4 Audit Sampling

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Audit Sampling AUD – 08

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Audit Sampling and Other Selective Testing Procedures - PSA 500, Audit Evidence - PSA 530, Audit Sampling and Other Selective Testing Procedures

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Means of Selection • 100% Testing • Small no. of high value items • Presence of significance risk • Feasible through CAATs • • Selection of specific items • • Audit Sampling •

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Audit Sampling • Involves application the application of audit procedures to less than 100% of the items within a class of transactions or account balance where samples selected are expected to be representative of the population. • All sampling units have a chance of selection. • Reasonable basis of the auditor to base conclusion about the population.

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Procedures NOT Involving Sampling • Inquiry and observation • Analytical procedures • Procedures applied to every item • Controls without audit trail •

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Audit Procedures and Sampling • Risk Assessment Procedures • Ordinarily does not involve audit sampling. • Exception • Test of Controls • The auditor tests the presence or absence of attributes. • Substantive Test • Substantive analytical procedures • Substantive test of details • •

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Dual Purpose Tests • Same set of samples is used to test a control and to serve as a substantive test. • select the sample size as the higher of that required for two purposes.

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Audit Risk and Sampling • Audit sampling and uncertainty • Eliminating uncertainty = undue delay, cost • Non-sampling risk • Aspects of audit risk not due to sampling. • Sampling Risk • Varies inversely with sample size •

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General Approaches in Sampling • Statistical sampling • Apply the laws of probability • quantify sampling risk • • Non-statistical sampling • subjective • • •

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Types of Statistical Sampling Plan • Attributes Sampling • rate of occurrence • used in Test of Controls

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Sample Selection Methods

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Audit Sampling in Test of Controls - PSA 500, Audit Evidence - PSA 530, Audit Sampling and Other Selective Testing Procedures

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Sampling Risks in Test of Control • Risk of assessing control risk too high (Alpha Risk) • Risk of under reliance • Affects audit efficiency. • Risk of assessing control risk too low (Beta Risk) • Risk of over reliance • Affects audit effectiveness. • More dangerous •

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Attribute Sampling • Used in test of controls • Reaches a conclusion in terms of occurrence rate or exception rate • Peso amounts are irrelevant •

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1. Determine the Objective • Reasonable assurance about design & operating effectiveness of internal control • Used when there is an audit trail

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2. Define the Attributes and Deviation Conditions • Attributes • characteristics indicating the operations of IC procedure. • Deviation • departure from the prescribed internal control policy or procedure. • The auditor considers the tolerable rate of deviation based on preliminary assessment of control risk. •

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3. Define the Population • Population in Tests of Control • Class of transaction • Conclusion in TOC can be drawn only to the population from which the samples were selected • Considerations • Define the period covered by the test • Define the sampling unit • Consider the completeness of transaction •

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4. Determine the Method of Selecting Sample • Random No. Sampling • • Systematic Sampling • • Haphazard Sampling

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5. Determine the Sample Size

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6. Perform the Sampling Plan • Other Sampling Approach in TOC • Sequential Sampling (Stop-or-go) • very few expected errors • After testing a sample, the auditor decides whether to stop testing or continue with the sampling plan. • Discovery Sampling • No expected deviations •

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7. Evaluate the Results • Evaluate whether sample results support reliance on the control procedure tested. • Evaluate the significance of control deficiency • Determine upper deviation limit • Compare the upper deviation limit with tolerable rate of deviation.

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7. Evaluate the Results & Document the Sampling Procedure • Upper deviation limit • Represents sample deviation rate plus allowance for sampling risk. • The upper deviation limit is found by referring into a sampling table taking into consideration the allowable risk of assessing control risk too low and no. of deviations. • If Upper Limit > Tolerable Rate = ICS is not effective.

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Audit Sampling in Substantive Test - PSA 500, Audit Evidence - PSA 530, Audit Sampling and Other Selective Testing Procedures

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Sampling Risks in Substantive Tests • Risk of incorrect rejection • Conclusion that the item is materially misstated but actually it is not. • Audit efficiency • Risk of incorrect acceptance • Conclusion that the item is not materially misstated, but it actually is. • Audit effectiveness • More dangerous

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Variables Sampling • Used in substantive test procedures • Applies to test of details only. • Reaches a conclusion in terms of peso amounts. • Materiality threshold applies. • •

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Steps in Variables Sampling 1. 2. 3. 4. 5. 6. 7.

Determine the objective Define the fair presentation and material misstatements Define the population Determine the method of selecting sample Determine sample size Perform the sampling plan Evaluate the results & document sampling procedure

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Sample Size in Variables Sampling

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Projection of Errors in Substantive Tests

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• Necessary before comparing the misstatements noted in sample results with materiality. • 29

Probability Proportional to Size (PPS) Sampling • Uses attribute sampling theory • The auditor selects individual pesos and audit the balances, transaction or document (logical units) that include the individual pesos selected. • The larger the size of logical unit the larger the probability of selection. • Applicable when few or no errors are expected and testing for overstatements. •

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End of Discussion QUESTIONS

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