WHAT IS SAMPLING?

Sampling involves testing less than 100 percent of a population and then utilizing the results to draw a conclusion about the entire population. This process saves the time, effort, and expense that may be involved in comprehensive testing. Sampling is most effective for populations in which a large number of similar transactions are processed in a similar manner. For example, sampling is typically appropriate for testing accounts payable, because a large number of invoices pass through this system and, usually, they are all subjected to the same procedures. Sampling accounts payable data should produce results that are representative of those yielded by an examination of the entire accounts payable population. However, for those situations in which a small number of transactions are involved, or in which the items are not processed in a similar manner, sampling is not a suitable approach. The appropriateness of sampling in a given testing situation is also largely dependent on the significance of the population. If the whole population is not significant--that is, if the population is not of consequence--then sampling, indeed any method of examination, would prove unrevealing. In addition, if a small number of transactions comprise the entire population and each is individually significant, all items should be examined rather than taking a sample.
Sampling Techniques There are some key sampling techniques which the auditor can adopt: Haphazard sampling Stratified sampling Systematic sampling (interval sampling) Block selection Haphazard Sampling Haphazard sampling is a technique adopted by the auditor where the Judgement

sample does not follow a structured technique. Haphazard sampling is not appropriate when using statistical sampling and the auditor should always ensure that haphazard sampling is not doctored in such a way that it deliberately avoids sampling items which, for example, are difficult to locate. All items in the population should stand a chance of being sampled. . Stratified Sampling This is a technique where the auditor will split items in a sample into their various stratas. For example, in a payroll sample the auditor might split the sample between full-time males, full-time females, part-time males and part-time females and work out the percentage of the strata in the population (the population being the total amount that makes up a figure). For example if 30% of the population are fulltime males, 40% full-time females, 20% part-time males and 10% parttime females, then the sample will consist of 30% full-time males, 40% full-time females etc. Systematic Sampling Often referred to as interval sampling this is where the auditor will take the number of sampling units in the population and divide this into the sample size to give a sampling interval. For example in a sales invoice sample where the sampling interval is 20, then the auditor will determine a starting point for sampling and sample every 20th sales invoice thereafter. Block Sampling Block sampling is a technique where the auditor applies procedures to such items that all occur in the same block of time or sequence. For example testing amounts received from customers in the month of September. Alternatively, a block of remittance advices received in September would be tested in their entirety. It is to be noted that block sampling should be used with caution because valid references cannot be made beyond the period or block examined. Where the auditor does use block sampling, then many blocks should be selected to help minimise sampling risk.

AUDIT SAMPLING REQUIRES AUDITOR JUDGMENT

The goal of an agency audit is to insure compliance with the client's work standards, evaluate performance and maximize profits. Obviously, no matter how competent the auditor or how sophisticated the collection software, reviewing each account is a physical impossibility. Even if 100 percent of the information could be tested, the cost of testing would likely exceed the expected benefits (the assurance that accompanies examining 100 percent of the total) to be derived. What is required is a sampling of the accounts. To accomplish this, the auditor needs to examine a representative sample or cross-section of the various type of accounts (e.g., legal, good telephone, skip, payment arrangements, settled, closed) as well a review of the remittance history. How the sample should be selected and how large the sample should be are critical issues for researchers as well as auditors. According to researchers M. Hanson and P. Hauser, in their article "Principles of Sample Design," "The science of sampling design involves: (1) looking at the resources available, the restrictions under which one must work, the mathematical and statistical tools available, the accumulated knowledge of certain characteristics of the populations to be sampled; and (2) putting these together to arrive at the optimum design for the purpose at hand." Hanson and Hauser point out that the overall criterion that should be applied in choosing a sampling design is to design the sample so that it will yield the desired information with the reliability required at a minimum cost; or conversely, that "at a fixed cost it will yield estimates of the statistics desired with the maximum reliability possible."

STATISTICAL VS. NONSTATISTICAL SAMPLING

Simply stated, a sampling plan is nonstatistical when it fails to meet at least one of the criteria required of a statistical sampling plan. Auditors should know the requirements of statistical plans, because, by definition, any deviation constitutes a nonstatistical approach. The difference between the two types of sampling is that the sampling risk of a statistical plan can be measured and controlled, while even a perfectly designed nonstatistical plan cannot provide for the measurement of sampling risk. The basic similarity between the two types is that both sampling approaches require the exercise of auditor judgment during the planning, implementation and evaluation of the sampling plan. In other words, the use of statistical methods does not eliminate the need to exercise judgment. In addition, the actual audit procedures performed on the items in the sample will be the same, whether a statistical or nonstatistical approach is used. The employment of a statistical plan does not mean the auditor can alter the procedures designed to collect evidence to draw an audit conclusion. It is up to the auditor to evaluate the individual and situational costs and benefits associated with each sampling approach before making a determination. In some circumstances, statistical sampling is more appropriate than judgment sampling. Before deciding whether to use statistical or judgmental sampling, the auditor must determine the audit objectives; identify the population characteristics of interest; and state the degree of risk that is acceptable. After making those determinations, it may be advisable to use statistical sampling if the auditor has a welldefined population and can easily access the necessary documentation.

Obviously, if the audit methodology and parameters limit the on-site portion of an agency audit to one or two days, the sample design and size must be a realistic reflection of this time constraint. It is a fallacy that the "statistical rule of thumb" is to sample 10% of the accounts. There is no such magic number. If the entire population is 10, a 10% sample equals one account -not very representative. Therefore, it is the absolute numbers, not the percentage, that is important.

STATISTICAL PROBABILITY SAMPLING

Accounts to be reviewed during an audit are normally selected through one of the probability sampling methods -- random, systematic or stratified. Probability sampling provides an objective method of determining sample size and selecting the items to be examined. Unlike nonstatistical sampling, it also provides a means of quantitatively assessing precision (how closely the sample represents the population) and reliability (confidence level, the percentage of times the sample will reflect the population). Simple Random Sampling In auditing, this method uses sampling without replacement; that is, once an item has been selected for testing it is removed from the population and is not subject to reselection. An auditor can implement simple random sampling in one of two ways: computer programs or random number tables. Systematic (Interval) Sampling This method provides for the selection of sample items in such a way that there is a uniform interval between each sample item. Under this method of sampling, every "Nth" item is selected with a random start. Stratified (Cluster) Sampling

This method provides for the selection of sample items by breaking the population down into stratas, or clusters. Each strata is then treated separately. For this plan to be effective, dispersion within clusters should be greater than dispersion among clusters. An example of cluster sampling is the inclusion in the sample of all remittances or cash disbursements for a particular month. If blocks of homogeneous samples are selected, the sample will be biased. Remember, an essential feature of probability sampling methods is that each element of the population being sampled has an equal chance of being included in the sample and, moreover, that the chance of probability is known. Only in this way, is a probability sample representative of a population.

NONSTATISTICAL SAMPLING

Some selection methods can be used only with nonstatistical sampling plans. Haphazard Selection In this method, the auditor selects the sample items without intentional bias to include or exclude certain items in the population. It represents the auditor's best estimate of a representative sample -- and may, in fact, be representative. Defined probability concepts are not employed. As a result, such a sample may not be used for statistical inferences. Haphazard selection is permitted for nonstatistical samples when the auditor believes it produces a fairly representative sample. Block Selection Block selection is performed by applying audit procedures to items, such as accounts, all of which occurred in the same "block" of time or sequence of accounts. For example, all remittances in the month of November. Alternatively, remittances 300-350 may be examined in their entirety. Block

selection should be used with caution because valid references cannot be made beyond the period or block examined. If block sampling is used, many blocks should be selected to help minimize sampling risk. Judgment Selection Judgment sample selection is based on the auditor's sound and seasoned judgment. Three basic issues determine which items are selected: 1. Value of items. A sufficient number of extensively worked or older accounts should be included to provide adequate audit coverage. 2. Relative risk. Items prone to error due to their nature or age should be given special attention. 3. Representativeness. Besides value and risk considerations, the auditor should be satisfied that the sample provides breadth and coverage over all types of items in the population.

Test check In audit work/procedures, there is the term called Surprise check. Surprise Check is also known as Test Check. The advantage and features of Surprise Check are as follows: Advantages of Surprise Check

Able to reduce the auditor routine work so that he can devote his time to more important aspects. Features Of Surprise Check Entries selected for surprise check should be representative of the

whole, and the entries of every description must be tested Selection of items to be checked should be at random. Salient Point Surprise Check Or Test Check is useful and important that if a clients internal control system is reliable but when surprise check reveal discrepancies then the auditor should do a thorough checking of the books and other relevant records.

Test checking

The concept of test checking in auditing is based on the Law of Statistical inertia which means the selection and checking of a representative number of entries of each class of transactions instead of going through every entry. The basis of though selected or checking during the audit. Whether the auditor should resort to test check or not depends upon several factors. The existence of a sound system of internal control or otherwise the existence of an efficient system of internal audit or otherwise.

However the following precautions must be taken by the auditor while carrying a test check of the transactions: While making selection for test checks every effort must be made to ensure that the entries are representative of the whole set of books.

 The clients should not know the period selected for the test check. The months selected for test check should be different in the forthcoming year. The first and the last moths of the period covered by the accounts may preferably be checked in every case.

Diff betwn routine check n test check

Impro

Routine checking is for verification of each and every items of books of a/c's Test checking refers to examination of selected numder of items. 2. Routine checking is to check all the transactions without exceptions. Test checking avoids immaterial items. 3. Routine checking is on routine basis. Test checking may be weekly, monthly or quarterly

Routine check

Routine Checking The auditors check the arithmetic accuracy of journals and ledgers. It is called routine checking. The purpose is detected the error and fraud of simples nature. The audit staff can check the balance appearing in journal and ledgers. The subtotal and total are examined. The differences are calculated. These balance are transfered from one page to another. The amounts carries forward should be the same. The checking is useful for determine the accuracy of the books of accounts. The accounting staff cannot chance the figures after routine

checking. The ledger posting is also tested by means of routine checking. The errors may be locked and frauds may be disclosed by it. The auditor is able to give his opinion about the fairness of the financial statements. The auditor can fix the responsibility of the accounting staff for negligence of duty. Essentials of Routine Checking 1. Sub-Cast Sub-Cast is a part of routine checking. Sub-total is possible in accounts matters. The sub-cast must be correct. 2. Casts Cast is part of routing checking. Total in journal and ledger accounts should be examined for accurate results. 3. Carry Forward Carry forward is a part of routing checking. The balance of one page can be transfered to the next page. 4. Posting Posting is a part of routing checking. The entries are posted in to the ledger accounts. Posting must be properly examined. 5. Balancing Balancing is a part of routing checking. Taking the difference of debit and credit in the accounts is called balancing. 6. Carry Down The amounts in an account can be transferred to next page. The carry down is a part of routing checking. 7. Transfer Transfer is part of routing checking. The amount is one accounts can be transferred to another account. Advantages of Routine Checking 1. Accuracy The benefit of routine checking is that there is accuracy of accounting books and records. The sub-total, casts and carry forward posting, balancing and transfer are stated as correct.

2. Frauds Routine checking is useful to checking fraud in the books of accounts. The responsibility lies on the head of management for location of fraud. The management can use this tool to meet its duty. 3. Positive Verification Routine checking helps to verify positive made in the ledger. The correct posting can provide true and fair view of financial statements. The management can verify posting through it. 4. No Change in Figures Routine checking is useful to eliminate the alternation of figures. The management can meet its obligation with the help of routine checking. The employees cannot alter figures. 5. Final Checking The benefit of routine checking is that final checking work is reduced. The final checking become early as major work has already been completed through routine checking.

Disadvantages of Routine Checking 1. No Care The work of routine checking is given to junior employee. They do not consider it as important matter. Therefore the expected

result cannot be produced for audit purpose. 2. Fraud The demerit of routine checking is that planned frauds are not disclosed. The responsibility of fraud lies on head of management. The audited accounts may fail to provide true and fair view. 3. Error The demerit of routine checking is that errors of principle are not disclosed. The responsibility or error can be placed on the head of management. The audited accounts may fail to provide true and fair view. 4. Monotony The work is routine checking is boring and time consuming. The clerks go on checking the totals and sub-totals and balances. It does not improve the performance of employee rather it bring monotary.

Essentials of Test Checking 1. Sample The sample items selected from whole data must be representative. The selection can be made by any method. The entire data must be presented in the form of sample. 2. Last Month The last month of the accounting year is most important. The items appearing in the last month must be given maximum importance at the time of selecting the sample. 3. First Month The first month of accounting year provides essentials information. The transactions recorded in the first month must

be assigned high weight age in order to select the sample. 4. Surprise Testing The auditors include the element of surprise in selection of test. The accounting staff must be unaware of test checking so that he should not make arrangement for test checking.

5. Checking Method The auditor can change his method of selecting the sample. At one time he can one use alternate method. The selection method must be charged in time to time. 6. Every Type of Transaction The auditor must select every type of transaction in test checking. There is a need to include each type of dealing in the sample. 7. Every Employee The auditor can select the work of every employee. The test checking can be used to examine the work of all employees in the organization. 8. Through Out The Year The test checking can be applied to all items appearing in the books through out the year. The recurring items are most suitable for test checking. 9. Cash Book The cash book entries must not be used for test checking. There is a need of cent percent checking of all cash items appearing in cashbook. The control over cash is essential for efficient business working. Advantages of Test Checking 1. Time Saving The benefit of test checking is available in the shape of time saving. A simple of items is checked and remaining items are treated as checked. In this way there is saving in time. 2. Less Labour

The test checking is useful for saving in labour. A lot of work requires many clerks for completing the audit. But test checking is used to test few items so there is less labour work. 3. Accurate Books The test checking is useful to note the accuracy of accounting books and other record. There is a demand of error free books. The test checking is a step in the right direction to prove accuracy. 4. Staff Efficiency The efficiency of accounting staff improves due to test checking. The weakness of employee is reported to management. The employees try to improve their work by overcoming their deficiencies. 5. Timely Report The benefit of test checking is that timely report can be submitted to the management. The large number of figures can be checked in short period of time so there is no delay. 6. Many Audits Test Checking is useful to complete many audits in one year. It saves sufficient time, which can be used to check the books of new clients. The auditor is able to raise more income. 7. Special Attention The auditor can pay special attention to important matters. Test Checking reduces the labour work on the part of audit staff. There is sufficient time period to settle the important matters.

Disadvantages of Test Checking 1. Errors The demerit of test checking is that errors are not disclosed by it. In the presence of error true and fair view is not possible. No doubt the location of errors is the duty of management but it effects the audit work. 2. Frauds

The demerit of test checking is that planned frauds may not be disclosed. The fraud discovers is the responsibility of management. The audited accounts cannot show true and fair view when fraud exists in books. 3. Responsibility The demerit of test checking is that auditor cannot shift his responsibility of management. The errors of fraud can be discovered through cent percent checking. So auditor is responsible for test checking. 4. Report The auditor report may fail to disclose true and fair view of business matters. After test the auditor signs checking the auditor report. The auditor is responsible for audit report based on test checking.