Sampling Techniques in Audit

Students dealing with auditing papers will have to gain an understanding of the different types of testing which can be applied by auditors. Audit sampling is dealt with under ISA 530 (redrafted) Audit Sampling . This article looks at the different types of audit testing an auditor can apply.

The definition of audit sampling in ISA 530 is:

the application of audit procedures to less than 100% of items within a class of transactions or account balance such that a ll sampling units have a chance of selection.

Illustration

Cosmos has reported trade receivables in the statement of financial position amounting to $100,000.

The population of the receivables balance are the individual balances that make up the $100,00 0. The auditor will select a sample of balances from the total balance using appropriate audit techniques.

The population is therefore the entire set of data from which a sample is selected.

Sampling Risk

There are two types of sampling risk:

The risk that the auditor will conclude (in the case of tests of controls) that controls are more effective than they actually are, or in the case of tests of details, that a material error does not exist when in fact it does. This is more likely to lead to an incorrect opinion being formed. The risk that the auditor will conclude (in the case of tests of controls) that controls are less effective than they actually are, or in the case of tests of details, that a material error does exist when in fact it does not. This impedes on audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.

Non-sampling risk cause the auditor to reach an incorrect conclusion for reasons other than the size of the sample. For example the auditor might use inappropriate audit procedures or misinterpret audit evidence which would then result in the auditor failing to spot an error.

Tests of Control

Tests of control are audit procedures which assess the effectiveness of the client s internal control systems. An example of a control procedure would be a senior official signing cheques for over (say) 10,000. The auditor would collate evidence to confirm that this control has been effective throughout the period.

Substantive Testing

Substantive testing are concerned with two types of amounts:

Tests of details of classes of transactions, account balances and disclosures; and Substantive analytical procedures.

The primary purpose of substantive testing is to enable the auditor to obtain audit evidence to detect material misstatements at the assertion level. When performing substantive procedures, audit evidence can be used to verify one or more assertions about amounts within the financial statements.

The auditor needs to determine the appropriate means of selecting items for testing and generally, there are three available means:

100% sampling Selection of specific items Audit sampling

The auditor needs to use professional judgement to identify the most appropriate method of selection. 100% sampling might be inappropriate for tests of controls but may be more appropriate for tests of details.

Selection of specific items could be those which are over a specific amount or high value items. The auditor, however, must consider the need to obtain appropriate audit evidence regarding the remainder of the population that has not been sampled when that remainder is material.

Sampling Techniques

There are some key sampling techniques which the auditor can adopt:

Haphazard sampling Stratified sampling Systematic sampling (interval sampling) Block selection

Haphazard Sampling

Haphazard sampling is a technique adopted by the auditor where the sample does not follow a structured technique. Haphazard sampling is n ot appropriate when using statistical sampling and the auditor should always ensure that haphazard sampling is not doctored in such a way that it deliberately avoids sampling items which, for example, are difficult to locate. All items in the population should stand a chance of being sampled.

Stratified Sampling

This is a technique where the auditor will split items in a sample into their various stratas. For example, in a payroll sample the auditor might split the sample between full-time males, full-time females, part-time males and part-time females and work out the percentage of the strata in the population (the population being the total amount that makes up a figure). For example if 30% of the population are full-time males, 40% full-time females, 20% part-time males and 10% part-time females, then the sample will consist of 30% full-time males, 40% full-time females etc.

Systematic Sampling

Often referred to as interval sampling this is where the auditor will take the number of sampling units in the population and divide this into the sample size to give a sampling interval. For example in a sales invoice sample where the sampling interval is 20, then the auditor will determine a starting point for sampling and sample every 20th sales invoice thereafter.

Block Sampling

Block sampling is a technique where the auditor applies procedures to such items that all occur in the same block of time or sequence. For example testing amounts received from customers in the month of September. Alternatively, a block of remittance advices received in September would be tested in their entirety. It is to be noted that block sampling should be used with caution because valid references cannot be made beyond the period or block examined. Where the auditor does use block sampling, then many blocks should be selected to help minimise sampling risk.

Judgement

Auditors can use their judgement in selecting items for sampling. There are three basic issues which determine which items are selected:

The value of items The relative risk (items prone to error should be given special attention) The representativeness (the sample should be representative of the population)

Random Sampling

This method uses sampling without replacement; that is, once an item has been selected for testing it is removed from the population and is not subject to re-selection. Auditors can use random number tables or random number generators when implementing this technique.

Statistical and Non-Statistical Sampling

Students will often come across the terms statistical and non-statistical sampling. In the sampling techniques we can classify each technique as either statistical or non -statistical.

Statistical Techniques

Random sampling Systematic (interval) sampling Stratified sampling

Non-Statistical Sampling

Haphazard sampling Block selection Judgement selection