Professional Documents
Culture Documents
Questionnaire Tally Sheet
Questionnaire Tally Sheet
Questionnaire Tally Sheet
The number and significance of audit adjustments and difference waived during the
audits of previous years.
Complexity of underlying calculations of accounting principles
The susceptibility of the asset to material fraud or misappropriation
Experience and competence of accounting personnel responsible for the component
Judgment involved in determining amount
Mix and size of items subject to the audit test
The degree to which the financial circumstances of the entity may motivate its
management to misstate the component in regard to this assertion
Integrity and behaviour of the management.
Management turnover and reputation
Annexure – B
B. Another approach, which is very similar to the first approach, takes into account the
following 3 factors
1 Acceptable Risk of Over- Reliance (ARO) / Acceptable Risk of Incorrect
Acceptance (ARIA), as explained earlier.
2 Tolerable Deviation Rate (TDR): This is the maximum rate of deviation the auditor
is willing to accept without altering his planned reliance on the controls and is the
same thing as the Tolerable Error Rate. For example, he may decide that in cash book
checking, if the deviation rate is not more than 1 in 30 days, i.e. if the cash book is
checked in at least 29 out of 30 days in a month, he will accept that the internal
control system in this regard is working satisfactorily. The TDR in this case is 3.3%.
Establishing the TDR is a matter of the auditor’s professional judgment and will relate
to the significance of the transactions and related balances affected by the relevant
internal controls. The higher the significance, lower is the TDR. As an illustration,
we may decide that if the internal controls affect highly significant balances, the TDR
of the auditor would be 4%; if they affect moderately significant balances, TDR of the
auditor would be 8% and in case these affect balances of low significance, the TDR of
the auditor would be reckoned as 12%.
3 Estimated Population Deviation Rate (EPDR): This is the expected error in the
population and can be determined by selecting a preliminary sample and using the
sample results to estimate the population deviation rate by applying either the Chi-
Square or the t-distribution as described above. Point estimate can also be used.
Once these three quantities are known, the sample size is automatically determined
which can be found out from the statistical tables. A sample of such table is placed at
Annexure E. After determining the size of the sample, auditor's task is reduced to
check the sample elements and find out the actual deviation rate in the sample.
C. A third approach suggests the following formula for determination of the sample size n
Z 2 p (1 p )
n= E2
…………………………………………….(2)
where Z=score associated with confidence level,
E= precision
p=occurrence rate
Z scores uses the Normal Distribution as shown in Annexure F.
D. Monetary Unit Sampling: In this the Sample size is determined on the basis of the
following four quantities:
1 Acceptable Risk of Incorrect Acceptance (ARIA): It correspondence of the ARO
used in attributes sampling for compliance test. The substantive testing where the
auditor tests transactions and balances, the same risk is expressed as ARIA. It is the
risk of accepting a transaction or an account balance as correct on the basis of the
results of sample whereas, in reality, the auditor should not have accepted the same.
2 Tolerable Error (TE): In trying to verify the balances under investment account, the
auditor may state that he will accept the recorded amount as correct, if the amount
estimated on the basis of his sample lies between Rs.31.0 lakh and the recorded
amount. Here the TE has been defined as Rs.1.0 lakh (=32-31)
3 Expected Error (EE): This is analogous to the EDPR as in attribute sampling. Here
the auditor has to estimate the ER in the population designing the sample applications.
4 Recorded Population Value (sample Size): This is the rupee value (or other
quantitative value) of the population taken from the records of the enterprise under
audit.
Step IV: Sample size can then be determined by using the formula:
Determining the appropriate sample size is the most crucial part of the entire procedure.
The sample size can be determined, once the confidence level and desired precision are
know and the value of the population standard deviation is estimated form a study of a
small pilot sample, by following the procedures described earlier. Once these three
quantities are known, the sample size can be calculated using the formula.
where n is the sample size, SXJ is the estimated standard deviation of the population, UR is the
coefficient (e.g. 1.645 is the coefficient of confidence for 90% level of confidence. The
coefficients can be directly found out from the normal distribution table annexed at Annexure
– D), N is the population size and A is the accuracy or precision desired in the estimates. As a
measure of safety, the sample size may be increased by 10% or so.
In the estimation of differences, the auditor calculates the differences between the values
found from the samples and the corresponding values found in the books of the auditee and
the difference is then projected for the whole population. If the resultant figure is within the
desired precision limits, the auditor accepts the recorded figure as correct.
In the estimation of ratios, the auditor calculates the ratio between the sum of the recorded
amounts of the sample items and projects the same to the population.
Stratum Ni Si NiSi Pi
1. High value items 1,500 36 54,000 0.35
2. Low value items 500 205 1,02,500 0.65
NiSi 54,000
= 0.35.
NiSi 1,56,500
Similarly Pi for Stratum 2 is: Pi = 0.65
It can be seen that the method of optimal allocation takes into account the standard
deviation as well as the number of elements in each stratum. It is a better method than
the proportional allocation method.
6. The next step is to compute the total sample size through the equation given below:
U R2 NiSi 2 ( N i Pi n )
n= ∑ …………………………………………….(4)
A2 Pi
It would be noted that except for n, which represents the sample size and which we
have to find out, all other quantities in this formula are know to us. Is the square of
the coefficient of reliability; A2 is the square of the precision limit required; Ni is the
number of elements in the population; Si is the square of the estimated standard
deviation of each stratum; and Pi is the percentage of the total sample size that each
stratum will contribute.)
7. From the solution of the sample size equation, the total sample size is known. The
contribution of each stratum to the total can be calculated by multiplying the total
sample size with Pi Thus, if the total sample size is 300, Stratum 1 will contribute 105
(300x0.35) items. To this, a 10 per cent addition many be made as a matter of
precaution and 116 items (105+11) will, therefore, be selected from Stratum A.
Similarly, Stratum B will contribute 215 (195+20) items.
8. From each stratum, select additional items for examination and record the individual
values.
9. Compute the new sample mean for each stratum.
10. Estimate the total population value. The estimated value of each stratum can be
reached by multiplying stratum sample mean by the number of elements in the
population. ( x iNi,, where x i is sample mean o a stratum and Ni is the number of
elements in the stratum.) The value of the various strata can then be added to each an
estimate of the value of the population.
There are other techniques available for sampling with the help of which the auditor looks for
a characteristic, which, if discovered in his sample might be indicative or more widespread
irregularities. Discovery of one such error will be indicative of the need to apply more
extensive checks. This technique, called discovery sampling, is especially useful in
unearthing frauds.