Audit Sampling PDF

c t i c e t Pr a I I d i e s Au cedur Pro & l i ng a mp i t S Aud  Audit Sampling Audit sampling is the application of an audit procedure to less than...

c t i c e t Pr a I I d i e s Au cedur Pro & l i ng a mp i t S Aud  Audit Sampling Audit sampling is the application of an audit procedure to less than 100% of the items within an account balance or class of transactions. https://pcaobus.org  Audit Sampling In devising their samples, auditors must ensure that the sample selected is representative of the population.  Audit Sampling Representative Sample - Example Internal controls require a clerk to attach a shipping document to every duplicate sales invoice, but the clerk fails to follow the procedure 5% of the time. If the auditor selects a sample of 2,000 duplicate sales invoices and finds 100 are missing attached shipping documents, the  Audit Sampling Two approaches to audit sampling: 1) Statistical Sampling 2) Non-statistical sampling https://pcaobus.org  Audit Sampling - Approaches Statistical Sampling: To be classified as statistical - the sample must meet these three criteria: 1) The sample size must be determined objectively or quantitatively. 2) The sample members must be selected randomly. 3) The sample results must be evaluated mathematically. https://pcaobus.org  Audit Sampling Statistical Sampling The sample must be probabilistic Applies mathematical rules, which allows auditors to quantify sampling risk in planning the sample and in evaluating the results.  Audit Sampling Statistical Sampling Probabilistic Sampling The auditor randomly selects items such that each population item has a known probability of being included in the sample.  Audit Sampling Statistical Sampling: Probabilistic Sample Selection Methods 1. Simple random sample selection 2. Systematic sample selection 3. Probability proportional to size sample selection 4. Stratified sample selection  Audit Sampling Statistical Sampling: Probabilistic Sample Selection Methods  Simple random sample selection: Every possible combination of population items has an equal chance of being included in the sample.  Audit Sampling Statistical Sampling: Probabilistic Sample Selection Methods  Simple random sample selection: Used to sample populations when there is no need to emphasize one or more types of population items.  Audit Sampling Statistical Sampling: Probabilistic Sample Selection Methods  Systematic sample selection / systematic sampling: The auditor calculates an interval and then selects the items for the sample based on the size of the interval.  Audit Sampling Statistical Sampling: Probabilistic Sample Selection Methods  Systematic sample selection / systematic sampling: Determined by dividing the population size by the desired sample size.  Audit Sampling Statistical Sampling: Probabilistic Sample Selection Methods  Probability proportional to size sample selection: Takes the varying size of each item within the population into account  Audit Sampling Statistical Sampling: Probabilistic Sample Selection Methods  Stratified sample selection: Where the entire population is divided into different subgroups then the sample items are randomly selected.  Audit Sampling - Approaches Non-statistical sampling – A sample is non-statistical if it does not meet to one or more of the three criteria set out in statistical sampling. https://pcaobus.org  Audit Sampling - Phases 1. Plan the sample 2. Select the sample and perform the tests 3. Evaluate the results  Audit Sampling – Phases Illustration  Assume that an auditor selects a sample of 2,050 duplicate sales invoices from a population.  Tests each to determine whether a shipping document is attached, and determines that there are 205 exceptions.  Audit Sampling Non-Statistical Sampling (Judgement Sampling): Auditors select sample items they believe will provide the most useful information, given the circumstances, and reach conclusions about populations on a judgmental basis.  Audit Sampling Non-statistical Sampling (Judgement Sampling): Non-probabilistic Sampling These do not meet the technical requirements for probabilistic sample selection. Not based on mathematical  Audit Sampling Non-statistical Sampling (Judgement Sampling): Non-probabilistic Sampling The auditor selects sample items using professional judgment rather than probabilistic methods.  Audit Sampling Non-statistical Sampling (Judgement Sampling): Non-probabilistic Sample Selection Methods 1. Directed sample selection 2. Block sample selection 3. Haphazard sample selection  Audit Sampling Non-statistical Sampling (Judgement Sampling): Non-probabilistic Sample Selection Methods  Directed sample selection: Auditors deliberately select each item in the sample based on their own judgmental criteria instead of using random selection.  Audit Sampling Non-statistical Sampling (Judgement Sampling): Non-probabilistic Sample Selection Methods  Block sample selection: Auditors select the first item in a block, and the remainder of the block is chosen in sequence.  Audit Sampling Non-statistical Sampling (Judgement Sampling): Non-probabilistic Sample Selection Methods  Haphazard sample selection: The selection of items without any conscious bias by the auditor.  QUIZ An advantage of statistical sampling over non-statistical sampling is that statistical sampling helps an auditor. a) Minimize the failure to detect errors and fraud. b) Eliminate the risk of non-sampling errors. c) Design more effective audit procedures. d) Measure the sufficiency of the audit  QUIZ Which of the following best illustrates the concept of sampling risk? a) The documents related to the chosen sample may not be available to the auditor for inspection. b) An auditor may fail to recognize errors in the documents from the sample. c) A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest. d) An auditor may select audit procedures that are not appropriate to achieve the specific objective.  QUIZ In non-statistical sampling for tests of controls, increasing the desired confidence level results in a? a) Higher tolerable deviation rate. b) Lower expected deviation rate. c) Larger sample size. d) Smaller sample size.  Audit Sampling Risk and Uncertainty The uncertainty inherent in applying audit procedures; audit risk. Audit Risk – includes both due to sampling (among other factors). Audit Risk – sampling risk & non- sampling risk. https://aicpa.org  Audit Sampling Risks of Sampling Sampling Risk (due to sampling error). Non-sampling Risk (due to non- sampling error).  Audit Sampling Risks - Non-sampling Risk Risk that audit tests do not uncover existing exceptions in the sample.  Audit Sampling Risks - Non-sampling Risk - Causes 1. The auditor’s failure to recognize exceptions. 2. Inappropriate or ineffective audit procedures.  Audit Sampling Risks - Non-sampling Risk - Example With a sample of invoices which requires duplicate shipping documents (and some are missing) – if the auditor should go ahead and conclude that there were no exceptions.  Audit Sampling Risks - Sampling Risk The risk that an auditor reaches an incorrect conclusion because the sample is not representative of the population.  Audit Sampling Risks - Controlling Sampling Risk 1. Adjust sample size 2. Use an appropriate method of selecting sample items from the population.  QUIZ The risk that audit tests do not uncover existing exceptions in the sample. a) Sampling Risk b) Non-sampling risk c) Sampling Error d) Non-sampling error  QUIZ Which of the following would have the least impact in determining sample size? a) Acceptable risk of overreliance b) Risk of assessing control risk too low c) Tolerable exception rate d) Population size  QUIZ 1. Does increasing the sampling size increases or reduces sampling risk? 2. Does increasing the sampling size increases or reduces non-sampling risk? THE END