Sample Design And Size

Question 1

Sample design and sign

Answer 1

To ensure an effective audit sampling exercise, the sample must be designed appropriately to reduce sampling risk and, consequently, detection risk. ISA 530 outlines the following requirements for designing a sample:

1. Purpose and Population:
   
   • Consider the Purpose: Understand the objective of the audit procedure.
   • Identify the Population: Determine the population from which the sample will be drawn.
2. Sample Size:
   
   • Determine Sample Size: Choose a sample size sufficient to reduce sampling risk to an acceptably low level.
3. Selection Method:
   
   • Equal Chance of Selection: Select items in such a way that each sampling unit in the population has an equal chance of being chosen.

When designing a sample, the auditor must make several key decisions:

1. Sampling Approach:
   
   • Statistical Sampling: Uses random selection and probability theory.
   • Non-Statistical Sampling: Based on the auditor’s judgment.
2. Population Characteristics:
   
   • Understand the characteristics of the population from which the sample is drawn.
3. Sample Selection Method:
   
   • Choose a method that ensures each item has an equal chance of selection.
4. Misstatement or Deviation:
   
   • Define what constitutes a misstatement or deviation.
5. Tolerable Misstatement or Rate of Deviation:
   
   • Set the maximum acceptable error amount or deviation rate.
6. Expected Misstatement or Rate of Deviation:
   
   • Estimate the expected error amount or deviation rate.

Statistical Sampling:
- Benefits:
- Provides an objective, mathematically precise basis for sampling.
- Allows precise calculation of required sample size using statistical probability.
- Disadvantages:
- Requires training and technical expertise.
- May result in larger sample sizes, increasing time and cost.
- Some auditors prefer relying on their skill and judgment rather than mathematical models.

Non-Statistical Sampling:
- Benefits:
- Relies on the auditor’s professional judgment and experience.
- Can be more flexible and tailored to specific audit circumstances.
- Disadvantages:
- Lacks the mathematical precision of statistical sampling.
- May be less objective and harder to justify.

Scenario: An auditor is auditing a company’s accounts receivable.

Steps:
1. Purpose and Population: The auditor identifies the purpose (verify accuracy of receivables) and the population (all receivables).
2. Sample Size: The auditor determines a sample size that reduces sampling risk to an acceptable level.
3. Selection Method: The auditor uses random selection to ensure each receivable has an equal chance of being selected.
4. Misstatement Definition: The auditor defines what constitutes a misstatement (e.g., incorrect amount).
5. Tolerable Misstatement: The auditor sets a threshold for acceptable errors (e.g., $5,000).
6. Expected Misstatement: The auditor estimates the expected error rate based on past audits.

By carefully designing the sample and making informed decisions, auditors can effectively gather sufficient and appropriate audit evidence. If you have any further questions or need more detailed examples, feel free to ask!