ACCA Strategic Professional · Advanced Audit and Assurance (International) · Audit procedures and obtaining evidence
Kestrel Components Co has monthly payroll costs that have been stable for years, with a headcount that is tracked closely and a fixed annual pay award. The auditor plans a substantive analytical procedure on total payroll expense. Which factor would most increase the reliability of the expectation developed?
Reliability of the expectation is increased by using data from an independent source that has been tested, such as headcount and pay rates. ISA 520 requires evaluation of data reliability. Using the draft figure being tested is circular, and thresholds should be below materiality.
- AUsing data for payroll costs from a prior year that was unaudited
- BUsing the entity's draft payroll expense figure as the basis for the expectation
- CUsing headcount records and pay rates that were obtained from an independent source and tested for reliabilityCorrect
- DUsing a threshold for investigation that is set at overall materiality for the financial statements
Explanation
ISA 520 requires the auditor to evaluate the reliability of data used, considering source, comparability, nature, relevance and controls over preparation. Independent, tested headcount and rate data give a reliable expectation. Using the draft figure itself is circular, and a threshold at overall materiality would be too coarse.
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