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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5 Audit Sampling for Tests of Controls and Substantive Tests of Transactions.

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Presentation on theme: "©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5 Audit Sampling for Tests of Controls and Substantive Tests of Transactions."— Presentation transcript:

1 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5 Audit Sampling for Tests of Controls and Substantive Tests of Transactions Chapter 15

2 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 2 Learning Objective 1 Explain the concept of representative sampling.

3 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 3 Representative Samples A representative sample is one in which the characteristics in the sample of audit interest are approximately the same as those of the population. In practice, an auditor can increase the likelihood of a representative sample by using care in designing the sampling process and selection, and evaluating the results.

4 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 4 Sampling Risks Sampling risk is the risk that an auditor reaches an incorrect conclusion because the sample is not representative of the population. Nonsampling risk is the risk that audit tests do not uncover existing exceptions in the sample.

5 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 5 Minimizing Sampling Risk Use appropriate sample selection method Adjust sample size Step 1 Step 2 Sampling Risk Meter

6 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 6 Learning Objective 2 Distinguish between statistical and nonstatistical sampling and between probabilistic and nonprobabilistic sample selection.

7 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 7 Statistical Versus Nonstatistical Sampling Similarities of both approaches: Select the sample and perform the tests Plan the sample Step 1 Step 2 Evaluate the results Step 3

8 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 8 Statistical Versus Nonstatistical Sampling Statistical sampling allows the quantification of sampling risk in planning the sample (Step 1) and evaluating the results (Step 3) In nonstatistical sampling those items that the auditor believes will provide the most useful information are selected Differences in approach:

9 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 9 Probabilistic Versus Nonprobabilistic Sample Selection Probabilistic sample selection is a method of selecting a sample such that each population item has a known probability of being included in the sample. Nonprobabilistic sample selection is a method in which the auditor uses professional judgment rather than probabilistic methods.

10 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 10 Probabilistic Versus Nonprobabilistic Sample Selection 1. Directed sample selection 2. Block sample selection 3. Haphazard sample selection Nonprobabilistic selection methods:

11 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 11 Probabilistic Versus Nonprobabilistic Sample Selection 1. Simple random sample selection 2. Systematic sample selection 3. Probability proportional to size sample selection 4. Stratified sample selection Probabilistic selection methods:

12 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 12 Nonprobabilistic Sample Selection Methods Directed sample selection is the selection of each item based on auditor’s judgmental criteria.  Items most likely to contain misstatements  Items containing selected population characteristics  Large dollar coverage

13 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 13 Nonprobabilistic Sample Selection Methods Block sample selection is the selection of several items in sequence. Haphazard sample selection is the selection of items without any conscious bias on the part of the auditor.

14 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 14 Learning Objective 3 Select representative samples.

15 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 15 Probabilistic Sample Selection Methods A simple random sample is one in which every possible combination of elements in the population has an equal chance of constituting the sample.  Computer generation of random numbers offers several advantages time savings reduced risk of error automatic documentation  Random number tables

16 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 16 Random Sample Selection Tools  Computer generation of random numbers offers several advantages time savings reduced risk of error automatic documentation  Random number tables

17 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 17 Probabilistic Sample Selection Methods 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 number of sample items desired.

18 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 18 Probabilistic Sample Selection Methods Probability proportional to size: A sample is taken where the probability of selecting any individual population item is proportional to its recorded amount (PPS).

19 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 19 Learning Objective 4 Define and describe audit sampling for exception rates.

20 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 20 Sampling for Exception Rates The occurrence rate, or exception rate, is the percent of items in the population containing the characteristic or specific attribute of interest to the total number of population items.

21 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 21 Sampling for Exception Rates Following are types of exceptions in populations of accounting data: 1.Deviations from client’s established controls 2.Monetary misstatements in populations of transaction data 3.Monetary misstatements in populationsof account balance details

22 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 22 Learning Objective 5 Use nonstatistical sampling in tests of controls and substantive tests of transactions.

23 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 23 Terms Used in Audit Sampling  Characteristic or attribute  Acceptable risk of assessing control risk too low (ARACR)  Tolerable exception rate (TER)  Estimated population exceptionrate (EPER)  Initial sample size Terms related to planning:

24 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 24 Terms Used in Audit Sampling  Exception  Sample exception rate (SER)  Computed upper exception rate (CUER) Terms related to evaluating results:

25 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 25 I: Plan the Sample I: Plan the Sample Decide whether audit sampling applies. State the objectives of the audit test. Step 1 Step 2 Define attributes and exception conditions Step 3 Define the population Step 4 Define the sampling unit Step 5

26 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 26 I: Plan the Sample I: Plan the Sample Specify acceptable risk of assessing control risk too low Specify the tolerable exception rate. Step 6 Step 7 Estimate the population exception rate. Step 8 Determine the initial sample size Step 9

27 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 27 II: Select the Sample and Perform the Audit Procedures Perform the audit procedures Select the sample Step10 Step 11

28 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 28 III: Evaluate the Results Analyze exceptions Generalize from the sample to the population Step 12 Step 13 Decide the acceptability of the population Step 14

29 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 29 Guidelines for ARACR and TER Tests of Controls

30 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 30 Guidelines for ARACR and TER Tests of Transactions

31 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 31 Effect on Sample Size of Changing Factors Effect on initial Type of changesample size Increase acceptable risk of assessing control risk too low Increase tolerable risk rate Increase estimated population exception rate Increase population size (minor)

32 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 32 Actions When Population is Not Acceptable  Revise TER or ARACR  Expand the sample size  Revise assessed control risk  Communicate with the audit committee or management

33 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 33 Summary of Audit Sampling Steps Plan the sample (Steps 1-9) Select the sample (Step 10) Perform the tests (Step 11) Evaluate the results (Steps 12-14) Number of exceptions in sample and actual sample size To Step 12To Step 14 From Step 12 Compare To/From Step 6 Computed upper exception rate

34 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 34 Learning Objective 6 Define and describe attributes sampling and a sampling distribution.

35 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 35 Statistical Audit Sampling The statistical sampling method most commonly used for tests of controls and substantive tests of transactions is attributes sampling.

36 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 36 Sampling Distribution It is a frequency distribution of the results of all possible samples of a specified size that could be obtained from a population containing some specific parameters. Attributes sampling is based on the binomial distribution.

37 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 37 Sampling Distribution

38 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 38 Learning Objective 7 Use attributes sampling in tests of controls and substantive tests of transactions.

39 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 39 Application of Attributes Sampling i.Select the table corresponding to the ARACR ii.Locate the TER on the top of the table iii.Locate the EPER in the far left column iv.Read down the appropriate TER column until it intersects with the appropriate EPER row in order to get the initial sample size Use of the tables:

40 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 40 Application of Attributes Sampling  Population size is a minor consideration in determining sample size  Representativeness is ensured by the sample selection process more than by sample size Effect of population size:

41 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 41 Application of Attributes Sampling  Select the sample  Perform the audit procedures  Evaluate the results

42 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5 End of Chapter 15

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