ACCA Applied Skills · Audit and Assurance

Audit procedures: formula sheet

Full chapter guide

Key formulas

Inspection: Examine records, documents or physical assets; Inspection of documents can support occurrence, rights and obligations, or other assertions, depending on the document and its reliability. Physical inspection gives evidence of existence, but not of ownership or valuation.
Observation: Watch a process being performed by others; Limited to the moment of observation. People may behave differently when watched.
Inquiry: Ask informed people inside or outside the entity; Must be corroborated by other evidence. Never enough alone for a significant item.
External confirmation: Direct written reply from a third party to the auditor; The auditor must control the request and the reply. Examples are bank, receivables and legal confirmations.
Recalculation: Auditor rechecks the arithmetic of a record or document; Tests mathematical accuracy, such as depreciation, invoice extensions or payroll totals.
Reperformance: Auditor independently executes a procedure or control; Tests that a control or procedure was done properly, such as redoing a bank reconciliation.
Analytical procedures: Compare, find relationships, investigate unexpected differences; Used in planning, as substantive tests and in the final review.
Reliability of evidence: External > internal; auditor-obtained > entity-provided; original > copy; written > oral; Rules of thumb for reliability, not absolute laws. Controls in the entity also affect reliability.
Components of audit evidence: Appropriate = Relevant + Reliable; Sufficient = Enough quantity; Sufficiency is about quantity. Appropriateness is about quality. Always address both.
Link between risk and quantity: Higher assessed risk of material misstatement → more evidence needed; Better quality evidence reduces the quantity required, but cannot remove the need for enough.
Reliability guide: source: External independent > Internal with strong controls > Internal with weak controls; A general guide only. Always consider the circumstances.
Reliability guide: method: Auditor's direct evidence > Indirect evidence > Enquiry alone; Inspection, observation and reperformance beat oral explanations.
Reliability guide: form: Documentary > Oral; Original > Copy; Photocopies, scans and faxes can be altered, so are less reliable.
Assertions for classes of transactions and events: Occurrence | Completeness | Accuracy | Cutoff | Classification; Apply to income statement items for the period, such as sales, purchases and payroll.
Assertions for account balances at the period end: Existence | Rights and obligations | Completeness | Accuracy, valuation and allocation; Apply to statement of financial position items such as inventory, receivables and payables.
Assertions for presentation and disclosure: Occurrence and rights and obligations | Completeness | Classification and understandability | Accuracy and valuation; Test that items are properly described, grouped and disclosed in line with the reporting framework.
Direction of testing: Existence/occurrence: records → item. Completeness: item → records; This rule applies to existence/occurrence and completeness only. For existence/occurrence (overstatement) test from records to evidence; for completeness (understatement) test from evidence to records. Other assertions, such as accuracy, valuation and cutoff, use recalculation, agreeing to invoices or confirmation.
Typical risk direction: Assets and income: overstatement risk. Liabilities and expenses: understatement risk; This is a starting point. Always consider the scenario, as incentives can reverse it.
Tests of controls: Purpose = operating effectiveness of controls → evidence on control risk; Used when you plan to rely on controls, or when substantive procedures alone are not enough.
Substantive procedures: Substantive procedures = tests of detail + substantive analytical procedures; Directly address the risk of material misstatement in balances, transactions and disclosures.
Link to risk: Higher assessed risk → more extensive, more persuasive substantive evidence; Lower risk with effective controls allows less substantive work, but never none for material items.
Rule of thumb for direction: Completeness → trace from source documents to records; Existence → trace from records to source or physical item; Use this to choose the starting point of a test of detail.
Sampling interval (systematic selection): Sampling interval = Population size ÷ Sample size; Choose a random start within the first interval, then select every nth item. Beware hidden patterns in the population.
Monetary unit sampling interval: Sampling interval = Population value ÷ Sample size; Each ₹/$ unit is a sampling unit, so larger items are more likely to be selected. Good for overstatement testing.
Projected misstatement: Projected misstatement = (Error found ÷ Value of sample) × Population value; Used when errors are found in a sample. Compare the result with tolerable misstatement.
Projection by error rate: Projected errors = (Errors in sample ÷ Sample size) × Population size; Used for tests of controls and item counts.
Factors affecting sample size: Higher tolerable misstatement → smaller sample; higher assessed risk → larger sample; Sample size rises with risk, expected misstatement and population variability. It falls with higher tolerable misstatement. Population size has little effect on sample size unless the population is very small.
Gross profit margin: Gross profit ÷ Revenue × 100; Compare with prior year and industry. A change suggests pricing, cost or cut-off issues, or misstatement.
Operating profit margin: Operating profit ÷ Revenue × 100; Shows whether overheads moved in line with sales.
Receivables days: Trade receivables ÷ Revenue × 365; Rising days may suggest overstated receivables, weak collection or irrecoverable debts.
Payables days: Trade payables ÷ Cost of sales × 365; Falling days may point to understated liabilities; rising days may signal cash-flow stress.
Inventory days: Inventory ÷ Cost of sales × 365; Rising days suggest obsolete or overstated inventory.
Current ratio: Current assets ÷ Current liabilities; Relevant to going concern and liquidity.
Gearing: Debt ÷ Equity (or Debt ÷ (Debt + Equity)); State which version you use. Relevant to going concern and covenants.
Percentage change: (Current year − Prior year) ÷ Prior year × 100; Used to measure trends and compare with the expected movement.
ISA 520 uses: Risk assessment (planning) + Overall review (final) = required; Substantive = optional; Know which stages are mandatory.
ISA 230 documentation test: Documentation is enough if an experienced auditor with no previous connection to the audit can understand it; Covers nature, timing and extent of procedures, results and evidence, and significant matters and judgements.
Ownership: Working papers = property of the audit firm; The client has no automatic right of access. Confidentiality still applies.
File assembly: Final audit file assembled promptly after the report date (not more than 60 days); Assembly is administrative. No new audit evidence or conclusions should be added to it.
Retention: Retention period = longer of firm policy and legal or regulatory requirement; ISA 230 gives no fixed number of years. Do not quote one as an ISA rule.
Specific items to record: Who performed the work, date completed, who reviewed, date of review, items tested and their identifying features; These show accountability and let the work be re-performed.
Audit software: main uses: Extract → Recalculate → Compare → Analyse → Select samples; Mostly substantive procedures on the client's files, such as ageing receivables or finding duplicates.
Test data: purpose: Dummy valid and invalid transactions → client system → compare actual result with expected result; Tests programmed controls such as validation, limits and authorisation. Use both valid and invalid items.
Data analytics: key strength: Whole population tested, exceptions investigated; Can reduce sampling risk, but follow-up of exceptions needs auditor judgement.
Advantage and limitation pairing: Speed and coverage vs cost, set-up and data reliability; Give one point from each side, linked to the scenario.

Quick revision

The main methods of evidence are inspection, observation, external confirmation, recalculation, reperformance, analytical procedures and inquiry.
Sufficiency is about the quantity of evidence. Appropriateness is about its quality, meaning relevance and reliability.
Evidence is generally more reliable when it is from external sources, obtained directly by the auditor and in written or original form.
Inquiry alone is not enough evidence. It must be backed up by other procedures.
Assertions cover classes of transactions, account balances and presentation and disclosure.
Tests of controls check that controls operated effectively. Substantive procedures check for material misstatement in the figures.
Substantive procedures are tests of detail and substantive analytical procedures.
Sampling risk is the risk that the sample leads to a different conclusion from testing the whole population.
Tolerable misstatement is the application of performance materiality to a particular sampling procedure. It may be set at the same level as, or lower than, performance materiality.
Analytical procedures are required at risk assessment and at the overall review stage. They may also be used as substantive procedures.
Working papers should let an experienced auditor with no prior link to the audit understand the work done, the evidence obtained and the conclusions reached.
CAATs include audit software and test data. They can test whole populations, but you still need to check that the data is complete and accurate.

Common mistakes

Writing 'check' or 'review' instead of a named procedure. Fix: Start each point with a precise verb such as inspect, observe, recalculate, reperform or confirm, then name the document.
Confusing recalculation with reperformance. Fix: Recalculation rechecks arithmetic. Reperformance redoes a procedure or control, such as a reconciliation or an authorisation check.
Treating sufficient and appropriate as the same thing. Fix: Sufficient is quantity. Appropriate is quality (relevance and reliability). State both separately.
Saying more evidence can compensate for poor quality. Fix: Quantity depends partly on quality, but weak evidence stays weak. Get better evidence, not just more.
Testing the wrong direction, such as tracing from ledger to delivery notes to prove completeness of sales. Fix: For completeness, start from an independent source (goods despatched notes) and trace to the ledger. For existence or occurrence, start from the ledger and trace to supporting documents.
Listing assertions without linking a procedure to each one. Fix: Always follow the assertion with a specific test and the evidence it will produce.
Describing a control instead of a test of it. Fix: Start with an audit verb: inspect, observe, re-perform, enquire. For example, inspect a sample of invoices for evidence of authorisation.
Writing tests of controls when asked for substantive procedures. Fix: Check the requirement wording. Substantive procedures test balances and transactions, not the system.
Calling any test of selected items 'sampling'. Fix: If items are picked by value or risk, call it selective testing and say the result cannot be projected.
Saying a bigger sample removes all risk. Fix: A bigger sample reduces only sampling risk. Non-sampling risk comes from poor procedures or judgement.

Exam tips

Always link each procedure to an assertion. A procedure listed without a purpose earns fewer marks.
In OT questions, a procedure using only inquiry is rarely the best answer for a significant balance.
In Section C, write one procedure per point, with the action, the document and the purpose.
Learn the recalculation versus reperformance distinction. It is a favourite OT item.
Always say that confirmations are sent and received by the auditor, not the client.
In written answers, always say 'sufficient' and 'appropriate' separately. Markers look for both words.
Qualify reliability statements with 'generally'. An exam scenario often includes an exception, such as a weak-control environment making internal documents less reliable.
In OT questions, read for the assertion being tested before choosing the best evidence.