Audit Sampling

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# Audit Sampling - PowerPoint PPT Presentation

Audit Sampling. Applying a procedure to less than 100% of a population To estimate some characteristic of the population Qualitative Quantitative . What is Audit Sampling? . Design efficient samples Measure sufficiency of evidence Objectively evaluate sample results.

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### Audit Sampling

Applying a procedure to less than 100% of a population

To estimate some characteristic of the population

Qualitative

Quantitative

What is Audit Sampling?
Design efficient samples

Measure sufficiency of evidence

Objectively evaluate sample results

Random number tables

Random number generators

Systematic selection

Selection of Random Sample
Attributes sampling

Discovery sampling

Classical variables sampling

Probability-proportional-to-size sampling

Types of Statistical Sampling Plans
When planning the sample consider:

The relationship of the sample to the relevant audit objective

Materiality or the maximum tolerable misstatement or deviation rate

Allowable sampling risk

Characteristics of the population

Select sample items in such a manner that they can be expected to be representative of the population

Sample results should be projected to the population

Items that cannot be audited should be treated as misstatements or deviations in evaluating the sample results

Nature and cause of misstatements or deviations should be evaluated

Requirements of Audit Sampling Plans
True State of Population

Deviation Rate Deviation Rate Exceeds Is Less Than

Auditors’ Conclusion Tolerable Rate Tolerable Rate

From the Sample Is:

Deviation Rate

Exceeds

Tolerable Rate

Deviation Rate

Is Less Than

Tolerable Rate

Sampling Risks--Tests of Controls

Correct

Decision

Incorrect

Decision

(Risk of Assessing

Control Risk

Too High)

Incorrect

Decision

(Risk of Assessing

Control Risk

Too Low)

Correct

Decision

Determine the objective of the test

Define the attributes and deviation conditions

Define the population to be sampled

Choose an audit sampling technique

Specify:

The risk of assessing control risk too low

The tolerable deviation rate

Estimate the population deviation rate

Determine the sample size

Select the sample

Test the sample items

Evaluate the sample results

Document the sampling procedure

Audit Sampling for Tests of Controls
True State of Population

Misstatement in Misstatement in Account Exceeds Account Is Less

Auditors’ Conclusion Tolerable Amount Than Tolerable

From the Sample Is: Amount

Misstatement in

Account Exceeds

Tolerable Amount

Misstatement in

Account Is Less

Than Tolerable

Amount

Sampling Risks--Substantive Tests

Correct

Decision

Incorrect

Decision

(Risk of Incorrect

Rejection)

Incorrect

Decision

(Risk of Incorrect

Acceptance)

Correct

Decision

Determine the objective of the test

Define the population and sampling unit

Choose an audit sampling technique

Determine the sample size

Select the sample

Test the sample items

Evaluate the sample results

Document the sampling procedure

Audit Sampling for Substantive Tests
Risk of incorrect rejection

Risk of incorrect acceptance

Tolerable misstatement

Characteristics of the population

Factors Affecting Sample Size
ItemPopulation APopulation B

1 2,100 8,000

2 2,100 25

3 2,100 2,000

4 2,100 400

5 2,100 75

Mean 2,100 2,100

Standard

deviation -0- 3,395

The variability determines how much information each of the items in the population tells you about the other items in the population.

Population Variability—Why it Matters
Determining Sample Size--MPU Sampling

Planned allowance

for sampling risk

Tolerable misstatement

______________________

=

Incorrect acceptance coef.

1 +

Incorrect rejection coef.

for sampling risk =

Tolerable _ (Population size * Incorrect acceptance coef. * Sample stan. dev.)

misstatementSample size

This formula “adjusts” the allowance for sampling risk to consider the standard deviation of the audited values in the sample. It holds the risk of incorrect acceptance at its planned level.

Variables Sampling Illustration--MPU

for sampling risk =

Tolerable _ (Population size * Incorrect acceptance coef. * Sample stan. dev.)

misstatement Sample size

= \$364,000 _ (\$100,000 * 1.64 * \$16)

225

= \$189,067

We would still “accept” the book balance because the \$6,250,000 (book value) falls within this interval

Estimate of total + Adjusted allowance

audited value for sampling risk

\$6,100,000 + \$189,067

[\$5,910,933 to \$6,289,067]

Variables Sampling Illustration--MPU
Plan Sample:

Population:

Size = 363 items

Book value = \$200,000

Tolerable misstatement = \$10,000

Risk assessments:

Inherent and control risk = Slightly below maximum

Other substantive tests = Moderate

Nonstatistical Variables Sampling Illustration
Sample results:

40 accounts in sample

\$350 net overstatement

\$60,000 book value of sample items

Projected misstatement:

= [Sample net misstatement] X Book value of population

[ Book value of sample ]

= [ \$350 ] X \$200,000

[\$60,000]

= \$1,167

Since the projected misstatement is only 11.7 percent (\$1,167/\$10,000) of tolerable misstatement, it is likely that the auditors would conclude that the account balance is materially correct.

Nonstatistical Sampling--Evaluation of Sample Results
Population book value = \$6,250,000

Other Information:

Tolerable misstatement = \$364,000

Sampling risk--Incorrect acceptance = 5%

Expected misstatement = \$50,000

Use Figures 9-14 and 9-15 to obtain a “reliability factor” and an “expansion factor.”

PPS Sampling Illustration
Sample size =

Recorded amount of population * Reliability factor

Tolerable misstatement - (Expected misstatement * Expansion factor)

= \$6,250,000 * 3.0 = 66

\$364,000 - (\$50,000 * 1.6)

Sampling interval = Book value of the population

Sample size

= \$6,250,000 = \$95,000 (approximately)

66

PPS Sample Size Computation
Upper Limit on misstatement =

Projected misstatement

+ Basic precision (Rel. factor x interval)

+ Incremental allowance

PPS Evaluation of Results