Scope and ive of Audit sampling
The scope of sampling is determined by audit ives, audit evidence and audit procedures. The purpose of this standard is to establish standards on the design and selection of an audit sample and the evaluation of the sample results. This AAS applies equally to both statistical and non statistical sampling methods. The application of either of the methods provides sufficient appropriate audit evidence.
Meaning of audit sampling
Audit sampling means the application of audit procedures to less than 100% of the items within an account balance or class of transactions to enable the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in order to form or assist in forming a conclusion concerning the population.
Need and Importance Of Sampling
The need for audit sampling arises from
- The increasing complexities in business,
- Auditor s time involved and
- The volume of transactions involved in the business
The purpose of audit sampling is
- to obtain an evidence,
- to fulfill the audit ives set by the auditor
- which enables the auditor to test the validity and accuracy of the transactions.
Design of the Sample
The following should be considered in the design of the sample.
- Audit ives
- sample size
- sampling risk
- The specific audit ives and audit procedures to accomplish those ives should be determined.
- The population is the entire set of data from which the auditor wishes to sample in order to reach a conclusion. The auditor will need to determine that the population from which the sample is drawn is appropriate for the specific audit ive.
- For eg. If the auditor s ive were to test for overstatement of accounts receivable, the population could be defined as accounts receivable testing. On the other hand, when testing for understatement of accounts payable the population would not be the accounts payable listing, but rather subsequent disbursements, unpaid invoices, suppliers statements, unmatched receiving reports or other populations that would provide audit evidence of understatement of accounts payable.
- Stratification is the process of dividing a population into subpopulations, each of which is a group of sampling units, which have similar characteristics
- The strata need to be explicitly defined so that each sampling unit can belong to only one stratum. This process reduces the variability of the items within each stratum. Stratification therefore, enables the auditor to direct audit efforts towards the items which for example contain the greatest potential monetary error.
- For eg, the auditor may direct attention to larger value items for accounts receivable to detect overstated material misstatements.
- While determining the sample size the auditor should consider sampling risk the tolerable error and the expected error.
- Sampling size is affected by the level of sampling risk the auditor is willing to accept from the results of the sample. The lower the risk the auditor is willing to accept, the greater the sample size will need to be
It arises from the possibility that the auditor s conclusion, based on a sample, may be different from the conclusion that would be reached if the entire population were subjected to the same audit procedure.
The auditor is faced with sampling risk in both tests of control and substantive procedures as follows;
Tests of control:
- Risk of under reliance: the risk that although the sample result does not support the auditors assessment of control risk, the actual compliance rate would support such an assessment
- Risk of over reliance: the risk that, although the sample result supports the auditor s assessment of control risk, the actual compliance rate would not support such an assessment.
- Risk of incorrect rejection: the risk that although the sample result supports the conclusion that a recorded account balance or class of transactions is materially misstated in fact it is not materially misstated
- Risk of incorrect acceptance: the risk that although the sample result supports the conclusion that a recorded account balance or class of transactions is not materially misstated, in fact it is materially misstated
- The risk of audit reliance and the risk of incorrect rejection affect audit efficiency as they would ordinarily lead to additional work being performed by the auditor or the entity which would establish that the initial conclusions were incorrect.
- The risk of over reliance and the risk of incorrect acceptance affect audit effectiveness and are more likely to lead to an erroneous opinion on the financial statements than either the risk of under reliance or the risk of incorrect rejection
It is the maximum error in the population that the auditor would be willing to accept and still concludes that the result from the sample has achieved the audit ive. Tolerable error is considered during the planning stage and for substantive procedures is related to the auditor s judgment about materiality. The smaller the tolerable error the greater the sample size will need to be
In tests of control, the tolerable error is the maximum rate of deviation from a prescribed control procedure that the auditor would be willing to accept, based on the preliminary assessment of control risk.
In substantive procedures, the tolerable error is the maximum monetary error in an account balance or class of transactions that the auditor would be willing to accept so that when the results of all audit procedures are considered, the auditor is able to conclude with reasonable assurance, that the financial statements are not materially misstated
If the auditor expects error to be present in the population, a larger sample than when no error is expected ordinarily needs to be examined to conclude that the actual error in the population is not greater than the planned tolerable error. Smaller sample sizes are justified when the population is expected to be error free. In determining the expected error in a population, the auditor would consider such matters as error levels identified in previous audits, changes in the entity s procedures, and evidence available from other procedures
Selection of the sample
The selection of sample items should be in such a way that it can be expected to be representative of the population. This requires that all items in the population have an opportunity of being selected.
Following are the three methods of selection
1. Random Selection
- Random selection, which ensures that all items in the population have an equal chance of selection
- Random number tables are used for selection
- For example, out of 10000 items, 50 items should be selected. The range will be fixed based on the characteristic of sample to be tested. Out of the range, either by using software or random number tables, the 50 items will be selected. Random selection, which ensures that all items in the population have an equal chance of selection for example b use of random number tables.
2. Systematic Selection
- It is also called as interval sampling.
- A systematic selection of the sample items is made based on a fixed sampling interval.
- For example, assume that a sample size (n) of 50 items of retail inventory are to be selected from a population (N) of, say, 600 items. The sampling interval is equal to N/n or 12. The first item chosen in the population is determined by reference to random number tables (based on the first random number selected between 1 and 12) and then after that, every 12th item is selected
3. Haphazard Selection
- The sample is selected haphazardly.
- No systematic procedures are applied while selecting sample
- For example, Play-win Lottery
Evaluation of sample results
Having carried out, on each sample item, those audit procedures that are appropriate to the particular audit ive, the auditor should:
- Analyze any errors detected in the sample
- Project the errors found in the sample to the population and
- Reassess the sampling risk
Analysis of errors in the sample
In deciding the sample, the auditor will have defined those conditions that constitute an error by reference to the audit ives. For example, in a substantive procedure relating to the recording of accounts receivable, a misposting between customer accounts does not affect the total accounts receivable. Therefore, it may be inappropriate to consider this an error in evaluating the sample results of this particular procedure, even though it may have an effect on other areas of the audit such as the assessment of doubtful accounts.
When the expected audit evidence regarding a specific sample item cannot be obtained, the auditor may be able to obtain sufficient appropriate audit evidence through performing alternative procedures. For eg, if a positive account receivable confirmation has been requested and no reply was received, the auditor may be able to obtain sufficient appropriate audit evidence that the receivable is valid by reviewing subsequent payments from the customer. If the auditor does not or is unable to perform satisfactory alternative procedures or if the procedures performed do not enable the auditor to obtain sufficient appropriate audit evidence, the item would be treated as an error
In analyzing the errors discovered the auditor may observe that many have a common feature for example, type of transaction, location, product line or period of item. In such circumstances, the auditor may decide to identify all items in the population which possess the common feature, thereby producing a sub population and extend audit procedures in this area, the auditor would then perform a separate analysis based on the items examined for each sub population.
Projection of errors
The auditor projects the error results of the sample to the population from which the sample was selected. These are several acceptable methods of projecting error results. However, in all the cases, the method of projection will need to be consistent with the method used to select the sampling unit. When projecting error results, the auditor needs to keep in mind the qualitative aspects of the errors found. When the population has been divided into sub population, the projection of errors is done separately for each sub population and the results are combined
Reassessing sampling Risk
The auditor needs to consider whether errors in the population might exceed the tolerable error. To accomplish this, the auditor compares 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 the comparison in the case of substantive procedures is net of adjustments made by the entity. When the projected error exceeds tolerable error, the auditor reassesses the sampling risk and if that risk is unacceptable would consider extending the audit procedure or performing alternative audit procedures.
Sampling In CIS /ERP Environment
Nature of Transaction
- Huge voluminous data for verification
- Large number of similar kind of transaction
- Transactions are clearly identifiable can be classified
- Determining the Size of the sample
- Use of CAAT s and Statistical technique for determining the samples.
- Fixing up Materiality levels
- Evaluation of Sample results
- Based on the such evaluation results, either increase the substantive procedure or conclude reliance to be placed on the Internal control.
Sampling Legal Frame work
We have conducted our audit in accordance with auditing standards generally accepted in
- Introductory paragraph of Audit Report under Sec 227 of the companies act
AAS-15 Audit Sampling
The purpose of this Auditing & Assurance Standard is to establish standards on the design & selection of an audit sample & the evaluation of the sample results.
When Not To Sample
There are many audit procedures which do not involve sampling.
Inquiry and Observation
- Observing accounting procedures
- Discussing methods of accounting and reporting .
Analytical Review Procedures
- Comparing records reports and other information
- Recomputing or estimating amounts
- Reviewing trends in reporting
- Comparing similar businesses
One Hundred Percent Examination
- Reviewing all fixed asset purchases, where appropriate
- Examining all contracts, where there are a small number
Zero Percent Examination
This occurs when the auditor determines that a type of receipt, deduction, exemption or other item does not need to be tested.