Select Sample Size

Question 1

Select sample size

Answer 1

Let’s delve into the application of these methods for selecting items for testing to obtain audit evidence, with practical examples to illustrate each concept.

Explanation: This method involves examining every item in a population. It’s typically used when the population is small, or when there’s a high risk of material misstatement that requires thorough examination.

When Appropriate:
- The population consists of a small number of high-value items.
- There’s a significant risk, and other methods don’t provide sufficient evidence.
- The process is automated, making 100% examination cost-effective.

Example: An auditor is examining a company’s fixed assets, which include 20 high-value machines. Given the high value and risk, the auditor decides to examine all 20 machines.

Explanation: This method involves selecting specific items based on certain criteria, such as high value, risk, or unusual characteristics. This approach is efficient but doesn’t constitute audit sampling, as results can’t be projected to the entire population.

When Appropriate:
- High-value or key items.
- Items over a certain amount.
- Items to obtain specific information.

Example: An auditor decides to examine all sales transactions over $50,000 to ensure significant transactions are accurately recorded.

Explanation: This method involves selecting a representative sample from the population. The auditor uses statistical or non-statistical techniques to draw conclusions about the entire population based on the sample.

Example: An auditor uses random sampling to select 100 out of 1,000 inventory items to verify their existence and condition.

Explanation: Stratification involves dividing a population into sub-populations (strata) based on specific characteristics. This reduces variability within each stratum, allowing for a smaller sample size without increasing sampling risk.

When Appropriate:
- When testing details, stratify by monetary value to focus on larger items.
- Stratify by characteristics indicating higher risk, such as age of receivables.

Example: An auditor stratifies accounts receivable by age to focus on older, potentially doubtful accounts.

Let’s consider an auditor auditing a company’s sales transactions for the year, with a total of 10,000 transactions.

1. Selecting All Items: The auditor examines all 10,000 transactions due to high risk.
   
   • Transactions examined: 10,000
   • Percentage examined: (\frac{10,000}{10,000} \times 100 = 100\%)
2. Selecting Specific Items: The auditor examines all transactions over $50,000.
   
   • Total transactions: 10,000
   • Transactions over $50,000: 200
   • Transactions examined: 200
   • Percentage examined: (\frac{200}{10,000} \times 100 = 2\%)
3. Audit Sampling: The auditor uses random sampling to select 500 transactions.
   
   • Total transactions: 10,000
   • Sample size: 500
   • Percentage examined: (\frac{500}{10,000} \times 100 = 5\%)
4. Stratification: The auditor stratifies transactions by value, focusing on the top 20% of transactions that make up 80% of the total value.
   
   • Total transactions: 10,000
   • Top 20% transactions: 2,000
   • Sample size from top 20%: 200
   • Percentage examined: (\frac{200}{2,000} \times 100 = 10\%)

By applying these methods, the auditor can gather sufficient and appropriate audit evidence tailored to the specific circumstances and risks.

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