AUDIT -SAMPLING
CHAPTER OBJECTIVE
1. AUDIT SAMPLING
2. SAMPLE SIZE
3. SAMPLE SELECTION
4. STATISTICAL AND NON-STATISTICAL SAMPLING
1. AUDIT SAMPLING
Definition:
Audit sampling as the application of audit procedures to less than 100% of the items (in population) with an account balance or class of transactions.
Using Sampling in Auditing:
Sampling is normally appropriate for areas in which there are a high number of similar transactions e.g. credit sales for the period. It may not be cost effective to test all transactions.
Sampling is not appropriate for the following situations.
– Populations are too small
– All the transactions in a particular area are material
– Sensitive items such as directors’ emoluments which require precise disclosure in the financial statements, regardless of their size.
– There is a non homogenous population
Sampling Risk:
The risk that the auditor draws a different conclusion from the results of a sample than that which would have been draw had the entire population been examined.
2. SAMPLE SIZE
When determining the sample size, auditors should consider
1. Sampling risk
When inherent risk and control risk are high, the auditor will be looking to minimise detection risk and vice versa.
High risk area => large sample size, and vice versa
2. Tolerable ( or acceptable error)
A monetary amount set by the auditor to obtain an appropriate level of assurance, and is related to the auditor’s judgement about materiality.
Large tolerable error => small sample size, and vice versa.
3. Expected error
Expected error is the actual level of error that the auditor anticipates exist in the population. Expected error is often based on past experience of previous year audit or client has alerted us to this possibility.
Large expected error => large sample size, and vice versa.
4. Stratification
The population is any group of items sharing a common characteristic, and if auditor is concerned that non-homogenous characteristic of population may make sampling difficult, so the stratification involves breaking a larger non-homogeneous population into a number of layers or strata which show homogeneous characteristics.
3.SAMPLE SELECTION
A number of sample selection methods are available to the auditor.
a. Random selection
Simple random sampling is a method of selection in which every item in population has the same statistical probability of being selected as every other item.
b. Value weighted selection
Value weighted selection is a sampling method which uses the currency unit value ( for example, the $) rather than the items as the sampling population.
The advantage of value weighted selection is that high-value items have a greater chance of being selected.
c. Systematic selection
Systematic sample selection method is where the auditor calculates a uniform sampling interval by dividing the population size by the sample size.
For example, if a population to be sampled is 600 items and the sample size is 50 the sampling interval will be 12. The starting point may be selected haphazardly or randomly. Systematic selection is particularly useful when sampling from non-monetary populations, for example despatch notes.
d. Block sampling
Block sampling is a method in which a number of adjacent transactions or items will be selected, e.g. all sales invoices in a particular week, or all receivables with a name beginning with a particular letter.
e. Judgemental/ haphazard selection
This is a selection process in which the auditor attempts to give all items in a population a chance of being selected by choosing items according to judgement.
4. STATISTICAL AND NON-STATISTICAL SAMPLING
Statistical Sampling:
Statistical sampling is a technique using probability theory and random selection to determine the sample size, evaluate quantitatively the sample results, and measure the sampling risk.
Non-statistical Sampling:
Non-statistical sampling (sometimes known as judgement sampling) is a technique which does not rely on probability theory and requires more subjectivity in making sampling decisions.
Source: Kaplan