Md Moniruzzaman A 514: Essay 1: Audit sampling under AICPA, PCAOB and IAASB

Introduction: My selected topic for this essay is Audit sampling, the scientific procedure of

drawing sample from a population in fulfilling the objective of auditing. Audit sampling is defined

as “The selection and evaluation of less than 100 percent of the population of audit relevance

such that the auditor expects the items selected (the sample) to be representative of the

population and, thus, likely to provide a reasonable basis for conclusions about the population.”1

Discussion and comparison of audit sampling procedures will be carried out in this essay among

audit sampling standards set by American Institute of Certified Public Accountants (AICPA), Public

Company Accounting Oversight Board (PCAOB) and International Auditing and Assurance

Standards Board (IAASB). AU-C 530 is the sampling standard set by AICPA , where AU 350 is by

PCAOB and ISA 530 is by IAASB.

Statements on Auditing Standard AU-C Section 530 by AICPA - Audit Sampling: AU-C Section

530 details the issues of sampling starting from designing the audit sample to evaluating the

results from the sample. AU-C 530 as per SAS No. 122 superseded the earlier AU 350 and has

been effective since December 15, 2012.

This standard starts with the definitions of relevant terms i.e. nonsampling risk, sampling risk,

tolerable misstatement, tolerable rate of deviation etc. Then it describes the issues auditors

should consider while designing and drawing a sample from a population like being careful so

that the sample is representative of the population and how to apply audit procedure to get the

best result from that sample. As per this section, the auditors should determine the tolerable

limits at the first place and compare the actual outcome. If there is any deviation, the auditors

will find out the reasons behind this deviation.

Section 530 says that there are two ways of audit sampling: one is statistical sampling and the

other is nonstatistical sampling. The method to be followed is totally based on the judgment of

the auditor based on the specific situation she is in. She may choose both of the methods if she

wants, but this is not required.2 The size of the sample depends on the sample risk the auditor is

willing to accept. Sampling risk is the risk that the sample might not be representative to the

population. If the auditor wants to accept lower risk, then the sample size will be higher and vice

versa.

The standard also defines when to perform test of details and when to perform test of control

based on the expected rate of deviation. In case of low expected rate of deviation is unacceptably

high, the auditor will normally decide to perform tests of controls and in case of high expected

rate, and test of details is performed.3 As sometimes audit procedures might not be possible to

carry out as planned, this standard also shows the ways what other alternative procedures to

1 Paragraph .05, AU-C Section 530: Audit Sampling, AICPA 2 Paragraph .A 14, AU-C Section 530: Audit Sampling, AICPA 3 Paragraph .A 10, AU-C Section 530: Audit Sampling, AICPA

Md Moniruzzaman A 514: Essay 1: Audit sampling under AICPA, PCAOB and IAASB

follow in these cases to get sufficient appropriate audit evidence and illustrates the case of

suitable alternative procedure for an accounts receivable positive confirmation request.4

This standard is concluded by describing the evaluation procedure of audit sampling.

PCAOB Interim Standards AU 350: PCAOB has not yet fully adopted any standard for audit

sampling. But, it has adopted AICPA AU 350 as an interim standard on April 2003.5 It is the earlier

version of AICPA SAS AU 350 that is later superseded by AU-C 530. However, PCAOB has edited

some places of that AU 350 of AICPA: some deletions and some additions. Those edition were

made by PCAOB Release No. 2010-004. The standards starts with the cases of where audit

sampling are applicable. By PCAOB Release No. 2010-004, PCAOB has inserted the ways of audit

sampling: statistical and nonstatistical from similarly of AICPA AU-C 530. Even though earlier

standard considered only the sampling risk, by that PCAOB release, PCAOB included both

uncertainties due to sampling and uncertainties due to factors other than sampling that is

nonsampling risks. This standard says that which method of sampling to be followed depends on

the judgment of auditors like the standard of AICPA. AU 350 describes the sampling in substantive

tests of details and sampling in tests of controls separately in details from the planning phase to

evaluation phase. But, the definition of different terms are same as AICPA AU-C 530. AU 350 has

a separate clause for dual purpose sampling that is designing a sample that will be used for dual

purposes: as a test of control and as a substantive test. 6

This standard also discusses about the benefit of statistical sampling and finally refers to the

method that auditors find better in terms of cost and effectiveness.7

International Standard on Auditing 530: Audit Sampling by IAASB: The scope of ISA 530 starts

after the auditor has decided to use audit-sampling technique for gahering audit evidence.8 Apart

from the definitions like earlier standards discribed above, ISA 530 also defines anomaly as the

ddeviation from the normal or common order.Anomaly occurs when the sample is not

reprasentative of the population. If anomaly is found, then the auditors must have to initiate

aditional audit procedure to be certain to obtain sufficient appropriate audit evidence that the

misstatement or deviation does not affect the remainder of the population.9 ISA 530 also details

about the total sample drawing technique to evaluation of the sample result. It also consists of

apendixes that shows the sampling methods practically. ISO 530 exemplifies the factors

Influencing Sample Size for Tests of Controls and test of details too. In apendix ISO 530 discribes

4 Paragraph .A 19 & .A 20, AU-C Section 530: Audit Sampling, AICPA 5 http://pcaobus.org/Standards/Auditing/Pages/default.aspx 6 Paragraph .44 CU section 350, PCAOB 7 Paragraph .46 CU section 350, PCAOB 8 Paragraph 1, International Standard on Auditing 530, IAASB 9 Paragraph 13, International Standard on Auditing 530, IAASB

Md Moniruzzaman A 514: Essay 1: Audit sampling under AICPA, PCAOB and IAASB

5 types of sampling methods in details. They are random selection, systematic selection,

monetary Unit Sampling, haphazard selection, and block selection. This standards also emphasize

on the judgement of auditos in selecting the method of sampling. This is the only standard that

talks about stratification and value weighted sampling techniques.

ISA 530, Audit Sampling, Compared to Section 530, Audit Sampling and their impact on

audinting: As PCAOB and AICPA sampling standard are alomst same, the focus on comparison

is on AICPA and IAASB formulated sampling standards.

Differences in Language

The definition of audit sampling in paragraph 5 of ISA 530 was revised in AU-C section 530 that

the ISA 530 wording defines audit sampling to require the auditor to select items such that “each

item has a chance of selection”. The definition was revised to:

(a) Focus on conclusions about the population, and

(b) Include the fundamental concept of representativeness.

Paragraph .08 of section 530, which establishes a requirement with respect to the selection of

items in a population, reflects the revised definition of audit sampling. The wording in paragraph

.13 of section 530 was broadened from the wording in paragraph 14 of ISA 530 to better

encompass the related application material.

Requirements in the ISAs Not in GAAS (AICPA):

The requirement in paragraph 13 of ISA 530 that addresses the issue of anomalies is not included

in section 530. Terms used in paragraph 13 of ISA 530, such as “in the extremely rare

circumstances” and “a high degree of certainty” are not used in GAAS . Unlike AU 530, ISA 530

provides specific direction in case the auditor discovers an anomalous deviation or

misstatement, by imposing to obtain a high degree of certainty that such misstatement or

deviation is not representative of the population.10

The deletion from section 530 of the option to consider a misstatement an anomaly will enhance

audit quality because misstatements identified by the auditor during audit sampling will be

treated in the same manner as any other misstatement identified by the auditor and, thus, will

prevent the misuse of anomalies.

Paragraph 14 of ISA 530 requires, for tests of details, the projection of misstatements found in a

sample to the population. The ASB ensures that projection of misstatements is also relevant to

tests of controls and tests of compliance, and accordingly, has broadened the requirement in

10 Paragraph 13, International Standard on Auditing 530, IAASB

Md Moniruzzaman A 514: Essay 1: Audit sampling under AICPA, PCAOB and IAASB

paragraph .14 of section 530 to project the results of audit sampling to also include tests of

controls and tests of compliance.

Other

The appendixes of ISA 530 were not included in section 530.

Conclusion: Even though there are some minor differences between these three standards, the

standards for audit sampling is almost same in all the three cases.