Professional Documents
Culture Documents
OVERVIEW
Objective
To identify and describe audit sampling and other selective testing procedures.
GATHERING
AUDIT EVIDENCE
Selection
ALL ITEMS
(100%)
Basic principles
methods
SPECIFIC ITEMS
Judgmental selection
AUDIT
SAMPLING
Definitions
Application
DESIGN
Basic principle
Sampling plan
Sample size
SELECTION
STATISTICAL
v NONSTATISTICAL
Statistical
Non-statistical
TESTING
Basic principle
Error projection
Evaluation
Basic principle
Common methods
Other methods
Essential procedure
SAMPLE
RESULTS
1901
1.1
Basic principles
1.1.1
Selection methods
1.1.2
Risk considerations
Example 1
Suggest circumstances in which a 100% check of a class of transactions or
account balances check may be necessary.
Solution
1902
Example 2
Suggest reasons why it is unnecessary for an auditor to carry out a complete
check of all the transactions and balances of a business.
Solution
3.1
Judgmental selection
3.1.1
Factors to consider
Knowledge of business
3.1.2
Specific items
3.1.3
Main advantage
3.1.4
Main disadvantage
1903
4.1
Definitions
Audit sampling applying procedures to less than 100% of items . . . such that all
sampling units have a chance of selection . . . in order to form a conclusion concerning
the population.
Error (in Audit sampling) either a control deviations (in tests of control) or a
misstatement (in a substantive procedure).
Anomalous error an error that arises from an isolated event that has not recurred other
than on specifically identifiable occasions and is therefore not representative of errors in
the population.
Population the entire set of data from which the auditor wishes to sample . . . . For
example, all items in an account balance or a class of transactions. A population may be
divided into strata, or sub-populations, with each stratum being examined separately.
Sampling risk arises from the possibility that the auditors conclusion, based on a
sample, may be different from the conclusion that would be reached if the entire
population were subjected to the same audit procedure. Two types:
(a) the risk the audit will conclude that control risk is lower than it actually is (for a test
of control) or that a material error does not exist when in fact it does (for a
substantive test). This type of risk affects audit effectiveness and is more likely to
lead to an inappropriate audit opinion
(b) the risk the auditor will conclude that control risk is higher than it actually is (for a
test of control) or that a material error exists when in fact it does not (for a
substantive test). This type of risk affects audit efficiency as it would usually lead to
additional work to establish that initials conclusions were incorrect.
Non-sampling risk arises from factors that cause the auditor to reach an erroneous
conclusion for any reason not related to the size of the sample. For example, the auditor
might use inappropriate procedures or misinterpret evidence and thus fail to recognize
an error.
Sampling unit the individual items constituting a population, for example credit entries
on bank statements, sales invoices, trade receivable balances, or a monetary unit (e.g.
$1).
Statistical sampling any approach to sampling that has the following characteristics
(a) random selection of a sample; and
(b) use of probability theory to evaluate sample results, including measurement of
sampling risk.
1904
Tolerable error (or deviation rate) the maximum error in the population that the auditor
is willing to accept (and still conclude that the result from the sample has achieved the
audit objective).
For tests of control, precision is the maximum rate of failure of an internal control
that can be accepted in order to place reliance on it (and is therefore likely to be
small).
4.2
Application
Audit sampling can be applied using either non-statistical or statistical sampling
methods (see later in this Session). Stages in the sampling process include:
sample design
sample selection
performing audit procedures (testing)
error evaluation.
DESIGN
5.1
Basic principle
5.2
Sampling plan
In practice a Sampling plan may be drawn up to cover
audit objectives
population and sampling unit (or attribute)
definition of an error (or deviation)
sample size
method(s) of sample selection.
1905
Specific audit
objectives
Note 1
Population and
sampling unit and
use of stratification
Appropriate
and complete
Note 2
Sampling
unit
Note 3
Sample size
Stratification
(into sub-popns)
Note 4
Considerations
Sampling risk
(acceptably
low?)
Tolerable error
(= maximum
error/deviation rate
willing to accept)
Expected error
Notes
5.3
Sample size
1906
Solution
Effect on Sample Size
(1)
(2)
(3)
(4)
(5)
Solution
Effect on Sample Size
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
1907
SELECTION
6.1
Basic principle
Items should be selected in such a way that all sampling units have a chance of selection.
6.2
Systematic (also called interval) selection uses a constant interval between items
selected (with a random start). Value-weighted selection is a method which uses
monetary unit values, rather than the items, as the sampling population.
CAUTION: The sampling units must not be structured in such a way that the sampling
interval corresponds with a pattern in the population.
6.3
Other methods
Block sampling (e.g. all items on a particular page) is not generally appropriate because
populations may be structured so that items in a sequence have similar characteristics
to each other but different characteristics to items elsewhere in the population.
TESTING
7.1
Essential procedure
Audit procedures appropriate to the test objective should be performed on each item
selected.
If an inappropriate item is selected (e.g. a document which has been made void) an
appropriately chosen replacement must be tested instead.
If the planned procedure cannot otherwise be performed (e.g. if a customer does not
reply to a direct confirmation request) a suitable alternative should be performed (e.g.
examination of after-date cash receipts).
1908
SAMPLE RESULTS
8.1
Basic principles
ISOLATED
8.2
Obtain corroborative
evidence of anomalous
error
COMMON FEATURE
Identify sub-population
Error projection
The effect of projected error (on test objective and other audit areas) should be
considered.
Compare:
Tolerable error.
Note that, for tests of control no projection is necessary (i.e. sample error rate represents
population error rate). (See Illustration 2 below.)
1909
Illustration 1
$
800,000
274,330
4,311
40,000 (5% of population)
Population value
800 ,000
= $12,572
= 4,311
274 ,330
Sample value
Conclusion: Trade receivables are not materially overstated (as the potential
error is less than the tolerable error of $40,000).
8.3
Evaluation of results
If projected error plus uncorrected anomalous error exceeds tolerable error, reassess
sampling risk.
8.3.1
Tests of control
extend substantive
procedures.
1910
8.3.2
Substantive procedures
re-evaluate unadjusted
errors.
1
4*
(3)
DN ref.
(13,685)
(17,345)
___
Actual deviations
2
___
Deviation rate:
2
= 0.016
125
If the tolerable error is 1% (say) the sample size could be extended (to at least
200). If no further errors were found the deviation rate would be acceptable.
9.1
Statistical sampling
Involves
probability theory to
1911
2 Main types
9.1.1
ATTRIBUTE SAMPLING
9.1.2
VARIABLES SAMPLING
Example 5
Suggest relative advantages/disadvantages of statistical sampling.
Solution
Advantages
Disadvantages
9.2
Non-statistical sampling
Any approach which does not fulfil ALL the conditions set out above in the definition of
statistical sampling.
Includes not only non-random selection but evaluating errors on a judgement basis.
1912
Example 6
Suggest the relative advantages/disadvantages of non-statistical sampling.
Solution
Advantages
Disadvantages
FOCUS
You should now be able to:
identify and discuss the differences between statistical and non-statistical sampling;
discuss and provide relevant examples of the application of the basic principles of
statistical sampling and other selective testing procedures;
1913
EXAMPLE SOLUTION
Solution 1 Why 100%
When the repetitive nature of a CIS operation makes 100% examination cost-effective
Sample
size
Explanation
(1)
Reliance on
accounting and
internal control
systems (i.e. CR)
Increase
(2)
Tolerable error
Decrease
(3)
Expected error
Increase
(4)
Confidence (i.e.
Risk)
Increase
1914
Factor
(5)
Population
Sample
size
Explanation
Negligible
Sample
size
Explanation
(1)
IR
Increase
(2)
CR
Increase
(3)
Other
substantive
procedures
Decrease
(4)
Confidence
Increase
As for Solution 3
(5)
Tolerable
error
Decrease
As for Solution 3
(6)
Expected error
Increase
As for Solution 3
(7)
Stratification
Decrease
(8)
Population
Negligible
1915
Disadvantages
Expense of implementation
Staff training
Disadvantages
1916