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Chapter 8 Audit Sampling: An Overview and Application to Tests of Controls Mc. Graw-Hill/Irwin Chapter 8 Audit Sampling: An Overview and Application to Tests of Controls Mc. Graw-Hill/Irwin Copyright © 2012 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

LO# 1 Introduction Auditing standards recognize and permit both statistical and nonstatistical methods of LO# 1 Introduction Auditing standards recognize and permit both statistical and nonstatistical methods of audit sampling. Two technological advances have reduced the number of times auditors need to apply sampling techniques to gather audit evidence: 1 Development of well-controlled, automated accounting systems. 2 Advent of powerful PC audit software to download and examine client data. 8 -2

LO# 1 Introduction However, technology will never eliminate the need for auditors to rely LO# 1 Introduction However, technology will never eliminate the need for auditors to rely on sampling to some degree because: 1. Many control processes require human involvement. 2. Many testing procedures require the auditor to physically examine an asset. 3. In many cases auditors are required to obtain and evaluate evidence from third parties. 8 -3

LO# 2 Definitions and Key Concepts 1. Audit Sampling. 2. Sampling Risk: Type I LO# 2 Definitions and Key Concepts 1. Audit Sampling. 2. Sampling Risk: Type I and Type II errors. Factors in determining sample size (items 3 and 4 below). 3. Confidence Level. 4. Tolerable and Expected Error. 8 -4

LO# 3 Audit Evidence – To Sample or Not? 8 -5 LO# 3 Audit Evidence – To Sample or Not? 8 -5

Testing All Items with a Particular Characteristic LO# 3 When an account or class Testing All Items with a Particular Characteristic LO# 3 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 number of large transactions make up a relatively large percent of an account or class of transactions, auditors will typically test all the transactions greater than a particular dollar amount. 8 -6

LO# 3 Testing Only One or a Few Items Highly automated information systems process LO# 3 Testing Only One or a Few Items Highly automated information systems process transactions consistently unless the system or programs are changed. The auditor may test the general controls over the system and any program changes, but test only a few transactions processed by the IT system. 8 -7

LO# 4 Types of Audit Sampling Auditing standards recognize and permit both statistical and LO# 4 Types of Audit Sampling Auditing standards recognize and permit both statistical and nonstatistical methods of audit sampling. In nonstatistical (or judgmental) sampling, the 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 and evaluate results. The auditor is able to use the most efficient sample size and quantify sampling risk. 8 -8

LO# 4 Statistical Sampling Techniques 1. Attribute Sampling. 2. Monetary-Unit Sampling. 3. Classical Variables LO# 4 Statistical Sampling Techniques 1. Attribute Sampling. 2. Monetary-Unit Sampling. 3. Classical Variables Sampling. 8 -9

LO# 5, 6, & 7 Attribute Sampling Applied to Tests of Controls In conducting LO# 5, 6, & 7 Attribute Sampling Applied to Tests of Controls In conducting a statistical sample for a test of controls, auditing standards require the auditor to properly plan, perform, and evaluate the sampling application and to adequately document each phase of the sampling application. Plan Perform Evaluate Document 8 -10

LO# Planning 5, 6, & 7 8 -11 LO# Planning 5, 6, & 7 8 -11

Performance and Evaluation LO# 5, 6, & 7 8 -12 Performance and Evaluation LO# 5, 6, & 7 8 -12

LO# 8 Nonstatistical Sampling for Tests of Controls The only differences between nonstatistical and LO# 8 Nonstatistical Sampling for Tests of Controls The only differences between nonstatistical and statistical sampling occur in the following steps: • Determining the sample size. • Selecting the sample items. • Calculating the computed upper deviation rate. 8 -13

LO# 8 Control Tests for Low Control Frequency The sample size tables in the LO# 8 Control Tests for Low Control Frequency The sample size tables in the chapter assume a large population. Sample size can be adjusted using the “finite correction factor” in the Advanced Module or by using the table below for very small populations (control performed less frequently): Control Frequency and Population Size Sample Size Quarterly (4) 2 Monthly (12) 2 -4 Semimonthly (24) 3 -8 Weekly (52) 5 -9 8 -14

End of Chapter 8 8 -15 End of Chapter 8 8 -15