selecting all items for examination 2 Audit sampling 100% Selection: 100% examination of population is not done in Tests of Controls but may be done in Substantive Procedures when: auto
Trang 1CHAPTER FOURTEEN
AUDIT SAMPLING
LO 2 RELATIONSHIP MODEL BETWE N SAMPLING AND AUDIT RISK 4.3.2
4.3.3
LO 7 PROJECTING RESULTS OF S AMPLING MIS TATEMENTS AND EVALUATING 4.3.6
*Explanation of Reference:
First digit in Study Text’s Reference represents chapter number, second and third digits represents section and sub-section number Contents in brackets (if any) represent part of the sub-section which is covered by the learning objective
Coverage from Question Bank:
After completion of this chapter, you will be able to attempt following questions in ICAP's Question Bank:
Q # 47
Q # 55
Q # 59
Q # 62a & 62b
Trang 2LO 1: SELECTING ITEMS FOR TESTING:
Following are different means of selecting items for testing:
1) 100% Selection (i.e selecting all items for examination)
2) Audit sampling
100% Selection:
100% examination of population is not done in Tests of Controls but may be done in Substantive Procedures when:
automatically by computer)
Audit Sampling:
Audit sampling:
Audit Sampling is the application of audit procedures to less than 100% of
items within a population in such a way that all sampling units have a chance
of selection, to draw conclusions about the entire population
Audit Sampling is used in Tests of Controls and Tests of Details
LO 2: RELATIONSHIP BETWE N SAMPLING AND AUDIT RISK MODEL:
Detection risk arises because of two components/reasons:
Sampling Risk:
Definition:
“Sampling risk is the risk that auditor’s conclusion based on sampling might be different from the conclusion if entire population would have been tested.”
Two Types of Incorrect conclusions in Sampling Risk:
1 In Tests of Controls, auditor erroneously concludes that controls are operating effectively (but actually they are not) In Tests of Details, auditor erroneously concludes that population is free from material misstatement (but actually it is not)
2 In Tests of Controls, auditor erroneously concludes that controls are not operating effectively (but actually they are) In Tests of Details, auditor erroneously concludes that population is not free from material misstatement (but actually it is)
First type of risk is more important because it may lead to incorrect audit opinion
How to reduce Sampling Risks:
Sampling risk can be reduced through:
Stratification (It is the process of dividing a population into subpopulations, each of which is
a group of sampling units which have similar characteristics, often monetary value.)
Trang 3Non-Sampling Risk:
Definition:
Non-sampling risk is the risk that auditor’s conclusion may be wrong for any reasons/errors other than sampling risk
Examples:
This risk arises due to errors by the auditors or incompetency of the audit team e.g
misstatement/deviation)
How to reduce Non-Sampling Risk:
Non-sampling risk can be reduced through:
Assigning more experienced and specialized staff e.g use of experts if necessary
LO 3: STEPS IN SAMPLING:
1) Sample Design
2) Sample Selection
3) Performing Audit Procedures on Sample & Projecting Misstatements
4) Evaluating results of Sampling
LO 4: SAMPLE DESIGN:
Designing of audit sample includes making following decisions:
i Determine Purpose of sample and Population from which sample will be drawn
ii Determine what constitutes a Misstatement or Deviation
iii Determine Tolerable Rate of Deviation and Expected Rate of Deviation (For Tests of Controls)
iv Determine Tolerable Misstatement and Expected Misstatement (For Tests of Details)
v Determine Sampling Approach (i.e whether Statistical or Non-Statistical)
vi Determine Method of Selection (i.e whether Systematic, Random or Haphazard)
Tolerable Rate of Deviation:
It is the rate of deviation (in internal control), set by auditor for which auditor obtains assurance
that actual rate of deviation in population does not exceed from this set-rate
Tolerable Misstatement:
It is the amount of misstatement (in financial statements) set by auditor for which auditor obtains assurance that actual amount of misstatements in population does not exceed from this set-amount
(it is the application of performance materiality in sampling)
Expected Rate of Deviation/Expected Misstatements:
Determination of Expected Rate of Deviation/Expected Misstatement is based on following factors:
Trang 4 Understanding of Internal Control/Results of Tests of Controls
Determining Sampling Approach:
Auditor shall determine whether to use Statistical Sampling or Non-Statistical Sampling
Statistical Sampling:
An approach of sampling is called Statistical Sampling, if it has following
characteristics:
i Use of Random selection to select items
ii Use of Probability theory to evaluate results
e.g Random Selection, Systematic Selection
Non-Statistical Sampling: (or Judgmental Sampling)
A sampling approach that does not have characteristics of Statistical Sampling
Instead of probability theory, it is based on judgmental opinion of auditor e.g
Haphazard Selection
Advantages of Statistical Sampling Disadvantages of Statistical Sampling
precise basis for sampling process
precisely (using statistical techniques)
It is the only mean of efficient auditing
in case of very large population
Training and technical expertise are required
Investment in training of audit staff required
sampling, hence increases the time and cost of audit
experience and judgments instead of statistical models
Determining Methods of Sample Selection:
Random Selection:
Use of a computerized random number generator or random number tables to
select items
Systematic Selection:
selected e.g selecting every 50th item
Haphazard Selection:
Auditor selects sample without a structured technique, however whole
population is considered by auditor in sample selection
Trang 5LO 5: SAMPLE S ELE TION:
Following factors influence determination of sample size:
Factors (Increase in) Effect on Sample Size for Tests of Details
Factors (Increase in) Effect on Sample Size for Tests of Control
LO 6: PERFORMING AUDI T PROC DURES ON SAMPLE & PROJE TION:
Performing Procedures:
Auditor shall perform audit procedures on EACH item selected
If audit procedures are not applicable to a
selected item (e.g cancelled cheque) Auditor shall perform procedures on a replacement item (e.g by selecting very next cheque)
If auditor is unable to apply audit procedures
on a selected item (e.g when a cheque is
missing or positive confirmation is not received)
Auditor shall treat that item as a deviation (in case
of tests of controls) or a misstatement (in case of tests of details)
If auditor identifies a deviation/misstatement, auditor shall investigate whether any of them is
Anomalous (Anomaly is a deviation or misstatement that is demonstrably not representative of
misstatements or deviations in a population Anomaly is NOT considered for Projection)
LO 7: EVALUATING RESULTS OF SAMPLING:
Projection:
Projecting Deviation Rate (for T.O.C.):
No explicit projection is made for deviations in tests of controls because Sample Deviation Rate is always the Projected Deviation Rate for population
Projecting Misstatements (for T.O.D.):
Projected misstatement means “Auditor’s best estimate of misstatements in population that are projected on the basis of sample”
Trang 6Evaluating results of Tests of Controls:
Evaluating results of Tests of Details:
If Projected Misstatement is below
–No further work necessary
If Projected Misstatement is above
Tolerable Misstatement
Sample has not provided a reasonable basis for conclusion about population that has been tested Auditor shall perform other substantive procedures
If Projected Deviation Rate is above
Tolerable Rate of Deviation
Deviation Rate is unexpectedly high Auditor may:
–increase his assessment of control risk
–auditor places no reliance on internal control
If Projected Deviation Rate is below
Tolerable Rate of Deviation Controls are operating effectively Auditor can rely on internal control