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. Show 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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Conditions leading to | |||
Factor | Smaller sample size | Larger sample size | Related factor for substantive sample planning |
a. Assessment of inherent risk. | Low assessed level of inherent risk. | High assessed level of inherent risk. | Allowable risk of incorrect acceptance. |
b. Assessment of control risk. | Low assessed level of control risk. | High assessed level of control risk. | Allowable risk of incorrect acceptance. |
c. Assessment of risk for other substantive tests related to the same assertion (including analytical procedures and other relevant substantive tests). | Low assessment of risk associated with other relevant substantive tests. | High assessment of risk associated with other relevant substantive tests. | Allowable risk of incorrect acceptance. |
d. Measure of tolerable misstatement for a specific account. | Larger measure of tolerable misstatement. | Smaller measure of tolerable misstatement. | Tolerable misstatement. |
e. Expected size and frequency of misstatements. | Smaller misstatements or lower frequency. | Larger misstatements or higher frequency. | Assessment of population characteristics. |
f. Number of items in the population. | Virtually no effect on sample size unless population is very small. |
Table 2
Allowable Risk of Incorrect Acceptance (TD)
for Various Assessments of CR and AP; for AR = .05 and IR = 1.0
Auditor's subjective assessment control risk. | Auditor's subjective assessment of risk that analytical procedures and other relevant substantive tests might fail to detect aggregate misstatements equal to tolerable misstatement. | ||||||
CR | AP | ||||||
10% | 30% | 50% | 100% | ||||
TD | |||||||
10% | * | * | * | 50% | |||
30% | * | 55% | 33% | 16% | |||
50% | * | 33% | 20% | 10% | |||
100% | 50% | 16% | 10% | 5% | |||
* The allowable level of AR of 5 percent exceeds the product of IR, CR, and AP, and thus, the planned substantive test of details may not be necessary. | |||||||
Note: The table entries for TD are computed from the illustrated model: TD equals AR/(IR x CR x AP). For example, for IR = 1.0, CR = .50, AP = .30, TD = .05/(1.0 x .50 x .30) or .33 (equals 33%). |