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HA3032
AUDITING
Topic 9
Audit Sampling
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Basic concepts of sampling
ASA 530.6Audit samplingdefines sampling as
a process which includes the application ofaudit 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
Sampling is used in both tests of controls and
substantive testing
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Sampling risk and Non-Sampling risk
When sampling is used to obtain evidence,
uncertainties may result from the use of sampling
(sampling risk)
factors unrelated to sampling
(non-sampling risk)
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Sampling risk
Sampling risk means the risk arising from the
possibility that the auditors conclusion, based
on a sample, may be different from the
conclusion reached if the entire population
were subjected to the same audit procedure
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Types of sampling risk
In the case of tests of control
The risk the auditor will conclude that control risk islower than it actually is (risk of over-reliance)
The risk the auditor will conclude that the controlrisk is higher than it actually is (risk of under-
reliance) In the case of substantive testing
The risk that the auditor will conclude that amaterial error does not exist when in fact it does
(risk of incorrect acceptance)The risk that the auditor will conclude that a
material error exists when in fact it does not (risk ofincorrect rejection)
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Non-Sampling risk
Non-sampling risk means the risk arising from
factors that cause the auditor to reach anerroneous conclusion for any reason not relatedto the size of the sample
Sources of non-sampling risk
human error reliance on erroneous information received from
another party
How to keep this risk to a minimum?
proper planning and supervision
adherence to quality control standards
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Statistical and Non-Statistical Sampling
Statistical sampling means any approach to
sampling that has the following characteristics: random selection of a sample; and
use of probability theory to evaluate sample results,including measurement of sampling risk
Non-statistical sampling means an approachto sampling that does not have any of theabove characteristics
In non-statistical sampling, the auditor uses
judgement in selecting the sample size and ininterpreting the results against the auditobjective
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Current practice
Many audit firms use non-statistical sampling,
as the auditor has a greater degree ofjudgement in: selecting a sample size, and
evaluating results based on previous client
knowledge Common approach is the use of haphazard
selection (this approach is not appropriatewhen statistical sampling is used)
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Statistical sampling is most often used in the
audit of a financial institution where the auditapproach relies heavily on controls testing
A research study by Hall et. al. (2002) on
sampling practices in the US, found that 85%of sample selection by auditors was non-
statistical and 74% used haphazard method
Current practice cont
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Other types of sampling
Selecting all items
100% examination
entire population is taken
This is a technically a survey and is not really
sampling at all
Selecting specific items (based on the
auditors knowledge of the business and the
characteristics of the population being tested)
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ASA 530.29 outlines specific items that may
be selected
These items are:
high value or key items
all items over a certain amount
items to obtain information
items to test control activities
Other types of sampling cont
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Use of samples for audit tests
In sampling the auditor typically undertakes
three common steps
planning the sample
selecting and testing the sample
evaluating the sample
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Planning the sample
Involves the following steps
determining the objectives of the test
defining what errors are being sought
identifying the population and sampling unit
specifying tolerable error, expected error andrequired confidence level
deciding the size of the sample
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Determining the objectives of the test
The auditor should consider
the specific objectives
combination of audit procedures
Need to determine what constitutes an error
and the appropriate population from which toselect the sample
Audit sampling is applicable to both tests of
controls and for substantive testing
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Defining what errors are being sought
The auditor must consider what constitutes an
error by referring to the objectives of the test Test of controls - the test objective is the
identification of deviations from the controlprocedure
Substantive tests - the test objective is theidentification of errors or misstatements inrecorded transactions or balances
An audit procedure may also detect errors not
being specifically sought and so extra testsmay be required to determine the extent ofsuch errors
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Identifying the population and sampling unit
The auditor must identify the population and
the sampling unit based on the objective of theaudit test
Population the entire set of data from which a sample is
selected and about which the auditor wishes todraw conclusions (ASA 530.9)
The auditor must ensure that the population isappropriate to the objective of the sampling
procedure and is complete
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Stratification of the population
increases audit efficiency and focuses greater auditwork on areas that are of higher inherent risk orpotentially materially misstated
is commonly based on monetary value
Stratification commonly used in the audit ofaccounts receivable
Sampling unit means the individual itemsconstituting a population
Examples include sales invoices, cash journalentries, listing of suppliers etc.
Identifying the population and sampling unit cont
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Specifying expected error and required confidence level
Tolerable error- the maximum error in a
population that the auditor is willing to accept Expected error- the error rate that the auditor
expects to exist in the population
Required confidence levelTests of controls: is the risk of
over-reliance (the risk that the allowable assessedcontrol risk is lower than it actually is)
Substantive tests: is the risk of incorrect
acceptance (the risk that the testing suggests amaterial error does not exist when it actually does)
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Deciding the sample size
In determining an appropriate sample size, the
auditors main concern is with reducingsampling risk to an acceptably low level
The level of sampling risk that the auditor is
willing to accept, will have an inverserelationship with the sample size required
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TABLE 11.1: Factors that influence sample size for tests of controls
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TABLE 11.2: Factors that influence sample size for substantive procedures
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Selecting the sample
Basic principle
each item in the population has a chance of beingselected (though not necessarily an equal chance)
Three approaches in selecting a sample (ASA530, Appendix 3)
RandomSystematic
Haphazard
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Random selection
Generally considered to be the best method of
obtaining a sample to evaluate the resultsstatistically
Each item in the population has a known
(usually equal) chance of selection
Auditing software can be used to select
random samples
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Systematic selection
Is the process of dividing the number of
sampling units in the population by the samplesize to give a sampling interval
As long as the starting number is selected
randomly, this method can be used as a
statistical sampling method
Drawback is the population may have a fixed
pattern which may lead to bias in the sampling
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Haphazard Selection
Selection of a sample without following
a structured technique
Is only practical when the population is not
ordered in any numerical sequence
This method is not recommended where othermethods are available
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Testing the sample and evaluating results
Having drawn the sample, the auditor then
examines or tests each item in accordancewith the required audit objective
Each error or deviation needs to be evaluated
as to its implications
For each error, the auditor must consider
whether the error
has an effect on the whole population
or is an isolated or localised occurrence
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Substantive tests
the sample results are projected to the population
the most common method is the difference
estimation method this method looks at the relative differences
between the recorded and audited amounts
if the projected error approaches or exceeds the
tolerable error, more evidence may be necessary
Projecting the error to the
population cont
T t i l
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Tutorial
Audit Sampling
Reading:
Leung Chapter 11
Audit Sampling
Tutorial Questions:
Leung Chapter 11
Questions 11.11, 11.14, 11.15, 11.17 & 11.23