Audit Sampling: A Basic Understanding AGA-Baltimore Johnny Ramsey, Senior Manager KPMG Government Industry Sector September 20, 2012

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International NYO We will discuss AUDIT SAMPLING2  The purpose and nature of audit sampling  The difference of audit sampling versus other statistical sampling  Distribution considerations  Types of substantive testing  Steps for performing a good substantive audit sample  Evaluation of audit samples  What to do when a sample goes wrong

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International NYO Purpose and nature of audit sampling AUDIT SAMPLING3 Audit sampling is… "the selection and evaluation of less than 100 percent of the population of audit relevance such that the auditor expects the items selected (the sample ) to be representative of the population and, thus, likely to provide a reasonable basis for conclusions about the population.“ Source: AU-C Section 530 paragraph.05, Audit Sampling (AICPA, Professional Standards)

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International NYO Audit sampling differs from sampling for other purposes AUDIT SAMPLING4 Accounting populations differ from most other populations, because before the auditor's testing begins, the data have been accumulated, compiled, and summarized. Normally, the auditor's objective is to corroborate the accuracy of certain client data, such as data about account balances or classes of transactions, or to evaluate the effectiveness of controls in the processing of the data. The audit process is generally an evaluation of whether an amount is materially misstated rather than a determination of original amounts. Source: Audit Guide: Audit Sampling, March 2012, paragraph 2.04

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International NYO Distribution considerations AUDIT SAMPLING5  The distribution of amounts in some accounting populations may differ from other populations.  Some non-accounting populations cluster around the average amount of the items in the population.  Accounting populations may include  a few very large amounts  a number of moderately large amounts  a large number of small amounts.  the auditor may need to consider stratifying the population or considering whether the audit sampling technique being used is likely to be effective in that population.  Source: Audit Guide: Audit Sampling, March 2012, paragraph 2.05

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International NYO Types of substantive testing AUDIT SAMPLING6  Substantive analytical procedures  Test of balances/classes of transactions  Entire population  Specific items  Statistical methods

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International NYO 11 steps for performing a good substantive audit sample AUDIT SAMPLING 7 1.Define the purpose of the procedure. 2.Understand the information that may be produced. 3.Determine the characteristics of the population to be tested. 4.Determine the population to be tested. 5.Determine the appropriate sampling method to use. 6.Determine the sampling units. 7.Define a misstatement. 8.Determine the sample size. 9.Stratify the population, if appropriate. 10.Select the sample items and perform audit procedures. 11.Evaluate the sample results and conclude.

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International NYO Evaluation of Audit Samples AUDIT SAMPLING8 Where the item selected or the supporting documentation is not available to the auditor, the auditor usually treats the item as a deviation or misstatement. This presumption may be overcome by appropriate evidence. The auditor should project the results of the sample to the population from which the sample was selected, and not conclude solely on the specific sample deviations or factual misstatements (even if corrected by the client). The auditor should compare the projected deviation rate or misstatement to the tolerable rate or tolerable misstatement for the test of the account balance or class of transactions, and should appropriately consider sampling risk. The auditor should consider the qualitative aspects of the deviations or misstatements in assessing whether the evidence may suggest other issues that might alter the implied severity of the assessment or need to be addressed in the audit. For example, a deviation might provide evidence of a fraud or a serious control issue. Source: Audit Guide: Audit Sampling, March 2012, paragraph 2.07

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International NYO What can you do when a sample goes wrong? AUDIT SAMPLING9  It depends on what went wrong!  Start over  Extend the sample  Use a lifeline – call a statistician.  Report what you found.

For further information Johnny E. Ramsey, CGFM, CPA, CGMA Senior Manager, Government Industry Sector, Audit, KPMG LLP

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