Nature and Cause of ErrorsNature and Cause of Errors

Nature and Cause of Errors

54 The auditor shall consider the sample results, the nature and cause of any errors identified, and their possible effect on the particular audit objective and on other areas of the audit.

55 When performing tests of controls, the auditor is primarily concerned with obtaining audit evidence that controls operated effectively throughout the period of reliance. This includes obtaining audit evidence about how controls were applied at relevant times during the period under audit, the consistency with which they were applied, and by whom or by what means they were applied. The concept of effectiveness of the operation of controls recognises that some errors in the way controls are applied by the entity may occur. However, when such errors are identified, the auditor ordinarily makes specific enquiries to understand these matters and also considers matters such as:

• the direct effect of identified errors on the financial report; and
• the effectiveness of internal control and their effect on the audit approach when, for example, the errors result from management override of a control.

In these cases, the auditor ordinarily determines whether the tests of controls performed provide an appropriate basis for use as audit evidence, whether additional tests of controls are necessary, or whether the potential risks of misstatement need to be addressed using substantive procedures.

56 In analysing the errors discovered, the auditor may observe that many have a common feature, for example, type of transaction, location, product line or period of time. In such circumstances, the auditor may decide to identify all items in the population that possess the common feature, and extend audit procedures in that stratum. In addition, such errors may be intentional, and may indicate the possibility of fraud.

57 Sometimes, the auditor may be able to establish that an error arises from an isolated event that has not recurred other than on specifically identifiable occasions and is, therefore, not representative of similar errors in the population (an anomalous error). Under paragraph 54, the auditor needs to obtain sufficient appropriate audit evidence by performing further audit procedures to be satisfied that errors which are suspected to be anomalous errors are not representative of the population. One example is an error caused by a computer breakdown that is known to have occurred on only one day during the period. In that case, the auditor ordinarily assesses the effect of the breakdown, for example by examining specific transactions processed on that day, and considers the effect of the cause of the breakdown on audit procedures and conclusions. Another example is an error that is found to be caused by use of an incorrect formula in calculating all inventory values at one particular branch. To establish that this is an anomalous error, the auditor ordinarily ensures the correct formula has been used at other branches.