1 au 350 sas 111 audit sampling c delano gray june 14, 2008

11

AU 350 SAS 111

Audit Sampling

C Delano Gray

June 14, 2008

22

Generally accepted auditing

standards

33

1. The audit is to be performed by a person orpersons having adequate technical trainingand proficiency as an auditor.

2. The auditor must maintain independencein mental attitude in all matters relatingto the audit.

General Standards

44

General Standards

3. The auditor must exercise due professionalcare in the performance of the audit and thepreparation of the report.

55

1. The auditor must adequately plan the workand must properly supervise any assistants.

2. The auditor must obtain a sufficient Understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement and to design further audit procedures.

Standards of Field Work

66


3. The auditor must obtain sufficient appropriateaudit evidence by performing audit proceduresto afford a reasonable basis for an opinion regarding the financial statements under audit.

77

1. The report shall state whether the financialstatements are presented in accordance withgenerally accepted accounting principles.

2. The report shall identify those circumstancesin which such principles have not beenconsistently observed in the current periodin relation to the preceding period.

Standards of Reporting

88

3. Informative disclosures in the financialstatements are to be regarded as reasonablyadequate unless otherwise stated in the report.

4. The report shall contain an expression ofopinion regarding the financial statements,taken as a whole.


99

Generally Accepted AuditingStandards

General Standards

1. Adequate training and proficiency

2. Independence in mental attitude

3. Due professional care

1010



1. Proper planning and supervision

2. Understanding of the entity

3. Sufficient appropriate evidence

1111



1. Statements prepared in accordance with GAAP

2. Circumstances when GAAP not followed

3. Adequacy of disclosures

4. Expression of opinion on financial statements

12

Audit Sampling for Tests of Controls Substantive Tests of Transactions

1313

AICPA SAS 111

.01 Audit sampling is the application of an audit procedure to less

than 100 percent of the items within an account balance or class

of transactions for the purpose of evaluating some characteristic

of the balance or class.

This section provides guidance for planning, performing,

and evaluating audit samples.

Source AICPA

1414

.02 The auditor often is aware of account balances and

transactions that may be more likely to contain misstatements.

He considers this knowledge in planning his procedures,

including audit sampling.

1515

.03 There are two general approaches to audit sampling: non-statistical

and statistical. Both approaches require that the auditor use professional

Judgment in planning, performing, and evaluating a sample and in relating the

audit evidence produced by the sample to other audit evidence when forming

a conclusion about the related account balance or class of transactions. The

guidance in this section applies equally to non-statistical and statistical sampling.

1616

.04 The third standard of field work states, "The auditor must obtain sufficient

appropriate audit evidence by performing audit procedures to afford a

reasonable basis for an opinion regarding the financial statements under audit."

Either approach to audit sampling, when properly applied, can provide

sufficient audit evidence.

1717

Representative sampling.

1818

Representative Samples

A representative sample is one in whichthe characteristics in the sample of auditinterest are approximately the same asthose of the population.

Nonsampling risk is the risk that audittests do not uncover existing exceptionsin the sample.

1919

Representative Samples

Sampling risk is the risk that an auditorreaches an incorrect conclusionbecause the sample is notrepresentative of the population.

Sampling risk is an inherent part ofsampling that results from testingless than the entire population.

2020

Distinguish between statistical

and nonstatistical sampling and

between probabilistic and non-

probabilistic sample selection.

2121

Statistical Versus Nonstatistical Sampling

Step 1: Plan the sample

Step 2: Select the sample and perform the tests

Step 3: Evaluate the results

Similarities:

2222

Statistical Versus Nonstatistical Sampling

Statistical sampling allows the quantificationof sampling risk in planning the sample (Step 1)and evaluating the results (Step 3)

In nonstatistical sampling those items thatthe auditor believes will provide the mostuseful information are selected

Differences:

2323

Probabilistic Versus Nonprobabilistic Sample Selection

Probabilistic sample selection is a methodof selecting a sample such that eachpopulation item has a known probabilityof being included in the sample.

Nonprobabilistic sample selection is amethod in which the auditor uses professionaljudgment rather than probabilistic methods.

2424


1. Directed sample selection

2. Block sample selection

3. Haphazard sample selection

Nonprobabilistic:

2525


1. Simple random sample selection

2. Systematic sample selection

3. Probability proportional to size sample selection

4. Stratified sample selection

Probabilistic:

2626

Nonprobabilistic SampleSelection Methods

Directed sample selection is the selection ofeach item based on auditor judgmental criteria.

Items most likely to contain misstatements

Items containing selected population characteristics

Large dollar coverage

2727

Nonprobabilistic SampleSelection Methods

Block sample selection is the selectionof several items in sequence.

Haphazard sample selection is the selectionof items without any conscious bias on the part of the auditor.

2828

Select representative samples.

2929

Probabilistic Sample Selection Methods

A simple random sample is one in whichevery possible combination of elementsin the population has an equal chanceof constituting the sample.

Computer generation of random numbers

Random number tables

3030


Systematic sample selection:

The auditor calculates an interval andthen selects the items for the samplebased on the size of the interval.

The interval is determined by dividingthe population size by the number ofsample items desired.

3131


Probability proportional to size:

A sample is taken where the probabilityof selecting any individual population itemis proportional to its recorded amount (PPS).

3232


Stratified sample selection:

The population is divided into subpopulationsby size and larger samples are taken of thelarger subpopulations.

3333

Sampling for Exception Rates

The occurrence rate, or exception rate,is the ratio of the items containing thespecific attribute to the total numberof population items.

3434

Sampling for Exception Rates

Following are types of exceptions inpopulations of accounting data:

1. Deviations from client’s established controls

2. Monetary misstatements in populationsof transaction data

3. Monetary misstatements in populations ofaccount balance details

3535

I: Plan the Sample

Step 1: State the objectives of the audit test.

Step 2: Decide whether audit sampling applies.

Step 3: Define attributes and exception conditions.

Step 4: Define the population.

Step 5: Define the sampling unit.

3636

I: Plan the Sample

Step 7: Specify acceptable risk of assessing control risk too low.

Step 8: Estimate the population exception rate.

Step 9: Determine the initial sample size.

Step 6: Specify the tolerable exception rate.

3737

II: Select the Sample and Perform the Audit Procedures

Step 10: Select the sample.

Step 11: Perform the audit procedures.

3838

III: Evaluate the Results

Step 12: Generalize from the sample to the population.

Step 13: Analyze exceptions.

Step 14: Decide the acceptability of the population.

3939

Effect on Sample Size of Changing Factors

Effect on initialType of change sample size

Increase acceptable risk ofassessing control risk too low Decrease

Increase tolerable risk rate Decrease

Increase estimated populationexception rate Increase

Increase population size Increase (minor)

4040

When planning a particular audit sample for a test of controls, the auditor should consider:• The relationship of the sample to the objective of the test of controls.• The maximum rate of deviations from prescribed controls that would support his planned assessed level of control risk.• The auditor's allowable risk of assessing control risk too low.• Characteristics of the population, that is, the items comprising the account balance or class of transactions of interest.

4141

Probability Proportion to Size

Probability proportional to size (PPS) is a sampling technique

for use with surveys or mini-surveys in which the probability

of selecting a sampling unit is proportional to the size of its

population. It gives a probability (i.e., random, representative)

sample.

4242

It is most useful when the sampling units vary considerably in size because it assures that those in larger dollar value Transaction have the same probability of getting into the sample as the smaller ones, and vice verse.

4343

Define and describe attributes

sampling and a sampling

distribution.

4444

Statistical Audit Sampling

The statistical sampling method mostcommonly used for tests of controlsand substantive tests of transactionsis attributes sampling.

4545

Sampling Distribution

It is a frequency distribution of the resultsof all possible samples of a specified sizethat could be obtained from a populationcontaining some specific parameters.

Attributes sampling is based on thebinomial distribution.

4646

Use of attributes sampling in tests

of controls and substantive

tests of transactions.

4747

Application of Attributes Sampling

Population size is a minor considerationin determining sample size

Representativeness is ensured by the sampleselection process more than by sample size

Effect of population size:

4848

Application of Attributes Sampling Select the sample

Perform the audit procedures

Evaluate the results

49

End

Questions?????

1 au 350 sas 111 audit sampling c delano gray june 14, 2008

Documents