the following key elements:
1. Verbal communication: Includes discussions, meetings, and interviews between the

auditor and the audited entity.
2. Written communication: Encompasses audit reports, management letters, and other
written correspondence.
3. Feedback and follow-up: Involves the exchange of information and responses
between the auditor and the audited entity.
4. Presentation and reporting: Refers to the clear and effective presentation of audit
findings and conclusions to various stakeholders.

Effective Communication Strategies: Auditors employ various strategies to enhance the
effectiveness of their communication, such as:
 Establishing clear and open lines of communication with the audited entity.
 Actively listening and seeking clarification as needed.
 Tailoring communication styles and methods to the audience's needs.
 Using appropriate language and avoiding technical jargon when communicating with
non-technical stakeholders.
 Providing timely and constructive feedback to the audited entity.
 Ensuring that audit reports are structured logically and presented in a clear and concise
manner.
Challenges and Considerations: Auditors may face challenges in communication, such as:
 Cultural and language barriers

 Resistance or reluctance to share information
 Conflicting interests or priorities among stakeholders
 Navigating sensitive or confidential information
 Ensuring the timeliness and relevance of communication
POSTULATE IN AUDITING
1. Going Concern Postulate: The going concern postulate assumes that the entity being
audited will continue to operate in the foreseeable future and will not be liquidated or cease
its operations. This postulate is essential in determining the appropriate valuation and
presentation of the entity's assets and liabilities.
2. Consistency Postulate: The consistency postulate requires that the entity being audited
applies the same accounting principles and methods consistently from one period to the next.
This ensures the comparability of financial information and the ability to analyze trends over
time.
3. Materiality Postulate: The materiality postulate states that the auditor should focus on
items and transactions that are material or significant to the financial statements, rather than
minor or insignificant details. This allows the auditor to concentrate on the most important
aspects of the audit.
4. Objectivity Postulate: The objectivity postulate requires the auditor to maintain an

independent and impartial attitude throughout the audit process. The auditor should not be
influenced by personal biases, conflicts of interest, or external pressures, and should make
judgments based on facts and evidence.
5. Audit Evidence Postulate: The audit evidence postulate states that the auditor must
obtain sufficient and appropriate audit evidence to support the conclusions and opinions
expressed in the audit report. This evidence should be reliable, relevant, and sufficient to
justify the auditor's findings.

6. Conservatism Postulate: The conservatism postulate suggests that in cases of uncertainty,
the auditor should adopt a cautious approach and err on the side of reporting lower asset
values and higher liability values. This helps to ensure that the financial statements do not
overstate the entity's financial position.
7. Disclosure Postulate: The disclosure postulate requires the entity being audited to provide
all relevant and material information in the financial statements, including any significant
events or transactions that may affect the entity's financial position or performance.
These postulates serve as the foundational principles that guide the auditing process, ensuring
the reliability, integrity, and fairness of the audit findings and conclusions.
PRINCIPLES OF AUDIT (ASS 1)
The concept of separation of management from ownership fuelled the growth of this
profession. The owners who could not participate in the day-to-day management of the
enterprise wanted an assurance that the financial information prepared by the management is
reliable. An audit provides such an assurance and enhances the credibility of the information.
The role of audit can be depicted as follows.
1. Integrity, Objectivity and Independences: Integrity implies an attitude of

straightforwardness, honesty, sincerity, uprightness and reliability.
2. Confidentiality: Auditor should not disclose the information acquired in the course of
audit to any one, unless there is a legal or professional duty to do so and Consented by the
client.
3. Skills and Competence: Audit should be conducted by persons
● Who possess due professional care,

● Who are adequately trained
● With experience and competence
4. Planning: Planning helps an auditor to conduct an audit in an effective, efficient and

timely manner. Planning includes: Acquiring knowledge about the client’s business, gaining
an understanding of the accounting system and revision of plan as and when required.
5. Work Performed by Others: An auditor cannot do all the work by himself. The work is
done either through his assistants or other professionals, but he continues to be responsible
for forming and expressing an opinion on the financial statements. While delegating the work
to others, he will be entitled to rely on the work performed by them, provided he exercises
adequate skill and care and is not aware of any reason to believe that he should not have so
relied.
6. Audit Evidences: An auditor should obtain sufficient (quantum) appropriate (relevance

and reliable) audit evidence through the performance of compliance and substantive
procedures.

7. Documentation: An auditor should document matters, which are important in providing
evidence that the audit was conducted in accordance with the basic principles governing an
audit. The auditor should maintain the documents for a reasonable period of time to meet the
demands of his practice
8. Audit Conclusions and Reporting: Auditor draws conclusions on the basis of Review
and assessment of the audit evidence obtained; and his knowledge of the business, to form his
opinion on the financial statements.
9. Assessing the Accounting System and Internal Control: An auditor should assess the
accounting system to ensure that the system is adequate to record all the accounting
information.
AUDIT TYPES
Audit is not legally obligatory for all types of business organizations or institutions. On this
basis audits may be of two broad categories i.e., audit required under law and voluntary
audits.
(i) Audit required under law : The organizations which require audit under law are the
following:
(a) companies governed by the Companies Act;
(b) banking companies governed by the Banking Regulation Act;
(c) electricity supply companies governed by the Electricity supply Act;
(d) co-operative societies registered under the co-operative Societies Act;
(e) public and charitable trusts registered under various Religious and Endowment Acts;
(f) corporations set up under an Act of parliament or State Legislature such as the Life
Insurance Corporation of Sierra Leone.
(g) Specified entities under various sections of the Income-tax Act.
(ii) In the voluntary category are the audits of the accounts of proprietary entities,
partnership firms, Hindu undivided families, etc. in respect of such accounts, there is no basic
legal requirement of audit. Many of such enterprises as a matter of internal rules require
audit. Some may be required to get their accounts audited on the directives of Government
for various purpose like sanction of grants, loans, etc. But the important motive for getting
accounts audited lies in the advantages that follow from an independent professional audit.
QUALITY OF AUDITORS
To be successful, an auditor should possess certain desirable qualities, besides having his
formal qualification. His qualification requires that he should be a qualified chartered
accountant. Besides, he should possess the following qualities:
1. Tactfulness
2. Cautious approach
3. Firmness.
4. Good temperament

5. Integrity etc.
TYPES OF AUDITORS
There are several types of auditors, each with their own specific roles and responsibilities.
The main types of auditors are:
1. External Auditors: External auditors are independent, professional accountants or audit

firms hired by an organization to conduct an objective and independent examination of its
financial statements and records. Their primary responsibility is to express an opinion on the
fair presentation of the organization's financial position, performance, and cash flows in
accordance with applicable accounting standards. External audits are typically mandated by
regulatory bodies or required for public companies.
2. Internal Auditors: Internal auditors are employed by the organization itself to provide
independent and objective assurance and consulting services. They evaluate the effectiveness
of the organization's internal controls, risk management, and governance processes. Internal
auditors work to improve the organization's operations and help achieve its strategic
objectives.
3. Governmental Auditors: Governmental auditors are employed by various government

agencies, such as the Government Accountability Office (GAO) or state/local audit offices.
They conduct audits of government agencies, programs, and expenditures to ensure
compliance with laws, regulations, and policies, as well as to evaluate the efficiency and
effectiveness of government operations.
4. Information Systems (IS) Auditors: IS auditors specialize in the audit of information

systems, including computer-based accounting and financial systems, as well as other
technology-related controls and processes. They assess the reliability, security, and
effectiveness of an organization's information systems and technologies.
5. Forensic Auditors: Forensic auditors are specialized in investigating and analyzing

financial records and transactions to detect and uncover fraud, embezzlement, or other
financial irregularities. They often work closely with legal professionals and law enforcement
agencies to provide expert testimony and evidence in legal proceedings.
6. Environmental Auditors: Environmental auditors assess an organization's compliance

with environmental laws and regulations, as well as its environmental management practices
and performance. They evaluate the organization's environmental impact and provide
recommendations for improvement.
7. Compliance Auditors: Compliance auditors ensure that an organization is adhering to

relevant laws, regulations, and industry standards applicable to its operations. They evaluate
the organization's policies, procedures, and controls to verify compliance and identify any
areas of non-compliance.

The specific type of auditor employed depends on the organization's needs, the scope of the
audit, and the regulatory or legal requirements that must be met.
AUDIT TESTING AND AUDIT EVIDENCE
AUDIT TESTING
Audit testing refers to the various procedures and techniques used by auditors to gather
evidence and evaluate the accuracy and reliability of a company's financial statements and
accounting records. The main goals of audit testing are to:
1. Verify the existence, completeness, and accuracy of the financial information reported by
the company.
2. Assess the company's internal controls and identify any weaknesses or deficiencies.
3. Ensure compliance with applicable accounting standards, laws, and regulations.
4. Provide an independent opinion on the fairness and reliability of the company's financial
statements.
TYPES OF AUDIT TESTING
Some common types of audit testing include:
1. Substantive testing
2. Compliance testing
3. Walk-through testing
SUBSTANTIVE TESTING
Substantive Testing: This involves directly examining and verifying the company's
transactions, account balances, and other financial information. Examples include vouching,
reconciliations, confirmations, and analytical procedures. The primary objectives of
substantive testing are to:
1. Verify the existence, valuation, and rights/obligations of account balances and

transactions.
2. Detect material misstatements in the financial statements.
3. Gather sufficient appropriate audit evidence to support the auditor's opinion.
TYPES OF SUBSTANTIVE TESTING
Some common types of substantive testing
1. Vouching: Tracing a sample of transactions from the accounting records to the underlying
supporting documentation, such as invoices, contracts, or bank statements. Verifying that the
transactions are properly recorded, classified, and supported.
2. Confirmations: Obtaining independent verification of account balances or transactions

from external third parties, such as customers, vendors, or financial institutions. Confirming
the existence, completeness, and accuracy of the information.
3. Recalculations: Re-performing calculations, such as interest, depreciation, or inventory
costing, to verify the accuracy of the amounts recorded.
4. Analytical Procedures: Analyzing financial and non-financial data to identify unusual

trends, relationships, or fluctuations that may indicate potential misstatements. Examples
include ratio analysis, trend analysis, and reasonableness tests.
5. Physical Inspections: Physically observing and verifying the existence and condition of
the company's assets, such as inventory, equipment, or cash on hand.
6. Documentation Review: Examining source documents, such as contracts, invoices, or

bank statements, to verify the accuracy and completeness of the recorded transactions.
COMPLIANCE TESTING
Compliance testing is a type of audit procedure used to evaluate the effectiveness of a

company's internal controls by testing whether they are designed and operating as intended
The primary objectives of compliance testing are to:
1. Assess whether the internal controls are designed and implemented properly.
2. Determine if the controls are operating as intended and effectively mitigating the
identified risks.
3. Identify any weaknesses or deficiencies in the internal control system.
TYPES OF COMPLIANCE TESTING
Some common types of compliance testing include:
2. Inquiries: Conducting interviews with personnel responsible for performing control

activities. Obtaining an understanding of the controls and how they are being applied in
practice.
3. Inspection of Documents: Reviewing written policies, procedures, and other

documentation related to the internal control system. Verifying that the controls are properly
documented and communicated to relevant personnel.
4. Observations: Observing the execution of control activities in the normal course of

operations. Ensuring that the controls are being performed as described and in a timely
manner.
5. Re-performance: Independently re-performing control activities to verify their

effectiveness. Ensuring that the controls are functioning as intended and producing the
expected results.
WALK-THROUGH TESTING
Walk-through testing is a type of compliance testing used in audit procedures to evaluate the
effectiveness of a company's internal controls. It involves tracing a transaction or process
from its origin to its final recording in the accounting records.

STEPS IN A WALK-THROUGH TESTING
The key steps in a walk-through test are:
1. Identify a specific transaction or process to test, such as the revenue cycle, purchasing
process, or payroll.
2. Obtain documentation related to that transaction or process, such as source documents,
authorization forms, journal entries, and reports.
3. Physically follow the transaction or process through the company's systems and
procedures, from the initial input or event to the final recording in the general ledger.
4. Observe and document each step in the process, including who performs the tasks, what
controls are in place, and how information flows through the system.
5. Verify that the actual procedures being performed match the company's documented
policies and procedures.
6. Identify any deviations, inefficiencies, or control weaknesses in the process.
The key benefits of walk-through testing include:
 Gaining a deeper understanding of the company's internal control environment

 Identifying control weaknesses or breakdowns in processes
 Evaluating the design effectiveness of controls
 Assessing the risk of material misstatement in the financial statements
 Providing a basis for determining the nature, timing, and extent of further audit testing
PROCEDURES OF AUDIT TESTING
The main procedures involved in audit testing can be summarized as follows:
1. Risk Assessment: The auditor evaluates and identifies the risks of material misstatement
in the financial statements. This assessment is based on the auditor's understanding of the
entity, its environment, and its internal control system.
2. Test of Controls: The auditor tests the operating effectiveness of the entity's internal
controls to determine if they are designed and functioning properly. This includes compliance
testing procedures such as walkthroughs, inquiries, and observations.
4. Sampling: The auditor may use statistical or non-statistical sampling techniques to select a
representative sample of transactions or account balances for testing. This allows the auditor
to draw conclusions about the entire population based on the results of the sample.
3. Vouching: Tracing a sample of transactions from the accounting records to the underlying
supporting documentation, such as invoices, contracts, or bank statements. Verify that the
transactions are properly recorded, classified, and supported.

5. Analytical Procedures: The auditor analyzes financial and non-financial data to identify
unusual trends, relationships, or fluctuations that may indicate potential misstatements. This
includes ratio analysis, trend analysis, and reasonableness tests.
6. Physical Inspections: The auditor physically observes and verifies the existence and
condition of the entity's assets, such as inventory, equipment, or cash.
7. Documentation Review: The auditor examines source documents, such as contracts,

invoices, and bank statements, to corroborate the recorded transactions.
8. Evaluation and Reporting: The auditor evaluates the audit evidence obtained and draws
conclusions about the fairness and reliability of the financial statements. The auditor then
prepares the audit report, which expresses an opinion on the financial statements.
9. Confirmation:
a. External confirmation: Obtaining independent verification of account balances or

transactions from third parties, such as customers, vendors, or financial institutions.
b. Internal confirmation: Verifying information within the client's organization, such as
the existence and condition of assets.
10. Re-performance: Independently re-performing control activities or calculations to

verify their accuracy and completeness.
11. Inquiry: Obtaining information and explanations from client personnel to understand the
entity's processes, controls, and accounting practices.
12. Walkthroughs: Tracing a transaction or process from its origin to its final recording in
the accounting records to assess the design and implementation of internal controls.
AUDIT EVIDENCE
Audit evidence refers to the information collected by the auditor to support the conclusions
and opinions expressed in the audit report. The auditor uses professional judgment to
determine the appropriate mix and quantity of audit evidence needed to achieve a high level
of assurance about the fairness and reliability of the financial statements.
TYPES OF AUDIT EVIDENCE
1. Oral evidence
2. Documentary evidence
ORAL EVIDENCE
Oral evidence is one type of audit evidence that refers to information obtained through verbal
communication and discussions with the client or other parties.
Oral evidence in an audit context can include:

1. Inquiries and interviews: Asking questions of management, employees, and other
relevant personnel to obtain information about the client's operations, accounting practices,
internal controls, or other matters. Conduct interviews to gain a better understanding of
specific transactions, events, or issues.
2. Discussions and representations: Engaging in discussions with the client's management

and those charged with governance to understand their views, insights, and explanations on
various aspects of the business. Obtaining verbal representations from the client regarding
matters such as the completeness of information provided compliance with laws and
regulations, or the existence of significant events or contingencies.
3. Walk-throughs and observations: Observing the client's personnel performing their

duties and discussing the processes involved.
Walkthroughs of the client's systems, procedures, and internal controls, accompanied by

explanations from the relevant personnel.
IMPORTANT OF ORAL EVIDENCE
Oral evidence can be valuable for the auditor in the following ways:
1. Provides additional context and understanding beyond what can be gleaned from
written documentation alone.
2. Helps the auditor identify potential issues or areas requiring further investigation.
3. Allows the auditor to corroborate or clarify information obtained from other sources
of evidence.
4. Facilitates the auditor's assessment of the client's control environment and the overall
tone at the top.
LIMITATION OF ORAL EVIDENCE
However, oral evidence also has certain limitations:
1. It may be subject to potential bias, misunderstanding, or selective disclosure by the

client.
2. It is more difficult to verify and document than written evidence.
3. The auditor needs to exercise professional scepticism when relying on oral evidence
and should seek to corroborate it with other sources of evidence whenever possible.
DOCUMENTARY EVIDENCE
Documentary evidence is a key component of audit evidence and refers to written or printed
information that the auditor obtains during the course of the audit. This type of evidence is
considered more reliable and verifiable compared to oral evidence.
Some examples of documentary evidence in an audit include:

1. Accounting records and financial statements: Ledgers, journals, invoices, contracts,
bills of lading, and other source documents. The client's financial statements, including the
balance sheet, income statement, and cash flow statement.
2. Internal policies, procedures, and reports: The client's accounting policies, internal
control procedures, organizational charts, and job descriptions. Internal management reports,
budgets, forecasts, and other operational documents.
3. External documents: Confirmations from third parties, such as bank statements,

customer/vendor confirmations, and legal opinions. Industry reports, government statistics,
and other publicly available information.
4. Audit documentation: The auditor's working papers, which include the procedures
performed, evidence gathered, and conclusions reached. Engagement letters, audit plans, and
other documentation related to the audit.
ADVANTAGES OF DOCUMENTARY EVIDENCE
The key advantages of documentary evidence include:
1. Reliability: Documentary evidence is generally considered more reliable than oral

evidence, as it provides a tangible and verifiable record.
2. Permanence: Documents can be retained and referenced throughout the audit and even in
subsequent periods.
3. Objectivity: Documentary evidence is less susceptible to bias or misinterpretation

compared to oral evidence.
To assess the reliability and relevance of documentary evidence, auditors consider factors
such as the source of the document, the authenticity of the information, and the timeliness
and accuracy of the records.
In some cases, auditors may also need to obtain and evaluate electronic documentation, such
as computer-generated reports, electronic files, and digital records, which require additional
procedures to validate their reliability and completeness.
Overall, documentary evidence plays a crucial role in supporting the auditor's conclusions
and providing a solid foundation for the audit opinion.
CHARACTERISTICS OF AUDIT EVIDENCE
The key characteristics of audit evidence are:
1. Relevance: The audit evidence must be relevant to the audit objectives and the specific
assertions being tested. It should provide information that is directly related to the audit issue
or question being addressed.

2. Sufficiency: The auditor must obtain enough relevant and reliable evidence to support the
conclusions and opinions expressed in the audit report. The quantity of evidence needed
depends on the assessed risks of material misstatement and the quality of the evidence
obtained.
3. Reliability: The audit evidence must be reliable, meaning that it is free from bias and
provides a true and accurate representation of the underlying transactions or balances.
Evidence obtained from independent third-party sources is generally considered more reliable
than evidence obtained solely from the client.
4. Timeliness: The audit evidence must be obtained in a timely manner to ensure it is current
and reflective of the entity's financial position and operations at the time of the audit. Out-
dated or stale evidence may not be relevant or reliable for the audit.
5. Objectivity: The audit evidence must be objective and unbiased, without any influence
from the client's management or the auditor's own preconceptions. The evidence should be
based on facts and observations rather than subjective opinions or assumptions.
6. Competence: The audit evidence must be generated by individuals or sources that have the
necessary knowledge, skills, and expertise to provide accurate and reliable information. This
includes the use of specialists or experts when appropriate.
7. Authenticity: The audit evidence must be genuine and free from any tampering or forgery.
The auditor should verify the source and validity of the evidence to ensure its authenticity.
8. Completeness - The evidence should include all relevant information needed to address the
audit objectives.
9. Accuracy - The evidence should accurately reflect the underlying transactions or balances.
10. Persuasiveness - The evidence as a whole should be persuasive in supporting the auditor's
conclusions.
11. Corroborative - Multiple sources of evidence should corroborate and support the same
conclusion.
12. Representational Faithfulness - The evidence should faithfully represent the economic
reality of the transactions or balances.
13. Verifiability - The evidence should be verifiable by other auditors or experts.
14. Neutrality - The evidence should be free from management bias or influence.
PROCEDURES OF COLLECTING AUDIT EVIDENCE
There are several ways and procedures that auditors can use to collect audit evidence. Here
are some of the common methods:

1. Inspection: Physical examination of assets, such as inventory, fixed assets, or records and
documents. Review of written evidence, such as contracts, invoices, or bank statements.
2. Observation: Watching the client's processes and procedures being performed, such as
inventory counts or controls. Observe the work environment and the client's operations.
3. Inquiry and Confirmation: Obtaining written or oral information from the client or third
parties, such as vendor confirmations or customer inquiries. Confirming account balances or
transactions with external parties.
4. Recalculation: Checking the mathematical accuracy of documents or records, such as the

calculation of depreciation or interest. Re-perform client calculations to verify the accuracy
of the underlying data.
5. Analytical Procedures: Analysing financial data or ratios to identify unusual trends or

relationships. Compare current-year information with prior-year data or industry benchmarks.
6. Sampling: Selecting a representative sample of transactions or account balances for

testing. Apply various sampling techniques, such as statistical or judgmental sampling.
7. Substantive Tests of Transactions: Tracing selected transactions from the accounting

records to the underlying supporting documentation. Verifying that transactions are properly
authorized, recorded, and classified.
8. Substantive Tests of Balances: Directly testing account balances, such as verifying the
existence and condition of inventory or the valuation of fixed assets. Reconciling account
balances to supporting documentation.
9. Walkthroughs: Following a transaction or process from the initiation to the final

recording in the accounting system. Identifying control weaknesses or areas for further
testing.
10. Enquiry of Management and Those Charged with Governance: Obtaining written or
oral information from management and those responsible for governance. Gaining an
understanding of the client's operations, internal controls, and accounting policies.
The choice of evidence collection methods depends on the specific audit objectives, the
assessed risks, and the auditor's professional judgment. Auditors often use a combination of
these procedures to gather sufficient and appropriate audit evidence.
SOURCES OF AUDIT EVIDENCE
1. Self-generated audit evidence

2. Internally generated audit evidence
3. Externally generated audit evidence
SELF-GENERATED AUDIT EVIDENCE

In the context of auditing, self-generated audit evidence refers to the information and
documentation that the auditor creates or develops during the course of the audit engagement.
This type of evidence is generated by the auditor's own work and is distinct from the
evidence that is obtained from the client or external sources.
Some examples of self-generated audit evidence include:
1. Audit documentation:
2. Audit tests and procedures:
3. Auditor's own observations and assessments:
4. Audit conclusions and judgments:
Self-generated audit evidence is crucial because it:
 Provides a documented record of the audit work performed and the evidence gathered.
 Supports the auditor's conclusions and the audit opinion.
 Demonstrates the auditor's adherence to professional standards and audit
methodologies.
 Allows for the review and supervision of the audit work by more experienced audit
team members or the audit firm's quality control processes.
INTERNALLY GENERATED AUDIT EVIDENCE
Internally generated audit evidence refers to the information and documentation that is
created by the client organization, as opposed to evidence that is obtained from external
sources or generated by the auditors themselves.
SOME EXAMPLES OF INTERNALLY GENERATED AUDIT EVIDENCE

INCLUDE:
1. Accounting records and financial statements: Ledgers, journals, invoices, contracts, and
other source documents. The client's financial statements, including the balance sheet,
income statement, and cash flow statement.
2. Internal policies, procedures, and reports: The client's accounting policies, internal
control procedures, organizational charts, and job descriptions. Internal management reports,
budgets, forecasts, and other operational documents.
3. Other internal documentation: Internal memos, emails, and correspondence related to

various business activities. Board meeting minutes, committee reports, and other governance-
related documents. Employee records, such as payroll information and personnel files.
ADVANTAGES OF INTERNALLY GENERATED EVIDENCE
The key advantages of internally generated audit evidence include:
1. Availability and accessibility: The client organization is the primary source of many of
the documents and records needed for the audit.

2. Familiarity: The auditor is likely more familiar with the client's internal records and
reporting processes, which can facilitate the evaluation and interpretation of the evidence.
3. Timeliness: Internally generated evidence is often more current and up-to-date compared
to external sources.
FACTORS TO CONSIDER WHEN ASSESSING THE RELIABILITY AND RELEVANCE

OF INTERNALLY GENERATED EVIDENCE
However, the auditor needs to exercise professional scepticism when evaluating internally
generated audit evidence, as it may be susceptible to bias or manipulation by the client. The
auditor should consider the following factors when assessing the reliability and
relevance of internally generated evidence:
1. The design and implementation of the client's internal controls over the record-
keeping and reporting processes.
2. The qualifications, experience, and independence of the personnel responsible for
generating the evidence.
3. The consistency and accuracy of the information compared to other sources of
evidence.
4. The timeliness and completeness of the records and reports.
To corroborate and validate the internally generated evidence, the auditor may also
seek external confirmation or perform additional procedures, such as analytical
reviews, physical inspections, or independent third-party verifications.
The appropriate use and evaluation of internally generated audit evidence is crucial in
forming a comprehensive and reliable audit opinion.
EXTERNALLY GENERATED AUDIT EVIDENCE
Externally generated audit evidence refers to information and documentation that is obtained
from sources outside the client organization, rather than from the client's internal records or
processes.
SOME EXAMPLES OF EXTERNALLY GENERATED AUDIT EVIDENCE

INCLUDE:
1. Confirmations: Written or electronic confirmations from third parties, such as customers,

suppliers, or banks, to verify account balances, transactions, or other information.
2. Expert reports: Evaluations, opinions, or assessments provided by independent experts,

such as legal counsel, actuaries, or appraisers.
3. Public information: Data and reports from government agencies, industry associations, or
other external sources, such as market research, economic reports, or regulatory filings.

4. Direct observations: Observations and inspections made by the auditor outside the client's
premises, such as physical inventory counts at a warehouse or site visits to major customers
or suppliers.
BENEFITS OF EXTERNALLY GENERATED AUDIT EVIDENCE
The key benefits of externally generated audit evidence include:
1. Independence and objectivity: External sources are independent of the client, reducing
the risk of bias or manipulation.
2. Specialized expertise: Expert reports and public information can provide specialized
knowledge and insights that the auditor may not have.
3. Corroborative value: Externally generated evidence can be used to corroborate and

validate internally generated evidence, enhancing the overall reliability of the audit evidence.
The auditor needs to consider the reliability and relevance of externally generated
evidence, as it may be subject to its own limitations or biases. The auditor should
evaluate factors such as:
 The competence, independence, and objectivity of the external source.

 The timeliness and completeness of the information provided.
 The consistency and alignment of the external evidence with other audit evidence.
 The auditor's own understanding of the client's business and industry.
To ensure the appropriateness and reliability of externally generated audit evidence, the
auditor may need to perform additional procedures, such as:
 Evaluating the qualifications and independence of the expert or source.

 Verifying the accuracy and completeness of the information provided.
 Comparing the external evidence to other sources or the auditor's own observations
and assessments.
The appropriate use and evaluation of externally generated audit evidence is crucial in
forming a comprehensive and reliable audit opinion, as it can provide valuable corroborative
or supplementary information to the audit.
AUDIT SAMPLING
What is Sampling?
Sampling is defined as a procedure to select a sample from individual or from a large group
of population for certain kind of research purpose.
Audit sampling is a statistical technique used in auditing to obtain and evaluate audit
evidence about specific account balances or classes of transactions within a financial
statement.

The auditor must first clearly define the audit population, which is the entire set of data from
which the sample will be drawn. This could be an entire account balance, a class of
transactions, or some other defined set of items. The auditor must also establish the audit
objective, such as testing the accuracy and completeness of the population.
The terms "sample" and "sampling" have distinct meanings in the context of auditing:
SAMPLE: A sample refers to a subset or portion of the entire audit population that is
selected for examination. The sample is intended to be representative of the overall
population, allowing the auditor to draw conclusions about the entire population based on the
sample results. Samples can be selected using various methods, such as random sampling,
systematic sampling, or haphazard sampling. The size of the sample is an important
consideration, as it affects the precision and reliability of the audit conclusions.
SAMPLING: Sampling refers to the overall process of selecting and examining a sample
from the audit population. Audit sampling is a statistical technique used by auditors to obtain
and evaluate audit evidence.
The sampling process involves defining the audit objective, selecting the sample, examining
the sample items, and evaluating the results to draw conclusions about the entire population.
Sampling allows auditors to reach conclusions about a population without having to examine
every single item, which would be impractical or impossible in many cases.
Key differences:
 Sample is the subset of items selected for examination, while sampling is the overall
process of selecting and evaluating the sample.
 Sample is the tangible output of the sampling process, while sampling is the
methodological approach used to obtain the sample.
 Sampling is a broader concept that encompasses the entire process of defining the
objective, selecting the sample, and evaluating the results, while a sample is a specific
component within that process.
Advantages and disadvantages of sampling
Advantages
 Saves time and money and gives faster results as the sample size is smaller than the
whole population
 Sampling gives more accurate results as it is performed by trained and experienced
investigators
 When there is large population, sampling is the best way
 Sampling enables to estimate the sampling errors. Hence, it assists in getting
information concerning to some characteristics of the population
 Study of samples requires less space and equipment as they are small in size

 When there is limited resources, sampling is best.
The main disadvantage of the sampling is chances of bias. But, seeing so many of
advantages, sampling is the best way to proceed in a research.
TYPES OF AUDIT SAMPLING
The main types of sampling techniques include:
1. Random Sampling: Items are selected randomly from the population, giving each item an
equal chance of being selected. This method helps ensure the sample is representative of the
overall population. Examples include simple random sampling and systematic random
sampling.
2. Monetary Unit Sampling (MUS): Also known as dollar-unit sampling or variable

sampling. The selection of sample items is based on the relative size of the monetary amounts
in the population. Larger monetary units have a higher probability of being selected. Useful
for testing high-value or high-risk accounts.
3. Attribute Sampling: Used to test for the presence or absence of a specific attribute or
characteristic in the population. The sample size is determined based on the desired precision
and confidence level for the attribute being tested. Examples include occurrence sampling
and discovery sampling.
4. Classical Variables Sampling: Used to estimate a population characteristic, such as the

mean or total value of an account balance. The sample size is determined based on the
desired precision and confidence level for the population parameter. Examples include mean-
per-unit sampling and ratio estimation sampling.
5. Haphazard Sampling: Items are selected without a specific pattern or method, relying on
the auditor's judgment. This approach is less statistically rigorous but can be useful for
preliminary testing or non-statistical samples.
The choice of sampling technique depends on the audit objectives, the characteristics of the
population, and the auditor's professional judgment. Auditors often use a combination of
these techniques to gather sufficient and appropriate audit evidence.
Additionally, auditors must consider factors such as sampling risk, non-sampling risk, and the
reliability of the sampling results when evaluating the overall audit evidence.
RANDOM SAMPLING
Random sampling is a widely used audit sampling technique in which items are selected from
the audit population in a way that gives each item an equal chance of being selected. This
helps ensure the sample is representative of the overall population.
TYPES OF RANDOM SAMPLING USED IN AUDITUNG
There are two main types of random sampling used in auditing:

1. Simple Random Sampling: Each item in the population has an equal probability of being
selected. The auditor uses a random number generator or random number table to select the
sample items.
This method is straightforward and easy to implement, but may not be appropriate for
populations with widely varying item values or risks.
2. Systematic Sampling: The population is arranged in a particular order, and items are
selected at regular intervals. For example, the auditor might select every 100th item from a
sorted list of invoices.
Systematic sampling is easy to implement and can provide a representative sample, but the
ordering of the population must be random to avoid biases.
Advantages of Random Sampling in Auditing:
1. Provides an unbiased sample that is representative of the entire population.

2. Allows the auditor to draw conclusions about the population based on the sample
results.
3. Enables the use of statistical techniques to calculate precision and reliability of the
sample.
4. Helps the auditor avoid the risk of consciously or unconsciously selecting a biased
sample.
Limitations of Random Sampling in Auditing:
 May not be appropriate for populations with widely varying item values or risks.
 Requires a complete and accurate listing of the population to ensure all items have an
equal chance of selection.
 Does not guarantee that the sample will be representative of the population, especially
for small sample sizes.
Auditors often use random sampling in conjunction with other sampling techniques, such as
monetary unit sampling or attribute sampling, to obtain a comprehensive view of the audit
population and support their conclusions.
NON-RANDOM SAMPLING
In addition to random sampling, auditors also use non-random sampling techniques in certain
situations. The main types of non-random sampling used in auditing include:
1. Judgmental (Haphazard) Sampling: The auditor selects sample items based on their
professional judgment and experience, without using a specific statistical method. Items are
selected in a non-systematic way, such as selecting every 10th item or selecting items that
appear unusual or high-risk. This approach is less statistically rigorous but can be useful for
preliminary testing or obtaining a general understanding of the population.

2. Monetary Unit Sampling (MUS): Also known as Dollar-Unit Sampling or Variables
Sampling. The probability of an item being selected is proportional to its monetary value.
Larger monetary amounts have a higher chance of being selected, which is useful for testing
high-value or high-risk accounts. The sample size is determined based on the desired
precision and confidence level for the population's total value.
3. Attribute Sampling: Used to test for the presence or absence of a specific attribute or
characteristic in the population. The sample size is determined based on the desired precision
and confidence level for the attribute being tested. Examples include occurrence sampling
(testing for the presence of a control procedure) and discovery sampling (testing for the
likelihood of discovering at least one item with a specific attribute).
4. Stratified Sampling: The population is divided into homogeneous subgroups (strata)

based on certain characteristics, such as account balance, transaction volume, or risk level. A
sample is then selected from each stratum using random sampling or other methods. This
approach can improve the precision of the sample estimates and provide more detailed
insights into the population.
Non-random sampling techniques are often used in conjunction with random sampling to
address specific audit objectives or to focus on high-risk or high-value areas of the
population. The choice of sampling method depends on the auditor's professional judgment,
the characteristics of the audit population, and the specific audit objectives.
It's important to note that while non-random sampling can be useful, it generally has a higher
risk of sampling bias and may not allow for the same level of statistical inference as random
sampling.
DETERMINATION OF AUDIT SAMPLING TECHNIQUES
The determination of which audit sampling technique to use is a critical decision that auditors
must make based on the specific objectives and characteristics of the audit engagement.
FACTORS TO CONSIDER WHEN SELECTING AN AUDIT SAMPLING
Here are the key factors that auditors consider when selecting the appropriate audit
sampling technique:
1. Audit Objectives: The purpose of the audit sampling, such as testing controls,
substantiating account balances, or detecting fraud. The desired level of assurance or
precision required to support the audit conclusions.
2. Characteristics of the Audit Population: The size, homogeneity, and variability of the
population. The distribution of values or attributes within the population. The presence of
high-risk or high-value items in the population.
3. Auditor's Professional Judgment: The auditor's experience and familiarity with the client
and industry. The auditor's assessment of risks and materiality in the engagement. The
auditor's ability to effectively implement and evaluate the selected sampling technique.
Based on these factors, auditors may choose from the various sampling techniques, such
as:
1. Random Sampling (simple random, systematic, stratified) for representative samples

2. Monetary Unit Sampling (MUS) for high-value or high-risk accounts
3. Attribute Sampling for testing the presence or absence of specific attributes
4. Classical Variables Sampling for estimating population characteristics
Auditors often use a combination of sampling techniques to address different audit objectives
and obtain a comprehensive understanding of the audit population. For example, they may
use random sampling for general testing and MUS for high-risk accounts.
The determination of the appropriate sample size is also a critical consideration, as it

affects the precision and reliability of the audit conclusions. Auditors use statistical
formulas or judgment-based approaches to calculate the optimal sample size based on
the desired level of assurance and the characteristics of the population.
Ultimately, the selection of audit sampling techniques is a matter of professional judgment,

taking into account the specific circumstances of the audit engagement and the auditor's
assessment of the risks and materiality involved.
STATUTORY AUDIT AND REGULATIONS
Statutory audits are audits that are required by law or regulation, as opposed to voluntary
audits initiated by the organization itself. The requirements and regulations surrounding
statutory audits vary by country and industry, but here are some common aspects:
1. Legal and Regulatory Framework: Statutory audits are mandated by laws, regulations,
or industry-specific requirements. Examples include the Audit service Act 2014 in Sierra
Leone, the Companies Act in the Sierra Leone, and the Corporations Act.
These laws and regulations define the types of entities that must undergo statutory audits, the
frequency of such audits, and the reporting requirements.
2. Appointed Auditors: Statutory audits must be conducted by qualified and independent

auditors, often registered or licensed by a professional accounting body. The appointment of
the auditor may be subject to specific requirements, such as shareholder approval or
regulatory oversight.
3. Audit Scope and Objectives: Statutory audits typically have a defined scope, which may
include auditing the financial statements, internal controls, compliance with laws and
regulations, or other aspects of the organization's operations.
The objectives of the statutory audit are often specified in the relevant laws and regulations,
such as ensuring the fair presentation of the financial statements or assessing the
effectiveness of the organization's internal control system.

4. Reporting Requirements: Statutory auditors are required to prepare and submit a formal
audit report, which is often made available to the public or specific stakeholders, such as
regulatory bodies or shareholders. The audit report must comply with the reporting standards
and format prescribed by the relevant laws and regulations.
In some cases, the auditor may be required to report on specific matters, such as the
organization's ability to continue as a going concern or the identification of any material
weaknesses in internal controls.
5. Enforcement and Penalties: Failure to comply with statutory audit requirements or the
provision of false or misleading information in the audit report can result in various penalties,
such as fines, legal action, or the revocation of the organization's license or registration.
Auditors themselves may also face disciplinary actions, including the suspension or
revocation of their professional licenses, for violations of audit standards or ethical
guidelines.
Statutory audits are an essential part of the regulatory framework that aims to ensure
transparency, accountability, and the protection of stakeholders' interests. Auditors
must be well-versed in the relevant laws and regulations governing statutory audits
within their jurisdiction and industry to ensure compliance and effectively carry out
their professional responsibilities.
HOW AUDITORS ARE REGULATED
Auditors are subject to a multi-layered regulatory framework that aims to ensure the quality,
independence, and accountability of the audit profession.
Here are the key ways in which auditors are regulated:
1. Professional Accounting Bodies: Auditors are typically required to be members of

professional accounting bodies, such as the Institute of chartered accountants in Sierra Leone
(ICASL).
These professional bodies establish ethical standards, codes of conduct, and continuing
professional development requirements for their members. They also have the power to
investigate and discipline members for violations of professional standards or ethical
breaches.
2. Regulatory Oversight: Auditors of public companies, or certain other entities, may be

subject to additional regulatory oversight by government agencies or independent regulatory
bodies.
For example, in Sierra Leone, ICASL is responsible for the oversight and inspection of
auditors of public companies. These regulatory bodies set audit standards, conduct
inspections of audit firms, and can impose sanctions or penalties for non-compliance.

3. Licensing and Registration: In many jurisdictions, auditors must be licensed or registered
with the appropriate regulatory authorities to perform statutory audits. The licensing process
typically involves meeting educational, experience, and examination requirements to
demonstrate competence and professional qualifications.
Auditors may be required to renew their licenses periodically and may face disciplinary
actions, such as the suspension or revocation of their licenses, for violations of professional
standards or ethical conduct.
4. Quality Control and Peer Review: Audit firms are required to establish and maintain
robust quality control systems to ensure the consistency and reliability of their audit work.
Audit firms may be subject to periodic peer reviews, where their quality control systems and
audit engagements are evaluated by other independent auditors.
The results of these peer reviews can be used by regulatory bodies or professional
associations to assess the firm's compliance with professional standards and take appropriate
actions.
5. Auditor Independence: Regulations often impose specific requirements and restrictions

to maintain the independence of auditors, such as: Prohibition of certain non-audit services
that could impair the auditor's objectivity, Mandatory rotation of audit firms or lead
engagement partners and disclosure of any potential conflicts of interest or threats to
independence
This multi-layered regulatory framework helps to ensure the integrity, competence, and
independence of the audit profession, thereby enhancing the reliability and credibility of
financial reporting and the overall functioning of the capital markets.
RIGHT OF AUDITORS
Auditors have certain rights and protections that are essential for them to effectively carry out
their duties and responsibilities. Here are some of the key rights of auditors:
1. Access to Information and Records:
 Auditors have the right to access all relevant information, documents, and records
necessary for the audit, regardless of their physical or electronic form.
 This includes the right to obtain information from the organization's management,
employees, and third-party service providers.
 Failure to provide access to information can be a violation of the law and may result
in penalties for the organization.
2. Right to Obtain Explanations and Representations:
 Auditors have the right to obtain written and oral explanations from the organization's
management and employees regarding the information and records provided.
 Auditors may also request formal written representations from management, such as
confirming specific assertions or disclosures in the financial statements.
3. Right to Communicate with Those Charged with Governance:
 Auditors have the right to communicate directly with the organization's board of
directors, audit committee, or other individuals responsible for the oversight of the
financial reporting process.
 This allows auditors to discuss matters related to the audit, such as significant
findings, internal control deficiencies, or any concerns about the integrity of the
financial reporting.
4. Protection from Obstruction or Intimidation:
 Auditors are protected by law from any form of obstruction, intimidation, or

interference in the performance of their duties.
 This includes prohibitions against the destruction or alteration of records, the
provision of false or misleading information, or attempts to hinder the auditor's access
to information or personnel.
 Violations of these protections can result in legal consequences for the organization
and its management.
5. Confidentiality and Professional Privileges:
 Auditors have a duty to maintain the confidentiality of the information they obtain
during the audit, subject to certain exceptions (e.g., reporting to regulatory
authorities).
 In some cases, auditors may be protected by legal professional privileges, which can
limit their ability to disclose certain information without the client's consent.
6. Professional Indemnity and Liability Insurance:
 Audit firms are often required to maintain professional indemnity or liability

insurance to cover any claims or liabilities that may arise from their audit work.
 This provides a measure of protection for auditors against potential legal actions or
financial losses resulting from the performance of their duties.
These rights and protections are essential for auditors to maintain their independence,
objectivity, and ability to perform their duties effectively, which in turn supports the
reliability and credibility of the audit process.
RESPONSIBILITIES OF AUDITORS
Auditors have a range of responsibilities when conducting an audit, which can be broadly
categorized as follows:
1. Compliance with Professional Standards and Regulations:

 Auditors are responsible for conducting the audit in accordance with applicable
professional standards, such as the International Standards on Auditing (ISAs) or the
Generally Accepted Auditing Standards (GAAS) in the United States.
 They must also comply with relevant laws, regulations, and ethical requirements that
govern the audit profession.
2. Risk Assessment and Audit Planning: Auditors are responsible for understanding the
entity, its environment, and the applicable internal control systems. They must assess the
risks of material misstatement in the financial statements, either due to fraud or error, and
develop an appropriate audit plan to address those risks.
3. Gathering Audit Evidence: Auditors are responsible for obtaining sufficient and
appropriate audit evidence to support their conclusions and opinions. This may involve
performing various audit procedures, such as inspections, observations, inquiries,
confirmations, recalculations, and analytical procedures.
4. Evaluation and Conclusions: Auditors are responsible for evaluating the audit evidence
obtained and drawing conclusions about the fair presentation of the financial statements and
the effectiveness of the entity's internal controls. They must also consider the potential impact
of any identified misstatements or control deficiencies on the audit opinion.
5. Reporting and Communication: Auditors are responsible for preparing and issuing a
formal audit report that communicates their findings, conclusions, and opinions to the entity's
management, those charged with governance, and other relevant stakeholders.
They may also be responsible for communicating significant matters, such as material
weaknesses in internal controls or suspected fraud, to the appropriate parties.
6. Professional Skepticism and Objectivity: Auditors are responsible for maintaining an

attitude of professional skepticism throughout the audit, which involves a questioning mind
and a critical assessment of audit evidence. They must also remain objective and
independent, avoiding any conflicts of interest or undue influence that could compromise the
integrity of the audit.
7. Continuous Professional Development: Auditors are responsible for maintaining and

enhancing their knowledge, skills, and competencies through ongoing professional
development activities, such as training, continuing education, and staying up-to-date with
changes in the regulatory and accounting environment.
By fulfilling these responsibilities, auditors play a crucial role in enhancing the reliability and
credibility of financial reporting, which is essential for the effective functioning of capital
markets and the protection of stakeholder interests.
REMOVAL OF AUDITORS

The removal of auditors is a serious matter that is typically subject to specific legal and
regulatory requirements. Here are the key considerations regarding the removal of
auditors:
1. Statutory and Regulatory Provisions: The laws and regulations governing the audit
profession in a given jurisdiction will often specify the conditions and procedures for the
removal of auditors. For example, in many countries, the removal of the auditor of a public
company may require the approval of the shareholders or the relevant regulatory authority.
2. Reasons for Removal: Auditors may be removed for various reasons, including:
1. Failure to perform their duties in accordance with professional standards and ethical
requirements
2. Conflict of interest or lack of independence
3. Misconduct or breach of duty
4. Disagreement over accounting treatments or financial reporting
5. Lack of competence or expertise
6. Organizational changes or restructuring that necessitate a change in auditors
3. Removal Process: The process for removing an auditor typically involves the following
steps:
1. Notification of the auditor about the proposed removal and the reasons for it
2. Provision of an opportunity for the auditor to respond and defend their position
3. Approval or ratification of the removal by the appropriate governing body, such as the
shareholders or the board of directors
4. Notification of the relevant regulatory authorities, if required
4. Consequences of Removal: The removal of an auditor may have several consequences,

such as:
 Requirement to appoint a new auditor and potentially conduct a new audit

 Potential legal or regulatory actions against the organization or the former auditor
 Impact on the organization's reputation and stakeholder confidence
 Potential claims or liabilities arising from the change in auditors
5. Auditor Safeguards: Auditors are typically afforded certain safeguards to protect their
independence and prevent undue removal, such as:
 Provisions for the auditor to be notified and heard before removal

 Requirements for the auditor's consent or approval for their removal, in certain
circumstances
 Protections against retaliatory actions or unjustified removal
The removal of auditors is a complex and sensitive process that must be handled in
accordance with the relevant laws, regulations, and professional standards to ensure the
integrity and continuity of the audit function.

Statistical Method in Professional Auditing

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Statistical Method in Professional Auditing

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DEFINITIONS OF AUDITING

The International Auditing Practices Committee defines Auditing as “The independent

Auditing and Assurance Standard (AAS1) by ICAI: “Auditing is the independent

a. Audit is a systematic and scientific examination of the books of accounts of a business;

The main differences between audit and auditing are:

3. Objective: The primary objective of an audit is to provide an independent opinion on the

PRIMARY OBJECTIVES / BASIC OBJECTIVES

a) Balance sheet shows true and fair view of the concern,

SECONDARY OBJECTIVES / INCIDENTAL OBJECTIVES

PREPARED BY OSMAN BARRIE B.Sc. HONS. ACCOUNTING AND FINANCE-2024 2

THE IMPORTANCE OF AUDITING

The importance of auditing can be summarized as follows:

1. Enhancing Financial Reporting Reliability: Audits provide an independent and

2. Improving Internal Controls: Audits assess the effectiveness and efficiency of an

3. Ensuring Compliance: Audits verify an organization's compliance with relevant laws,

5. Providing Assurance to Stakeholders: Audited financial statements and reports give

6. Supporting Decision-Making: Audit findings and recommendations provide valuable

7. Enhancing Corporate Governance: Audits contribute to effective corporate governance

PREPARED BY OSMAN BARRIE B.Sc. HONS. ACCOUNTING AND FINANCE-2024 3

The advantages of Audit are as follow:

TRUE AND FAIR VIEW.

PREPARED BY OSMAN BARRIE B.Sc. HONS. ACCOUNTING AND FINANCE-2024 4

TYPES OF AUDITING THEORIES

6. Theory of communicative action: This theory views auditing as a form of communication

PREPARED BY OSMAN BARRIE B.Sc. HONS. ACCOUNTING AND FINANCE-2024 5

There are four main concepts in auditing:

Definition of Credibility: Credibility in auditing refers to the trustworthiness, reliability, and

Importance of Credibility concept: Credibility is essential in auditing because it ensures

FACTORS AFFECTING CREDIBILITY:

 Independence and objectivity of the auditor

 Maintaining independence and objectivity throughout the audit

Consequences of Lack of Credibility:

PREPARED BY OSMAN BARRIE B.Sc. HONS. ACCOUNTING AND FINANCE-2024 6

DEFINITION OF PROCESS CONCEPT:

ELEMENTS OF THE AUDIT PROCESS:

The audit process typically includes the following key elements:

IMPORTANCE OF THE PROCESS CONCEPT:

The process concept is crucial in auditing for several reasons:

APPLICATION OF THE PROCESS CONCEPT:

 Engagement acceptance and planning

PREPARED BY OSMAN BARRIE B.Sc. HONS. ACCOUNTING AND FINANCE-2024 7

 Reviewing and updating audit methodologies and techniques

DEFINITION OF THE PERFORMANCE CONCEPT:

The performance concept in auditing refers to the evaluation of an entity's or organization's

ELEMENTS OF THE PERFORMANCE CONCEPT:

IMPORTANCE OF THE PERFORMANCE CONCEPT

The performance concept is crucial in auditing for several reasons:

1. It provides a comprehensive evaluation of an entity's or organization's operations and

Application of the Performance Concept:

The performance concept is typically applied in the following types of audits:

PREPARED BY OSMAN BARRIE B.Sc. HONS. ACCOUNTING AND FINANCE-2024 8

DEFINITION OF THE COMMUNICATION CONCEPT:

IMPORTANCE OF COMMUNICATION IN AUDITING

Effective communication is crucial in auditing for several reasons:

Elements of the Communication Concept:

The communication concept in auditing includes the following key elements:

1. Verbal communication: Includes discussions, meetings, and interviews between the

PREPARED BY OSMAN BARRIE B.Sc. HONS. ACCOUNTING AND FINANCE-2024 9