W13 Audit Sampling

Question 1

What is Sampling

Answer 1

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.

Question 2

Why do audiotrs use sampling

Answer 2

In a big organization it would be time-consuming to test every item so sampling saves time and cost.

Auditors give reasonable assurance, not absolute, so sampling is appropriate.

Question 3

What is a representative sample

Answer 3

If a sample is representative, the same conclusion ill be drawn from that sample as would have been drawn had the whole population been tested

It must have the same characteristics as the other items in the population from which it was chosen

To reduce sampling risk and ensure the sample is representative, the auditor can increase the size of the sample selected or use stratification.

Question 4

What is stratification

Answer 4

Division of one population into smaller subpopulations

Each subpopulation is a group of items (sampling units) which have similar characteristics

Often used when there is a wide range of values within the population, e.g non-current assets

Different sampling methods can then be used within each sub-population

Question 5

What are the 5 ways of selecting sampling units

Answer 5

1.Random
2. Systematic
3. Monetary unit sampling
4. Haphazard
5. Block

Question 6

Random (selecting sampling units)

Answer 6

sample selected randomly

intended to produce representative sample

auditors may use random number generators or random number tables to chose which items to select from the population

Question 7

Systematic (selecting sample units)

Answer 7

The number of sampling units in the population is divided by the sample size to give a sampling interval, for example 50, and having determined a starting point within the first 50, each 50th sampling unit thereafter is selected

starting point may be chosen at random

*result of this method may not be valid if a pattern in the population, e.g. if every 20th item is the one the supervisor checks as part of their control procedures

Question 8

Monetary unit sampling (selecting sample units)

Answer 8

This involves identifying each monetary unit in a population as a sampling unit.

◈ For example, if the total on the receivables ledger is £1,000,000 then the population will be made up of 1,000,000 sampling units of £1

The auditor will then select a monetary unit upon which to base the sample selection, and will examine each balance on the ledger containing that monetary unit

Results in a focus on higher value items

Question 9

Haphazard (selecting sample units)

Answer 9

The auditor selects the sample without following a structured technique in an attempt to ensure that all items in the population have a chance of selection.

◈ Note: It is different from genuine random sampling

Question 10

Block (selecting sample units)

Answer 10

This involves selecting a block of adjacent transactions or items from the population, e.g. all invoices issued in one month.

◈ Commonly used when testing cut-off

Question 11

Difference between statistical and non-statistical sampling

Answer 11

Statistical sampling: approach that requires random selection of the sample items and probability theory to evaluate the results (Random, Systematic, Monetary unit selection)

Any sampling approach that doesnt have these characterisitcs is considered to be non-statistical (Haphazard, Block selection)

Question 12

What are the 3 automated tools and techniques relevant to an audit

Answer 12

Test data

Audit software

Data analytical tools

Question 13

Test data (automated tools)

Answer 13

Involves the auditor submitting dummy data into the clients system to ensure that the system correctly processes it and that it prevents or detects and corrects misstatements.

To be successful, test data should include both data with errors built into it and data without errors

e.g codes that do not exist (customer supplier employee)

Invoices with arithmetical errors

Question 14

Audit software (automated tools)

Answer 14

Audit software is used to interrogate a client’s system. It can be either
packaged, off-the-shelf software or it can be purpose written to work on a
client’s system. The main advantage of these programs is that they can be used
to scrutinise large volumes of data, which would be inefficient to do manually.

Specific procedures that can be performed are

• calculating ratios and indicators

casting ledgers and schedules

recalculation of amounts such as depreciation