Paper F8, Audit and Assurance and Paper FAU, Foundations in Audit require students to gain an understanding of audit sampling. While you won’t be expected to pick a sample, you must have an understanding of how the various sampling methods work. This article will consider the various sampling methods in the context of Paper F8 and Paper FAU. This subject is dealt with in ISA 530, Audit Sampling. The definition of audit sampling is: ‘The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.’ (1) In other words, the standard recognises that auditors will not ordinarily test all the information available to them because this would be impractical as well as uneconomical. Instead, the auditor will use sampling as an audit technique in order to form their conclusions. It is important at the outset to understand that some procedures that the auditor may adopt do not involve audit sampling, 100% testing of items within a population, for example. Auditors may deem 100% testing appropriate where there are a small number of high value items that make up a population, or when there is a significant risk of material misstatement and other audit procedures will not provide sufficient appropriate audit evidence. However, candidates must appreciate that 100% examination is highly unlikely in the case of tests of controls; such sampling is more common for tests of detail (ie substantive testing). The use of sampling is widely adopted in auditing because it offers the opportunity for the auditor to obtain the minimum amount of audit evidence, which is both sufficient and appropriate, in order to form valid conclusions on the population. Audit sampling is also widely known to reduce the risk of ‘over-auditing’ in certain areas, and enables a much more efficient review of the working papers at the review stage of the audit. In devising their samples, auditors must ensure that the sample selected is representative of the population. If the sample is not representative of the population, the auditor will be unable to form a conclusion on the entire population. For example, if the auditor tests only 20% of trade receivables for existence at the reporting date by confirming after-date cash, this is hardly representative of the population, whereas, say, 75% would be much more representative.
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Customer Name | Customer Balance | Cumulative Balance | Sampling Item |
---|---|---|---|
ABC Electric | $435 | $435 | |
Best Friend Cat Care | $785 | $1,220 | (1) $556 |
Brandy’s Grill | $1,510 | $2,730 | |
Buddy’s Gas Station | $5,000 | $7,730 | (2) $3,681 |
First, pick the records to test: Take the alphabetically ordered list shown in the Customer Name column, which lists every customer balance by dollar amount, and count each dollar until you get to $556 (remember that the random number generator gives you the number 556 in Step 3 in the previous numbered list). The cumulative dollar amount for ABC Electric is under $556.
That tells you that the first sampling item is Best Friend Cat Care, which at a cumulative total of $1,220 is the first customer in the list with a cumulative balance over $556. The client gives you the Best Friend Cat Care file. You go through these ordered invoices (usually the invoices are ordered by date) to find the invoice with the 556th dollar. That invoice is your item to sample.
To select your next invoice to sample, add the sampling interval of $3,125 to your random number of $556. This equal $3,681, which is your next sampled item dollar amount. Brandy’s Grill at $2,730 cumulatively is under $3,681, so skip past Brandy’s to Buddy’s. Follow the same procedure you use for Best Friends to find the Buddy invoice with the 3,681st dollar.
Although the table only goes as far as Buddy’s, your client has many more customers. To pick the next sampling item, add the sampling interval of $3,125 to your prior sampling item of $3,681, which equals $6,806, and so on until you reach the last name in the customer list.
When you’re sampling, you’re looking for misstatements. If an invoice should have been entered for $986, for example, and it was entered as $896, the misstatement is 9 percent of the transaction (the inverse of 896/986). If the total misstatements exceed your assessed tolerance level, you have to decide whether to perform other procedures.