Statistical Sampling For Auditors
Statistical Sampling For Auditors
Statistical Sampling For Auditors
APIPA 2009
Jeanne H. Yamamura
OBJECTIVES
Review of sampling concepts Types of sampling
Attribute sampling
Steps Nonstatistical attribute sampling Compliance auditing
Classical sampling
Ratio estimation Difference estimation
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AUDIT SAMPLING
Application of an audit procedure to less than 100% of the items in a population
Account balance Class of transactions
SAMPLING RISK
Possibility that the sample is NOT representative of the population As a result, auditor will reach WRONG conclusion Decision errors
Type I Risk of incorrect rejection Type II Risk of incorrect acceptance
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Substantive testing: Risk that sample supports conclusion that balance is NOT properly stated when it really is
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Substantive testing: Risk that sample supports conclusion that balance is properly stated when it really isnt
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NONSAMPLING RISK
Risk of auditor error
Sample wrong population Fail to detect a misstatement when applying audit procedure Misinterpret audit result
Controlled through
Adequate training Proper planning Effective supervision
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CONFIDENCE LEVEL
Complement of sampling risk
5% sampling risk, 95% confidence level
How much reliance will be placed on test results The greater the reliance and the more severe the consequences of Type II error, the higher the confidence level needed Sample size increases with confidence level (decreases with sampling risk)
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WALKTHROUGHS
Designed to provide evidence regarding the design and implementation of controls Can provide some assurance of operating effectiveness BUT
Depends on nature of control (automated or manual) Depends on nature of auditors procedures to test control (also includes inquiry and observation combined with strong control environment and adequate monitoring)
Walkthough = sample of 1
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Nonstatistical sampling Sample sizes should be approximately the same (AU 350.22) Sample sizes must be sufficient to support reliance on controls and assertions being tested
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TYPES OF SAMPLING
Attribute sampling Monetary unit sampling Classical variables sampling
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ATTRIBUTE SAMPLING
Used to estimate proportion of a population that possesses a specific characteristic Most commonly used for T of C Can also be used for dual purpose testing (T of C and Substantive T of T)
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MONETARY-UNIT SAMPLING
AKA probability proportional to size (PPS) sampling, cumulative monetary unit sampling Used to estimate dollar amount of misstatement
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Effective for both overstatements and understatements Can easily incorporate zero balances
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1 2 3 4 5 6
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Yes No Yes No No No
7 8 9 10 11
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Performance
4. Select sample items 5. Perform the auditing procedures
Evaluation
6. Calculate the results 7. Draw conclusions
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TESTS OF CONTROLS
Concerned primarily with
Were the necessary controls performed? How were they performed? By whom were they performed?
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Select every nth item Continue sample selection until population is exhausted
(Last sample selected + sampling interval) > Last item in population In other words, dont stop when desired sample size reached
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EVALUATION OF EXPOSURE
In a sample of 25 manual control operations from a population of 3,000 control operations, 1 deviation was identified. The sample was designed with an expectation that 0 deviations would be found. Looking up the results (in 90% confidence level table): Computed upper error limit = 14.7%
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EVALUATION OF EXPOSURE
The sample did not meet its design criteria, so there is a higher than desired risk that the control will fail to prevent or detect a misstatement. To assess the magnitude of the exposure: Identify the gross exposure of the account or process. This is based on the volume of dollars processed through the control. The upper limit on the control deviations was 14.7%. The adjusted exposure is $735,000 (14.7% * $5,000,000). The $735,000 exposure may assist the auditor in evaluating the severity of the control deficiency.
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21926 to 28511 Use last 4 digits with random start at 0005-07 7744 7632 8120 3736 4091
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Sampling unit Population numbering system Random number table correspondence First 5 items in sample
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Each line 9 * 60 = 540 + 36 = 576 lines Add 2000 (2001 to 2576) Use last 4 digits with random start at 00040-01 going down and then right 2240 2055 2094 2087 2608
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Sampling unit Population numbering system Random number table correspondence First 5 items in sample
Page of invoices Starting with January, first page is 1 (up to 185) Random start at 0008-03 going down then right, subtract random number from next 1000 4000 3982 = 18; 7000 6847 = 153; 5000 - 4956 = 44; 6000 5985 = 15; 5000 4941 = 59
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1 2 3 4 5a 5b
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5c 5d 5e 6
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Sales invoice
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63
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Performance
4. Select sample items 5. Perform the auditing procedures
Evaluation
6. Calculate the results 7. Draw conclusions
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COMPLIANCE AUDITING
Performance of auditing procedures to determine whether an entity is complying with specific requirements of laws, regulations, or agreements Governmental entities and other recipients of governmental financial assistance
Compliance with laws and regulations that materially affect each major federal assistance program
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Control: Transaction review to ensure that only legally allowable costs are charged to each program
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2 2-4 3-8
Weekly (52)
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5-9
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Moderately critical affects E/O of S& W Very critical affects E/O of S&W
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Developed by auditors Assumes little or no misstatements Designed primarily to test for overstatements
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ADVANTAGES
When no misstatements expected, results in smaller (more efficient) sample size than classical variables sampling No need to compute/identify standard deviation Automatically stratifies sample
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DISADVANTAGES
Zero or negative balances must be tested separately Assumes audited amount of sample items is not in error by more than 100% When more than 1 or 2 misstatements found, allowance for sampling risk may be overstated
Auditor more likely to reject balance and overaudit
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Performance
4. Select sample items 5. Perform the auditing procedures
Evaluation
6. Calculate the results 7. Draw conclusions
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Define the sampling unit - Each individual dollar Define the logical unit - The account or transaction that contains the sampling units Define a misstatement The difference between the book value and the audited value
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From random start (within first interval), select every nth dollar
Logical unit included only once even if includes more than one sample unit
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Item 1
12,000
3,120
8,880
Item 2
Item 3
35,000
1,400
32,000
0
3,000
1,400
Item 4
Item 5
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45,200
740
41,000
555
4,200
185
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Item 2
Item 4
35,000
45,200
32,000
41,000
3,000
4,200
7,200
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Item 1
Item 3 Item 5
8,880
1,400 185
12,000
1,400 740
.74
1.0 .25
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5
11 20 24
10,230
4,350 16,530 2,950
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27 32
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131,200
50,370 5,900
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320 0 6,500
80 500 500
20% 100% NA
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Logical unit BV < Sampling Interval 2 100 6,780 6,780 1.7 11,526
20
6,780
1,356
1.5
2,034
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Logical unit BV < Sampling Interval Logical unit BV > Sampling Interval Basic Precision Upper Misstatement Limit
Conclusion: The account is materially misstated. The upper misstatement limit of 34,400 exceeds the tolerable misstatement of 20,000.
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CLASSICAL SAMPLING
Ratio estimation Difference estimation
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RATIO ESTIMATION
Sample misstatements = $19,000 Sample book value = $175,000 Sample error rate = 10.9%, round to 11% Total population BV = $1,840,000 Projected misstatement = $1,840,000 * 11% = $202,400 Compare projected misstatement to tolerable misstatement
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DIFFERENCE ESTIMATION
Sample misstatements = $19,000 # of sample items with misstatements = 5 Average misstatement per sample item = $3,800 # items in population = 256 Projected misstatement = $3,800 * 256 = $972,800 Compare projected misstatement to tolerable misstatement
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33,000
Audited Value
4,820 385 250 3,875 1,825 3,780 0
Difference
300 100 1,000 100 25 420 2,405
Tainting %
5.85 20.6 80 25.2 1.4 10 100
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1
2 3 4 5 6
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6.30 7.76 9.16 10.52 11.85 13.15
1.75
1.55 1.46 1.40 1.36 1.33 1.30
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Item 59 Item 12
Item 51
10 5.85
1.4
31,014 31,014
31,014
3,101 1,814
434
1.36 1.33
1.30
4,218 2,413
564 120,282
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RESOURCES
Audit Sampling: An Introduction, 3rd Edition, Guy, Carmichael & Whittington Audit Guide: Audit Sampling, New Edition as of May 1, 2008, AICPA Auditing & Assurance Services, 6th Edition, Messier, Glover, & Prawitt Auditing & Assurance Services, 12th Edition, Arens, Elder & Beasley
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THE END!
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