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Sampling and Financial Audit

This document discusses sampling techniques used in financial audits. It defines sampling as applying audit procedures to less than 100% of items in a population to evaluate characteristics and reach conclusions. There are two main types of sampling: statistical and non-statistical. Statistical sampling involves probability and specific characteristics like known probability of selection. The document outlines various probability sampling methods like simple random, systematic, stratified, cluster, and probability proportional to size sampling. It also discusses key terms like population, sampling frame, sample size calculation factors like confidence level, precision, and occurrence rate.

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48 views19 pages

Sampling and Financial Audit

This document discusses sampling techniques used in financial audits. It defines sampling as applying audit procedures to less than 100% of items in a population to evaluate characteristics and reach conclusions. There are two main types of sampling: statistical and non-statistical. Statistical sampling involves probability and specific characteristics like known probability of selection. The document outlines various probability sampling methods like simple random, systematic, stratified, cluster, and probability proportional to size sampling. It also discusses key terms like population, sampling frame, sample size calculation factors like confidence level, precision, and occurrence rate.

Uploaded by

amit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Sampling and Financial Audit

KP Yadaw
What is Sampling?

o Application of audit procedures to less than


100 per cent items within a class of
transactions to enable auditors to obtain
and evaluate evidence about some
characteristics of the items for forming
conclusion regarding the population.
o Sampling may be statistical as well as non-
statistical. (Probability and Non-probability
Sampling)
Characteristics of Statistical
sampling
 Sample items should have known probability.
 The Sample should be representative of the
different items in the population.
 Sampling should be unpredictable i.e. the
auditee organisations should not be able o
know which items will be examined.
 Sample results should be evaluated
mathematically.
Sampling process
o Defining the population
o Specifying a sampling frame, a set of events
or items possible to measure.
o Specifying a sampling method for selecting
items from the frame.
o Determining the sample size.
o Implementing the sampling plan
o Sampling and data collecting
o Reviewing he sampling process
Population
 All people or items with the characteristics one
wishes to understand.
 It can be tangible or less tangible. For example,
we need to study the behaviour of roulette
wheels at a casino in Las Vegas .Here the
population is overall behaviour of the wheel
(probability distribution of its results over
infinitely many trials and sample would be
formed from the observed results from that
wheel.
 Success rate of smoking program on a test
group of 200 patients ?
Sampling frame

 A list of elements of the population


 Electoral Register
 Telephone directory

 Accounts receivable file in MS Excel.

 Fixed Assets register


Probability Sampling

 Simple Random Sampling


 Systematic Sampling
 Stratified sampling
 Probability Proportional to Size sampling
 Cluster Sampling
 Multistage Sampling
Simple Random Sampling
a) Simple Random Sampling With
Replacement (SRSWR)

A unit is selected from the sampling frame and an
appropriate sample is selected and the unit is
placed back in the sampling frame.

b) Simple Random Sampling without


Replacement (SRSWOR)

Once a unit is selected for inclusion in the sample,
it is removed from the sampling frame.
Systematic Sampling

 Sample is chosen by selecting a random


starting point and then picking every nth
item (Sample interval). Sampling interval
is the ratio of population size to sample
size.
 Less costly and easy to implement.
 Easier to implement than SRS because
random selection is done only once.
Stratified Sampling

o A two step- process


o Population is divided into strata.( Strata
should be mutually exclusive and
collectively exhaustive)
o From each stratum, units are selected by
random selection method.
o Population in each stratum should be
homogeneous.
Cluster Sampling

 Selecting units from certain areas or


clusters or certain time-periods only.
 A two stage sampling or multistage
sampling
o Sample of areas
o A sample of respondents within those areas.
Probability Proportional to Size

 It assigns higher inclusion probability of


selection for units with higher sizes
( Sizes may be total expenditure, value,
total population etc.).
 In other words, entities having higher
sizes, based on some characteristics,
will have higher chances of selection.
Example

 Six schools with populations of


150,180,200, 220, 260 and 490 (total
1500 students)
 We want to use student population on
the basis for PPS sample of size three.
 What will we do?
 Allocate the first school numbers 1 to 150, the
second school 151 to 330 (150+180), the third
school 331 to 530 and so on to the last school
(1011 t0 1500)
 Make a random start between 1 to 500(1500/3)

and count through the school populations b


multiples of 500.
 Suppose the random start was 137, we would

select the schools having numbers 137, 637 and


1137 i.e. the first , fourth and sixth schools.
Multi-Stage Sampling

 A complex form of cluster sampling in


which two or more levels of units are
imbedded one in the other.
 Constructing the clusters that will be used to
sample from.
 A sample of primary units is randomly selected

from each cluster rather than using all units


contained in all selected clusters
 In each of those selected clusters, additional

samples of units are selected and so on.


Calculation of sample size

 Confidence level
 Likelihood that the sample range contains the
true value. It is based on the degree of
confidence the auditor wishes to place in
sampling results.
 Synonymous with reliability

 Precision
 Range within which the true answer most likely
falls, for example +-5%
Occurrence Rate

 Percentage of items in the population


having errors.
 For example, 2% of the pension
Payment Orders having errors in
computation of the pension amount
 It can be estimated on the basis of a pilot
sample of about 30 items.
Tolerable Occurrence Rate

 Maximum rate of error acceptable to the


auditor.

 Z Factor
 Represents the degree of variability of individual
items in the population. They calculated for
different confidence levels and are available in
Standard Tables.
Formula

n= Z2 (p)(1-p)/A2
where Z = Z factor as per Table
p = Occurrence rate
A = Desired precision

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