Audit Sampling

Adli Rafdi Annas 344168

Gerald Prayogo342858

M Heickal Pradinanta350168

Nature of Audit Sampling The process of using auditing

procedures to test less than 100 percent of various items in a company's account balance such that each unit may have an equal opportunity of being selected.

Define Audit Sampling Refer to Definition on ISA 530 for Audit

Sampling Process of selecting a subset of a population

of items for the purpose of making inferences to whole population.

The process of using auditing procedures to less than 100 per cent of various items in a company's account balance such that each unit may have an equal opportunity of being selected.

Purpose of Audit sampling Audit sampling help auditors on doing their audit

work at a given period of time. It is possible for auditor to make details examination on all the items being examined.

To gather or get the evidences from the audit procedures being performed. Sampling is only the method (efficient) or sources of the evidence.

To detect error and any materially misstatements.

Select the audit samples 1) Simple random sampling – cases are

selected in a completely random way which ensures that each case has an equal chance of being

2) Stratified random sampling – The population is divided into groups depending on characteristics they share in common e.g. diagnosis, age. A random sample is then selected from each group.

Select the audit samples 3) Interval random sampling – The population is

arranged in order and the first case is then selected at random. The rest of the cases are then selected at pre-defined intervals,

4) Rapid-cycle sampling – This method can be used where you know there may be a problem and you want to obtain results as quickly as possible. Here you carry out the audit with a relatively small sample, implement changes and then re-audit using another small sample to determine whether improvements have been made. This method uses lots of small data sets to monitor care and can make the change cycle quicker to complete.

factors affecting the sample size.Population Size This is only relevant in very small populations.

Level of confidence Even a 100% sample will not give complete

assurance .Auditors work to level of confidence which can be expressed precisely .

Precision Clearly the level of confidence and the precision interval

are related ,in that for a given sample size higher confidence can be expressed in a wider precision interval and vice versa.

RiskRisk is a highly important concept in modern auditing and in high risk areas a large sample will be desirable. MaterialityMateriality is fundamental to modern auditing and with all populations being sample, materiality should be considered in fixing the sample size. Subjective factorsThis is most important and yet difficult area of consideration .The auditor expects to gain audit evidence about a population from a sample. Expected error/deviation rateThe theory requires that the samples size required is a function of the error .This is only known after the results have been evaluated .However an estimate based on previous experience and knowledge of other factors may give a good indication

Audit samples selection methodCHARACTERISTICS OF SAMPLE:

Random A random sample is one where each item of the

population has an equal or specified chance of being selected

 Representatives The sample should be representative of the

differing items in the whole population .

ProtectiveProtective that is of the auditor. More intensive auditing should occur on high value items known to be high risk. UnpredictableClient should not be able to know or guess which items will be examined.

HaphazardSimply choosing items subjectively but avoiding bias.  Simple randomAll items in population have a number .

StratifiedDividing the population into sub population and is useful when parts of the population have higher than normal risk.

Cluster samplingThis is useful when data is maintained in clusters as wage records are kept in weeks or sales invoice in months. Random systematicsInvolves making a random start and then taking every “n”th item thereafter. Multi stage samplingThis method is appropriate when data is stored in two or more levels. For example stock in a retail chain of shops. The first stage is to randomly select a sample of shops and the second stage is to randomly select stock items from the chosen shops.

Examine the evaluation of sample size by using….

Test of control Determine the system’s internal controls comply with the

stated policies, plans, laws and regulations. Evaluate the design of controls and determine if the

controls are in operation. To detect material error and whether the internal controls

were operating effectively through out the period being audited.

Provide information as to the rate of error in terms of control failure rather than to enable direct extrapolation in term of monetary errors in the financial statements.

Substantive test Provide audit evidence to the completeness, accuracy

and validity of the information contained in the financial statements.

Determine their accuracy and to draw conclusions about the materiality of the error amounts in the accounts.

To obtain reliable confidence limits, such as confidence limits with actual confidence levels

Example the total error amount should not be very much greater than the true error amount with sample sizes that are not too large for practical audit applications.

Distinguish the advantages and disadvantages of selecting samples…

Statistical vs. Non-statistical

Statistical Through the

application of mathematical rules.

It allows the quantification (measurement) of sampling risk in planning the sample and evaluate the results.

Non-statistical Auditor does not

quantify sampling risk. Instead, those sample

items that auditor believes will provide the most useful information in the circumstances are selected.

Advantages Very accurate. Economical in nature. Very reliable. High suitability ratio

towards the different surveys.

Takes less time. In cases, when the

universe is very large, then the sampling method is the only practical method for collecting the data.

Disadvantages Inadequacy of the

samples. Chances for bias. Problems of accuracy. Difficulty of getting

the representative sample.

Untrained manpower. Absence of the

informants. Chances of committing

the errors in sampling.

Probability SamplingAdvantages Less prone to bias Allows estimation of

magnitude of sampling error, from which you can determine the statistical significance of changes/differences in indicators

Disadvantages Requires that you have a list

of all sample elements More time-consuming More costly No advantage when small

numbers of elements are to be

chosen

Non-Probability SamplingAdvantages More flexible Less costly Less time-consuming Judgmentally representative samples may be preferred

when small numbers of elements are to be chosen

Disadvantages Greater risk of bias May not be possible to

generalize to program target population

Subjectivity can make it difficult to

measure changes in indicators over time

No way to assess precision or reliability of data

ERROR IN THE POPULATION

Type I and Type II errors Type I and Type II errors are the two types of

decision errors an auditor can make when deciding that sample evidence supports or does not support a test of controls or a substantive procedures based on a sampling application.

In reference to a test of controls Type I and Type II errors are:

Risk of incorrect rejection (Type I): Level of Control Risk > Operating Effectiveness Risk of assessing control risk too high or the risk of

under-reliance.

Risk of incorrect acceptance (Type II): Level of CR < Operating Effectiveness Risk of assessing control risk too low or the risk of

over-reliance. In reference to substantive tests Type I and

Type II errors as follows: Risk of incorrect rejection (Type I):

Overestimating Misstatement in samples that support the conclusion

Risk of incorrect acceptance (Type II): The risk of Underestimating the misstatement

in samples that support the conclusion Such errors can result in the auditor's

conducting more audit work than necessary in order to reach the correct conclusion. The risk of incorrect acceptance can result in the auditor failing to detect a material misstatement in the financial statements. This can lead to litigation against the auditor by the parties who relied on the financial statements. 

EXPECTED ERROR IN THE POPULATION

a) Tolerable error Tolerable error is the maximum error in the population that

auditors would be willing to accept and still conclude that the result from the sample has achieved the audit objective. Is considered during the planning stage and, for substantive

procedures, is related to the auditors' judgement about materiality. The smaller the tolerable error, the greater the sample size needs to

be.

In tests of control, the tolerable error is the maximum rate of deviation from a prescribed control procedure that auditors would be willing to accept and still conclude that the preliminary assessment of control risk is valid.

In substantive procedures, the tolerable error is the maximum monetary error in an account balance or a class of transactions that auditors would be willing to accept so that when the results of all audit procedures are considered, auditors are able to conclude, with reasonable assurance, that the financial statements are not materially misstated.

b) Expected error

More expected errors = larger sample required

Smaller sample sizes are justified when the population is expected to be error free.

In determining the expected error in a population, auditors would consider such matters as error levels identified in previous audits, changes in the entity's procedures and evidence available from other procedures, including tests of control.

NATURE OF ERROR Common features: type of transaction, location,

product line or period of time. In such circumstances, auditors may decide to

identify all items in the population which possess the common feature, thereby producing a subpopulation, and extend audit procedures in this area.

Auditors would then perform a separate analysis based on the items examined for each sub-population.

What if the auditor finds there is an error?

Material error is usually the result of one or more of the following :

a) A large number of small error – should be detected by representative sampling.

b)Few large error – should be detected by selecting sampling.

c) A combination of (a) and (b) – both sample types will be needed

a) Representative sample Drawn at random from a population. A sample should be large enough to allow auditors to draw valid inferences about the whole population. Auditors test of control will always make use of representative sampling may also be used for substantive testing.

b) Selecting samplesFocus on particular items in the population. These are usually the large and unusual items, transactions or balances that are large enough to give a materials error if incorrect, or which are worthy of investigation.

ACTION TAKEN WHEN ERROR IS FOUND

Auditors project the error results of the sample to the population from which the sample was selected in order to form a conclusion about the possible level of error in the population as a whole.

The projection of the error results of the sample to the population as a whole involves estimating the probable error in the population by extrapolating the errors found in the sample.

When projecting error results, auditors would ensure that the method of projection is consistent with the method used to select the sampling unit.

This is in addition to considering the qualitative aspects of the errors found. When the population has been divided into sub-populations, the projection of errors is done separately for each sub-population and the results are combined.

Auditors would consider whether errors in the population might exceed the tolerable error. To accomplish this, auditors compare the projected population error to the tolerable error taking into account the results of other audit procedures relevant to the specific control or financial statement assertion.

The projected population error used for this comparison in the case of substantive procedures is net of adjustments made by the entity. When the projected error exceeds tolerable error, auditors re-assess the sampling risk and if that risk is unacceptable, consider extending the audit procedure or performing alternative audit procedures, either of which may result in them proposing an adjustment to the financial statements.

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