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Audit book by m asif chapter 14 audit sampling

Auditing – Study Notes

Chapter 14 Audit Sampling

CHAPTER FOURTEEN
AUDIT SAMPLING
LO #

ICAP'S STUDY TEXT
REFERENCE*

LEARNING OBJCTIVE

LO 1

SELECTING ITEMS FOR TESTING

4.3.1

LO 2


RELATIONSHIP BETWEEN SAMPLING AND AUDIT RISK
MODEL

4.3.2
4.3.3

LO 3

STEPS IN SAMPLING

4.3.4

LO 4

SAMPLE DESIGN

4.3.3
4.3.4

LO 5

SAMPLE SELECTION

4.3.4

LO 6

PERFORMING AUDIT PROCEDURES ON SAMPLE

4.3.5

LO 7

PROJECTING MISSTATEMENTS
RESULTS OF SAMPLING

4.3.6

AND EVALUATING


*Explanation of Reference:
First digit in Study Text’s Reference represents chapter number, second and third digits represents
section and sub-section number. Contents in brackets (if any) represent part of the sub-section
which is covered by the learning objective.
Coverage from Question Bank:
After completion of this chapter, you will be able to attempt following questions in ICAP's Question
Bank:
 Q. # 47
 Q. # 55
 Q. # 59
 Q. # 62a & 62b
 Q. # 64c

1

By: Muhammad Asif, ACA


Auditing – Study Notes

Chapter 14 Audit Sampling

LO 1: SELECTING ITEMS FOR TESTING:

Following are different means of selecting items for testing:
1) 100% Selection (i.e. selecting all items for examination)
2) Audit sampling

100% Selection:
100% examination of population is not done in Tests of Controls but may be done in Substantive
Procedures when:
o Population consists of small number of large values or
o There is a significant risk which cannot be reduced by other means or
o 100% examination becomes cost effective (e.g. when a repetitive calculation is performed
automatically by computer).
Audit Sampling:

Audit sampling:
Audit Sampling is the application of audit procedures to less than 100% of
items within a population in such a way that all sampling units have a chance
of selection, to draw conclusions about the entire population.

Audit Sampling is used in Tests of Controls and Tests of Details.

LO 2: RELATIONSHIP BETWEEN SAMPLING AND AUDIT RISK MODEL:
Detection risk arises because of two components/reasons:
 Sampling risk (due to sampling)
 Non-Sampling risk

Sampling Risk:
Definition:
“Sampling risk is the risk that auditor’s conclusion based on sampling might be different from the
conclusion if entire population would have been tested.”

Two Types of Incorrect conclusions in Sampling Risk:
1. In Tests of Controls, auditor erroneously concludes that controls are operating effectively
(but actually they are not). In Tests of Details, auditor erroneously concludes that
population is free from material misstatement (but actually it is not).
2. In Tests of Controls, auditor erroneously concludes that controls are not operating
effectively (but actually they are). In Tests of Details, auditor erroneously concludes that
population is not free from material misstatement (but actually it is).
First type of risk is more important because it may lead to incorrect audit opinion.

How to reduce Sampling Risks:
Sampling risk can be reduced through:
 Increase in Sample Size
 Stratification (It is the process of dividing a population into subpopulations, each of which is
a group of sampling units which have similar characteristics, often monetary value.)
2

By: Muhammad Asif, ACA


Auditing – Study Notes

Chapter 14 Audit Sampling

Non-Sampling Risk:
Definition:
Non-sampling risk is the risk that auditor’s conclusion may be wrong for any reasons/errors other
than sampling risk.

Examples:
This risk arises due to errors by the auditors or incompetency of the audit team e.g.
 Inappropriate selection of audit procedure
 Inappropriate application of audit procedures
 Inappropriate interpretation of results of audit procedures (i.e. failure to recognize a
misstatement/deviation)
How to reduce Non-Sampling Risk:
Non-sampling risk can be reduced through:
 Adequate planning
 Adequate application of professional skepticism
 Assigning more experienced and specialized staff e.g. use of experts if necessary.
 Adequate supervision and review of the audit work performed

LO 3: STEPS IN SAMPLING:
1)
2)
3)
4)

Sample Design
Sample Selection
Performing Audit Procedures on Sample & Projecting Misstatements
Evaluating results of Sampling

LO 4: SAMPLE DESIGN:

Designing of audit sample includes making following decisions:
i. Determine Purpose of sample and Population from which sample will be drawn.
ii. Determine what constitutes a Misstatement or Deviation.
iii. Determine Tolerable Rate of Deviation and Expected Rate of Deviation (For Tests of
Controls)
iv. Determine Tolerable Misstatement and Expected Misstatement (For Tests of Details)
v. Determine Sampling Approach (i.e. whether Statistical or Non-Statistical)
vi. Determine Method of Selection (i.e. whether Systematic, Random or Haphazard)

Tolerable Rate of Deviation:
It is the rate of deviation (in internal control), set by auditor for which auditor obtains assurance
that actual rate of deviation in population does not exceed from this set-rate.

Tolerable Misstatement:
It is the amount of misstatement (in financial statements) set by auditor for which auditor obtains
assurance that actual amount of misstatements in population does not exceed from this set-amount.
(it is the application of performance materiality in sampling).
Expected Rate of Deviation/Expected Misstatements:
Determination of Expected Rate of Deviation/Expected Misstatement is based on following factors:
 Rate of deviations/misstatements in prior periods
 Risk Assessment Procedures
3

By: Muhammad Asif, ACA


Auditing – Study Notes



Chapter 14 Audit Sampling

Understanding of business
Understanding of Internal Control/Results of Tests of Controls

Determining Sampling Approach:
Auditor shall determine whether to use Statistical Sampling or Non-Statistical Sampling.
Statistical Sampling:
An approach of sampling is called Statistical Sampling, if it has following
characteristics:
i.
Use of Random selection to select items.
ii.
Use of Probability theory to evaluate results.
e.g. Random Selection, Systematic Selection
Non-Statistical Sampling: (or Judgmental Sampling)
A sampling approach that does not have characteristics of Statistical Sampling.
Instead of probability theory, it is based on judgmental opinion of auditor e.g.
Haphazard Selection.
Advantages of Statistical Sampling
 It provides objective, mathematically
precise basis for sampling process.
 Required sample size can be calculated
precisely (using statistical techniques)
 It is the only mean of efficient auditing
in case of very large population.

Disadvantages of Statistical Sampling
 Training and technical expertise are required.
 Investment in training of audit staff required.
 Sample size is usually larger than judgmental
sampling, hence increases the time and cost of audit.
 Some auditors prefer to rely on their skills,
experience and judgments instead of statistical
models.

Determining Methods of Sample Selection:

Random Selection:
Use of a computerized random number generator or random number tables to
select items.

Systematic Selection:
In this method, a random starting point is chosen and then every nth item is
selected e.g. selecting every 50th item.

Haphazard Selection:
Auditor selects sample without a structured technique, however whole
population is considered by auditor in sample selection.

4

By: Muhammad Asif, ACA


Auditing – Study Notes

Chapter 14 Audit Sampling

LO 5: SAMPLE SELECTION:

Following factors influence determination of sample size:
Factors
(Increase in)
Tolerable rate of deviation/misstatement
Expected Rate of Deviation/Misstatement
Desired Level of Assurance
Risk of Material Misstatement
Stratification of Population
Other Substantive Procedures (e.g. analytical procedures)
Population Size
Factors
(Increase in)
Tolerable rate of deviation/misstatement
Expected Rate of Deviation/Misstatement
Desired Level of Assurance
Extent to which auditor considers controls in Risk Assessment
Population Size

Effect on Sample Size
for Tests of Details
Decrease
Increase
Increase
Increase
Decrease
Decrease
Negligible
Effect on Sample Size
for Tests of Control
Decrease
Increase
Increase
Increase
Negligible

LO 6: PERFORMING AUDIT PROCEDURES ON SAMPLE & PROJECTION:

Performing Procedures:
Auditor shall perform audit procedures on EACH item selected.
If audit procedures are not applicable to a Auditor shall perform procedures on a replacement
selected item (e.g. cancelled cheque)
item (e.g. by selecting very next cheque)
If auditor is unable to apply audit procedures Auditor shall treat that item as a deviation (in case
on a selected item (e.g. when a cheque is of tests of controls) or a misstatement (in case of
missing or positive confirmation is not received) tests of details).
If auditor identifies a deviation/misstatement, auditor shall investigate whether any of them is
Anomalous. (Anomaly is a deviation or misstatement that is demonstrably not representative of
misstatements or deviations in a population. Anomaly is NOT considered for Projection)

LO 7: EV ALUATING RESULTS OF SAMPLING:
Projection:

Projecting Deviation Rate (for T.O.C.):
No explicit projection is made for deviations in tests of controls because Sample Deviation Rate is
always the Projected Deviation Rate for population.

Projecting Misstatements (for T.O.D.):
Projected misstatement means “Auditor’s best estimate of misstatements in population that are
projected on the basis of sample”.
5

By: Muhammad Asif, ACA


Auditing – Study Notes

Chapter 14 Audit Sampling

Evaluating results of Tests of Controls:
Result
If Projected Deviation Rate is above
Tolerable Rate of Deviation

If Projected Deviation Rate is below
Tolerable Rate of Deviation

Evaluating results of Tests of Details:
Result
If Projected Misstatement is below
Tolerable Misstatement

If Projected Misstatement is above
Tolerable Misstatement

6

Evaluation
Deviation Rate is unexpectedly high. Auditor may:
–increase his assessment of control risk.
–auditor places no reliance on internal control.
Controls are operating effectively. Auditor can rely on
internal control.
Conclusion and Auditor's Procedures
–Population is not materially misstated.
–No further work necessary.
Sample has not provided a reasonable basis for
conclusion about population that has been tested.
Auditor shall perform other substantive procedures.

By: Muhammad Asif, ACA



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