Audit Sampling Techniques Quiz

Audit Practice and Procedures II

• Topic: Audit Sampling, Audit Testing, Sales and Collection Cycle
• Week: Six
• Course: Audit Practice and Procedures II
• Institution: Commonwealth Caribbean (UCC)

Recap of Last Class

• No specific information provided

Audit Sampling

• Defined as the selection and evaluation of less than 100% of the audit population.
• Aims to choose items representative of the whole population.
• Auditors strive for representative samples, where characteristics of sampled items mirror the overall population.
• However, auditors cannot definitively know if a sample is truly representative, even after complete testing.

Representative Samples

• Representative samples are crucial for accurate inferences about the population.
• Sampled items should mirror the characteristics of un-sampled items in the population.
• Sample results can potentially lead to incorrect conclusions due to sampling error or non-sampling error.
• Sampling risk and non-sampling risk are the two types of errors that can occur during the process

Sampling Risk

• Risk of making an incorrect conclusion because the sample is non-representative of the population.
• Inherent in sampling when fewer than all items are tested.
• Controllable by sample size adjustment and proper sample selection and evaluation methods.

Non-sampling Risk

• Risk of an incorrect conclusion due to causes unrelated to sample representativeness.
• Caused by auditor's failure to recognize exceptions or employ ineffective audit procedures.

Statistical Versus Nonstatistical Sampling

• Two broad categories of sampling methods.
• Both involve planning, selecting the sample, and evaluating the results.
• Purpose of planning is to ensure appropriate sampling risk and minimize non-sampling risks.
• Selection involves deciding how to select from the population.
• Evaluation draws conclusions based on audit tests.

Statistical Sampling

• Uses mathematical rules to quantify sampling risk (measure) in planning and evaluating results.
• Auditors can estimate sampling risk using a 95% confidence level (5% sampling risk).

Nonstatistical Sampling

• Auditors do not quantify sampling risk.
• Proper design and careful consideration of sampling factors (like statistical sampling factors) can produce effective results.

Probabilistic Versus Nonprobabilistic Sample Selection

• Probabilistic methods involve randomly selecting items where each item has a known probability of inclusion in the sample. (Greater care required.)
• Nonprobabilistic methods approximate random selection using methods that don't directly measure probabilities. (Often easier for auditors to apply)

Probabilistic Sample Selection Methods

• Simple random sample selection
• Systematic sample selection
• Probability proportional to size sample selection

Nonprobabilistic Sample Selection Methods

• Haphazard sample selection
• Block sample selection

Sampling for Exception Rates

• Used in tests of controls and substantive tests for transaction data.
• Aiming to check if monetary errors are within tolerable limits.
• Exception rate is the percentage of items with a specific characteristic or attribute of interest within a population.
• Auditors interested in deviations, transaction misstatements, and account balance misstatements.

Exception Rate in a Sample

• Used to estimate the exception rate within a population.
• The auditor's "best estimate" of the exception rate in the population, encompassing deviations and monetary errors.

Applying Statistical and Nonstatistical Sampling in Practice and Sample Selection Methods

• Auditors may select either method (statistical or non-statistical).
• Crucial that either approach is applied with due care.
• Statistical sampling requires a probabilistic sample to accurately measure sampling risk.
• Non-statistical methods may be just as effective with proper factors considered.
• Probabilistic methods include simple random, systematic, and probability proportional to size selections.
• Nonprobabilistic methods include haphazard and block selections.

Plan the Sample

• State audit test objectives.
• Decide if audit sampling is necessary.
• Define attributes/exception conditions.
• Define population.
• Define sampling unit.
• Specify tolerable exception rate (TER).
• Specify acceptable risk of overreliance.
• Estimate population exception rate (EPER).
• Determine the initial sample size.

Select the Sample and Perform Audit Procedures

• Select the sample
• Perform the audit procedures to examine sample items for accuracy and agreement with attributes.
• Main differences are probabilistic vs. non-probabilistic selection methods

Evaluate the Results

• Generalize from sample to population.
• Analyze exceptions.
• Decide on acceptability of the population.

Methodology for Designing Tests of Details of Balances

• Auditors must follow eight balanced-related audit objectives when doing receivable tests.
• These objectives apply to all account types, but will be examined through different objectives for receivables for detailed testing.
• Accounts for all aspects of accounts receivable need to be validated.

Accounts Receivable, Test of Details

• Evaluate if accounts receivables are properly recorded and present. (Accuracy, Completeness, Cutoff, Realizable value, Rights)
• Confirm with third parties involved with receivables (customers) using methods like positive and negative confirmations
• Auditors should use caution and test accounts receivables and consider factors like errors in accounting, internal controls, significant exceptions, and others

Sampling Decisions

• Factors in determining sample size for confirming accounts receivable include materiality of performance, inherent risks, control risks, risks from other substantive tests, and type of confirmation used.
• Sample size is adjusted for these factors and the specific account receivable test

Timing

• Ideally, confirmations are performed close to the balance sheet date to verify the accounts receivable balance directly, without needing inference about transactions since the date.
• Interim dates may be used when time constraints are a factor.

Verification of Addresses and Maintaining Control

• Verify addresses and email addresses provided by the customer to ensure the addresses are valid, or if a post office box or an email address is inconsistent with customer Web site addresses
• Auditors should control confirmations until received to prevent fraud or alteration by the client.

Positive Confirmations

• Communication to debtors requesting confirmation about the balance if correct, or if not to specify the discrepancy.
• Blank forms also exist in which the debtor can specify the correct balance. This type is favored as it tends to achieve higher response rates.
• Individual invoices can be confirmed, as opposed to confirming the whole receivables balance. This is also favoured to achieve higher response rates.

Negative Confirmations

• Communication to debtor requesting only confirmation if not correct.
• Often considered less reliable than positive confirmations, because response may not reflect the full picture
• Still useful to include some negative confirmations to achieve higher response rates.

Types of Sampling Decisions

• Different sampling categories are used depending on the sample type selection (statistical vs. non) method used
• Use of statistical sampling requires precise considerations of factors to yield an acceptable result.

Test your knowledge on various aspects of audit sampling techniques. This quiz covers topics such as sample selection methods, audit objectives, and the distinction between sampling and nonsampling risk. Perfect for students or professionals looking to refresh their understanding of audit practices.