Post on 24-Dec-2015
Copyright © 2007 Pearson Education Canada
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Chapter 12 objectives
Define sampling Discuss the advantages and disadvantages
of statistical and non-statistical sampling Identify three ways that a statistical
sampling method can be selected Describe the 14 steps in planning,
selecting, performing the tests and evaluating a sample
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Importance of sampling to auditors
The auditor doesn’t look at everything… just pieces. The auditor CANNOT look at everything.
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Purpose of sampling
Sampling is a method of obtaining information that will permit an estimate of the value or quality of a population by examining only a portion of the population.
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Auditors sample when
The nature and materiality of the balance or class of transactions does not demand a 100% audit
A decision must be made about the balance or class of transactions
The time and cost to audit 100% of the population would be too great
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Sampling is used to conduct
Walk through tests (to understand internal controls)
Tests of controlsTests of details
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Representative sampling
Definition: The characteristics in the sample of audit interest are approximately the same as those of the population
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Practice question 12-17, p. 364
Sampling multiple choice
Concept check
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Representative sampling (cont’d)
Non-representativeness can occur due to:-Non-sampling risk: Audit test do not uncover the exceptions in the sample due to failure to recognize them, or due to ineffective procedures-Sampling risk: Results from testing less than the entire population
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Statistical sampling
Sampling that uses the laws of probability for selecting and evaluating a sample from a population for the purposes of reaching a conclusion about the population– selected at random– statistical calculations are used to
measure and express the results
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Statistical vs. non-statistical
Similarities Both require a
structured process involving planning, selection, conducting, evaluating
Any type can be stratified
Differences Sampling risk can be
quantified in statistical sampling using mathematical formulae
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Non-probabilistic (judgmental) sample selection methods
Directed sample selection, useful for:– Items likely to contain errors– Items containing selected characteristics (e.g.
old amounts– Large dollar item coverage
Block sample selection (e.g. sequences) Haphazard sample selection
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Probabilistic sample selection methods
Simple random sample selection Systematic sample selection Probability proportionate-to-size sample
selection (also known as MUS monetary unit sampling)
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Statistical sampling
Advantages -- Provides
for quantitative evaluation of the sample results.
a more defensible expression of the test results.
for more objective recommendations for management.
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Statistical Sampling (cont’d)
Disadvantages
Requires random sample selection which may be more costly and time consuming.
Might require additional training costs for staff members to use statistics or specialized software.
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Non-statistical Sampling (Judgmental)
Advantages
Allows the auditor to inject his or her subjective judgment in determining the sample size and selection process to audit items of greatest value and highest risk.
May be designed so that it is equally effective and efficient as statistical sampling while being less costly.
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Non-statistical Sampling (Judgmental) (cont’d)
Disadvantages Cannot draw objectively valid statistical
inferences from the sample results. Cannot quantitatively measure and express
sampling risk.
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Practice problem 12-23 (p. 366)
Making decisions about sampling
Does the implementation method matter?
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Sampling process
For both statistical and non-statistical methods, the four main parts are:
1. Planning the sample
2. Selecting the sample
3. Performing the tests
4. Evaluating the results
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Sampling process
We are going to look at the fourteen steps in the sampling process, comparing the process for tests of controls versus tests of details
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1. State the objectives of the test
Test of control: Are the controls
applied? Are there monetary
errors or fraud or other irregularities
Test of detail: Auditor wants to
determine the maximum amount of overstatement and understatement that could exist based on the sample
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2. Decide if audit sampling applies
Some controls can be sampled (e.g. is a shipping document attached?) while others cannot be (e.g. separation of duties)
Ability to sample for test of details depends on the nature of the population (e.g. capital assets may not be sampled, depending upon volume, while A/R confirmations will be
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3. Define attributes and exception or error conditions
Term related to planning:
Test of control (e.g. attribute sample)
Test of detail (e.g. for MUS sample)
Define the item of interest
Identify the characteristic or attribute of interest
Individual dollars
Define exceptions or errors
Define the control deviation (an exception)
Normally, any monetary difference (error)
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3. Define attributes and exception or error conditions (cont’d) - Sales and A/R
Term related to planning:
Test of control (e.g. attribute sample) Sales
Test of detail (e.g. for MUS sample) Accounts Rec’bl
Define the item of interest
Are sales approved for credit?
Individual dollars
Define exceptions or errors
Sale made that causes customer balance to exceed credit limit
Confirmed amount different from amount in customer account
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4. Define the population
Population can be defined in a way to suit the audit
tests
Must sample from the entire population as defined
In testing controls over sales population is likely
recorded sales invoices
In testing details in accounts receivable it is the
recorded dollar population
Most populations can be stratified, if needed.
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5. Define the sampling unit
Tests of controls: Usually a physical
unit, e.g. invoice, shipping document, purchase order
Test of detail: If MUS, would be the
individual dollar For non-statistical
sampling, it is likely the unit making up the balance, e.g. an unpaid invoice
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6. Specify tolerable exception rate (TER) or specify materiality
Test of control TER is the exception rate
the auditor will permit in the population and still be willing to use the assessed control risk
As TER increases, the sample size decreases
Test of detail Materiality is used to
determine the tolerable misstatement amount for the audit of each account
These decisions require the use of professional judgment.
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7. Specify ARACR or ARIA
Test of control Acceptable Risk of
Assessing Control Risk Too Low (ARACR) is the risk that the auditor will take of accepting controls as effective when population error rates are actually greater
Test of detail Acceptable Risk of
Incorrect Acceptance (ARIA) is the risk the auditor will take of accepting a balance as correct when the true misstatement is greater than materiality
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7. Specify ARACR or ARIA (cont’d) examplesARACR and ARIA are measures of sampling risk.
Test of control Assumes TER 6%,
ARACR 10%, true error rate 8%
True error rate exceeds TER, so population is NOT acceptable, but auditor does not know!
Test of detail If ARIA changes from
10% to 5%, sample size increases, since assurance required increases
When controls are good (control risk is low), ARIA can be increased
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8. Estimate population exception rate or misstatements
Test of control Estimated population
error rate (EPER) is an advance estimate of the percentage of exceptions in the population
The lower the EPER, the smaller the sample size
Test of detail Provide an advance
estimate of the total dollar error (misstatements) in the population
Use prior year data and professional judgment.
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9. Determine the initial sample size
For non-statistical (also called judgmental)
sampling, professional judgment is used to
calculate the sample size
For statistical sampling, mathematical formulae are
used, either in specially prepared tables or using
software designed for audit sampling
For stratified sampling, the sample is allocated
among the strata
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10. Select the sample
Using the number of items determined in Step
#9, choose the items from the population using
the sampling unit defined in Step #5
Use probabilistic or non-probabilistic methods
To enable quantification of sampling risk,
probabilistic (statistical) methods must be used
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11. Perform the audit procedures
For test of controls, examine each item for the attribute defined in Step #3, recording all exceptions found (e.g. all sales approved for credit)
For test of details, apply the audit procedures to each item to determine whether it is correct or contains a misstatement (e.g. send and reconcile confirmations, conduct alternative procedures)
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12. Generalize from the sample to the population
For test of controls sample error rate (SER) equals actual number of exceptions divided by actual sample size– But that is not necessarily equal to the actual
population rate: a potential range must be calculated
In practice, auditors tend to test controls when they expect no exceptions
Method of generalization depends on the sampling methodology used
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12. Generalize from the sample to the population (cont’d)
When generalizing tests of details, auditors deal
with dollar amounts rather than with exceptions
Misstatements found are projected from the
sample results to the population
Need to consider sampling error and sampling
risk (ARIA)
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13. Analyze exceptions or misstatements
Test of control What breakdown in
internal controls caused the exceptions? (does it affect control risk?)
Should additional substantive testing be conducted because of these results?
Test of detail Were the
misstatements caused by control exceptions? (need to reassess control risk?
Is additional substantive testing required?
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14. Decide the acceptability of the population
Test of control If TER (Tolerable
Error Rate) is sufficiently larger than SER (sample error rate) will normally accept the population
Test of detail Compare the
difference between the projection to the population and materiality
Use decision rule for statistical sampling
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14. Decide the acceptability of the population (cont’d)
What if the auditor decides the population is NOT acceptable? What to do?– 1. Revise TER (tolerable error rate), ARACR, or
ARIA (the risks of accepting incorrect populations) - not easily defensible
– 2. Expand the sample size. Will decrease the sampling error OR you could end up with the same result.
– 3. Revise assessed control risk. This will likely mean an increase in tests of detail.
– 4. Report weaknesses in management letter.