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# The Audit Process: Audit Sampling Concepts

Auditing: The Art and Science of Assurance Engagements
by

## Aliya Lalani

on 11 October 2012

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#### Transcript of The Audit Process: Audit Sampling Concepts

Presented by: Aliya Lalani, Ameel Velji, Mishna Johar, and Tan Giang Audit Sampling Concepts Test of controls Procedures to obtain an understanding of internal control Risk Assessment Procedures AR=IR x CR x PDR Audit Sampling in Relation to the Audit Risk Model The sampling data that is tested should be representative of the whole population for the results to be valid. The process of using audit procedures to a portion of the available data in the population that contribute to the company's account balances which must be tied to the auditor's risk assessment. What is Audit Sampling Types of Risk Non-Sampling Risk Sampling Risk Non-Sampling risk occurs when audit tests do not uncover exceptions existing in the sample due to mistake, misstatement or the ineffectiveness of the audit procedure. Sampling risk is an inherent part of sampling that results from testing less than the entire population. Simple Random Sample Statistical Sampling The
Sampling
Tree Non-Statistical Sampling Types of Sampling Selection Non-Probabilistic Sample Probabilistic Sample Selection Systematic Sample Selection Stratified Sample Selection Block Sample Selection Direct Sample Selection Haphazard Sample Selection Statistical sampling uses mathematical measurement techniques to calculate formal statistical results and quantify sampling risk. Non-statistical/Judgmental sampling provides the auditor useful information in the circumstances and conclusions are reached on judgmental basis. Every item in the population has an equal opportunity to be selected and must have same characteristics for the audit procedure. The auditor calculates an interval and selects the items for the sample based on the size of the interval and a randomly selected number between zero and sample size. PRO Easy to Use Possibility of bias CON The grouping of the selection based on an identical characteristic. Each item in the sample is selected on the basis of some judgmental criteria established by the auditor. It is crucial to ensure that the test is clearly defined an its audit role is identified. The most commonly used criteria to make the selection are: items more likely to contain misstatements, items containing selected population characteristics, and large dollar coverage. Where items are selected in measured sequences. It is only acceptable if a reasonable number of blocks are used to reduce the risk of having non-representative in the data. Where items are chosen without regard to their size source or other distinguished characteristics or attempt to select without bias. The major drawback of this selection is that it is extremely difficult for an auditor to remain unbiased in the selection. Evaluating the Results Performing the Tests Planning the Sample and Selecting the Sample Decide if audit sampling applies to the audit procedures State the objectives of the audit test Define attributes and exception or error conditions Define Population Define Sampling Unit Specify Tolerable Exception Rate (TER) or specify materiality Specify acceptable risk of assessing control Estimate the population of exception rate or misstatements in the population Determine initial sample size SELECT THE SAMPLE Perform the Audit Procedure Generalize from the sample to the population Analyze Exceptions or Misstatements Determine the acceptability of the population Increasing Sample Size Using proper sample methodologies Attribute Sampling Variable Sampling Probability Proportionate to Size Statistical Sampling Methodologies It is very important that the auditor has proper records of the procedure performed, the methods used to select sample and perform the tests, results from the tests and conclusions drawn in order to defend the audit if required. Documentation ... small Reduce Sampling Risk Why are Samples Used? Economic
Audit becomes cost effective
Time
Complete check would take time
Practical
Users do not expect 100% accuracy
Fruitfulness
The emphasis in auditing should be on the completeness of record and the true and fair view. TWO TYPES OF SAMPLING RISKS

Type 1 error - Rejection of true null hypothesis

Type 2 error - Failure to reject a false null hypothesis

Ho = Financial Statements are fairly represented
H1 = Financial Statements are not fairly represented Factors Influencing Sample Size 1. Preliminary assessment of risk
2. TER
3. Number of items in population
4. Expected error
-High expected error, increase sample pool
-Lower expected error, decrease sample pool Drawbacks THE END
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