Audit Sampling. Murodullo Turdiyev.pptx

Auditing

1. Audit Sampling Prepared by Murodullo Turdiyev . Group Hba-81i

2. Learning Objectives 1. Definition and features 2. General approach sampling to 3. Planning and designing the sample 4. Factors affecting the sample size 5. Projecting the error

3. What is Audit sampling? Audit sampling : Process of selecting a subset of a population (entire set of data) of items for the purpose of making inferences to whole population . The process of using auditing procedures to less than 100 per cent of various items in a company's account balance such that each unit may have an equal opportunity of being selected.

4. Audit sampling is important because it provides information on: How many items to examine Which items to select How sample results are evaluated and extrapolated to the population in order to tell us something about the population (e.g. level of misstatement)

5. Basic concepts of sampling

6. When is Sampling used? Sampling is generally used in field audits when it is not efficient to review 100% of the records. Sampling may also be used if records are missing or other circumstances make reviewing all of the records difficult.

7. Purpose of Audit sampling Audit sampling help auditors on doing their audit work at a given period of time. It is possible for auditor to make details examination on all the items being examined. To gather or get the evidences from the audit procedures being performed. Sampling is only the method (efficient) or sources of the evidence. To detect error and any materially misstatements.

8. Re presentative And Non – Representative Sample A representative sample is one in which the characteristics in the sample of audit interest are approximately the same as those of the population. Two things cause a sample to be non-representative: • ► Non-sampling risk • ► Sampling risk

9. Sampling and non-sampling risks Sampling risk : the probability that the auditor has reached an incorrect conclusion because audit sampling was used rather than 100% examination ( i . e. correctly chosen sample was not representative of the population). Non-sampling risk : arises from factors, other than sample size, that cause an auditor to reach an incorrect conclusion, such as the possiblility that : T he auditor will fail to recognise misstatements included in examined items The auditor will therefore apply a procedure that is not effective in achieving a specific objective.

10. General approaches to sampling Statistical vs non-statistical sampling

11. Statistical and non-statistical sampling Statistical sampling means any approach to sampling that has the following characteristics: random selection of a sample; and use of probability theory to evaluate sample results, including measurement of sampling risk. Non-statistical sampling means an approach to sampling that does not have the above characteristics. In non-statistical sampling, the auditor uses judgement in selecting the sample size and in interpreting the results against the audit objective.

12. Non-statistical sampling Statistical sampling means any approach to sampling that has the following characteristics: random selection of a sample ; use of probability theory to evaluate sample results, including measurement of sampling risk.

13. Statistical Applies laws of probability Sampling risks are quantified Costly Non-statistical sampling Based on judgment Sampling risks are not quantified Less costly & easy to use

14. In sampling the auditor typically undertakes three common steps 1. P lanning the sample; 2. S electing and testing the sample; and 3. E valuating the sample.

15. Planning the sample determining the objectives of the test; defining what errors are being sought (=search); identifying the population and sampling unit; specifying the tolerable error, expected error and required confidence level; and deciding the size of the sample

16. Sample selection methods Probabilistic T he auditor randomly selects items such that each population item has a known probability of being included in the sample. This process requires great care and uses one of several methods discussed shortly Random sample selection Systematic sample selection Probability proportional to size Stratified sample selection Non-probabilistic T he auditor selects sample items using professional judgment rather than probabilistic methods. Auditors can use one of several Non-probabilistic sample selection methods: Directed sample selection Haphazard Block sample

17. Random selection Generally considered to be the best method of obtaining a sample to evaluate the results statistically. Each item in the population has a known (usually equal) chance of selection. Auditing software can be used to select random samples.

18. Systematic sample selection the auditor calculates an interval and then selects the items for the sample based on the size of the interval. The interval is determined by dividing the population size by the desired sample size. Interval = population size/ sample size Easy to use Possibility of bias - once the first item in the sample is selected, all other items are chosen automatically.

19. Haphazard sample selection Selection of a sample without following a structured technique. Is only practical when the population is not ordered in any numerical sequence. This method is not recommended where other methods are available.

20. Testing the sample and evaluating results Having drawn the sample, the auditor then examines or tests each item in accordance with the required audit objective. Each error or deviation needs to be evaluated as to its implications. For each error, the auditor must consider whether the error has an effect on the whole population or is an isolated or localized occurrence.

21. factors affecting the sample size Population Size This is only relevant in very small populations. Level of confidence Even a 100% sample will not give complete assurance .Auditors work to level of confidence which can be expressed precisely . Precision Clearly the level of confidence and the precision interval are related in that for a given sample size higher confidence can be expressed in a wider precision interval and vice versa .

22. Risk Risk is a highly important concept in modern auditing and in high risk areas a large sample will be desirable. Materiality Materiality is fundamental to modern auditing and with allpopulations being sample, materiality should be considered in fixing the sample size. Subjective factors This is most important and yet difficult area of consideration .The auditor expects to gain audit evidence about a population from a sample. Expected error/deviation rate The theory requires that the samples size required is a function of the error .This is only known after the results have been evaluated .However an estimate based on previous experience and knowledge of other factors may give a good indication

23. Projecting the error to the population When the analysis identifies errors consistent with the objective of the test, the auditor then draws conclusions as to the population. Test of control A projected deviation rate should be estimated. If the projected deviation rate exceeds the tolerable deviation rate, the preliminary assessment of control risk is not confirmed more substantive tests will be required

24. Substantive tests The sample results are projected to the population. The most common method is the difference estimation method. This method looks at the relative differences between the recorded and audited amounts. If the projected error approaches or exceeds the tolerable error, more evidence may be necessary.

25. Used sources: Arens , Elder, Beasley. Auditing and assurance services book. Gey , Semnati . Auditing and assurance services book accaglobal.com (website) Accountingtools.com (website)

26. Thanks for your attention!