Audit Sampling Using Statistical Methods

Audit Sampling Using Statistical Methods Presented By: Abhishek Agrawal

AUDIT SAMPLING
• Application of an audit procedure to less than 100% of the items in a population
– Account balance – Class of transactions

• Examination “on a test basis” • Key: Sample is intended to be representative of the population.

APIPA 2009

2

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

APIPA 2009

3

TYPE I – RISK OF INCORRECT REJECTION
• Internal control: Risk that sample supports conclusion that control is NOT operating effectively when it really is
– AKA – Risk of underreliance, risk of assessing control risk too high

• Substantive testing: Risk that sample supports conclusion that balance is NOT properly stated when it really is
APIPA 2009 4

TYPE II – RISK OF INCORRECT ACCEPTANCE
• Internal control: Risk that sample supports conclusion that control is operating effectively when it really isn’t
– AKA – Risk of overreliance, risk of assessing control risk too low

• Substantive testing: Risk that sample supports conclusion that balance is properly stated when it really isn’t
APIPA 2009 5

WHICH RISK POSES THE GREATER DANGER TO AN AUDITOR? • Risk of incorrect rejection
– Efficiency

• Risk of incorrect acceptance
– Effectiveness

• Auditor focus on Type II
– Also provides coverage for Type I

APIPA 2009

6

WHEN DO YOU SAMPLE?
• Inspection of tangible assets, e.g., inventory observation • Inspection of records or documents, e.g., internal control testing • Reperformance, e.g., internal control testing • Confirmation, e.g., verification of AR balances

APIPA 2009

7

Audit sampling can be based on: judgment OR statistics nonstatistical sampling judgmentally determine sample size implicitly recognizing relevant factors