17. Audit Sampling

Question 1

Explain 100% selection?

Answer 1

Normally the auditors don’t check 100% transactions. However it may be appropriate to test the entire population in the following areas:
population consists of small number of large value items OR
there is significant risk which cannot be reduced by other means OR
population doesn’t consists of items which have common characteristics

Question 2

Explain specific item selection?

Answer 2

It is also known as Judgmental selection. Following items may be relevant for auditor while selecting items for specific examination:
all items over a certain amount
items to obtain information about nature of entity or transactions
key items showing certain characteristics

Question 3

What is audit sampling?

Answer 3

Audit sampling is the application of audit procedures to less than 100% items within a population selected in such a way that all sampling units have a chance of selection. Objective of audit sampling is to provide the basis for conclusion about entire population.
It is used in Test of controls and Test of details.

Question 4

How is detection risk arisen?

Answer 4

Detection risk arises because of 2 components:
Sampling risk and Non-sampling risk.
To reduce the detection risk, it is necessary to understand and reduce both risks.

Question 5

Explain Sampling risk?

Answer 5

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

Question 6

What are the erroneous conclusions, sampling risk may lead to?

Answer 6

1. Risk of under-reliance or incorrect rejection:
   controls are less effective than they actually are
   material misstatement exists when actually it doesn’t
2. Risk of over-reliance or incorrect acceptance:
   controls are more effective than they actually are
   material misstatement doesn’t exist when it actually does

Question 7

How to reduce sampling risk?

Answer 7

Sampling risk can be reduced by:
Increasing the sample size
Stratification

Question 8

Explain stratification?

Answer 8

In stratification, the entire population is sub-divided into different segments (which have similar characteristics) and then sample is selected from each segment.
Population can be stratified by:
monetary value
OR any other characteristics.

Question 9

What is a non-sampling risk?

Answer 9

Non-sampling risk is the risk that the auditor’s conclusion may be wrong for any reason other than sampling risk.
For example; use of inappropriate procedures by auditor or misinterpretation of evidence, failing to recognize a misstatement.
It should be zero.

Question 10

How can non-sampling risk be reduced?

Answer 10

Non-sampling risk can be reduced by:
proper planning,
supervision,
review.

Question 11

What are the steps involved in sampling?

Answer 11

The following are the steps involved in sampling:

   1. Sample design
   2. Performing audit procedures on sample
   3. Projecting rate of deviation/ misstatement
   4. Evaluating results of sampling

Question 12

What is the purpose of sampling?

Answer 12

The purpose of sampling could be:
test of controls or test of details
testing for overstatement or understatement

Question 13

What does the purpose of sampling determines?

Answer 13

Purpose determines what would be the relevant population.

Question 14

Differentiate between Population and Sampling Unit?

Answer 14

Population is the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions. Auditor shall ensure that the population is complete.
Sampling unit are the individual items constituting a population.

Question 15

Give examples of deviation or misstatement?

Answer 15

1. timing difference between client record and customer’s record is not a misstatement.
2. if the auditor wants to check the accuracy of receivables, posting in the wrong customer’s account is not a misstatement as the total balance is correct.
3. if the documentation relating to the item has been lost then it will be a deviation or a misstatement.

Question 16

What is a Tolerable rate of deviation?

Answer 16

A tolerable rate of deviation in the internal controls is set by the auditor in which the auditor obtains assurance that the actual rate of deviation in the population does not exceed the rate of deviation set by the auditor.

Question 17

What is tolerable misstatement?

Answer 17

It is the amount of misstatement in the financial statements set y the auditor for which the auditor obtains assurance that the actual amount of misstatement in population does not exceed the amount set by the auditor.

Question 18

Explain Statistical and Non-Statistical Sampling?

Answer 18

A sampling approach that involves random selection of items and application of probability theory to evaluate results of the sample and measurement of sampling risk is statistical sampling.
A non-statistical sampling approach does not use the characteristics of statistical sampling. It is based on the judgement of auditor.

Question 19

What are the advantages of statistical sampling?

Answer 19

1. It is based on specific techniques.
2. Using statistical techniques, sample size can be calculated accurately, precisely and objectively.
3. It is free from bias and can be easily defended in a review.
4. Special softwares are available to help efficient execution.
5. It is a mean of efficient auditing in case of large population.

Question 20

What are the disadvantages of statistical sampling?

Answer 20

1. It lacks human judgement and over-emphasizes statistical calculations. So, some auditors prefer to rely on their skills, experience and judgements instead of statistical sampling.
2. Investment, training and technical expertise are required for statistical sampling.
3. As the technique is not easily understood, false conclusions may also be drawn.

Question 21

What will happen if audit procedure is not applicable to a selected item?

Answer 21

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

Question 22

What if the auditor is unable to apply desired procedures on selected items?

Answer 22

For example: if a cheque or a document is lost, the auditor shall treat this as a deviation or misstatement.

Question 23

What if deviation or misstatement is identified?

Answer 23

If a deviation or misstatement is identified in sampling, the auditor shall investigate their nature and cause. Then shall evaluate its possible effect on audit procedures.

Question 24

Explain the examples of deviation/misstatements?

Answer 24

Some of the deviations or misstatements may be:

1. Anomalous: In such case, the auditor shall obtain high degree of certainty that the deviation or misstatement does not affect the remainder of the population.
2. Sharing common features: Auditor shall select all such items in the population and shall extend his procedures on those items. If such deviations or misstatements are intentional, the auditor must increase the risk of fraud.

Question 25

What is anomaly?

Answer 25

It is the deviation or misstatement that occurs because of a one-off event and is not a representative of misstatements or deviations in a population.
Example: Error by a temporary employee.

Question 26

What will happen if the projected rate of deviation is BELOW/ABOVE the tolerable rate of deviation?

Answer 26

Below: Controls are operating effectively. Auditor can rely on internal controls and can decrease the substantive testing.
Above: Auditor shall increase his assessment of control risk and may place no reliance on controls.

Question 27

What will happen if projected misstatement is BELOW/ABOVE the tolerable misstatement?

Answer 27

Below: Population is not materially misstated. No further work necessary.
Above: Sample has not provided a reasonable base for conclusion about the population that has been tested. In such situation, the auditor shall:-
Request the management to investigate identified misstatements and search further misstatements to make adjustments.
Revise the nature, timing and extent of further audit procedures.