Chapter 8 Audit Notes
Chapter 8 Audit Notes ACCT 4150
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This 5 page Class Notes was uploaded by Victoria Andreski on Saturday March 5, 2016. The Class Notes belongs to ACCT 4150 at Clemson University taught by Nancy Harp in Spring 2016. Since its upload, it has received 23 views. For similar materials see Auditing in Accounting at Clemson University.
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Date Created: 03/05/16
CHAPTER 8—Audit Sampling: An Overview & Application to Tests of Controls Sampling • Application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some crdracteristic of the balance or class • 3 Standard of Fieldwork o Sufficient (measure of quantity) competent evidential matter is to be obtained…to afford a reasonable basis for an opinion • Sampling Risk—risk that conclusions based on a sample may be different from the conclusions reached if the test were applied to all items o Risk that we may get a different conclusion b/c all items weren’t tested • Nonsampling Risk—all aspects of audit risk that are not due to sampling (human error) o Be careless, do the wrong test, or do a test incorrectly • Auditing standards recognize & permit both statistical & nonstatistical methods of audit sampling o 1. Development of well-controlled, automated accounting systems o 2. Advent of powerful PC audit software to download & examine client data • Technology will never eliminate the need for auditors to rely on sampling to some degree b/c: o 1) Many control processes require human involvement o 2) Many testing procedures require the auditor to physically examine an asset o 3) In many cases auditors are required to obtain & evaluate evidence from 3 parties Audit Sampling • Selection & evaluation of less than 100% of the items in a population of audit relevance selected in such a way that the auditor expects the sample to be representative of the population & thus likely to provide a reasonable basis for conclusions about the population Sampling Risk • Element of uncertainty that enters into the auditor’s conclusions anytime sampling is used o Type 1—risk of incorrect rejection § Risk that the sample supports a conclusion that the control is not operating effectively when, in fact, it is operating effectively § Problem w/ efficiency of audit § Did more work than we had to • Subject to loss of profitability o Type 2—risk of incorrect acceptance § Risk that the sample supports a conclusion that the control is operating effectively when, in fact, it is not operating effectively § Auditors most worried about § Problem w/ effectiveness of audit • Subject to lawsuits • Determining Sample Size o 1) Desired level of assurance in the results (or confidence level) § How confident do we want to be in our test? (Usually about 95%) § Confidence level is the complement of sampling risk • Auditor may set sampling risk for a particular sample at 5%, resulting in a confidence level of 95% o 2) Acceptable defect rate (or tolerable error) § Once the desired confidence level is established, the sample size is determined largely by how much the tolerable error exceeds expected error Precision, at the planning stage of Auditing Standards refer audit sampling, is the difference to Precision as the between the expected & tolerable “Allowance for Sampling deviation rates Risk” § Example: We can tolerate a 5% deviation & expect a 3 % deviationà the difference is the cushion • The larger the cushion, the smaller the precision • The smaller the cushion, the more precise we must be Precision= Expected - Tolerable o 3) Historical defect rate (or expected error) § What do you think the error rate will be before doing any testing? Audit Evidence—Sample or Not? • Inspection of tangible assets o Auditors typically attend the client’s year-end inventory count o When there are a large # of items in inventory, the auditor will select a sample to physically inspect & count • Inspection of records or documents o Certain controls may require the matching of documents o Procedure may take place several times a day o Auditor may gather evidence on the effectiveness of the control by testing a sample of the document package • Reperformance o To comply w/ PCAOB standards, publicly traded clients must document & test controls over important assertions for significant accounts o Auditor may reperform a sample of the tests performed by the client • Confirmation o Rather than confirm all customer account receivable balances, auditor may select a sample of customers Testing all items w/ a particular characteristic • When an account or class of transactions is made up of a few large items, the auditor may examine all the items in the account or class of transaction • When a small # of large transactions make up a relatively large % of an account/class of transactions, auditors will typically test ALL the transactions greater than a particular dollar amount Testing only one or a few items • Highly automated information systems process transactions consistently unless the system or programs are changed • Auditor may test the general controls over the system& any program changes, but test only a few transactions processed by the IT system • Evaluate the nature of the accounts & the balances when determining what to sample Types of Audit Sampling • Nonstatistical (judgmental) sampling—auditor does NOT use statistical techniques to determine sample size, select the sample items, or measure sampling risk • Statistical sampling—uses the laws of probability to compute sample size & evaluate results o Auditor is able to use the most efficient sample size & quantify sampling risk o Advantages § 1. Design an efficient sample § 2. Measure the sufficiency of evidence obtained § 3. Quantify sampling risk o Disadvantages § 1. Training auditors in proper use § 2. Time to design & conduct sampling application § 3. Lack of consistent application across audit teams Attribute Sampling • Used to estimate the proportion of a population that possess a specified characteristic • Most common use is for tests of controls • Look for attributes/indicators (example: initials) • In conducting a statistical sample for a test of controls, auditing standards require the auditor to properly plan, perform, & evaluate the sampling application & to adequately document each phase of the sampling application o Planà Performà Evaluateà Document Planning 1. Determine the test objectives a. The objective of attribute sampling when used for tests of controls is to evaluate the operating of effectiveness of the internal control b. What am I trying to verify from the test? (Authorization, accuracy, etc.) 2. Define the population characteristics: a. Define the sampling population i. All of the items that constitute the class of transactions make up the sampling population b. Define the sampling unit i. Each sampling unit makes up one item in the population ii. The sampling unit should be defined in relation to the specific control being tested c. Define the control deviation conditions i. A deviation is a departure from adequate performance of the internal control 3. Determine the sample size a. The desired confidence level or risk of incorrect acceptance i. Confidence level—desired level of assurance that the sample results will support a conclusion that the control is functioning effectively ii. Generally, when the auditor has decided to rely on controls, the confidence level is set at 90% or 95% 1. Auditor is willing to accept a 10% or 5% risk of accepting the control as effective when it is not b. The tolerable deviation rate i. Maximum deviation rate from a prescribed control that the auditor is willing to accept & still consider the control effective c. The expected population deviation rate i. Rate the auditor expects to exist in the population 1. The larger the expected population deviation rate, the larger the sample size must be, all else equal Performance 4. Select sample items: a. Random-Number Selection i. Every item in the population has the same probability of being selected as every other sampling unit in the population b. Systematic Selection i. Auditor determines the sampling interval by dividing the population by the sample size ii. A starting # is randomly selected in the first interval & every nth item is selected thereafter 5. Perform the Audit Procedures a. Voided documents b. Unused or inapplicable documents i. Unless the auditor finds something unusual about either of these items, they should be replaced w/ a new sample item c. Inability to examine a sample item i. If the auditor is unable to examine a document or to use an alternative procedure to test the control, the sample item is a deviation for purposes of evaluating the sample results d. Stopping the test before completion i. If a large # of deviations are detected early in the tests of controls, the auditor should consider stopping the test, as soon as it is clear that the results of the test will not support the planned assessed level of CR 6. Calculate the Sample Deviation & Upper Deviation Rates a. After completing the audit procedures, the auditor summarizes the deviations for each control tested & evaluates the results b. Upper deviation rate—sum of the sample deviation rate & an appropriate allowance for sampling risk 7. Draw Final Conclusions a. Auditor compares the tolerable deviation rate to the computed upper deviation rate Nonstatistical Sampling for Tests of Controls • Calculating the upper deviation rate o With a nonstatistical sample, the auditor can calculate the sample deviation rate, but cannot mathematically quantify the computed upper deviation rate & sampling risk associated w/ the risk o Disadvantage of nonsampling
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