April 4, 2011

Technical Director

International Auditing and Assurance Standards Board

545 Fifth Avenue, 14th Floor

New York, New York 10017 USA

Submitted electronically at: www.iasb.org

Re: IAASB Consultation Paper –

Proposed IAASB Strategy and Work Program for 2012–2014

The New York State Society of Certified Public Accountants, representing more

than 28,000 CPAs in public practice, industry, government and education, welcomes the

opportunity to comment on the above captioned consultation paper.

The NYSSCPA’s Auditing Standards and International Accounting and Auditing

Committees deliberated the consultation paper and prepared the attached comments. If

you would like additional discussion with us, please contact Jan C. Herringer, Chair of

the Auditing Standards Committee at (212) 885-8133, or Ernest J. Markezin, NYSSCPA

staff, at (212) 719-8303.

Sincerely,

NYSSCPA NYSSCPA Margaret A. Wood

President

Attachment

NEW YORK STATE SOCIETY OF

CERTIFIED PUBLIC ACCOUNTANTS

COMMENTS ON

IAASB CONSULTATION PAPER – PROPOSED IAASB STRATEGY AND

WORK PROGRAM FOR 2012–2014

April 4, 2011

Principal Drafters

Jan C. Herringer

Julian E. Jacoby

Renee Mikalopas-Cassidy

NYSSCPA 2010 – 2011 Board of Directors

Margaret A. Wood,

President

John Barone

Cynthia D. Barry

Mark G. Leeds

Pei-Cen Lin

Richard E. Piluso,

President-elect

S. David Belsky

Ian J. Benjamin

Heather Losi

Anthony J. Maltese

Joseph M. Falbo Jr.,

Secretary/Treasurer

Robert W. Berliner

Anthony Cassella

Barbara A. Marino

David J. Moynihan

Scott M. Adair,

Vice President

Sherry L. DelleBovi

Adrian P. Fitzsimons

Avery E. Neumark

Joel C. Quall

David R. Herman,

Vice President

Stephen E. Franciosa

Jennifer R. George

Robert R. Ritz

Erin Scanlon

Martha A. Jaeckle,

Vice President

Gail M. Kinsella,

Rosemarie A. Giovinazzo-

Barnickel

Mitchell L. Gusler

Robert E. Sohr

George I. Victor

Charles J. Weintraub

Vice President

Joanne S. Barry,

John B. Huttlinger Jr.

Nancy A. Kirby

Jesse J. Wheeler

F. Michael Zovistoski

ex officio J. Michael Kirkland

NYSSCPA 2010 – 2011 Accounting & Auditing Oversight Committee

Rita M. Piazza, Chair Jay H. Goldberg Mark Mycio

Anthony S. Chan Jan C. Herringer Michael A. Pinna

Sharon S. Fierstein Edward P. Ichart William M. Stocker III

Elliot A. Lesser

NYSSCPA 2010 – 2011 Auditing Standards Committee

Jan C. Herringer, Chair J. Roger Donohue Lawrence Nalitt

Kamel Abouchacra John Georger Wayne Nast

Robert Berliner Fred Goldstein Bernard Newman

Roberto Bolanos Menachem Halpert John Parcell

Sharon Campbell Julian Jacoby William Prue

Santo Chiarelli Michael Kayser John Sacco

Steven Connors Elliot Lesser Mark Springer

Robert Cordero Moshe Levitin Stephen Tuffy

Ryan Crowe Ralph Lucarello Robert Waxman

Mark Mycio

NYSSCPA 2010 – 2011 International Accounting and Auditing Committee

William M. Stocker III, Chair Andreas Chrysostomou John McCurdy

Renee Mikalopas-Cassidy,

Vice-Chair

Remi Forgeas

John Galiski

Michael McMurtry

Matthew Redente

Ma. Efleda Almadin James Hadfield Bhoj Raj Rijal

Timothy Andrews Jan Herringer Weiran Song

Gudmundur Atlason Richard Jeffreys Elizabeth Venuti

Sidney Barclais Richard Jones George Victor

Francesco Bellandi Hisham Kader Lynn Wayne

Oliver Binns Steven Kahn Patrick Yaghdjian

Kenneth Bosin Steve Lehrer Eric Yu

Lori Catapano Rosario Manco Yan Zhang

NYSSCPA Staff

Ernest J. Markezin

1

New York State Society of Certified Public Accountants

Comments on

IAASB Consultation Paper –

Proposed IAASB Strategy and Work Program for 2012–2014

The New York State Society of Certified Public Accountants is pleased to submit

the following comments in response to the request by the International Auditing and

Assurance Standards Board (IAASB) for comments on the proposed IAASB Strategy and

Work Program for 2012 - 2014.

Overall Comments

Overall, we support the proposed IAASB strategy and work program for 2012 –

2014 (“proposed strategy and work program”) set out in the consultation paper that

focuses to a large extent on monitoring the effective implementation of the International

Standards on Auditing (ISAs), including assisting small and medium sized practitioners

in this regard, and responding to the needs of the investing community as the accounting

standards become more complex. We believe such monitoring is essential to ensure the

clarified ISAs are clear and understandable by practitioners across multiple jurisdictions.

While we are supportive of the proposed strategy and work program, we have the

following over-arching comments for your consideration, followed by our responses to

the specific questions posed in the consultation paper.

We support the focus of the IAASB proposed strategy and work program to

monitor the implementation of the clarified ISAs, as we believe anecdotal evidence

indicates that smaller firms may require assistance in implementing risk assessments

appropriately. Further, since smaller firms often use the audit methodologies and work

programs developed by third party providers, we encourage the IAASB to monitor not

only the implementation of the clarified ISAs by firms, but also the development of the

audit methodologies by these third party providers to ensure compliance with the clarified

ISAs.

As part of the monitoring process, we believe one area of focus should be to

understand how firms and third party providers have incorporated the application

guidance into their audit methodologies. Our understanding is that the application

guidance is essential to understanding how to apply the requirements. However, we

believe that there is confusion about the authority of such guidance, and how this

guidance is meant to fit into a firm’s audit methodology.

In addition to the areas of focus set out in the consultation paper, we believe that

certain of the clarified ISAs should be revisited to enhance practice in the areas of audit

2

sampling1 and materiality

2 and ensure consistent application. There is a short window of

opportunity for the IAASB to enhance these standards, and we encourage the IAASB to

take advantage of this opportunity, since once the clarified ISAs are adopted into law in

those jurisdictions that require such adoption, any revisions will likely be difficult.

Another area of focus that we believe is critical is the need to work with the

accounting standard setters to ensure the provisions within the accounting standards are

auditable and susceptible to measurement. While additional ISAs or requirements to the

clarified ISAs may not be necessary to address the challenges facing auditors in

addressing the provisions in accounting standards that rely increasingly on estimates and

judgments, we believe additional guidance in the form of application guidance, staff

Q&As, or practice aids is appropriate.

Our responses to the specific questions posed in the consultation paper are set out

below.

Specific Questions Posed to Respondents

(per Guide for Respondents, p. 20 of Consultation Paper)

15. The IAASB invites comments on any aspect of the proposed strategy and

possible actions to implement the proposed strategy and specifically:

Are the IAASB’s three areas of strategic focus noted in paragraphs 7-11

appropriate?

Overall, we agree that the three areas of strategic focus: (1) developing and

revising standards and pronouncements, (2) monitoring and facilitating adoption of those

standards, and (3) responding to concerns about the consistent implementation of the

standards, remain appropriate. In addition, as mentioned earlier, we encourage the

IAASB, as part of its implementation and monitoring process, to more fully communicate

to users that the application guidance included within the clarified ISAs, while not

requirements, are essential to understanding how to apply the requirements.

We have noted that in certain instances, practitioners have not fully considered

the application guidance in the ISAs, in part because of a misunderstanding of the

importance of the application guidance to the proper application of the ISA requirements.

We note that the International Standard on Quality Control (ISQC) 1, Quality Controls

for Firms that Perform Audits and Reviews of Financial Statements, and Other

Assurance and Related Engagements, paragraph 8, explains the authority of the

application guidance as follows:

1 ISA 530, Audit Sampling

2 ISA 320, Materiality in Planning and Performing an Audit

3

Where necessary, the application and other explanatory material provide

further explanation of the requirements and guidance for carrying them out. In

particular it may:

Explain more precisely what a requirement means or is intended to

cover; and

Include examples of policies and procedures that may be appropriate

in the circumstances

While such guidance does not in itself impose a requirement it is relevant to

the proper application of the requirements. [Emphasis added.]

Additionally, paragraph 19 of ISA 200, Overall Objectives of the Independent

Auditor And the Conduct of an Audit in Accordance with International Standards on

Auditing, states that:

The auditor shall have an understanding of the entire text of an ISA, including

its application and other explanatory material, to understand its objectives and

apply its requirements properly.

To ensure the appropriate consideration of the guidance set out in ISQC 1 and the

ISAs, we recommend developing further communications explaining its importance in

implementing the ISAs.

Does the list of anticipated projects likely to commence in 2012-2014 (Column B)

adequately address issues currently facing the accounting and auditing professions?

Generally, we believe the list of anticipated projects likely to commence in 2012-

2014 (Column B) are appropriate. In addition to these projects, as noted above, we

believe that, in conjunction with the Implementation Monitoring Project, the auditing

standards on audit sampling and materiality should be revisited. Including such projects

would enhance audit quality.

While the concept of statistical sampling has been part of the auditor’s toolkit for

many years (in the United States, the original standard on audit sampling was issued in

1982), statistical sampling has continued to be somewhat of a mystery to many auditors.

We believe that the increased availability of statistical sampling tools, coupled with

additional education about the benefits of statistical sampling in evaluating the

sufficiency of audit evidence and a revised standard that promotes the use of statistical

sampling, would provide the resources necessary to advance its use. The ability of the

auditor to measure the precision of an audit procedure is a significantly better outcome

for the evaluation of the sufficiency of audit evidence and the Board’s objective to

improve audit quality.

On May 29, 2009, the NYSSCPA commented on the AICPA Auditing Standards

Board’s corresponding proposed standard on Audit Sampling. Its content continues to be

4

applicable, and we invite you to review the points made in that letter regarding statistical

sampling and materiality for incorporation into the clarified ISAs. We have attached that

letter as an appendix for your convenience.

Additionally, with respect to materiality, we believe that the discussion in ISA

320, Materiality in Planning and Performing an Audit, is incomplete. While the concept

of materiality as it relates to the evaluation of findings is well developed and understood,

the application of the concept of materiality to planning and scoping is less so. For

example, in certain circumstances, materiality benchmarks determined using performance

measures are not practical when a statistical sampling approach is used to audit

significant assertions.

We believe there should be a better distinction in the ISA between materiality

used for planning (scoping) procedures and materiality used to determine a threshold for

adjustment (evaluation purposes). To illustrate this, if an entity is on the cusp of a debt

covenant, the guidance in the clarified ISA is unclear about how materiality for scoping

purposes would work. Accordingly, we recommend including guidance in the ISA to

explain that the appropriate solution would be to use a normal level of materiality to

scope work and to use zero as an adjustment threshold. In other words, an auditor would

not significantly expand scope to identify misstatements (how much you look for), but

instead propose adjustments for all misstatements found.

Further, when materiality is determined using a benchmark approach that results

in a small value, the resulting planning materiality value (used to determine the extent of

work) is not reasonable. This occurs because materiality needs to contain a factor for

sampling precision (the difference between tolerable error and projected error) at the

financial statement level. This is not discussed in the sampling literature or in ISA 320.

For this reason, we suggest clarifying the difference between accounting materiality (used

in the evaluation of misstatements) and audit materiality (used to plan and scope the

audit) in the ISA.

(i) Do respondents support the IAASB undertaking work in these areas (Column B)

and, if not, the reasons why a particular project(s) would not be supported?

We support the IAASB undertaking work in the areas noted within Column B, in

addition to the projects described above.

(ii) Do respondents believe these projects are consistent with the IAASB’s three

areas of strategic focus?

Yes, we believe the projects are consistent with the three areas of strategic focus.

(iii) How should these anticipated projects be prioritized in light of the current

projects (Column A)?

5

We believe that the more significant projects in Column B, in addition to the

projects described earlier, in order of importance, are as follows:

B.1 Undertake new project(s) to respond to findings of the ISA Implementation

Monitoring project, in consultation with the IAASB CAG – output in the form of

a revised ISA(s), new ISS, IAPS, or other form, as deemed appropriate.

B.4 Through the ISA Implementation Monitoring project and other outreach

activities, take a proactive role in identifying implementation challenges and seek

to develop materials aimed at addressing these challenges, working with NSS,

IFAC member bodies and others.

B.5 Seek feedback from service organizations, service auditors, user entities, user

auditors, and others on their experiences with the implementation of ISAE 3402,

Assurance Reports on Controls at a Service Organization.

We have no particular preference to the prioritization of projects B.2, B.3, or B.6.

(c) With respect to the additional projects (Column C):

Which of the suggestions, if any, should be considered for inclusion on the future

work program, and how should these be prioritized in light of the current projects

(Column A) and anticipated projects likely to commence in 2012-2014 (Column B)?

We believe that the following three projects, listed in order of importance, should

be considered for inclusion on the future work program. Further, we believe that work on

project C.1 should begin as soon as possible due to (1) the importance of banking

institutions to the effective functioning of international markets and (2) the recent

withdrawal of the extant IAPSs. While we acknowledge that such an undertaking by the

IAASB may require the assistance of others such as banking regulators and supervisors,

as well as audit firm experts, we believe such a project is essential.

C.1 In consultation with banking regulators and supervisors, consider undertaking

a project with regard to IAPS 1004, The Relationship between Banking

Supervisors and Banks’ External Auditors, and IAPS 1006, Audits of the

Financial Statements of Banks, for the audit of banks.

C.5 Evaluate whether to develop a new ISAE addressing assurance on corporate

governance statements.

C.4 Evaluate whether to develop a new ISAE addressing assurance on

sustainability reporting.

Whether any particular project(s) in Column C would not be supported and

whether there are additional actions or projects that respondents believe should be

6

addressed, and, if so, how these should be prioritized in relation to the projects

identified in Columns B and C?

In the longer term, the development of additional industry specific guidance

would be helpful in areas such as banking, as mentioned above, ecommerce, and

insurance.

Further, we believe it would be appropriate to monitor developments related to

XBRL Reporting, as it relates to users’ expectations that such data be subject to some

form of auditor reporting.

16. The IAASB intends to devote the majority of its efforts on the projects in

Column A through 2011 and into 2012 and beyond to progress these projects on a

timely basis. If respondents support commencing the majority of the anticipated

projects (Column B), the IAASB currently anticipates it will have resources and

time to commence 3 further new projects, although substantive activity for these

new projects would not be expected to commence before 2013.

Respondents are therefore specifically asked to select the top three projects either

from, or in addition to, the list of suggestions for additional projects (Column C)

that they believe would best meet the IAASB’s public interest mandate. However,

outreach activities, the findings of the ISA Implementation Monitoring project, the

fundamental debates about the role of the auditor, and unforeseen events beyond

the IAASB’s control may require the IAASB to amend its Work Program or

reprioritize its agenda.

In addition to the projects relating to audit sampling and materiality, please also

refer to our response to question 15 (c).

17. The IAASB notes that, depending on the priorities identified by respondents, the

balance of the IAASB’s future time spent on auditing and implementation of the

ISAs as compared to development of new assurance standards may vary

significantly. For this reason, it would also be helpful to understand which one

project (either from Column B, Column C or an additional action not included in

either column) respondents would identify as the IAASB’s top priority, in order for

the IAASB to consider how each of the three areas of strategic focus would be

addressed in the future Work Program.

We believe that the revision of the standards on audit sampling and materiality

should be a top priority of the Board for the reasons set out earlier in our letter.

18. In addition, the IAASB would welcome comments from respondents as to the

following:

(a) What types of publications or further implementation guidance may be of most

use to facilitate the adoption and implementation of the IAASB’s pronouncements?

7

In addition to the matters described in our response to question 15 above, we

believe additional implementation guidance in the form of a staff bulletin or Q&A around

the use of substantive analytical procedures would be helpful to practitioners. We have

noted that some audit methodologies have been developed that place reliance on

substantive procedures to address the risk of material misstatement when such reliance

may not be warranted. While substantive analytical procedures may be efficient and

effective in reducing audit risk at the assertion level to an acceptably low level in certain

situations, we believe that practitioners may be inappropriately applying the guidance in

ISA 520, Analytical Procedures, and placing undue reliance on such procedures.

Accordingly, we encourage the IAASB to include an assessment of the implementation

of this particular standard as part of the monitoring and implementation project (see

project B.1).

(b) What opportunities may exist for the IAASB to partner with others to facilitate

implementation of the clarified ISAs (for example, IFAC member bodies, NSS,

training organizations, and others)?

We have no comments on this matter.

N Y S S C P A

May 29, 2009

Ms. Sherry Hazel

AICPA

1211 Avenue of the Americas

New York, N.Y. 10036-8775

By e-mail: shazel@aicpa.org

Re: Proposed Statement on Auditing Standards, Audit Sampling (Redrafted)

Dear Ms. Hazel:

The New York State Society of Certified Public Accountants, representing 30,000 CPAs

in public practice, industry, government and education, welcomes the opportunity to comment on

the above captioned exposure draft.

The NYSSCPA’s Auditing Standards Committee deliberated the exposure draft and

prepared the attached comments. If you would like additional discussion with us, please contact

Robert N. Waxman, Chair of the Auditing Standards Committee at (212) 755-3400, or Ernest J.

Markezin, NYSSCPA staff, at (212) 719-8303.

Sincerely,

Sharon Sabba Fierstein

President

Attachment

Appendix

NEW YORK STATE SOCIETY OF

CERTIFIED PUBLIC ACCOUNTANTS

COMMENTS ON

PROPOSED STATEMENT ON AUDITING STANDARDS, AUDIT SAMPLING

(REDRAFTED)

May 29, 2009

Principal Drafters

Neal B. Hitzig

Julian E. Jacoby

Paul D. Warner

NYSSCPA 2008 – 2009 Board of Directors

Sharon Sabba Fierstein,

President

Scott M. Adair

Edward L. Arcara

Nancy A. Kirby

J. Michael Kirkland

David J. Moynihan,

President-elect

Cynthia D. Barry

John Barone

Kevin Leifer

Elliot A. Lesser

Richard E. Piluso,

Secretary/Treasurer

Susan M. Barossi

S. David Belsky

David A. Lifson

Anthony J. Maltese

Barbara S. Dwyer,

Vice President

Anthony Cassella

Robert L. Goecks

Mark L. Meinberg

Avery E. Neumark

Joseph M. Falbo Jr.,

Vice President

David R. Herman

Scott Hotalen

Robert A. Pryba, Jr.

Joel C. Quall

Elliot L. Hendler,

Vice President

John B. Huttlinger, Jr.

Martha A. Jaeckle

Ita M. Rahilly

Judith I. Seidman

Margaret A. Wood,

Vice President

Suzanne M. Jensen

Lauren L. Kincaid

Thomas M. VanHatten

Liren Wei

Louis Grumet, ex officio Gail M. Kinsella Charles J. Weintraub

NYSSCPA 2008 – 2009 Accounting & Auditing Oversight Committee

Mitchell J. Mertz, Chair Thomas O. Linder Ira M. Talbi

Michael J. Aroyo Rita M. Piazza George I. Victor

Robert W. Berliner William M. Stocker III Robert N. Waxman

Edward P. Ichart Bruce I. Sussman

NYSSCPA 2008 – 2009 Auditing Standards Committee

Robert N. Waxman, Chair Jan C. Herringer John C. Parcell IV

Gillad C. Avnit Neal B. Hitzig William J. Prue

Robert W. Berliner Anil Kumar Andrew W. Reiss

Karin Blaney Elliot A. Lesser Michael A. Sabatini

Rosanne G. Bowen Moshe S. Levitin John M. Sacco

Sharon M. Campbell Ralph Lucarello Mark Springer

Robert Cordero Michael R. McMurtry Stephen P. Tuffy

Vincent Gaudiuso Mark Mycio Richard T. Van Osten

Fred R. Goldstein Lawrence E. Nalitt Paul D. Warner

John F. Georger, Jr. Wayne Nast Anna Zubets

Menachem M. Halpert Bernard H. Newman

NYSSCPA Staff

Ernest J. Markezin

William R. Lalli

1

New York State Society of Certified Public Accountants

Auditing Standards Committee

Comments on

Proposed Statement on Auditing Standards, Audit Sampling (Redrafted)

The New York State Society of Certified Public Accountants welcomes the opportunity

to comment on the AICPA Auditing Standards Board’s (ASB) Proposed Statement on

Auditing Standards, Audit Sampling, (Redrafted).

General Comments

We support the ASB’s efforts to improve the audit testing procedures undertaken during

an audit and to converge the proposed standards with International Standards on Auditing

(ISAs). However, we believe that the ASB missed an opportunity to strengthen SAS 39,

Audit Sampling. A stated objective of the proposal is to improve the clarity of ASB

standards. Yet, as discussed below, we find that the exposure draft (ED) perpetuates two

of the most serious deficiencies of SAS 39. First, it places “nonstatistical” sampling on an

equal evidentiary footing with statistical sampling despite the fact that the reasons for

doing so have evaporated long ago; second, it permits the auditor to disregard readily

obtainable and statistically valid results from a probability sample by the expedience of

labeling such a sample “nonstatistical.”

The ED does not provide a clear approach to the evaluation of samples by stressing the

relationship of the sample point estimate to risk. The appropriate measurement instrument

for any sample that satisfies the “representativeness” requirement should be a confidence

interval that is universally accepted. Statement on Audit Procedures Number 54, and

Statistical Auditing, by Donald M. Roberts (AICPA, 1978) provide such guidance. The

incorporation of much of the verbiage of ISA 530 in the interest of “convergence” will

result in a document that will contain the technical errors that exist in SAS 39 and the

deletion of significant, relevant items.

This ED does not contain any indication of any results of an audit sample that can

provide a basis for proposing an adjusting journal entry to correct for misstatements. The

orientation of this ED appears to provide a basis for rationalizing or disregarding adverse

sample results.

The conceptual errors in and omissions from the proposed standard, if adopted as written,

could result in practitioners who are inexperienced in statistical theory being exposed to

serious risk of liability when faced by knowledgeable and credible experts in adversarial

proceedings.

2

Further, we believe that it would have been helpful if the AICPA Audit and Accounting

Guide, Audit Sampling, had been published subsequent to the publication of the final

standard so that it would have been derived from the ultimate guidance provided by this

ED.

We suggest that this ED be revised as indicated in our comments.

Requested responses

1. Are the auditor’s objectives appropriate?

The auditor’s objective, as expressed in paragraph 4 of the ED, is appropriate.

2. Are the revisions made to converge the existing standard with ISA No. 530

(Redrafted) appropriate?

The revisions are not appropriate because we believe that ISA No. 530

(Redrafted) is flawed. International convergence should not be an end in itself,

especially if there are problems with the standard toward which convergence is

directed.

3. Are the differences between the proposed SAS and ISA No. 530 (Redrafted)

identified in the exhibit, and other language changes, appropriate?

Where there are differences between the ED and ISA No. 530, they are frequently

inappropriate, as discussed below.

Specific Comments

All ED text is in italics, followed by our comments.

Definitions

Haphazard selection. The approximation of random selection without the use of a

structured selection technique, such as a random number generator. It is the selection of

sampling units without any intentional bias; that is, without any special reason for

including or omitting items from the sample. Haphazard selection does not consist of

selecting sampling units in a careless manner and is implemented in a manner such that

the auditor expects the resulting sample to be representative of the population.

Despite its common usage, “haphazard” is an unfortunate choice of words,

notwithstanding the “careless manner” sentence. A better choice of terms is

“informal.” If substituted for “haphazard,” the use of “informal” would obviate the

need for the last sentence.

3

Population. The entire set of data from which a sample is selected and about which the

auditor wishes to draw conclusions.

This is factually incorrect and, consequently, misleading. The data from which the

sample is selected and the data about which the auditor wishes to draw conclusions

may not be congruent. The latter data is the population; but the former data comprise

the “frame.” Ideally, there should be no difference between the two data sets.

However, this is frequently not the case in practice. In most audit applications, the

frame is a list or file from which the selected items are identified. If there are items in

the population that are not in the frame, the list is incomplete (a failure of a key

transactions or account balance assertion) and the test yields invalid results. If, there

are items in the frame that do not belong to the population of interest, those items

need to be identified and treated accordingly. For example, in a substantive test of

details, such items, if not extracted before sampling, would be assigned a monetary

misstatement value of zero; the average misstatement would be projected to the

frame, yielding an unbiased estimate (the projection) of the total misstatement.

In order to improve practice, the ED should distinguish between the population and

the frame by defining both terms. By doing so, the ED would more effectively guide

auditors to perform procedures to address appropriately differences that may exist.

Sampling risk. The risk that the auditor’s conclusion based on a sample may be different

from the conclusion if the entire population was subjected to the same audit procedure.

Sampling risk can lead to two types of erroneous conclusions:

a. In the case of a test of controls, that controls are more effective than they

actually are or, in the case of a test of details, that a material misstatement does not

exist when in fact it does. The auditor is primarily concerned with this type of

erroneous conclusion because it affects audit effectiveness and is more likely to lead

to an inappropriate audit opinion. [Emphasis added.]

The ED implies that a test of controls might not be a test of details and vice versa.

This is incorrect and is contrary to long-standing usage in practice. The term “test

of details,” when intended to exclude a test of controls, has always been expressed

with the adjective “substantive” preceding it. A test of details (of transactions or

balances), whether intended to test for misstatement or for compliance with

controls (or both) is a term that may be used for any test that involves inspection

of the individually selected sampling units. In the case of a test of controls, this

might involve, for example, inspecting documents to determine that appropriate

approvals were given or reviews were performed. Moreover, AU 350.44

specifically and correctly recognizes the dual nature of tests of details.

The dropping of the adjective “substantive” is inappropriate in light of a recent

ASB decision to add that adjective when referring to analytical procedures.

4

b. In the case of a test of controls, that controls are less effective than they actually

are or, in the case of a test of details, that a material misstatement exists when in

fact it does not. This type of erroneous conclusion affects audit efficiency as it

would usually lead to additional work to establish that initial conclusions were

incorrect. [Emphasis added.]

The statement that “[t]his type of erroneous conclusion affects audit efficiency as

it would usually lead to additional work to establish that initial conclusions were

incorrect” (which is a carryover from AU 350) is appropriate for a test of controls.

For a substantive test of details, however, the risk of incorrect rejection is also

equal to estimation risk. Estimation risk measures the chance that a confidence

interval will fail to contain the actual amount of misstatement within its calculated

range. The purpose of an audit sample is to provide a basis for an audit decision.

An unfavorable (or undesirable) result in a substantive test of details does not

necessarily lead to additional work. In fact, the results may be sufficiently precise

to provide for the proposal of a materially correct adjusting journal entry. A

confidence interval and its associated risk provide an objective basis for

proposing an adjusting journal entry should the sample results indicate that risk of

intolerable misstatement is unacceptable. The risk addressed in b. is the risk that

the audited account (post adjustment) is not materially (tolerably) correct.

The statement that “[t]his type of erroneous conclusion affects audit efficiency as

it would usually lead to additional work” is inappropriate because (1) the auditor

does not know if the sample findings are incorrect, and (2) the findings may be

sufficiently precise for the auditor to propose an adjusting journal entry.

We suggest that the last sentence be replaced with the following:

While this risk is a consideration and might result in additional work, this

risk is identical to the risk that an account balance, subsequent to any

adjusting entry, is misstated by an amount that exceeds the tolerable

amount.

See our comment relative to paragraph A2 below.

________________________________________________________________________

Sampling unit. The individual items constituting a population. (Ref: par. A4)

The sampling unit is the item that is actually examined by an auditor. It may be, for

example, an account, a transaction, or a line item within a transaction. It is not a

“monetary” unit (not withstanding popular usage; see further comment regarding

paragraph A4, below). As stated above, whether or not the sampling units constitute

the population of interest depends on the relationship of the frame to that population.

Statistical sampling. An approach to sampling that has the following characteristics:

5

a. Random selection of the sample items (Ref: par. A5)

b. The use of an appropriate statistical technique to evaluate sample results

including measurement of sampling risk

A sampling approach that does not have characteristics (a) and (b) is considered

nonstatistical sampling.

Random sampling is statistical sampling. Statistical evaluation of a randomly selected

sample is a best practice and is always appropriate. Accordingly, characteristic b.

above should be eliminated. See our comment regarding paragraph A7. We suggest

the following definition be substituted:

Statistical sampling. Statistical sampling is probability sampling, in

which each item in the frame has a known chance of selection. A

probability sample is evaluated by appropriate statistical techniques.

We recognize that auditors may seek to avoid random selection entirely if statistical

evaluation of random samples is to be required. Some auditors may decide to apply

“haphazard” sampling in order to avoid the need to perform an appropriate statistical

evaluation. For this reason, the ASB should express a preference for random sampling

(that is, statistical sampling). There are few situations in which some form of random

selection is impracticable. Client data which is not readily amenable to computer-

aided selection can usually be subjected to informal selection techniques that

approximate equal probability random selection. An informal sample is one that is

selected without conscious bias and without random numbers or computerized

random selection. See our comment to paragraph A7 for an example of an informal

selection procedure.

The ED’s definition perpetuates an erroneous concept: that a random sample need not

be evaluated by “the use of an appropriate statistical technique.” This is an invitation

to an auditor to act inappropriately by ignoring readily available statistical evaluation

methods. “Professional” judgment in this instance is an inferior substitute for

measurement.

Tolerable misstatement. A monetary amount set by the auditor in respect of which the

auditor seeks to obtain an appropriate level of assurance that the monetary amount set by

the auditor is not exceeded by the actual misstatement in the population.

This is a substantial and inappropriate definitional departure from what is presented in

AU 350.18. The wording is ungainly and is not a definitional improvement.

Moreover, this definition does not include those situations in which monetary

misstatement exceeds the tolerable amount. Although somewhat difficult to apply, the

original definition of AU 350.18 is superior. See our comment on paragraph A6.

6

Tolerable rate of deviation. A rate of deviation from prescribed internal control

procedures set by the auditor in respect of which the auditor seeks to obtain an

appropriate level of assurance that the rate of deviation set by the auditor is not exceeded

by the actual rate of deviation in the population.

See immediately preceding comment.

________________________________________________________________________

Sample Design, Size, and Selection of Items for Testing

8. The auditor should select items for the sample in such a way that the auditor can

reasonably expect the sample to be free of intentional bias and thus will be representative

of the relevant population and likely to provide the auditor a reasonable basis for

conclusions about the population. (Ref: par. A16-A18)

This text is a carryover from AU 350 and continues to confuse the meaning of bias

within the context of sampling procedures. Bias is an estimation issue; not a selection

issue. Selection with probability proportional to size is clearly biased toward selection

of the larger items, yet, it is the application of an appropriate estimator that eliminates

bias. There are common estimators (such as the ratio estimators) that are biased. The

bias can be estimated and be applied to provide a correction for the estimator. The

following wording is preferable because it correctly encompasses both selection and

evaluation of a sample:

The selection and evaluation of a sample should be performed in such

a way that the resulting estimates are unbiased.

____________________________________________________________

Performing Audit Procedures

10. If the audit procedure is not applicable to the selected item, the auditor should

perform the procedure on a replacement item. (Ref: par. A19)

This guidance is incorrect and should be removed because it will lead to invalid

results. As stated above, there are situations in which the population is only a subset

of the frame. Items deemed to be “not applicable” are, nevertheless, members of the

frame from which the sample was selected. If such items are removed from the

sample and are replaced only with “applicable” items, the expected occurrence rate of

“applicable” items will be greater than their occurrence rate in the frame. Estimates

(projections) obtained from such samples will be biased. It is especially important in a

substantive test of details that such items, if selected, are assigned misstatement

values of zero and must remain in the sample. Only if the exact number of “not

7

applicable” items in the population is known may a “not applicable” item be replaced.

Otherwise, and this is generally the case, the total number of “not applicable” items is

unknown. See our comments on paragraphs A19 and A20.

11. If the auditor is unable to apply the designed audit procedures, or suitable alternative

procedures, to a selected item, the auditor should treat that item as a deviation from the

prescribed control, in the case of tests of controls, or a misstatement, in the case of tests

of details. (Ref: par. A20-A21) [Emphasis added.]

Treating those items for which the auditor is unable to apply test procedures as

deviations from prescribed controls is reasonable and conservative because the result

is less reliance on the controls for purposes of determining the scope of substantive

tests.

However, the same is not true for a substantive test of details. In such a case, the

inability to apply audit procedures is a scope limitation that must be evaluated and

considered for its effect on the audit opinion as per AU 508.20-32. Whether or not the

potential impact of such a limitation is intolerable can be estimated and assessed by

projecting the recorded amounts of such items. However, to consider such items to be

misstated is not only inconsistent with other literature that speaks to such limitations

(AU 508.20-32), but it raises the risk that an auditor will propose an adjusting journal

entry that will create rather than correct a material misstatement (see our comment to

A.20). Moreover, considering untested items as misstatements requires the auditor to

specify the amounts by which such items are presumed to be misstated and, for tests

of valuation and accuracy assertions, the algebraic signs of those presumed

misstatements. The emphasized text is inappropriate and should be deleted.

The following two sections, entitled “Projecting Misstatements” and “Evaluating the

Results of Audit Sampling,” present separately what is actually a unified topic: Sample

projection is integral to evaluation.

Projecting Misstatements

13. For tests of details, the auditor should project misstatements found in the sample to

the population. (Ref: par. A25–A26)

This paragraph should be eliminated and combined with paragraph 14. The current

wordings of AU 350.26 (for substantive tests of details) and AU 350.41 (for tests of

controls) are superior to the above sentence. Further, the referenced paragraphs A25-

A26 fail to provide necessary amplification. The point estimate obtained from a

sample (referred to in the ED as the projection) provides little information regarding

the risk that material (or intolerable) misstatement exists. In probability sampling, a

8

calculated confidence interval provides such information. See our comment on

paragraph 14 below.

Evaluating Results of Audit Sampling

14. The auditor should evaluate

a. the results of the sample and (Ref: par. A27–A29)

b. whether the use of audit sampling has provided a reasonable basis for conclusions

about the population that has been tested. (Ref: par. A28–A29)

The evaluation of the results of a sample includes the calculation of a point

estimate (a projection in the case of a substantive test of details, and deviation rate

in the case of a test of controls) and confidence interval (to use statistical

sampling terminology). The latter provides a measure of the risk that the actual,

but unknown, misstatement or deviation rate is beyond the calculated confidence

limits. The foregoing can be expressed in a number of ways, including using the

existing verbiage of AU 350.26 and .41.

The language of ED paragraph 14 (including the referenced A27-A29) fails to

provide appropriate guidance and might unintentionally cause the commission of

malpractice by suggesting that an auditor simply decide that audit sampling has

not provided a reasonable basis for conclusions without stating, in accordance

with AU 339, what enables the auditor to make such a decision. In fact, the only

objective basis for such a decision to be made, given a properly executed sample,

is an imprecise confidence interval. We believe that even an imprecise confidence

interval indicates that planning assumptions need to be revised and additional

testing is needed.

The words of AU 350.26, “appropriate consideration should be given to sampling

risk” (and similar guidance in AU 350.41 for a test of controls), are proposed to

be deleted, leaving the auditor with neither a standard nor even unambiguous

guidance as to an appropriate evaluation methodology. We believe that this

deletion is inappropriate.

As stated in the introductory comments, the confidence interval is a universally

accepted methodology for the evaluation of a probability sample (and even a

sample whose selection may reasonably be assumed to be the functional

equivalent of a random sample). Such a methodology, whether presented as a

method of estimation or as a test of hypothesis, should be an explicitly required

approach.

9

Sampling Risk (Ref: par. 5)

A2. The risk of incorrect rejection and the risk of assessing control risk too high relate

to the efficiency of the audit. For example, if the auditor’s evaluation of an audit sample

leads the auditor to the initial erroneous conclusion that a balance is materially

misstated when it is not, the application of additional audit procedures and consideration

of other audit evidence might lead the auditor to the correct conclusion. Similarly, if the

auditor’s evaluation of a sample leads him or her to unnecessarily assess control risk too

high for an assertion, the auditor might increase the scope of substantive procedures to

compensate for the perceived ineffectiveness of the controls. Although the audit may be

less efficient in these circumstances, the audit is, nevertheless, effective. [Emphasis

added.]

The highlighted text, which modified the original AU 350 term, “risk of

underreliance,” in a previous change to AU 350 does not provide clarity to the

concepts discussed. The original term is the meaningful expression of risk.

It is especially inappropriate that the ED ignores the risk of overreliance, which is

expressed in the current text of AU 350 as the risk of assessing control risk too low,

and is clearly the more important risk for a test of controls.

In an earlier revision of SAS 39, the ASB introduced “risk of assessing risk too low

(too high)” as replacements for “risk of overreliance (underreliance).” The

substitution has no practical meaning in statistics. In fact, the performance of an audit

sample to test controls provides a direct and incontrovertible measure of risk. If, for

example, an auditor selects a random sample of 100 items, which discloses no control

deviations, the auditor can conclude that there is only a 5% risk that the deviation rate

in the population exceeds 3%. If 3% is the tolerable deviation rate, 5% is the

appropriate control risk. The risk of assessing control risk too low is (in the context of

the current and proposed jargon), mathematically, zero. We recommend that the ED

be revised to restore the control risk definitions in the original SAS 39 text.

The statement that the risk of incorrect rejection …relate[s] to the efficiency of the

audit (AU 350.13) is misleading and incomplete regarding substantive tests of details.

The risk of incorrect rejection is, in fact, estimation risk. It is the risk that the actual

misstatement amount is not within the two-sided confidence interval that is calculated

from the sample results. If sufficiently precise, such an interval provides a reliable

basis for proposing a materially correct adjusting journal entry without the need to

perform additional procedures. See our comment on the sampling risk in paragraph 5

above.

Sampling Unit (Ref: par. 5)

A4. The sampling units might be physical items (for example, checks listed on deposit

slips, credit entries on bank statements, sales invoices, or debtors’ balances) or monetary

units. [Emphasis added.]

10

We believe that it is incorrect to equate monetary units with sampling units, however

popular that usage may be. In practice, the smallest auditable data source (line item,

invoice, account) is the sampling unit. Some writers on the subject of sampling have

addressed this fact by creating the notion of the monetary unit serving as a “hook”

that enables the auditor to identify the actual item (i.e., sampling unit) to be vouched,

traced, or otherwise inspected. That “hooked” item (sometimes also referred to in

auditing literature as “physical unit”) is the sampling unit. For engagement

documentation purposes, it is far better to identify the sampling unit properly. We

recommend deleting the last prepositional phrase, “or monetary units.”

A5. Random selection techniques include the following:

a. Simple random

b. Systematic random

c. Monetary unit

d. Probability weighted

Item d. should be eliminated because monetary unit sampling is a probability

weighted random selection technique. The text should read:

c. Probability weighted, including monetary unit.

Tolerable Misstatement (Ref: par. 5)

A6. The auditor is required by paragraph 11 of the proposed SAS Materiality in Planning

and Performing an Audit (Redrafted) to determine performance materiality. Performance

materiality is determined in order to address the risk that the aggregate of individually

immaterial misstatements may cause the financial statements to be materially misstated

and provide a margin for possible undetected misstatements. Tolerable misstatement is

the application of performance materiality to a particular sampling procedure. Tolerable

misstatement may be the same amount or an amount lower than performance materiality

(for example, when the sample population is lower than the account balance).

It is unclear what this paragraph accomplishes and why the introduction of a new

term, “performance materiality,” is an improvement over AU 350’s definition of

“tolerable misstatement” (which is a difficult concept to implement properly and not

improved by the proposed alternative). We recommend that the ED be revised to

retain the original definition of tolerable misstatement.

Sample Design, Size, and Selection of Items for Testing

Sample Design (Ref: par. 6)

11

A7. Audit sampling enables the auditor to obtain and evaluate audit evidence about some

characteristic of the items selected in order to form or assist in forming a conclusion

concerning the population from which the sample is drawn. Audit sampling can be

applied using either nonstatistical or statistical sampling approaches. [Emphasis

added.]

The definitions of statistical and nonstatistical sampling approaches require

substantial revision.

As previously stated, any probability sample is a statistical sample. A probability

sample is one in which item selection is left strictly to the laws of chance. The

principal property of such a sample is measurability. The results can be measured by

applying appropriate statistical procedures. If results can be measured, they should be

measured; those results should not be assessed solely by professional judgment. A

secondary property of a properly documented probability sample is that it can be

replicated by a reviewer.

Well-organized and computerized client files provide natural frames for probability

(statistical) sampling. In cases in which a client’s files do not readily lend themselves

to the formal methods associated with probability sampling, informal methods may be

applied, taking care not to introduce any unintended bias. Such populations may be

thoroughly mixed (as in the case of a shuffled deck of cards) or their frames may

provide no indication to the auditor as to whether the items identified in the frames

are misstated or have associated control deviations. For example, a frame might

consist of index cards in a file drawer, from which the auditor selects cards

throughout the drawer without inspecting them. Informally selected samples may be

evaluated as though they had been randomly selected provided that the working

papers describe the frame and the selection method. An informal sample emulates a

simple random or systematic random sample (that is, an equal probability sample)

because it is selected without conscious bias and because the organization of the

frame does not cause unintended bias.

There are situations in which the auditor employs judgment to decide which items to

select because the auditor believes the selected items to be of greater audit interest

than items that are passed over for selection. Those situations involve nonstatistical

sampling and can be evaluated only by the exercise of sound, rational auditor

judgment.

A8. When designing an audit sample, the auditor’s consideration includes the specific

purpose to be achieved and the combination of audit procedures that is likely to achieve

that purpose.

We believe that this sentence does not add any substantive guidance to considerations

that are applicable to other audit test procedures and should be removed.

12

Consideration of the nature of the audit evidence sought and possible deviation or

misstatement conditions or other characteristics relating to that audit evidence will assist

the auditor in defining what constitutes a deviation or misstatement and what population

to use for sampling

This sentence is unclear and does not provide meaningful guidance. We suggest that

the entire paragraph be replaced by the following:

When planning an audit sample, the auditor decides the classes of

transactions or accounts that are of audit significance. The auditor’s

understanding of the client’s information systems and the records that the

client maintains enables the auditor to decide on a suitable frame for

selection of a sample. The auditor also decides which assertions are to be

tested (which lead to the auditor’s decisions as to the defining of deviations or

misstatement conditions).

In fulfilling the requirement of paragraph 8 of the proposed SAS, Audit Evidence,

(Redrafted), when performing audit sampling, the auditor is required to perform audit

procedures to obtain evidence that the population from which the audit sample is drawn

is complete.

This appears to be the only section of the ED that addresses the frame/population

issue. We suggest expanding the guidance and presenting it in a separate paragraph.

A10. The auditor’s consideration of the purpose of the audit procedure, as required by

paragraph 6, includes a clear understanding of what constitutes a deviation or

misstatement so that all, and only, those conditions that are relevant to the purpose of the

audit procedure are included in the evaluation of deviations or projection of

misstatements. For example, in a test of details relating to the existence of accounts

receivable, such as confirmation, payments made by the customer before the

confirmation date but received shortly after that date by the client are not considered a

misstatement. Also, an incorrect posting between customer accounts does not affect the

total accounts receivable balance. Therefore, it may not be appropriate to consider this

a misstatement in evaluating the sample results of this particular audit procedure, even

though it may have an important effect on other areas of the audit, such as the

assessment of the risk of fraud or the adequacy of the allowance for doubtful accounts. [Emphasis added.]

It is incorrect to suggest that the highlighted example may not describe a relevant

deviation or misstatement. In fact, it describes a failure of internal control regarding

the transactions-based assertion that transactions are properly classified. The fact that

this example is used in the context of a substantive test of details refutes any notion

that a test of details may not also serve as a test of controls, particularly when

apparent control failures are identified. The highlighted text should be deleted.

13

A11. In considering the characteristics of a population for tests of controls, the auditor

makes an assessment of the expected rate of deviation based on the auditor’s

understanding of the relevant controls or on the examination of a small number of

items from the population. [Emphasis added.]

The highlighted text presents an impracticable approach to planning. A small sample

is unlikely to detect relatively infrequent control deviations and, thus, will provide no

useful planning information. Moreover, such an approach unnecessarily extends the

elapsed time needed to complete the test of controls in that it involves the selection of

two samples. Finally, such a procedure is in fact a sequential sampling procedure,

which entails greater complexity in evaluation [see Roberts, op cit, pp. 59-61]. The

highlighted text should be deleted.

This assessment is made in order to design an audit sample and to determine sample size.

For example, if the expected rate of deviation is unacceptably high, the auditor will

normally decide not to perform tests of controls. Similarly, for tests of details, the

auditor makes an assessment of the expected misstatement in the population. If the

expected misstatement is high, 100 percent examination or use of a large sample size

may be appropriate when performing tests of details. [Emphasis added.]

The emphasized text is potentially misleading. A 100 percent examination is rarely

practicable and, even then, only for small populations. It is inappropriate to suggest

that undefined “large” sample sizes should be viewed by auditors as the evidential

equivalent of a risk-free 100 percent examination. While the expected misstatement is

a sufficient parameter for monetary unit sampling and tests for overstatement

(assuming that tolerable misstatement and risk of incorrect acceptance are specified),

it would be insufficient for stratified random sampling, (e.g., inventory price tests, if

misstatements in both directions are deemed likely). In general, it is population

volatility, as measured by the standard deviation of misstatements (including zero

amounts), which is the appropriate term to use. Volatility is a function of both the

proportion of non-zero misstated items and variability of those non-zero

misstatements. If the standard deviation is small or can be controlled by adequate

stratification, large sample sizes may not be necessary.

The emphasized text should be deleted and replaced by the planning considerations,

such as those described in AU 350 pars. 16-17 & 21-22.

A12. In considering the characteristics of the population from which the sample will be

drawn, the auditor may determine that stratification or value-weighted selection is

appropriate.

This sentence is insufficiently informative to provide an auditor with a useful basis

for making an audit sampling decision. For example, cluster sampling (both single

and multi-stage) is not mentioned. See the previous comment. This paragraph should

be elaborated upon or deleted.

14

A14. The sample size can be determined by the application of a statistically based

formula or through the exercise of professional judgment. Various factors typically

influence determination of sample size, as follows:

For substantive tests of details:

The auditor’s desired level of assurance (complement of risk of incorrect acceptance)

that tolerable misstatement is not exceeded by actual misstatement in the population;

A more straightforward statement is:

The auditor’s desired level of assurance (the complement of the risk of

incorrect acceptance) that actual misstatement is no greater than

tolerable misstatement

Tolerable misstatement

Expected misstatement for the population

Stratification of the population when performed

For some sampling methods, the number of sampling units in each stratum.

While the text for describing planning considerations for tests of controls is

reasonable, these bullets are inelegantly worded. We suggest the following as a

replacement for the four bulleted items above:

Sample size is sensitive to auditor-specified factors and population

characteristics.

Auditor-specified factors

o tolerable misstatement

o risk of incorrect acceptance

Population characteristics

o proportion of misstatements in the population

o volatility of the misstatements (i.e., their standard deviation)

o population size, for small and stratified populations

A15. The decision whether to use a statistical or nonstatistical sampling approach is a

matter for the auditor’s judgment; however, sample size is not a valid criterion to decide

between statistical and nonstatistical approaches. An auditor who applies statistical

sampling uses tables or formulas to compute sample size based on the judgments in

paragraph A14. [Emphasis added.]

The statistical/nonstatistical issue is addressed in the comment relative to A7.

However, the highlighted text contains an error that requires correction.

Sample sizes can always be arbitrarily or judgmentally determined (even for

statistical sampling). There are situations in which an auditor does not have

15

information deemed adequate for computation of a sample size or in which time or

budget restrictions limit the extent of testing. The sufficiency of such a sample size

(or the lack thereof) will be evident upon evaluation of the sample. The highlighted

text should be deleted.

An auditor who applies nonstatistical sampling uses professional judgment to relate the

same factors used in statistical sampling in determining the appropriate sample size.

Ordinarily, this would result in a sample size comparable to the sample size resulting

from an efficient and effectively designed statistical sample, considering the same

sampling parameters. This guidance does not suggest that the auditor using

nonstatistical sampling also compute a corresponding sample size using an appropriate

statistical technique. [Emphasis added.]

We believe that it is inappropriate for the ED to fail to suggest “that the auditor using

nonstatistical sampling also compute a corresponding sample size using an

appropriate statistical technique,” if such a technique is available. However, as

previously stated, sample sizes can always be arbitrarily specified. The highlighted

text should be deleted.

Selection of Items for Testing (Ref: par. 8)

A16. To be considered representative, an audit sample is selected in a manner such that

the auditor can reasonably expect that the sample is free of intentional bias or

preference.

See comment in regard to paragraph 8 above.

A17. With statistical sampling, sample items are selected in a way that each sampling

unit has a known probability of being selected. With nonstatistical sampling, haphazard

or random-based selection is used to select sample items. [Emphasis added.]

Random sampling is measurable by appropriate statistical methods and is, therefore,

statistical sampling. The highlighted text should be deleted or replaced with:

With nonstatistical sampling, the auditor uses judgment to decide

which items are to be selected from the frame.

A18. The principal methods of selecting samples are the use of random selection,

systematic selection, and haphazard selection.

See the comment relative to the Definitions section, above, regarding the use of the

term “haphazard.”

A18 is redundant and is covered by A17. It should be deleted.

16

Performing Audit Procedures (Ref: par. 10–11)

A19. An example of when it is necessary to perform the procedure on a replacement

item is when a voided check is selected while testing for evidence of payment

authorization. If the auditor is satisfied that the check has been properly voided such

that it does not constitute a deviation, an appropriately chosen replacement is

examined. Another example is a telephone expense item selected as part of a sample

for which a deviation has been defined as a transaction not supported by receiving

report; telephone expense may not be expected to be supported by a receiving report. If

the auditor has obtained assurance that the transaction is not applicable and does not

represent a deviation from the prescribed control, the auditor would replace the item

with another transaction for testing the relevant control. [Emphasis added.]

This paragraph should be deleted because both examples present invalid approaches

to sampling. It can easily be proved that, for both examples, replacing items in the

manner suggested will result in biased estimates. Such samples will have higher rates

of deviations or misstatements than exist in the sampled populations because the

“applicable” items will be over-represented in the sample. Projections resulting there

from will be based on projections to populations that include all other non-applicable

items whereas the samples will not include those items. See the comment regarding

paragraph 10 above.

The second example does not define a deviation properly. A receiving report is just

one piece of evidence that applies only to a subcategory of some, but not all,

expenditures. Its presence is relevant only when it is expected to be present, and its

absence is not an exception, nor does it make the sample item not applicable with

regard to the underlying characteristic being tested, that is, the validity of the

expenditure (not the presence of a receiving report).

A20. In some circumstances the auditor may not be able to apply the planned audit

procedures to selected sample items; because, for example, the entity might not be able to

locate supporting documentation. The auditor’s treatment of unexamined items will

depend on their effect on the auditor’s evaluation of the sample. If the auditor’s

evaluation of the sample results would not be altered by considering those unexamined

items to be misstated, it may not be necessary to examine the items. However, if

considering those unexamined items to be misstated would lead to a conclusion that the

balance or class contains material misstatement, the auditor may consider alternative

audit procedures that would provide sufficient appropriate audit evidence to form a

conclusion. AU section 316, Consideration of Fraud in a Financial Statement Audit

(AICPA, Professional Standards, vol. 1), also requires the auditor to consider whether

the reasons for the auditor’s inability to examine the items have implications in relation

to assessing risks of material misstatement due to fraud, the assessed level of control risk

that the auditor expects to be supported, or the degree of reliance on management

representations.

17

An auditor’s inability to examine items constitutes a scope limitation unless adequate

alternative evidence is obtained to meet the audit objective. The best one can do in a

substantive test, in the absence of adequate alternative procedures, is to project the

recorded amounts of the untested items in order to estimate the extent of the

limitation (that is, the estimated aggregate size of the effectively untested items) and

consider the effect on the audit report. We suggest the following be inserted between

the third and fourth sentences:

The auditor can assess the potential extent of unexamined items by

projecting their recorded amounts to the frame including an

appropriate allowance for sampling risk.

A24. A representative sample is expected to be representative of the population only

with respect to the incidence of misstatements or deviations and not necessarily with

respect to their nature. The auditor may not assume that the observed incidence of

misstatements or deviations in the sample is not representative of the population because

a misstatement or deviation included in the sample is caused by unusual circumstances

(sometimes referred to as an anomalous or isolated misstatement or deviation).

[Emphasis added.]

The first sentence should be deleted because it is incorrect. Any observable

characteristic, whether quantitative or qualitative, can be estimated or projected. In

the case of a probability sample, the precision of the estimate is measurable at any

specified level of confidence.

The second sentence, is correct, but does not follow from the first.

“Representative,” as used within the context of audit sampling, has referred to the

overall property of a sampling procedure in relation to the population and not to any

specific sample outcome. Failure to recognize this fundamental fact can lead to such

improper rationalizing and inherently risky decisions as discarding a sample or a

sampling result because it is not, in the auditor’s judgment, “representative.”

A25. The auditor is required by paragraph 13 to project misstatements for the population

to obtain a broad view of the scale of misstatement, but this projection may not be

sufficient to determine an amount to be recorded. [Emphasis added.]

The expression “a broad view” has no operational meaning in the context of audit

sampling. The projection is an estimate of the total amount of misstatement-- one

sample outcome obtained from a myriad of possible outcomes. The statistical term for

the projection is “point estimate.”

A25 is one of several instances in the ED that exhibits bias against using sample

results as a basis for audit decision-making. This paragraph does not provide any

indication of what constitutes an insufficiency. Thus, the text is merely an opportunity

for the auditor to disregard the objective results of a substantive test of details. If, in

18

fact, the auditor has satisfied the representativeness requirement with respect to

selection and evaluation, the only basis for considering the projection (that is, the

sample point estimate) to be insufficient is that the precision of the estimate, as

calculated at an auditor-specified confidence level (assurance), is too large to provide

a reasonable basis for a conclusion. The resultant quantifiable risk of drawing an

incorrect conclusion is too large for auditor comfort. The ED fails to discuss any

explicit requirement to perform the confidence interval estimation or hypothesis

testing that is common to other professions.

We suggest the following wording:

The auditor is required by paragraph 13 to project misstatements for the

population including an appropriate allowance for sampling risk. When

considered together, the projection and its associated allowance for sampling

risk might be sufficient to determine an amount to be recorded.

A28. In the case of tests of details, the projected misstatement is the auditor’s best

estimate of misstatement in the population. As the projected misstatement approaches or

exceeds tolerable misstatement, the more likely it is that actual misstatement in the

population may exceed tolerable misstatement. Also, if the projected misstatement is

greater than the auditor’s expectations of misstatement used to determine the sample

size, the auditor may conclude that an unacceptable sampling risk exists that the actual

misstatement in the population exceeds the tolerable misstatement. [Emphasis added.]

If the projected misstatement exceeds the tolerable amount, the auditor should

conclude that the risk is too high to be acceptable, because such risk would exceed 50

percent. The statement seems to be rationalizing an auditor’s decision to ignore

sampling results. The appropriate basis for an audit decision is, in probability

sampling, the confidence interval, which is calculated using appropriate statistical

techniques. In a judgmentally selected sample, the auditor must assess the risk of

potential exposure to intolerable misstatement, and decide accordingly. We suggest

replacement of the last sentence in the paragraph with the following, which is

partially adapted from AU 350.26:

The projected misstatement should be compared with the tolerable

misstatement, and appropriate consideration should be given to

sampling risk for both statistical and nonstatistical sampling. For

probability samples and for samples that may reasonably be

presumed to emulate random samples, the auditor applies

appropriate statistical methods. For other samples, the auditor

exercises professional judgment.

Considering the results of other audit procedures helps the auditor to assess the risk that

actual misstatement in the population exceeds tolerable misstatement; and, the risk may

be reduced if additional audit evidence is obtained. [Emphasis added.]

19

The highlighted text should be deleted. Intolerable misstatements do exist in

accounting populations. Yet, the guidance in the ED is oriented toward finding

possible explanations that might refute the sample findings, and not toward guiding

an auditor when there is a high level of assurance that intolerable misstatement exists.

Neither inquiry nor analytical procedures can be shown to be superior to a properly

planned and executed substantive test of details. The only measurable approaches to

reducing risk are to select and examine additional sample items, or to propose an

adjusting journal entry. Moreover, extending a sample is more likely to confirm, not

refute, the initial sample results.

A29. If the auditor concludes that audit sampling has not provided a reasonable basis for

conclusions about the population that has been tested, the auditor may

request management to investigate misstatements that have been identified and the

potential for further misstatements and to make any necessary adjustments, or

tailor the nature, timing, and extent of those further audit procedures to best achieve

the required assurance. For example, in the case of tests of controls, the auditor

might extend the sample size, test an alternative control, or modify related substantive

procedures.

Proposed SAS Evaluation of Misstatements Identified During the Audit addresses

misstatements identified by the auditor during the audit.

This last paragraph sums up the ED’s contradictory guidance: Use samples because

they provide audit evidence, but do not make decisions based on those results if those

results do not support a favorable conclusion (i.e., that any potential misstatement is

tolerable). Either find other evidence that can be used to explain a sample result as

aberrant or ask management to investigate further.

A well-planned sampling procedure will provide a reasonable basis for both accepting

a population whose misstatement does not exceed the tolerable amount, and for

proposing appropriate action when a sample result leads to a decision that

misstatement may exceed the tolerable amount. One such action is the proposal of an

adjusting journal entry that will reduce any potentially remaining misstatement to an

amount that is unlikely to exceed the tolerable misstatement. A sample that fails to do

so is either poorly planned or is revealing a situation that is worse than even good

planning has led the auditor to believe

As stated previously there is no consideration in this ED for use of the universally

employed mechanism that enables a sampler to draw reliable conclusions from a

sample – the confidence interval (or its companion, the test of hypothesis).