audit sampling - pearsonwps.prenhall.com/wps/media/objects/437/… · ppt file · web view ·...

11 - 1Copyright 2003 Pearson Education Canada Inc.

CHAPTER 11Audit Sampling

Concepts


What is a What is a representativerepresentative sample? sample?


What is a What is a representativerepresentative sample? sample?A representative sample has the samecharacteristics as the population from

which the sample was taken.


What can make a sample What can make a sample nonnon--representative?representative?



- sampling errors

?



Sampling errorsoccur because of the nature

of sampling; the propersampling method was selected,

applied, and interpreted but failed to uncover material

misstatements.


What can an auditor do to reduce What can an auditor do to reduce the risk of the risk of sampling errorssampling errors??


What can an auditor do to reduce What can an auditor do to reduce the risk of the risk of sampling errorssampling errors??

increase sample size



- sampling errorsnonsampling errors

?



- sampling errorsnonsampling errors result from auditor failure to recognize errors or exceptions or from the selection of ineffec- tive or inappropriate procedures

oops!


What can an auditor do to reduce What can an auditor do to reduce the risk of the risk of nonsampling errorsnonsampling errors??


What can an auditor do to reduce What can an auditor do to reduce the risk of the risk of nonsampling errorsnonsampling errors??increase auditor competence

Continuing Professional Education


Audit sampling can be based on: Audit sampling can be based on:

statisticsOR

judgment


nonstatistical sampling statistical sampling


primaryadvantage:

the auditrisk can bequantified


primaryadvantage:

employsauditor’s

experienceand

judgment



primaryadvantage:

thesampling

risk can bequantified

primaryadvantage:

employsauditor’s

experienceand

judgment



determine sample size explicitly recognizing relevant factors

judgmentallydetermine sample size implicitly recognizing relevant factors




randomly select arepresentative sample


judgmentally select arepresentative sample




apply audit procedures










evaluate test results statistically and judgmentally




evaluate test results judgmentally


nonstatistical sampling judgmentally select arepresentative sample

sample selection

Nonstatistical sampling employsnonprobabilistic selection - the auditor decides which population items to select.


nonprobabilistic selection methods- judgmental (directed sample) selection auditor selects items based on characteristics because random selection does not consider: ~ each type of transaction

sample selectionnonstatistical sampling judgmentally select arepresentative sample


nonprobabilistic selection methods- judgmental (directed sample) selection auditor selects items based on characteristics because random selection does not consider: ~ each type of transaction ~ each preparer of transactions



nonprobabilistic selection methods- judgmental (directed sample) selection auditor selects items based on characteristics because random selection does not consider: ~ each type of transaction ~ each preparer of transactions ~ large dollar balances



sample selection

nonprobabilistic selection methods- block sampling - selection of a sequence and examining every item in the sequence

Example: examine all cancelled cheques of February

Ace Corporation 324

$pay to the order of

date


CANADIAN BANK


nonprobabilistic selection methods- haphazard selection - auditor selects items without regard to characteristics

sample selection

Bewareof bias!



statistical sampling randomly select arepresentative sample sample selection

Statistical sampling employs probabilistic selection - every population item has a known

chance of being selected.


statistical sampling randomly select arepresentative sample

sample selection

probabilistic selection methods- simple random sample selection

used to sample populations

that are not segmentedfor audit purposes



sample selection

probabilistic selection methods- random number tables

Howdoes an

auditor userandom

number tables?



sample selection

probabilistic selection methods- use of random number table 1. number each population item 2. establish correspondence between table and population 3. establish a route in the table 4. select a random starting point 5. document the method



sample selection

probabilistic selection methods- computer generation of random numbers



sample selection

probabilistic selection methods- systematic selection - the auditor cal- culates an interval, starts at random, and selects every nth item.

Beware of possible bias with numeric tests,e.g., every 314th cheque is written on a Friday.



sample selection

probabilistic selection methods- probability proportional to size and stratified sample selection

discussed in chapter 14


Audit SamplingAudit Sampling

?


Auditsampling is amethod used

to determine theproportion of

population itemscontaining a

particular attribute.

Audit SamplingAudit Sampling


When is audit sampling When is audit sampling

appropriate?appropriate?


When is audit When is audit sampling sampling

appropriate?appropriate?

Example:credit

authorization of sales

SALES INVOICE 38527 Date: Ace Company Customer: 834 Reynolds Rd. Winnipeg, MB R2V 4E3 Sales Representative: Quantity Description Price

total invoice amount

Terms of sale (including discounts and freight costs): Carrier: Credit authorization:

tests of controls


Audit Sampling Terms Audit Sampling Terms - attribute - the tested characteristic


- attribute- acceptable risk of assessing control risk too low (ARACR)- the risk that the auditor is willing to accept that controls are accepted as effective, but the actual population exception rate is greater than the TER

Audit Sampling Terms Audit Sampling Terms


- attribute- acceptable risk of assessing control risk too low (ARACR)- tolerable exception rate (TER) - the population exception rate the auditor will permit and still be willing to use the assessed control risk and/or the amount of monetary misstatements in the transactions established during planning

Audit Sampling TermsAudit Sampling Terms


- attribute- acceptable risk of assessing control risk too low (ARACR)- tolerable exception rate (TER) - estimated population exception rate (EPER) - the exception rate that the auditor expects to find (this estimate is made prior to any testing)



- attribute- acceptable risk of assessing control risk too low (ARACR)- tolerable exception rate (TER) - estimated population exception rate (EPER)- initial sample size - determined judgmentally by the auditor implicitly considering the ARACR, TER, EPER, and population size



- attribute- acceptable risk of assessing control risk too low (ARACR)- tolerable exception rate (TER) - estimated population exception rate (EPER)- initial sample size- exception - a deviation from the tested characteristic



- attribute- acceptable risk of assessing control risk too low (ARACR)- tolerable exception rate (TER) - estimated population exception rate (EPER)- initial sample size- exception- sample exception rate (SER):

number of exceptionssample size



- attribute- acceptable risk of assessing control risk too low (ARACR)- tolerable exception rate (TER) - estimated population exception rate (EPER)- initial sample size- exception- sample exception rate (SER)- computed upper exception rate (CUER) - considering the extent of exceptions, the worst likely population exception rate



Audit Sampling Sequence Audit Sampling Sequence

?


SALES INVOICE 38527 Date: Acme Company Customer: 834 Reynolda Rd. Winnipeg, MB R2V 4E3 Sales Representative: Quantity Description Price

total invoice amount Est. shipment date: Terms of sale (including discounts and freight costs): Carrier:

Credit authorization:

1. State the objectives of the audit test.Example: The auditor is testing proper credit approval of sales.

Audit Sampling SequenceAudit Sampling Sequence


2. Decide if audit sampling applies.

yes noaudit

samplingis

appropriate

audit sampling

is notappropriate

Does the auditorplan to reach

conclusions basedon a sample?



3. Define attributes and exception conditions.

In theexample, what is

the attribute?





Est. shipment date: Terms of sale (including discounts and freight costs): Carrier:


Joe Credit

thesignature

of thecredit

manageron thesales

invoice


the attribute?






the exceptioncondition?





Est. shipment date: Terms of sale (including discounts and freight costs): Carrier:


forged signatureof credit manag-er, no signature,

signature of someone else

Jill Accountant


the exceptioncondition?




4. Define the population.

In theexample, what is the

population?

audit sampling sequence audit sampling sequence


4. Define the population.

2004 sales invoices(sequence 10397 - 40465)Population size = 30,068.


population?



5. Define the sampling unit.


sampling unit?



5. Define the sampling unit.

onesales invoice


sampling unit?



6. Specify the tolerable exception rate.

This determination is based on:- auditor judgment- materiality- importance of the attribute



In the example, the auditor needs to ask:concerning the indication of credit ap-

proval on sales invoices, what percent ofinvoices without appropriate approval

would prevent auditor use of the assessedcontrol risk and/or the amount of monetary

misstatement in the transactionsestablished during planning.






In the example, the auditors judgmentally assess the tolerable exception rate

(TER):

TER = 7%


When would the auditorWhen would the auditorestablish a establish a lowlow TER? TER?




When would the auditorWhen would the auditorestablish a establish a lowlow TER? TER?

when the auditoris less willing to accept excep-

tions (e.g., cash controls)




7. Specify the acceptable risk of assessing control risk too low (ARACR).

To what degreedoes the auditor wantto rely on controls?



low reliance on controls = high ARACRhigh reliance on controls = low ARACR



7. Specify the acceptable risk of assessing control risk too low (ARACR).



In the example, the auditors judgmentallyassess the acceptable risk of assessing con-trol risk too low:

ARACR = medium

Audit Sampling SequenceAudit Sampling Sequence7. Specify the acceptable risk of assessing control risk too low (ARACR).


8. Estimate the population exception rate (EPER) - estimate based on prior year year audit or small preliminary sample

For theexample: EPER = 4%



9. Determine the initial sample size (SS).

considered initial because the auditor may later decide to sample more




Determined judgmentallybased on

= 30,068= 7%= 10%= 4%

pop.TERARACREPER



Sample Size Determination Sample Size Determination RELATIONSHIPFACTOR TO SAMPLE SIZEARACR inverseTER inverseEPER directPop. size no effect (if pop.> 5,000)



sample size = 150

= 30,068= 7%= medium= 4%

pop.TERARACREPER


Determined judgmentallybased on


SALES INVOICE 38527 Date: Acme Company Customer: 834 Reynolda Rd. Winston-Salem, NC27109 Sales Representative: Quantity Description Price


Est. shipment date: Carrier:

Credit authorization: Joe Credit

10. Select the sample.11. Perform the audit procedures.

how?



SALES INVOICE 38527 Date: Acme Company Customer: 834 Reynolda Rd. Winston-Salem, NC27109 Sales Representative: Quantity Description Price


Carrier:

Credit authorization: Joe Credit

10. Select the sample.11. Perform the audit procedures.Of 150

invoicesexamined, 7

had no credit

approval.



12. Generalize from the sample to the population.

= 30,068= 7%= medium= 4%= 150= 7

pop.TERARACREPERSSexceptions


Considering these factors,judgmentally determine CUER



= 30,068= 7%= medium= 4%= 150= 7

pop.TERARACREPERSSexceptions


Considering these factors,judgmentally determine CUER

CUER= 8%


What does this mean?


CUER= 8%



There is a mediumrisk (ARACR) that the

true exception rate > 8%

Audit Sampling SequenceAudit Sampling Sequence12. Generalize from the sample to the population.

CUER= 8%


13. Analyze the exceptions. Is there a justifiable reason?

In the example, the auditors found 7 sales in-voices without credit approval. Could they besales to internal departments or subsidiaries?



14. Decide on the acceptability of the population.

Decision ruleDecision rule::For population acceptability:

CUER CUER << TER TER



8% < 7%

Decision ruleDecision rule::For population acceptability:

CUER CUER << TER TERThe population is

not acceptable; the controls regarding theindication of credit approval on sales

invoices are not satisfactory.


When an internal control is When an internal control is judged unacceptable, what judged unacceptable, what

options does the auditor have?options does the auditor have?


- revise the TER and/or ARACR

This may beconsidered ethically questionable.

WHY?




- expand the sample size

When is this appropriate?




This is only appropriateif the auditor believes thatthe sample was not repre-

sentative of the population.



- expand the sample size


- revise the assessed control risk up- ward, and increase tests of details of balances for related accounts (a/r, sales, bad debt expense, allowance for doubtful accounts)




When an internal control is When an internal control is judged unacceptable, the judged unacceptable, the

auditor is auditor is requiredrequired to to communicate this weakness communicate this weakness

to management, and may to management, and may inform the audit committee as inform the audit committee as

well.well.



1. State the objectives of the audit test.


1. State the objectives of the audit test.Example: The auditor wants to deter-mine the acceptability of the notes re-ceivable balance of $600,000.

notes receivable $600,000

acceptable?



1. Determine the objectives of the test.2. Decide if audit sampling applies.

Doesthe auditor

plan to reachconclusionsbased on a

sample?



1. Determine the objectives of the test.2. Decide if audit sampling applies.3. Define misstatement conditions.

?



1. Determine the objectives of the test.2. Decide if audit sampling applies.3. Define misstatement conditions.

Misstatementconditions are any conditions

that represent monetary fraud, errors or irregularities

in the accounting records.



1. Determine the objectives of the test.2. Decide if audit sampling applies.3. Define misstatement conditions.4. Define the population.

?



1. Determine the objectives of the test.2. Decide if audit sampling applies.3. Define misstatement conditions.4. Define the population.

notesreceivable

dollars



1. Determine the objectives of the test.2. Decide if audit sampling applies.3. Define misstatement conditions.4. Define the population.5. Define the sampling unit.

?



1. Determine the objectives of the test.2. Decide if audit sampling applies.3. Define misstatement conditions.4. Define the population.5. Define the sampling unit.

onecustomer

name or loannumber



1. Determine the objectives of the test.2. Decide if audit sampling applies.3. Define misstatement conditions.4. Define the population.5. Define the sampling unit.6. Specify tolerable misstatement.

What amount of monetary fraud, erroror irregularity can exist in notes receivable without causing the financial statements to

be materially misstated?



6. Specify tolerable misstatement.

based onauditor judgment





6. Specify tolerable misstatement.

In the notesreceivable example, tolerable mis-statement is established at $24,000for both over- and understatements.





7. Specify acceptable risk of incorrect acceptance.

What level of risk is theauditor willing to take of concluding

that the account balance is not materi-ally misstated when, in fact, it is

materially misstated.







also based onauditor judgment







In thenotes receivable example,ARIA is established at 5%.



8. Estimate misstatements in the population.

What is the amount of mis-statement that the auditor expects

to find in the population?





based onauditor judgment and prior

year results

8. Estimate misstatements in the population.Audit Sampling SequenceAudit Sampling Sequence




In the example,EPER is 1.5%; i.e., the auditor expects that 1.5% of the notes

receivable balance is misstated.

8. Estimate misstatements in the population.Audit Sampling SequenceAudit Sampling Sequence


9. Determine the initial sample size.

For nonstatistical sampling, professional judgment of auditor is used to determine initial sample size.



9. Determine the initial sample size.

For statistical sampling of test of controls, population size, TER, ARACR, and EPER are all factors used to determine initial sample size.



Audit Sampling SequenceAudit Sampling Sequence10. Select the sample.

Nonprobabilistic: - Directed sample selection

- Block sample selection - Haphazard sample selection



10. Select the sample.

Probabilistic: - Simple random sample selection

- Systematic sample selection - Probability proportionate-to-size

sample selection


11. Perform the audit procedures.

Through confirmationof selected notes receivable

balances, $1,380 of misstatementswere discovered in a sample

of $35,500.


Canada 48




Project the sample misstatementresults to the population and consider

sampling error and sampling risk:sample misstatement total recorded point estimate total sample pop. value of misstatement x =



Project the sample misstatementresults to the population and consider

sampling error and sampling risk:

In the notes receivable example:


sample misstatement total recorded point estimate total sample pop. value of misstatement x =

$1,380 $35,500

x $600,000 = $23,324 point estimate




tolerable misstatement - point estimate= allowance for sampling error

$24,000 - $23,324 = $676

The auditor must also judgmentallyassess sampling error, considering severalfactors. The most important of these factorsis the difference between the point estimate

and tolerable misstatement.



The auditor must also judgmentallyassess sampling error, considering severalfactors. The most important of these factorsis the difference between the point estimate

and tolerable misstatement.



tolerable misstatement - point estimate= allowance for sampling error

$24,000 - $23,324 = $676


13. Analyze exceptions or misstatements.

evaluate the natureand cause of each

misstatement



13. Analyze the exceptions or misstatements.

evaluate the nature andcause of each misstatement

This evaluation may affect the auditor’s conclu-sions regarding financial

statements, client operations,and/or other areas.



14. Determine the acceptability of the population.

Decision Rule:Considering sampling error, if the pointestimate is less than the tolerable mis-statement, accept the conclusion thatthe book value is not misstated by a

material amount.





material amount.

original point estimate estimate of point estimate incl. of misstatement sampling error sampling error + =

$23,324 + $1,500 = $24,824judgmentallydetermined

conclusion?


$24,824>$24,000 tolerable misstatementThe notes receivable balance of $600,000 is not acceptable.



material amount.

original point estimate estimate of point estimate incl. of misstatement sampling error sampling error + =

$23,324 + $1,500 = $24,824

conclusion?


What are the What are the auditor’s auditor’s optionsoptions??

book valueis not

acceptable


- take no action until tests of other audit areas are completed


book valueis not

acceptable


- take no action until tests of other audit areas are completed- perform expanded audit tests in specific areas


book valueis not

acceptable


- take no action until tests of other audit areas are completed- perform expanded audit tests in specific areas- increase sample size


book valueis not

acceptable


- take no action until tests of other audit areas are completed- perform expanded audit tests in specific areas- increase sample size- request the account balance be adjusted


book valueis not

acceptable


- take no action until tests of other audit areas are completed- perform expanded audit tests in specific areas- increase sample size- request the account balance be adjusted-request the client to correct the population


book valueis not

acceptable


- take no action until tests of other audit areas are completed- perform expanded audit tests in specific areas- increase sample size- request the account balance be adjusted- request the client to correct the population- refuse to give an unqualified opinion


book valueis not

acceptable

audit sampling - pearsonwps.prenhall.com/wps/media/objects/437/… · ppt file · web view ·...

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