Audit Sampling

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Audit Sampling
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Risks of Sampling

• Sampling Risk
• The risk that an auditor will reach an erroneous
  conclusion because the sample was not
  representative
• Nonsampling Risk
• The risk that audit tests will not uncover
  exceptions

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Sampling Risk

• Efficiency
• Risk of assessing control risk too high
• Risk of incorrect rejection
• Effectiveness
• Risk of assessing control risk too low
• Risk of incorrect acceptance
• These must be considered when planning a sample

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Sample Selection

• Two basic techniques
• Probabilistic
• Nonprobabilistic
• Probabilistic selection allows auditors to
  quantify sampling risk, while nonprobabilistic
  does not.

• Probabilistic
• Random
• Probability proportional to size
• Stratified random
• Nonprobabilistic
• Judgmental
• Directed
• Block

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Planning Samples

• Substantive tests
• Relationship of the sample to the audit objective
• Tolerable misstatement (inverse)
• Risk of incorrect acceptance (inverse)
• Tests of controls
• Relationship of the sample to the audit objective
• Tolerable deviation rate (inverse)
• Risk of assessing control risk too low (inverse)
• Likely rate of deviations (direct)

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Steps in Audit Sampling

• State the objectives of the test
• Decide whether audit sampling is appropriate
• Define attributes and exception conditions
• Define the population
• Define the sampling unit
• Specify the TER and the ARACR
• Estimate the EPER
• Determine the initial sample size

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Steps in Audit Sampling

• Determine the selection method and select the
  sample
• Perform the audit procedures (e.g., TOC)
• Evaluate the results based on
• SDR
• Sample size
• ARACR
• Qualitative aspects of deviations
• Decide acceptability of the population

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Attributes Sampling

• Attributes sampling is the most common sampling
  method used for tests of controls (TOC)
• Attributes sampling is applied whenever the
  population contains characteristics of interest
• Examples Credit is approved, Details on bill of
  lading agree to sales invoice, Pricing and
  extensions on invoices are checked, etc.
• Attributes sampling may follow either a
  statistical sampling or a non-statistical
  sampling methodology

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Attribute Sampling Example

• Facts
• You wish to conduct TOC related to a clients
  sales and receipts cycle.
• You are specifically interested in testing
  controls related to the shipping and invoicing
  processes.
• You decide to test the following attributes
• Credit approval
• Agreement of details on bill of lading and sales
  invoice
• Verification of pricing and extensions on
  invoices
• You will select a sample from duplicate sales
  invoices

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Attribute Sampling Example

• Facts (cont.)
• TDR is 5
• ARACR is 5
• EPER is 0.50
• You selected your sample using a simple random
  selection technique where the invoice numbers
  were used to select the items

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Attribute Sampling Example

• Determine the sample size
• Initial sample size __________
• Your results were
• Observed deviations 2
• No significant qualitative issues were observed
• Sample and population evaluation
• TDR 5
• Computed (Achieved) Upper Precision Limit ____
• Decision ________________________________

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Evaluation of Results

• Considerations related to substantive tests
• Calculate the allowance for sampling risk
• Nature of misstatements
• Relationship of misstatements to other aspects of
  the audit
• Possible fraud
• Considerations related to tests of controls
• Inability to apply tests is indicative of a
  deviation
• Calculate the allowance for sampling risk
• Relationship of exceptions to other aspects of
  the audit
• Possible fraud