Audit Sampling Concepts: 2003 Pearson Education Canada Inc

CHAPTER 11
Audit Sampling
Concepts
Copyright  2003 Pearson Education Canada Inc. 11 - 1
What is a representative sample?

What is a representative sample?
A representative sample has the same
characteristics as the population from
which the sample was taken.

What can make a sample non-
representative?

representative?
- sampling errors
?
representative?
Sampling errors
occur because of the nature
of sampling; the proper
sampling method was selected,
applied, and interpreted but
failed to uncover material
misstatements.

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

the risk of sampling errors?
increase sample size

representative?
- sampling errors
- nonsampling errors
?
representative?
- sampling errors
- nonsampling errors result from auditor
failure to recognize errors or excep-
tions or from the selection of ineffec-
tive or inappropriate procedures
oops!
the risk of nonsampling errors?

the risk of nonsampling errors?
increase auditor competence
Continuing
Professional
Education

Audit sampling can be based on:
judgment
OR
statistics

nonstatistical sampling statistical sampling

primary primary
advantage: advantage:
employs the audit
auditor’s risk can be
experience
quantified
and
judgment
primary primary
advantage: advantage:
employs the
auditor’s sampling
experience risk can be
and quantified
judgment
judgmentally determine sample size

determine sample size explicitly recognizing
implicitly recognizing relevant factors
relevant factors


relevant factors
judgmentally select a randomly select a

representative sample representative sample


relevant factors

apply audit procedures apply audit procedures


relevant factors

apply audit procedures apply audit procedures
evaluate test results evaluate test results

judgmentally statistically and
judgmentally

nonstatistical sampling
judgmentally select a sample selection
representative sample
Nonstatistical sampling employs

nonprobabilistic selection -
the auditor decides which
population items to select.

nonprobabilistic selection methods

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


does not consider:
~ each preparer of transactions


does not consider:
~ each preparer of transactions
~ large dollar balances

judgmentally select a
sample selection

- block sampling - selection of a
sequence and examining every item in
the sequence
Ace Corporation 324
date
pay to the order of $

Example:
CANADIAN BANK
examine all
cancelled
cheques of February Copyright  2003 Pearson Education Canada Inc. 11 - 25
judgmentally select a
sample selection

- haphazard selection - auditor selects
items without regard to characteristics
Beware
of bias!
statistical sampling
randomly select a
representative sample sample selection
Statistical sampling employs

probabilistic selection - every
population item has a known
chance of being selected.

randomly select a
sample selection
probabilistic selection methods

- simple random sample selection
used to
sample populations
that are not segmented
for audit purposes
randomly select a sample selection

- random number tables
How
does an
auditor use
random
number tables?

- 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

- computer generation of random
numbers


- 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.


- probability proportional to size and
stratified sample selection
discussed in
chapter 14
Audit Sampling

Audit Sampling
Audit
sampling is a
method used
to determine the
proportion of
population items
containing a
particular attribute.

When is audit sampling
appropriate?

When is audit
sampling SALES INVOICE 38527
Date:
appropriate? Ace Company Customer:
834 Reynolds Rd.
tests of Winnipeg, MB R2V 4E3
controls Sales Representative:
Quantity Description Price
total invoice amount

Example: Terms of sale (including discounts and freight
costs):
credit Carrier:
authorization Credit authorization:
of sales
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 con-
trols are accepted as effective, but the
actual population exception rate is
greater than the TER

- attribute
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 Copyright  2003 Pearson Education Canada Inc. 11 - 40
- attribute
- 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
(EPER)
- initial sample size - determined judg-
mentally by the auditor implicitly con-
sidering the ARACR, TER, EPER, and
population size
- attribute
(EPER)
- initial sample size
- exception - a deviation from the tested
characteristic
- attribute
(EPER)
- exception
- sample exception rate (SER):
number of exceptions
sample size
- attribute
- estimated population exception rate (EPER)
- exception
- sample exception rate (SER)
- computed upper exception rate (CUER) -
considering the extent of exceptions, the
worst likely population exception rate
Audit Sampling Sequence

SALES INVOICE 38527
Date:
1. StateAcme
the objectives of the audit test.
Company Customer:
834 Reynolda Rd.
Example: The auditor is testing proper
Winnipeg, MB R2V 4E3
Sales Representative:
credit approval of sales.

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

2. Decide if audit sampling applies.
Does the auditor

plan to reach
yes conclusions based
no
audit on a sample? audit
sampling sampling
is is not
appropriate appropriate

3. Define attributes and exception
conditions.
In the
example, what is
the attribute?
SALES INVOICE 38527
3. Define attributes and
Acme Company
exception
Date:
Customer:
conditions.834 Reynolda Rd.
the Quantity DescriptionIn the Price
signature
example, what is
of the
credit the
Est. shipment date:attribute?
Terms of sale (including discounts and freight
manager costs):
Carrier:
on the
sales Credit authorization:
Joe Credit
invoice
3. Define attributes and exception
conditions.
In the
example, what is
the exception
condition?
SALES INVOICE 38527
3. Define attributes and
Acme Company
exception
Date:
Customer:
conditions.834 Reynolda Rd.
In the
forged signature example, what is
of credit manag- Est. shipment date:
er, no signature, Terms of salethe exception
(including discounts and freight
costs):
signature of Carrier:
condition?
someone else
Credit authorization:
Jill Accountant

audit sampling sequence
4. Define the population.
In the
example, what is the
population?

In the
population?
2004 sales invoices
(sequence 10397 - 40465)
Population size = 30,068.
5. Define the sampling unit.
In the
sampling unit?

In the
sampling unit?
one
sales invoice
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 of
invoices without appropriate approval
would prevent auditor use of the assessed
control risk and/or the amount of monetary
misstatement in the transactions
established during planning.
In the example, the auditors judgmentally

assess the tolerable exception rate
(TER):
TER = 7%
When would the auditor

establish a low TER?

When would the auditor

establish a low TER?
when the auditor
is less willing to accept excep-
tions (e.g., cash controls)
7. Specify the acceptable risk of assess-

ing control risk too low (ARACR).
To what degree
does the auditor want
to rely on controls?
To what degree
low reliance on controls = high ARACR
high reliance on controls = low ARACR
To what degree
In the example, the auditors judgmentally
assess the acceptable risk of assessing con-
trol risk too low:
ARACR = medium
8. Estimate the population exception rate
(EPER) - estimate based on prior year
year audit or small preliminary sample
For the
example: EPER = 4%

9. Determine the initial sample size (SS).
considered
initial because
the auditor may
later decide to
sample more
Determined judgmentally
based on
pop. = 30,068
TER = 7%
ARACR = 10%
EPER = 4%
Sample Size Determination
RELATIONSHIP
FACTOR TO SAMPLE SIZE
ARACR inverse
TER inverse
EPER direct
Pop. size no effect
(if pop.> 5,000)

Determined judgmentally
based on
pop. = 30,068
TER = 7%
ARACR = medium
EPER = 4%
sample size = 150 Copyright  2003 Pearson Education Canada Inc. 11 - 69

SALES INVOICE 38527
10. Select the sample. Date:
Acme Company Customer:
11. Perform the audit Rd.
834 Reynolda procedures.
Winston-Salem, NC27109
how? total invoice amount

Est. shipment date:
Carrier:
Credit authorization: Joe Credit

SALES INVOICE 38527
Audit Sampling
Acme Company Sequence Date:
Customer:
834
10. Reynolda
Select Rd.the sample.
Winston-Salem, NC27109
11. Perform
Sales the audit
Representative:
procedures.
Of 150
invoices
examined, 7 total invoice amount
had no Carrier:
credit Credit authorization:

Joe Credit
approval.
12. Generalize from the sample to the
population.
pop. = 30,068
TER = 7%
ARACR = medium
EPER = 4%
SS = 150
exceptions = 7
Considering these factors,
judgmentally determine CUER
population.
pop. = 30,068
TER = 7%
ARACR = medium
EPER = 4%
SS = 150 CUER
exceptions = 7 = 8%
Considering these factors,
judgmentally determine CUER
population.
CUER
= 8%
What does
this mean?
population.
CUER
= 8%
There is a medium
risk (ARACR) that the
true exception rate > 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 be
sales to internal departments or subsidiaries?

14. Decide on the acceptability of the
population.
Decision rule:
For population acceptability:
CUER < TER

Decision rule:
For population acceptability:
CUER < TER

8% < 7%
The population is
not acceptable; the controls regarding the
indication of credit approval on sales
invoices are not satisfactory.
When an internal control is
judged unacceptable, what
options does the auditor have?

- revise the TER and/or
ARACR
This may be
considered ethically questionable.
WHY?
- expand the sample size
When is this
appropriate?
- expand the sample size

This is only appropriate
if the auditor believes that
the sample was not repre-
sentative of the population.

- 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)

judged unacceptable, the
auditor is required to
communicate this weakness
to management, and may
inform the audit committee as
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.
Does
the auditor
plan to reach
conclusions
based on a
sample?

3. Define misstatement conditions.
?
Misstatement
conditions are any conditions
that represent monetary fraud,
errors or irregularities
in the accounting
records.

?
notes
receivable
dollars
?
one
customer
name or loan
number
6. Specify tolerable misstatement.
What amount of monetary fraud, error
or irregularity can exist in notes receivable
without causing the financial statements to
be materially misstated?


based on
auditor judgment

In the notes
receivable example, tolerable mis-
statement is established at $24,000
for both over- and understatements.
7. Specify acceptable risk of incorrect
acceptance.
What level of risk is the

auditor willing to take of concluding
that the account balance is not materi-
ally misstated when, in fact, it is
materially misstated.

acceptance.
also based on
auditor judgment
acceptance.
In the
notes 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 on
auditor judgment and prior
year results


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

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.

10. 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.

Canada 48
Through confirmation
of selected notes receivable
balances, $1,380 of misstatements
were discovered in a sample
of $35,500.

population.
Project the sample misstatement

results to the population and consider
sampling error and sampling risk:
sample misstatement total recorded point estimate
total sample x pop. value = of misstatement

population.
Project the sample misstatement
results to the population and consider
sampling error and sampling risk:
sample misstatement total recorded point estimate
total sample x pop. value = of misstatement
In the notes receivable example:
$1,380 x $600,000 = $23,324 point estimate

$35,500

population.
The auditor must also judgmentally

assess sampling error, considering several
factors. The most important of these factors
is the difference between the point estimate
and tolerable misstatement.
tolerable misstatement - point estimate
= allowance for sampling error
$24,000 - $23,324 = $676
population.
The auditor must also judgmentally
assess sampling error, considering several
factors. The most important of these factors
is 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 nature

and cause of each
misstatement

13. Analyze the exceptions or
misstatements.
evaluate the nature and
cause 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 point
estimate is less than the tolerable mis-
statement, accept the conclusion that
the book value is not misstated by a
material amount.

Decision Rule:
material amount.
original point estimate
+ estimate of = point estimate incl.
of misstatement sampling error sampling error
$23,324 + $1,500 = $24,824

judgmentally conclusion?
determined

Decision Rule:
material amount.
original point estimate
+ estimate of = point estimate incl.
of misstatement sampling error sampling error
$23,324 + $1,500 = $24,824

$24,824>$24,000 tolerable
misstatement
The notes receivable balance
conclusion? of $600,000 is not acceptable.

book value What are the
is not
acceptable
auditor’s
options?

is not
acceptable
auditor’s
options?
- take no action until tests of other audit

areas are completed

is not
acceptable
auditor’s
options?
areas are completed
- perform expanded audit tests in specific
areas

is not
acceptable
auditor’s
options?
areas are completed
areas
- increase sample size

is not
acceptable
auditor’s
options?
areas are completed
areas
- request the account balance be adjusted
is not
acceptable
auditor’s
options?
areas are completed
areas
-request the client to correct
the population 11 - 122
Copyright  2003 Pearson Education Canada Inc.
is not
acceptable
auditor’s
options?
areas are completed
areas
- request the client to correct the population
- refuse to give an unqualified opinion

Audit Sampling Concepts: 2003 Pearson Education Canada Inc

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Audit Sampling Concepts: 2003 Pearson Education Canada Inc

Enviado por

Direitos autorais:

Formatos disponíveis

CHAPTER 11

Copyright  2003 Pearson Education Canada Inc. 11 - 2

Copyright  2003 Pearson Education Canada Inc. 11 - 3

Copyright  2003 Pearson Education Canada Inc. 11 - 4

Copyright  2003 Pearson Education Canada Inc. 11 - 6

Copyright  2003 Pearson Education Canada Inc. 11 - 7

Copyright  2003 Pearson Education Canada Inc. 11 - 8

Copyright  2003 Pearson Education Canada Inc. 11 - 11

Copyright  2003 Pearson Education Canada Inc. 11 - 12

Copyright  2003 Pearson Education Canada Inc. 11 - 13

Copyright  2003 Pearson Education Canada Inc. 11 - 14

judgmentally determine sample size

Copyright  2003 Pearson Education Canada Inc. 11 - 17

judgmentally determine sample size

judgmentally select a randomly select a

Copyright  2003 Pearson Education Canada Inc. 11 - 18

judgmentally determine sample size

judgmentally select a randomly select a

apply audit procedures apply audit procedures

Copyright  2003 Pearson Education Canada Inc. 11 - 19

judgmentally determine sample size

judgmentally select a randomly select a

apply audit procedures apply audit procedures

evaluate test results evaluate test results

Copyright  2003 Pearson Education Canada Inc. 11 - 20

Nonstatistical sampling employs

Copyright  2003 Pearson Education Canada Inc. 11 - 21

nonprobabilistic selection methods

Copyright  2003 Pearson Education Canada Inc. 11 - 22

nonprobabilistic selection methods

Copyright  2003 Pearson Education Canada Inc. 11 - 23

nonprobabilistic selection methods

Copyright  2003 Pearson Education Canada Inc. 11 - 24

nonprobabilistic selection methods

pay to the order of $

nonprobabilistic selection methods

Statistical sampling employs

Copyright  2003 Pearson Education Canada Inc. 11 - 27

probabilistic selection methods

probabilistic selection methods

probabilistic selection methods

probabilistic selection methods

Copyright  2003 Pearson Education Canada Inc. 11 - 31

probabilistic selection methods

Copyright  2003 Pearson Education Canada Inc. 11 - 32

probabilistic selection methods

Copyright  2003 Pearson Education Canada Inc. 11 - 34

Copyright  2003 Pearson Education Canada Inc. 11 - 35

Copyright  2003 Pearson Education Canada Inc. 11 - 36

total invoice amount

Copyright  2003 Pearson Education Canada Inc. 11 - 38

Copyright  2003 Pearson Education Canada Inc. 11 - 39

Copyright  2003 Pearson Education Canada Inc. 11 - 41

Copyright  2003 Pearson Education Canada Inc. 11 - 46

total invoice amount

Copyright  2003 Pearson Education Canada Inc. 11 - 47

Does the auditor

Copyright  2003 Pearson Education Canada Inc. 11 - 48

Copyright  2003 Pearson Education Canada Inc. 11 - 52

Copyright  2003 Pearson Education Canada Inc. 11 - 53

5. Define the sampling unit.

Copyright  2003 Pearson Education Canada Inc. 11 - 55

This determination is based on: