Audit Sampling

Question 1

what involves in Testing and How Items can be selected for testing?

Answer 1

Testing involves Test of controls and test of details.

Three means for Selecting Items for Testing
1- 100% Selection.
2- Specific Item selection.
3- Audit Sampling.

Question 2

In what Areas 100% Sampling is Appropriate?

Answer 2

1- Poplulation consists for Small Number of large value items. (eg share capital)
2- Significant risk which cannot be reduced by other means. (eg banks, lawyers)
3- 100% Examination becomes Cost Effective. (eg CAAT)
4- Population is not homogenous

Question 3

What items are relevant to be selected Specificaly?

Answer 3

1- All items over a certain amount. (to cover large portion)
2- Key items showing certain characteristics. (ie High risk)
3- Items to obtain information (about nature of entity, nature of transactions)

Question 4

How Audit Sampling works and what is its objective?

Answer 4

1- Application of Audit procedures on less than 100 of items of population.
2- selected in such a way that all sampling untis have a chance of selection.

OBJECTIVE is to Provide basis for concluion about entire population.
Auditor uses it in TOC and TOD.

Question 5

What is Audit Risk and How Auditor can reduce it?

Answer 5

Audit risk consists of: Inherent risk, control risk and detection risk.

The only way for Auditor to reduce the Audit risk is to reduce the Detection risk.

Question 6

What is the relationship between Audit risk model and Sampling?

Answer 6

Detection risk arises because of two reasons,
1- Sampling risk
2- Non Sampling risk

Therefore it is Necessary to understand and reduce both.

Question 7

State How we can reduce the sampling and non sampling risk?

Answer 7

Sampling risk:
1- Increasing the size of sample.
2- Stratification.

Non Sampling risk:
1- Proper planning
2- supervision of staff
3- review of the work performed

Question 8

How to perform stratification (stratified sampling)?

Answer 8

Population is sub-divided into different segments (which have similar characteristics) and then sample is selected frome each segment. Population can be stratified by:

1- Monetary value (to focus on large value items)
2- other particular characteristics (indicating risk) e.g. receivables may be stratified by age.

If an area is stratified, items are selected from each class.

Question 9

How do you define sampling risk and how it effects audit?

Answer 9

Sampling risk:
Risk that Auditor’s conclusion based on sample might be different from the conclusion if entire population would have been tested. This will happen if sample is not a representative of population.

It will lead two Erroneous conclusions:

Risk of under-reliance/incorrect rejection (effecting audit efficiency leading to increased work)
Risk of over- reliance/incorrect acceptance (effecting audit effectivness leading to incorrect opinion)

Question 10

How do you define Non sampling risk and how it effects audit?

Answer 10

Risk that Auditor’s conclusion may be wrong for any reasons other than sampling risk

For Example:
Use of Inappropriate procedures by auditor,
Misinterpretation of evidence,
Failing to recognize a deviation/Misstatment
Need to work on very tight deadline.

It must be zero.

Question 11

Steps in sampling?

Answer 11

Following are the steps of sampling
1- Sample Design.
2- performing Audit procedures on sample.
3- projecting rate of Deviation/Misstatment.
4- Evaluating results of sampling.

Question 12

Steps in sample Design?

Answer 12

1- Determine purpose and population of sampling.
2- Define what will be Deviation or Misstatment.
3- Make Assessment of Tolerable Rate of Deviation or Tolerable Misstatment.
4- Make Assessment of Expected Rate of Deviation, or Expected Misstatement.
5- Determine sampling Approach (i.e. whether statistical or Non-Statistical)
6- Determine sample size
7- Select items by choosing Appropriate method.

Question 13

What is tolerable rate of Deviation?

Answer 13

A rate of Deviation (in internal control) set by the auditor in respect of which the auditor obtains assurance that the actual rate of deviation in the population does not exceed rate of Deviation set by the Auditor.

Question 14

What is tolerable Misstatment?

Answer 14

It is the amount of misstatment (in financial statments) set by the auditor for wich auditor obtains assurance that actual amount of misstatment in population does not exceed from amount set by the Auditor.

Question 15

Elaborate the Sampling Approach?

Answer 15

Auditor shall determine whether to use “statistical sampling” or “Non statistical sampling”.
Statistical Sampling: A sampling approach that involves random selection of itmes, and application of Probablity theory to evaluate the results of the sample and meaurement of sampling risk.

Non statistical Sampling: A sampling approach that does not use the characteristics of statistical sampling (i.e. does not use random selection and probability theory).
It is based on judgement of Auditor.

Question 16

Describe the Advantages and Disadvantages of Statistical sampling?

Answer 16

Advantages:
1- Based on Scientific techniques.
2- sample size can be calculated Accurately, precisely and objectively.
3- Free from Bias and can be defended in review.
4- Special softwares are available to help efficient execution.
5- Mean of Effecient Auditing in case of large population.

Disadvantages:
1- Lacks Human Judgement and over-emphasizes statistical conclusion.
2- Investment, training and technical expertise are required.
3- As the technique is not easly understood, false conclusion may also be drawn.
4- Sample size may be larger than under a judgmental Approach.

Question 17

Describe the Factors that influence the sample size in sampling for Test of Controsl?

Answer 17

1- Tolerable rate of Deviation.
2- Expected rate of Deviation.
3- Desired Level of Assurance.
4- Extent to which Auditor plans to rely on controls.
5- population size (negligible effect).

Question 18

Describe the Factors that influence the sample size in sampling for Test of Details?

Answer 18

1- Tolerable Misstatement.
2- Expected Misstatement.
3- Desired Level of Assurance.
4- other substantive Procedures (eg Analytical procedures).
5- Stratification of Population .
6- Population size (negligible effect).

Question 19

Describe the Methods of sampling Selection?

Answer 19

1- Systematic Selection.
2- Random Selection.
3- Haphazard Selection.
4- Block Selection.

Question 20

Describe the Methods of selecting the sample based on statistical sampling?

Answer 20

Systematic selection:
Select the sample size. Then Divide the number of units in population with sample size to get the sampling interval. A random starting point is choosen within the First interval, and then every nth item is selected in sebsequent intervals.
Random Selection:
In this method, all items in the population have an equal chance of Selection. Random numbers are used to select the items for testing.

Question 21

Describe Haphazard Selection?

Answer 21

Auditor selects the sample on Arbitrary basis, without a structured technique. It is not Appropriate when using statistical sampling because sample could contain bias.

Question 22

Describe the block Selection?

Answer 22

Block Selection involves selection of a complete block of Adjacent itmes from the population e.g. Selecting All sale invoices of a particular week or month.

Question 23

What if Procedure is not applicable to selected item?

Answer 23

For example, if a cheque is cancelled, Auditor shall perform procedures on its replacement itme i.e. by selecting very next cheque.

Question 24

What if Auditor is not able to apply Alternative or Desired Audit procedures on selected item?

Answer 24

For Example, If a cheque/Document is lost, Auditor shall treat this as Deviations (in case of tests of control) or a misstatement (in case of tests of detail)

Question 25

Describe the Auditor’s course of Action if a misstatment or deviation is identified after performing Audit Procedures on sample

Answer 25

Auditor shall investgate their nature and cause and shall evaluate its possible effect on aduit procedures.
Auditor may observe that some of the deviations/misstatments are:
1- Anomalous
2- sharing common features (e.g. type of transaction, location, staff, product line, or period of time)

Question 26

Describe the Auditors course of action if he face Anomalous Deviations or misstatments?

Answer 26

1- obtain high degree of certainty that the deviation or misstatement does not effect the reminder of the population.
2- Auditor shall not consider it for projection.
3- However, this still shall be included in the list of identified misstatements.

Question 27

Describe the Auditors course of action if he face Deviations or misstatments showing common features?

Answer 27

1- select all items in the population and,
2- shall extend procedures on those items.
3- If intentional, Auditor shall also increase risk of fraud.

Question 28

How Auditor evaluate the results of the sampling for test of controls?

Answer 28

If projected < Tolerable:
1- Controls are opperating effectively.
2- Auditor can rely on internal control.
3- and can decrease substantive procedures.

If projected > Tolerable (unexpectedy high)
1- Auditor shall increase his assessment of control risk and may place no reliance on controls.

Question 29

How Auditor evaluate the results of the sampling for test of details?

Answer 29

If projected < Tolerable:
1- Means population is not materially misstated. No further work necessary.

If projected > Tolerable:
Means sample has not provided a reasonable basis for conclusion about population that has been tested. In this situation, auditor shall:
—- request management to investigate misstatements and search further misstatements to make adjustments.
—- revise the nature, timing and extent of further audit procedures
e.g. increase in related substantive Procedures.