3General Standards 1. The audit is to be performed by a person or persons having adequate technical trainingand proficiency as an auditor.2. The auditor must maintain independencein mental attitude in all matters relatingto the audit.
4General Standards 3. The auditor must exercise due professional care in the performance of the audit and thepreparation of the report.
5Standards of Field Work 1. The auditor must adequately plan the workand must properly supervise any assistants.2. The auditor must obtain a sufficientUnderstanding of the entity and its environment,including its internal control, to assess therisk of material misstatement and to designfurther audit procedures.
6Standards of Field Work 3. The auditor must obtain sufficient appropriateaudit evidence by performing audit proceduresto afford a reasonable basis for an opinionregarding the financial statements under audit.
7Standards of Reporting 1. The report shall state whether the financialstatements are presented in accordance withgenerally accepted accounting principles.2. The report shall identify those circumstancesin which such principles have not beenconsistently observed in the current periodin relation to the preceding period.
8Standards of Reporting 3. Informative disclosures in the financialstatements are to be regarded as reasonablyadequate unless otherwise stated in the report.4. The report shall contain an expression ofopinion regarding the financial statements,taken as a whole.
9Generally Accepted Auditing Standards General Standards1. Adequate training and proficiency2. Independence in mental attitude3. Due professional care
10Generally Accepted Auditing Standards Standards of Field Work1. Proper planning and supervision2. Understanding of the entity3. Sufficient appropriate evidence
11Generally Accepted Auditing Standards Standards of Reporting1. Statements prepared in accordance with GAAP2. Circumstances when GAAP not followed3. Adequacy of disclosures4. Expression of opinion on financial statements
12Audit Sampling for Tests of Controls Substantive Tests of Transactions
13AICPA SAS 111.01 Audit sampling is the application of an audit procedure to lessthan 100 percent of the items within an account balance or classof transactions for the purpose of evaluating some characteristicof the balance or class.This section provides guidance for planning, performing,and evaluating audit samples.Source AICPA
14.02 The auditor often is aware of account balances and transactions that may be more likely to contain misstatements.He considers this knowledge in planning his procedures,including audit sampling.
15.03 There are two general approaches to audit sampling: non-statistical and statistical. Both approaches require that the auditor use professionalJudgment in planning, performing, and evaluating a sample and in relating theaudit evidence produced by the sample to other audit evidence when forminga conclusion about the related account balance or class of transactions. Theguidance in this section applies equally to non-statistical and statistical sampling.
16.04 The third standard of field work states, "The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford areasonable basis for an opinion regarding the financial statements under audit."Either approach to audit sampling, when properly applied, can providesufficient audit evidence.
18Representative Samples A representative sample is one in whichthe characteristics in the sample of auditinterest are approximately the same asthose of the population.Nonsampling risk is the risk that audittests do not uncover existing exceptionsin the sample.
19Representative Samples Sampling risk is the risk that an auditorreaches an incorrect conclusionbecause the sample is notrepresentative of the population.Sampling risk is an inherent part ofsampling that results from testingless than the entire population.
20Distinguish between statistical and nonstatistical sampling andbetween probabilistic and non-probabilistic sample selection.
21Statistical Versus Nonstatistical Sampling Similarities:Step 1: Plan the sampleStep 2: Select the sample and perform the testsStep 3: Evaluate the results
22Statistical Versus Nonstatistical Sampling Differences:Statistical sampling allows the quantificationof sampling risk in planning the sample (Step 1)and evaluating the results (Step 3)In nonstatistical sampling those items thatthe auditor believes will provide the mostuseful information are selected
23Probabilistic Versus Nonprobabilistic Sample Selection Probabilistic sample selection is a methodof selecting a sample such that eachpopulation item has a known probabilityof being included in the sample.Nonprobabilistic sample selection is amethod in which the auditor uses professionaljudgment rather than probabilistic methods.
25Probabilistic Versus Nonprobabilistic Sample Selection 1. Simple random sample selection2. Systematic sample selection3. Probability proportional to size sample selection4. Stratified sample selection
26Nonprobabilistic Sample Selection Methods Directed sample selection is the selection ofeach item based on auditor judgmental criteria.Items most likely to contain misstatementsItems containing selected population characteristicsLarge dollar coverage
27Nonprobabilistic Sample Selection Methods Block sample selection is the selectionof several items in sequence.Haphazard sample selection is the selectionof items without any conscious bias on thepart of the auditor.
29Probabilistic Sample Selection Methods A simple random sample is one in whichevery possible combination of elementsin the population has an equal chanceof constituting the sample.Random number tablesComputer generation of random numbers
30Probabilistic Sample Selection Methods Systematic sample selection:The auditor calculates an interval andthen selects the items for the samplebased on the size of the interval.The interval is determined by dividingthe population size by the number ofsample items desired.
31Probabilistic Sample Selection Methods Probability proportional to size:A sample is taken where the probabilityof selecting any individual population itemis proportional to its recorded amount (PPS).
32Probabilistic Sample Selection Methods Stratified sample selection:The population is divided into subpopulationsby size and larger samples are taken of thelarger subpopulations.
33Sampling for Exception Rates The occurrence rate, or exception rate,is the ratio of the items containing thespecific attribute to the total numberof population items.
34Sampling for Exception Rates Following are types of exceptions inpopulations of accounting data:1. Deviations from client’s established controls2. Monetary misstatements in populationsof transaction data3. Monetary misstatements in populations ofaccount balance details
35I: Plan the Sample Step 1: State the objectives of the audit test. Step 2: Decide whether audit sampling applies.Step 3: Define attributes and exception conditions.Step 4: Define the population.Step 5: Define the sampling unit.
36I: Plan the Sample Step 6: Specify the tolerable exception rate. Step 7: Specify acceptable risk of assessingcontrol risk too low.Step 8: Estimate the population exception rate.Step 9: Determine the initial sample size.
37II: Select the Sample and Perform the Audit Procedures Step 10: Select the sample.Step 11: Perform the audit procedures.
38III: Evaluate the Results Step 12: Generalize from the sample to thepopulation.Step 13: Analyze exceptions.Step 14: Decide the acceptability of the population.
39Effect on Sample Size of Changing Factors Effect on initialType of change sample sizeIncrease acceptable risk ofassessing control risk too low DecreaseIncrease tolerable risk rate DecreaseIncrease estimated populationexception rate IncreaseIncrease population size Increase (minor)
40When planning a particular audit sample for a test of controls, the auditor should consider: • The relationship of the sample to the objective of the test of controls.• The maximum rate of deviations from prescribed controls that would support his planned assessed level of control risk.• The auditor's allowable risk of assessing control risk too low.• Characteristics of the population, that is, the items comprising the account balance or class of transactions of interest.
41Probability Proportion to Size Probability proportional to size (PPS) is a sampling techniquefor use with surveys or mini-surveys in which the probabilityof selecting a sampling unit is proportional to the size of itspopulation. It gives a probability (i.e., random, representative)sample.
42It is most useful when the sampling units vary considerably in size because it assures that those in larger dollar valueTransaction have the same probability of getting into the sampleas the smaller ones, and vice verse.
43Define and describe attributes sampling and a samplingdistribution.
44Statistical Audit Sampling The statistical sampling method mostcommonly used for tests of controlsand substantive tests of transactionsis attributes sampling.
45Sampling Distribution It is a frequency distribution of the resultsof all possible samples of a specified sizethat could be obtained from a populationcontaining some specific parameters.Attributes sampling is based on thebinomial distribution.
46Use of attributes sampling in tests of controls and substantivetests of transactions.
47Application of Attributes Sampling Effect of population size:Population size is a minor considerationin determining sample sizeRepresentativeness is ensured by the sampleselection process more than by sample size
48Application of Attributes Sampling Select the samplePerform the audit proceduresEvaluate the results