1 Chapter 9 Audit Sampling – Part b. 2 Basic steps: 1. Specify audit objective of the test 2....
-
Upload
aleesha-lizbeth-day -
Category
Documents
-
view
216 -
download
0
Transcript of 1 Chapter 9 Audit Sampling – Part b. 2 Basic steps: 1. Specify audit objective of the test 2....
1
Chapter 9
Audit Sampling – Part b
2
Basic steps:1. Specify audit objective
of the test2. Define misstatement3. Define population (and
sampling units)4. Choose sampling
method5. Determine sample size
6. Select sample
7. Audit selected items
8. Evaluate sample results
9. Perform follow-up work as necessary
10. Document sampling procedure and results
Sampling to Test for Account Balance Misstatements (Substantive Testing)
3
1. Define Specify Audit ObjectiveSampling always relates to one specific procedure
usually testing one specific assertion
Specifying the audit objective determines the population to test
For example: If objective is to determine existence, the sample should
be selected from recorded information - On the other hand, if the objective is to determine
completeness, the sample should be selected from a complementary population such as source documents (or cash disbursements if testing for unrecorded payables)
4
2. Define Misstatements
Misstatement is usually defined as difference that affects the correctness of the overall account balance
Misstatements should be defined before sampling to:Preclude auditor from rationalizing away
misstatements as isolated eventsProvide guidance to the audit team
5
3. Define the Population Group of items in an account balance that the
auditor wants to test. It does not include: Items the auditor has decided to examine 100% Items that will be tested separately
Important to properly define the population: Sample results can be projected only to the
group from which the sample is selected The population must be directly related to the
audit objective
6
3. Define the Sampling Unit Sampling units are the individual auditable
elements that make up the population
Example: sampling units for confirming accounts receivable could be the individual customer's balance or individual unpaid invoices
7
Identify Individually Significant Items Many account balances are comprised of a few
large dollar items and many smaller items Dividing a population into two or more
subgroups based on dollar amount can increase audit efficiency Items in excess of a specified dollar amount (top
stratum items) are examined 100% Items less than the specified amount (lower stratum
items) are sampled This process (stratification) allows the auditor to
examine a significant portion ($ value) of an account balance even though s/he examines a relatively few items
8
4. Choosing a Sampling Method There are a number of sampling methods
an auditor may useNon-statistical Probability proportional to size (PPS)Classical sampling methods (not covered in
this text/course) Mean-per-unit Ratio estimation Difference estimation
9
4. Choosing a Sampling Method – Cont’d - Differences between methods)
A. Measure of sampling risk Statistical methods provide an objective
measure of sampling risk Non-statistical methods do not provide
such a measure
B. Tests for account balance PPS is designed to test for overstatement
of an account balance Classical methods test for both
overstatement and understatement
10
4. Choosing a Sampling Method – Cont’d (differences between methods)
C. Statistical estimates PPS provides an estimate of the amount of
misstatement in the account Classical methods provide an estimated range of
the account balance
D. Sample selection PPS is a dollar-based approach; each dollar is a
sampling unit Classical samples are selected using a variety of
sampling units e.g. balances or items
11
4. Choosing a Sampling Method – Cont’d Use of PPS would be appropriate if
Auditor is testing for overstatements in an account balanceA dollar-based sampling approach increases the probability of selecting overstated items
Few or no misstatements expectedIndividual book values (like a
subsidiary ledger) are available
12
4. Choosing a Sampling Method – Cont’d One of the classical methods would be
appropriate if the auditor Is concerned about understatements in an
account balanceExpects numerous misstatementsIs examining an account balance based on
estimates rather than a total of individual items
Is trying to estimate an account balance
13
5 – 8. Determining Sample Size, Selecting Sample, Evaluating Results Sample size, method of selecting the sample, and the approach to
evaluating sample results all depend on the sampling method used
Whichever sampling method is used, consideration must be given to the risk of misstatement, sampling risk, and the auditor's assessment of tolerable and expected misstatement
Tolerable misstatement Maximum misstatement an auditor will accept before deciding
the recorded account balance is materially misstated Expected misstatement
Based on results of other substantive tests and auditor's prior experience with the client
Expected misstatement should be less than tolerable misstatement
14
Steps in non-statistical sampling? Determine sample size
All significant items should be tested No way to mathematically control sampling risk
Select the sample Sample must be representative of population Could use random-based method or haphazard selection
Evaluate sample results Project misstatements to the population Consider sampling error Make judgment as to whether account is likely to be
materially misstated
15
Probability Proportional to Size (PPS) Sampling Dollar-based sampling approach where the
population is the number of dollars in the account balance examined
Using dollars as sampling units means larger dollar items in the account balance are more likely to be selected in the sample
PPS is an effective sampling approach when the auditor is testing for overstatements
Appropriate when few misstatements are expected and individual book values are available
16
Probability proportional to size (PPS) sampling: TD risk
To use PPS, the auditor must determine the allowable risk of the sample failing to detect a material misstatement (test of details risk) and tolerable and expected misstatements for the account balance
Detection risk is the risk that the substantive audit procedures will fail to detect material misstatements
There are two types of substantive audit procedures - those that use sampling, and other (non-sampling) substantive procedures
Test of details (TD) risk is the part of detection risk related to sampling; the risk that substantive sampling procedures will fail to detect a material misstatement
Other substantive procedures risk (OSPR) is the risk that the non-sampling procedures will fail to detect a material misstatement
17
Probability Proportional to Size (PPS) Sampling: TD risk– Cont’d: The relation between TD risk and inherent
and control risks and OSPR is inverse High inherent risk means the auditor is examining
transactions that are susceptible to misstatement High control risk means the client controls are
weak High OPSR means the non-sampling audit
procedures are not effective in detecting material misstatements
18
Probability Proportional to Size (PPS) Sampling: TD risk– Cont’d: In each of these situations, the auditor would
want to be more careful with his/her sampling procedures
The auditor would want lower TD risk; less chance of failing to detect material misstatements with sampling procedures
Lower TD risk means the auditor wants a lower risk of sampling procedures failing to detect material misstatements
To achieve this lower risk of failing to detect, the sample size must increase
19
Probability Proportional to Size (PPS) Sampling: Sample Size
PPS samples are usually selected using a fixed interval sampling approach
The sampling interval (I) is calculated as I = TM - (EM x EEF) RFTM = Tolerable misstatement (in population)EM = Expected misstatement (in population)EEF = Error expansion factor (derived form tables)RF = Reliability factor (derived form tables) Error expansion and reliability factors are based on TD risk
20
Probability Proportional to Size (PPS) Sampling: Sample Size
Sample size (n) is computed by dividing the account book value by the sampling interval
n = Population Book Value
Sampling Interval
21
Probability Proportional to Size (PPS) Sampling - Sample Selection
Sample items are often selected using a fixed interval approach Every nth dollar after a random start A random start is required to give every dollar in the population
an equal chance to be included in the sample The first sample item is the one that first causes the cumulative
total (cumulative book value + random start) to equal or exceed the sampling interval
Successive sample items are those first causing the cumulative total to equal or exceed multiples of the interval
Sample composition: All top stratum items will be included in the sample Lower stratum items will be sampled
22
Probability Proportional to Size: Zero or Negative Balances
Zero balances Items with zero balances have no chance of being
selected using PPS If evaluation is necessary, zero balance items should
be audited as a different population
Two approaches to deal with population items with negative balances: Exclude them from the selection process and test
them as a separate population Include them in the selection process and ignore the
negative sign
23
Probability Proportional to Size: Sample Evaluation Based on sample results, the auditor computes
the upper misstatement limit
Upper misstatement limit (UML) Maximum dollar overstatement that might exist
in the population Given the misstatements detected in the sample,
at the specified TD risk level, UML is the sum of three components: Basic precision Most likely misstatement Incremental allowance for sampling error.
24
Evaluation: If the UML is less than the tolerable
misstatement, the account balance is considered fairly presented
If the UML exceeds the tolerable misstatement, the account balance is not fairly presented and further work is necessary
Probability Proportional to Size: Sample Evaluation – Cont’d