Specialized Audit Sampling (PSA 30) PDF

**SPECIALZIED AUDIT** **AUDIT SAMPLING** Auditing Standards: **PSA: PSA 30** Means of Selecting Items for testing 1\. Selecting all items (100% examination) 2\. Selecting specific items 3\. Audit Sampling When Designing test of controls (For IC) and tests of details (For Substantive testing),...

**SPECIALZIED AUDIT** **AUDIT SAMPLING** Auditing Standards: **PSA: PSA 30** Means of Selecting Items for testing 1\. Selecting all items (100% examination) 2\. Selecting specific items 3\. Audit Sampling When Designing test of controls (For IC) and tests of details (For Substantive testing), the auditor shall determine means of selecting items for testing that are **effective in meeting the purpose of the audit procedure.** **Selecting all items (100% examination)** Examination of the entire population of items that make up a class of transaction or account balance. Unlikely in the case of test of controls, common test for test of details Appropriate when: - **The population consists of a small number of large value items** - **There is a high audit risk** - **Auditor use CAATS** **Selecting Specific Items** **High Value or key Items** ***High value items** --* those of high value ***Key Items*** -- Items that exhibit some other characteristics such as being suspicious, unusual, risk-prone, or having a history of error **All Items over a certain amount --** those with recorded values exceed a certain amount so as to verify a large proportion of the total amount of a class of transactions or account balance. **Items to obtain information --** those to obtain information about matters such as the nature of the entity or the nature of transactions. **Audit Sampling** The application of audit 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]** in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population **Can be used in:** - TOC - Substantive tests of details - Dual Purpose Tests - Inquiry and Observation - Analytical Procedure - Timeliness - More expeditious review of working papers - Efficiency - Reduce audit costs - Effectiveness - Minimized risk of over-auditing **Sampling Risk** The risk that the auditor's **conclusion based on a sample** may be different from the **conclusion had the entire population** were subjected to the same procedure. **Confidence Level** The **probability** that the sample will produce **accurate results** Ex. 95% confidence level: If a particular test was performed 100 times, the results would be accurate 95 times, with a risk that 5 tests will produce inaccurate results (or 5% beta risk) **90% or 95%** confidence levels are recommended **Test of Controls** - There are evidence obtained from other sources such as test of operational effectiveness or related controls **Test of Details** - The class of transactions/account balance/disclosure being tested is below performance materiality. - There are evidence obtained from other sources such as analytical review and other substantive procedure. **Confidence Level: 90%** **Risk: 10%** **Test of Controls** - There are no evidence obtained from other sources such as test of operational effectives or related controls. **Test of Details** - The class of transactions/account balance/disclosure being tested is above performance materiality - There are no evidence obtained from other sources such as analytical review and other substantive procedures. **Confidence Level: 95%** **Risk: 5%** **Non-Sampling Risk** - The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk Ex: - Use of inappropriate audit procedures - Misinterpretation of audit evidence - Failure to recognize a misstatement or deviation - Cannot be measured - Can be reduced to an acceptable level by [**adequate planning and supervision of audit** **work**] and by implementing an **[effective quality control system.]** **Sample Selection Methods** 1. Random Sampling 2. Systematic Sampling 3. Monetary Unit Sampling 4. Test Audit Day Scheme 5. Not recommend methods: Haphazard Selection and Block Selection The auditor shall select items for the sample in such a way that [**each sampling unit in the population has a chance of selection.** ] **Random Sampling** Allows each item in the population an equal chance being selected. It is useful when a **unique identification number for every sampling unit in the population** **Systematic Sampling** - Allows every sampling unit in the population equal chance of being selected - Selected of every Nth item from a population of sequentially ordered items (n is the sampling interval) - **Useful when:** Population items lack of identification numbers and there is no list of items. **Monetary Unit Sampling** - **A.K.A** Probability-Proportional-to-Size sampling - Uses **Pesos** as sampling units-higher value, higher changes of being selected. - Uses **sampling interval** (like systematic sampling) and RNS - Useful when: The auditors gives greater importance to items with higher values, there is a list of all items in the population, together with their monetary values. - Cannot be applied if there are transactions with balances equal to Zero (or negative, rarely) exclude these items first **Test Audit Day Scheme** - Used for purposes such as determining whether the day's collection was deposited intact on the day following the date of collection - The sampling units are the **working days** in a year. The samples are called test days. All transactions in a test day will be audited. - Here should be at least **6 days per month, including the mandatory test days** (last working day of each month and first working day of January), for a total of 72 day test a year. The Random Number Table \#1 will be used to determine the test days. 1. **Use the Audit Sampling Working Paper -- TOC** 2. **Define Specific risk Control(s)** In the [**Results of Risk Assessment at the Assertion Level (RRAAL) Template**] of Financial Audit Manual, the risk controls to be tested are the ones which have **[adequate control design.]** Multiple specific risk controls may be tested using one sampling working paper. Ex. A. Approval of Requisition and issues slips supported with valid doctor's prescription 3\. **Define the objectives** [Objective of test of controls:] to obtain evidence of the operating effectiveness of certain risk controls during the period covered by the test **[Operating effectiveness --]** the controls are being applied as designed on a sufficiently consistent basis. **[Ex.]** To test the operating effectiveness of the control that the prescribed approval of RIS with valid doctor's prescription is obtained before issuance of drugs and medicines **[4.]** **Define what constitutes a deviation** Define the conditions by which items will be considered deviations. **Deviations** -- Non-performance of a prescribed risk controls **EX.** Approval of RIS without valid doctor's prescription and Absence of signature of end-users in the RIS. **5.** **Describe the population to be tested** **6. Determine the sample size** Determine sample size for controls operating less than daily +-----------------+-----------------+-----------------+-----------------+ | Control | Usual | Suggested | Expected | | Operations | Population | Minimun Sample | Deviation | | | | Size | | +=================+=================+=================+=================+ | Weekly | 54 | 10 | 0 | | | | | | | Semimonthly | 24 | 8 | 0 | | | | | | | Monthly | 12 | 4 | 0 | | | | | | | Quarterly | 4 | 2 | 0 | +-----------------+-----------------+-----------------+-----------------+ Facts to consider: 1\. Confidence level 2\. Tolerable rate of deviation 3\. Expected rate of deviation **1. Confidence Level** **Choose either 95% or 90% and May consider if there are other sources of evidence** **Example: Suppose that we assume a risk of assessing control risk too low of 5%, meaning, we will choose a 95% level of confidence.** **2. Tolerable Rate of Deviation -- the maximum rate of nonperformance in a prescribed control that the auditor is willing to accept and still rely on that risk control** **Ex. We choose a tolerable rate of deviation of 6% due to the moderate likelihood of material misstatement arising from control failure and existence of some compensating controls** **3. Expected Rate of Deviation** Based on either: A. The auditor's understanding of the relevant controls B. Examination of Small number of items from the population  [Zero expected deviation rate] may be used when test is to be done on computerized transactions since the auditor generally does not expect a deviation from risk control unless there is an error in the program or design of the system **7. Choose a sample selection Method** **8. Perform the Test and Conclude** **Others points to Remember** - The auditor may discontinue testing if during the examination of the first few items, there is already a number of deviations which exceed the expected number of deviations - If the audit procedure is not applicable to the selected item (check is voided), the auditor shall **perform the procedure on a replacement item.** The auditor may choose the item which immediately follows the voided item as replacement - If the auditor is unable to apply the designed audit procedures (eg. Lost documentation) or suitable alternative procedures to a selected item, the auditor shall **treat that item as deviation** from the prescribed control. - The population should cover the period of reliance on control +-----------------------------------+-----------------------------------+ | Confidence Level % | R-Factor | +===================================+===================================+ | 95 | 3.0 | | | | | 90 | 2.3 | +-----------------------------------+-----------------------------------+ **12. Determine if there is a reasonable basis for conclusion.** **AUDIT SAMPLING (AUDITING THEORY)** **Types of Sampling Risk** **Risk of under-reliance (doubtful) -- FOR TOC** - Sample **does not support** the auditor's planned degree of reliance on the control when true compliance rate supports such reliance. Also known as the **risk of assessing control risk too high --** the risk the auditor will conclude that control risk is higher than it actually is Efficiency -- The **risk of under reliance** and the **risk of incorrect rejection** (**both referred to as Alpha Risk)** affect audit efficiency as it would usually lead to additional work to establish that initial conclusion were incorrect. **Type 1 error -- Alpha Risk** **Type 2 Error -- Beta Risk** Effectiveness -- The [Risk of over-reliance] and [risk of incorrect acceptance] (both referred to as **Beta Risk**) affect the audit effectiveness and is more likely to lead an inappropriate audit opinion.  **General Approaches to audit sampling** **Statistical sampling -- approach to sampling that has the characteristics of:** - **Random selection of sample; and** - **Use of probability theory to evaluate sample results, including measurements of sampling risk** **Advantages -- Helps Auditor** 1\. Design an efficient sample 2\. Measure the sufficiency of evidential matter obtained 3\. Objectively evaluate sample results **Disadvantages -- May involved additional costs** **1.** Training auditors 2\. Designing samples 3\. Selecting items to be tested **Non-statistical sampling --** A sampling approach that does not have characteristics of statistical sampling Ex. Haphazard and Block Selection (If hindi maganda yung control, non-statistical sampling) **Reasons for use --** often less costly and time-consuming to apply than statistical sampling **Other matters** Similarities -- Both statistical and non-statistical sampling 1\. Can provide sufficient, competent evidential matter 2\. Involved judgement in planning, executing, the sampling plan and evaluating 3\. Request that sample item **be selected in such a way that sample can be expected to be representative of population** **Choice of approach --** the decision whether to use statistical or non-statistical. **Sample selection Methods** - Sample size is not a valid criterion to distinguish between statistical and non-statistical approaches. Sample size is a function of various factors. When circumstances are similar, the effect on sample size will be the same regardless of whether it's statistical or non-statistical **Types of Sampling plans for Substantive Testing** **Variable sampling** -- a sampling plan used in substantive testing to estimate the total peso amount or possibly units of a population or the peso amount of an error. Attribute Sampling plan - TOC 1\. Determine the objective(s) of the test 2\. Define the attribute **(characteristics of a control) and** deviation (**absence of an attribute)** conditions How can you say na it is attribute or paano nag a-arrive sa attribute na ýon? Nag start sa assertion level. After test of design yung attribute of sampling then sa test of design makakakita ng lapses then re-relate mo yon sa assertion ng management then gagawa ka attribute ng sampling na nag pe-pertain doon sa procedure na ýon 3\. Define Population 4\. Determine the method of sample selection 5\. Determine Sample Size 6\. Perform the sampling plan 7\. Evaluate Result 8\. Document the sampling plan, the procedures performed, and the conclusions reached. **Factors influencing Sample Size (Test of Control)** **FACTORS** **Effects on sample size** ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ---------------------------- An increase in the auditor's intended reliance on accounting and internal control system **Increase** An increase in the rate of deviation from the prescribed control procedure that the auditors is willing to accept **(Tolerable deviation rate)** **Decrease** An increase in the rate of deviation from the prescribed control procedure that the auditor expects to find in the population **(Expected Deviation Rate)** **Increase** An increase in the auditor's required confidence level (or conversely), a decrease in the risk that the auditor will conclude that the CR is lower than actual CR in the population (risk of assessing CR is too low) **Increase** An increase in the number of sampling units in the population **Negligible effect** **OTHER SAMPLING TECHNIQUES FOR TEST OF CONTROL** **[Sequential (Stop-or-Go) Sampling]** Audit sampling can be accomplished with either a fixed or sequential sampling plan. 1\. Fixed Sampling Plan -- The auditor tests a single plan, such as attribute estimation 2\. Sequential Sampling Plan -- the sampling is performed in a several steps. Following each step, the auditor decides whether to stop testing or to go the next step Sequential sampling plan can be used as an alternative to attribute estimation when auditor expects **[Zero or very Few Deviation]** within an audit population. **[Discovery Sampling]** Discovery sampling is appropriate when: 1\. Audit objective is to observe **[at least one deviation at a specified rate]** 2\. The **[expected population deviation rate is near zero]** 3\. the auditor desires a specified probability of observing at least one deviation of the actual population rate exceeds the critical rate (this is comparable to the tolerable rate in attribute estimation sequential sampling). **Variable Sampling Plan** 1. Determine the objective(s) of the test 2. Define Population 3. Choose an audit sampling approach/technique 4. Determine Sample Size 5. Determine the method of sample selection 6. Perform the sampling plan 7. Evaluate Result 8. Document the sampling plan, the procedures performed, and the conclusions reached. **SAMPLING TECHNIQUES FOR SUBSTANTIVE TESTING** **[Probability-proportional-to-size (PPS) Sampling]** Is a sampling technique that uses attribute sampling theory to evaluate the results when a large number of transactions are captured within a single account [PPS sampling is most appropriate when:] **[1.] [No errors are expected]** (Although it is also appropriate when one or few errors are expected **[2. Testing for overstatement]** (Normally for assets and income) **[Classical Variable sampling]** -- Relies on normal distribution theory to evaluate audit samples. These may be appropriate when the audit objective is to estimate the true but unknown monetary balance. The three commonly used classical variables sampling techniques are: **[Ratio Estimation --]** uses the ratio of audited amounts to recorded amounts in the sample to estimate the total peso amount of the population (**Also Called Point Estimate)** and an allowance for sampling risk. [SAV/SBV x PBV = EPAV] **Sample Audit Value/Sample Recorded Book Value x Population Book Value = Estimated Population audited value +(-) sampling risk** [The use of ratio estimation is appropriate when the misstatement in an account is directly proportional to its book value] **[Difference estimation --]** uses the average difference between audited amounts individual recorded amounts in the sample to estimate the total audited amount of the population and an allowance for sampling Risk (SAV-SBV)/SS x P = Projected Error (**Sample Audit Value -- Sample Recorded Book Value)/ Sample Size x Number of Items in population** **= Projected Error** [The use of difference estimation is more appropriate when the misstatement, in an account is not affected by the book value of the item being examined.] **[Mean-per-unit-estimation]** -- Projects sample average (mean) to the total population by multiplying the sample average by the number of items in the population [SAV/SS x P = EPAV +(-) sampling risk] **Sample Audit Value/Sample Size x Number of items in the population = Estimated Population audited value +(-) sampling risk** [The use of mean-per-unit estimation is appropriate when the individual population items do not have recorded values] **Reminders:** Before applying ratio or difference estimation, the following **three conditions must exist** 1\. Each **[population item must have recorded value]** (perpetual rather than periodic, inventory) 2\. Total population **[book value must be known]** (recorded general ledger book value) and must correspond to the sum of all individual population items) 3\. Expected **[differences]** between audited and recorded book values **[must ]** **[COMPARATIVE ADVATANGES OF PPS AND CVS]** **[PPS Sampling ]** [**CVS** ] -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------- Automatically **results in stratified** sample because items are selected in proportion to their peso amount **May result is smaller sample size** if there are many individual differences between recorded and audited amounts in the population Usually **results in a smaller sample size** than classical variables sampling when no errors are expected **Selection of zero or negative balances** within a sample does not require special sample design considerations **Can be designed more easily** and sample selection can begin before complete population is available If necessary, it is **easier to expand samples** than PPS **PPS SAMPLING (DISADVANTAGES)** **CVS SAMPLING (DISADVANTAGES)** -------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Evaluation of the sample will **require special sample design consideration if sample includes understatement of errors** **More complex** than pps Evaluation **may overstate the allowance for sampling risk** when errors are found To determine the sample size, **the auditor must have an estimate of the population standard deviation** Generally includes an assumption that the audited amount of a **sampling unit should not be less than zero or greater than the recorded amount** Normal distribution theory, the basis underlying classical variables sampling **may not be appropriate when the sample size is not large and there are either very large items or very large difference between recorded amount and audited amount in the population** **FACTORS INFLUENCING SAMPLE SIZE (SUBSTANTIVE PROCEDURES)** **FACTORS** **EFFECT ON SAMPLE SIZE** ----------------------------------------------------------------------------------------------------------- --------------------------- An increase in the auditor's assessment of inherent risk **INCREASE** An increase in the auditor's assessment of CR (or a decrease in reliance of IC) **INCREASE** An increase in the use of other substantive procedures directed at the same financial statement assertion **DECREASE** An increase in the auditor's required confidence level (risk of incorrect acceptance) **INCREASE** An increase in the total error that the auditor is willing to accept (tolerable error) **DECREASE** An increase in the amount of error the auditor expects to find in the population (expected error) **INCREASE** Stratification of the population when appropriate **DECREASE** The number of sampling units in the population **Negligible effect**