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AUDIT SAMPLING
• What is sampling?
Sampling is the process of applying audit procedures to less than 100% of
items of an audit population, such that every item of the population has a fair
chance of being selected, so as to provide the auditor a reasonable basis to
draw conclusions about the entire population without verifying the entire lot
enabling him to prioritize valuable and scarce audit resources.
• Audit Sampling
From the above definitions, we can deduce that audit sampling is the audit
i.e. verification of a sample i.e. of representative transactions, selected
disinterestedly.
Whereas the erstwhile AAS stressed on Audit Sampling as one of the ways of
merely obtaining audit evidence, the superseding SA states that the objective
of audit sampling is to provide the auditor a basis to draw conclusions from
and thereby express his opinion. It is clearly evident that the SA is in line with
‘quality centric assurance approach’, which gives the auditor far more
intelligent freedom to express his opinion from analyzing the results of his
audit procedures on a sample, rather than merely considering it as evidence.
To put it pragmatically, the objectives of using sampling techniques in auditing
are:
• Design efficient samples
• Measure sufficiency of evidence
• Detect significant deviations
• Fraud Detection
• Provide true and fair view
What ICAI has to say
ICAI has issued SA 530 – Audit Sampling on the issue, which supersedes the hitherto
AAS 15. This SA shall be effective for audits of financial statements for periods
commencing on 1st April, 2009 or later.
• Scope of SA 530
This Standard applies when the auditor decides perform audit
procedures on audit samples.
SA 530 encapsulates both statistical and non-statistical sampling.
Also, SA 530 covers every step of sampling process, elaborated
further.
Sample Population
b. Audit Efficiency
An erroneous selection of an audit sample affects audit
efficiency as it would lead to additional work to establish that
initial conclusions were correct.
• Types of Sampling
a. Statistical Sampling
Statistical sampling is characterized by
- Random selection of samples
- Use of probability theory to evaluate sample results
b. Non-statistical sampling
Non statistical sampling refers to the sampling technique which does
not use the sampling approaches used in statistical sampling. The use
of non statistical sampling depends on the effectiveness and the
efficiency with which the audit is to be carried out.
• Tolerable misstatement
A monetary amount set by the auditor in respect of which the auditor seeks
to obtain an appropriate level of assurance that the monetary amount set by
the auditor is not exceeded by the actual misstatement in the population.
The hitherto applicable AAS 15 required the auditor to consider sampling risk,
tolerable error and the expected error. The stark shift in emphasis clearly
emphasizes a rather magnified focus on the preliminary and basic steps in
sample designing, which in any case, logically, precede risk assessment.
The notable difference in AAS 15 and SA 530 is the terminology used. The
AAS 15 required the auditor to analyze ‘errors’, and much before that,
establish that it qualified to be an error. The focus back then was on
performing audit procedures, to obtain evidence to prove an error.
However, the SA requires the auditor to delve into the nature and reasons of
‘deviations and misstatements’, and further consider their effect on other
areas of the audit and the purpose of this procedures. It is evident that the
requirement is more analytical than clerical.
Evaluation of the results implies that the auditor understand the implication of
the deviations and/or misstatements and the eventual consequences on his
opinion.
RELATED PARTIES
It is important to note that the definition lays great emphasis on the ability of the
related part to control and exercise significant influence on the other. In other
words, a seemingly unrelated party can be a factor affecting the independence or
objectivity of the decisions of another entity.
Requirements
1. Understand the Entity’s Related Party Relationships and Transactions
As stated in the Objectives, the auditor shall understand the entity’s related party
relationships and the transactions with these parties. In order to develop this
understanding, he shall inquire of the management regarding:
a. The identity of the entity’s related parties, including changes from the prior
period
b. The nature of the relationships between the entity and these related parties
c. Whether the entity entered into any transactions with these related parties
during the period
The auditors shall inquire and perform other risk assessment procedures, to
obtain of internal controls, in order to:
i. Identify, account for and disclose related party relationships and
transactions.
ii. Authorize and approve significant transactions and arrangements with
the related parties
iii. Authorize and approve significant transactions and arrangements
outside the normal course of business
It is a genuine possibility that the auditor may not have all the information
regarding related parties made available to him on a platter. It is equally
probable that the entity may conceal the related party transactions. In such a
case, it is incumbent upon the auditor to be alert, so as not to let any indicative
information by pass him.
In particular, the auditor shall inspect the following indications for the existence
of related party relationships or transactions that the management may not have
identified or disclosed
i. Bank, legal and third party confirmations
ii. Minutes of meetings of shareholders and those charged with governance
iii. Other records or documents
In case the auditor identifies significant transactions outside the entity’s normal
course of business, he shall inquire of management about
i. The nature of the transactions
ii. Involvement of related parties
There are sufficient cases to prove that related party transactions have been
arranged to circumvent rules and regulations on the milder side, and even
perpetrate deceit and fraud on the extreme side.
Even the Income Tax Act, which is generous enough to exempt profits of EOU’s,
SEZ’s etc. from the ambit of taxation, has explicit provisions enabling the
Assessing Officers to inquire into suspicious transaction so as to ascertain f they
have been arranged to unduly benefit either party or both parties.
In another situation, it can also be possible that the auditor or the management
itself may not have identified such relationships or transactions, as a result of
genuine mistake or otherwise. However, the emphasis of this standard is on the
intentional concealment of such information by the management.
For indentified significant related party transactions outside the entity’s normal
course of business, the auditors shall:
Where the management makes such assertions, the auditor shall obtain sufficient
appropriate audit evidence that :
9. Written Representations
If the financial reporting framework establishes related part requirements, the
auditor shall obtain written representations from management that:
1. They have disclosed to the auditor the identity of the related parties and the
related party relationships and transactions
2. They have appropriately accounted for and disclosed such relationships and
transactions.
11.Documentation
The auditor shall include in the audit documentation
The names of the identified related parties
The nature of related party relationships
STANDARD ON AUDITING (SA) 580 (REVISED)
WRITTEN REPRESENTATIONS
Form of representations
i. The written representations shall be in the form of a representation letter
addressed to the auditor.
ii. If law or regulations requires management to made written public statements
about its responsibilities, and the auditor determines that such statements
provide some or all of the representations, these matters need not be
included in the representation letters.
If the management does not provide one or more of the requested written representations,
the auditor shall:
i. The auditor concludes that there is sufficient doubt about the integrity of the
management, such that the written representations are not reliable; or
ii. Management does not provide the written representations