Topic 9 Audit Sampling

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HA3032

AUDITING

Topic 9

Audit Sampling


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HA3032 Auditing Holmes Institute 2009

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Basic concepts of sampling

ASA 530.6Audit samplingdefines sampling as

a process which includes the application ofaudit procedures to less than 100% of items

within a class of transactions or account

balance, such that all sampling units have a

chance of selection

Sampling is used in both tests of controls and

substantive testing


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Sampling risk and Non-Sampling risk

When sampling is used to obtain evidence,

uncertainties may result from the use of sampling

(sampling risk)

factors unrelated to sampling

(non-sampling risk)


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Sampling risk

Sampling risk means the risk arising from the

possibility that the auditors conclusion, based

on a sample, may be different from the

conclusion reached if the entire population

were subjected to the same audit procedure


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Types of sampling risk

In the case of tests of control

The risk the auditor will conclude that control risk islower than it actually is (risk of over-reliance)

The risk the auditor will conclude that the controlrisk is higher than it actually is (risk of under-

reliance) In the case of substantive testing

The risk that the auditor will conclude that amaterial error does not exist when in fact it does

(risk of incorrect acceptance)The risk that the auditor will conclude that a

material error exists when in fact it does not (risk ofincorrect rejection)


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Non-Sampling risk

Non-sampling risk means the risk arising from

factors that cause the auditor to reach anerroneous conclusion for any reason not relatedto the size of the sample

Sources of non-sampling risk

human error reliance on erroneous information received from

another party

How to keep this risk to a minimum?

proper planning and supervision

adherence to quality control standards


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Statistical and Non-Statistical Sampling

Statistical sampling means any approach to

sampling that has the following characteristics: random selection of a sample; and

use of probability theory to evaluate sample results,including measurement of sampling risk

Non-statistical sampling means an approachto sampling that does not have any of theabove characteristics

In non-statistical sampling, the auditor uses

judgement in selecting the sample size and ininterpreting the results against the auditobjective


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Current practice

Many audit firms use non-statistical sampling,

as the auditor has a greater degree ofjudgement in: selecting a sample size, and

evaluating results based on previous client

knowledge Common approach is the use of haphazard

selection (this approach is not appropriatewhen statistical sampling is used)


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Statistical sampling is most often used in the

audit of a financial institution where the auditapproach relies heavily on controls testing

A research study by Hall et. al. (2002) on

sampling practices in the US, found that 85%of sample selection by auditors was non-

statistical and 74% used haphazard method

Current practice cont


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Other types of sampling

Selecting all items

100% examination

entire population is taken

This is a technically a survey and is not really

sampling at all

Selecting specific items (based on the

auditors knowledge of the business and the

characteristics of the population being tested)


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ASA 530.29 outlines specific items that may

be selected

These items are:

high value or key items

all items over a certain amount

items to obtain information

items to test control activities

Other types of sampling cont


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Use of samples for audit tests

In sampling the auditor typically undertakes

three common steps

planning the sample

selecting and testing the sample

evaluating the sample


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Planning the sample

Involves the following steps

determining the objectives of the test

defining what errors are being sought

identifying the population and sampling unit

specifying tolerable error, expected error andrequired confidence level

deciding the size of the sample


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Determining the objectives of the test

The auditor should consider

the specific objectives

combination of audit procedures

Need to determine what constitutes an error

and the appropriate population from which toselect the sample

Audit sampling is applicable to both tests of

controls and for substantive testing


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Defining what errors are being sought

The auditor must consider what constitutes an

error by referring to the objectives of the test Test of controls - the test objective is the

identification of deviations from the controlprocedure

Substantive tests - the test objective is theidentification of errors or misstatements inrecorded transactions or balances

An audit procedure may also detect errors not

being specifically sought and so extra testsmay be required to determine the extent ofsuch errors


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Identifying the population and sampling unit

The auditor must identify the population and

the sampling unit based on the objective of theaudit test

Population the entire set of data from which a sample is

selected and about which the auditor wishes todraw conclusions (ASA 530.9)

The auditor must ensure that the population isappropriate to the objective of the sampling

procedure and is complete


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Stratification of the population

increases audit efficiency and focuses greater auditwork on areas that are of higher inherent risk orpotentially materially misstated

is commonly based on monetary value

Stratification commonly used in the audit ofaccounts receivable

Sampling unit means the individual itemsconstituting a population

Examples include sales invoices, cash journalentries, listing of suppliers etc.

Identifying the population and sampling unit cont


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Specifying expected error and required confidence level

Tolerable error- the maximum error in a

population that the auditor is willing to accept Expected error- the error rate that the auditor

expects to exist in the population

Required confidence levelTests of controls: is the risk of

over-reliance (the risk that the allowable assessedcontrol risk is lower than it actually is)

Substantive tests: is the risk of incorrect

acceptance (the risk that the testing suggests amaterial error does not exist when it actually does)


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Deciding the sample size

In determining an appropriate sample size, the

auditors main concern is with reducingsampling risk to an acceptably low level

The level of sampling risk that the auditor is

willing to accept, will have an inverserelationship with the sample size required


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TABLE 11.1: Factors that influence sample size for tests of controls


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TABLE 11.2: Factors that influence sample size for substantive procedures


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Selecting the sample

Basic principle

each item in the population has a chance of beingselected (though not necessarily an equal chance)

Three approaches in selecting a sample (ASA530, Appendix 3)

RandomSystematic

Haphazard


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Random selection

Generally considered to be the best method of

obtaining a sample to evaluate the resultsstatistically

Each item in the population has a known

(usually equal) chance of selection

Auditing software can be used to select

random samples


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Systematic selection

Is the process of dividing the number of

sampling units in the population by the samplesize to give a sampling interval

As long as the starting number is selected

randomly, this method can be used as a

statistical sampling method

Drawback is the population may have a fixed

pattern which may lead to bias in the sampling


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Haphazard Selection

Selection of a sample without following

a structured technique

Is only practical when the population is not

ordered in any numerical sequence

This method is not recommended where othermethods are available


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Testing the sample and evaluating results

Having drawn the sample, the auditor then

examines or tests each item in accordancewith the required audit objective

Each error or deviation needs to be evaluated

as to its implications

For each error, the auditor must consider

whether the error

has an effect on the whole population

or is an isolated or localised occurrence


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Substantive tests

the sample results are projected to the population

the most common method is the difference

estimation method this method looks at the relative differences

between the recorded and audited amounts

if the projected error approaches or exceeds the

tolerable error, more evidence may be necessary

Projecting the error to the

population cont

T t i l


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HA3032 Auditing H l I tit t 2009

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Tutorial

Audit Sampling

Reading:

Leung Chapter 11

Audit Sampling

Tutorial Questions:

Leung Chapter 11

Questions 11.11, 11.14, 11.15, 11.17 & 11.23

Documents

Topic 9 Audit Sampling