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Memo84 316 B
Memo84 316 B
In view thereof, Mr. Omar Costibolo and Ms. Cecilia umatay are designated
as team members effective January 2, 1985 until April 30, 1985. Their terms of
reference are attached.
The project team members will coordinate their efforts with he auditing units
in National and Local Agencies and government-owned and/or Controlled
Corporations which have been elected by managers in coordination with the
researcher for the purpose of validating the COA-Sampling-Card Methodology. The
Auditing units shall prepare and submit to the project team the necessary working
papers and reports to be defined by the researcher. The project team will also
coordinate with the manager responsible for the project examining the withdrawal of
Resident auditing units.
SAAC will provide the office space for the project team and Allocate five
thousand (P5, 000.00) to cover transportation costs of the project team to the audit
units. Public utility vehicles shall be utilized.
For compliance.
INTRODUCTION
First, let us follow the steps that a field auditor would have to take after
being given a COA-Sampling-Card such as the one in Exhibit 1-A. Later, we will
see how such a card can be prepared. But one it has been all the auditor has to do
is:
First, the auditor would list the population of vouchers together with their
monetary amounts and total them, or obtain such a listing from the auditee. Next,
the auditor eliminates voucher amounts that are so high in value that they are
too important to leave out of the audit. For COA, large amounts are defined as a
percentage of the total value of the vouchers. For a population of 3,000 vouchers, the
COA-Sampling-Card instructions recommend 1%. Suppose the total monetary
value of the 3,000 vouchers is 4 million pesos. The auditor would be required to
audit all vouchers over (4,000,000 pesos x 1% =) 40,000 pesos. Let's suppose
there are 5 such vouchers in the population totalling 840,000 pesos.
There may also be vouchers that the auditor wants to check knowing from
past experience they are particularly prone to error. Let's suppose there are 45
smaller payments to dubious construction companies totalling 100,000 pesos.
These might also be eliminated from the population and audited individually.
The auditor is now left with an adjusted population of 2,950 vouchers, places
us somewhere down the third column on the front of the COA-Sampling-Card.
Next, the auditor would check the characteristics of the vouchers, and in this case,
let us assume they are all judged to be current transactions with good controls.
This puts us somewhere along the second row of COA-Sampling-Card. At the
intersection of the row along the column, the auditor can see that the recommended
sample size is 200.
Before actually choosing the 200 samples, the auditor needs to determine
the sample interval. This defined as the monetary value of the adjusted population
divided by the sample size. In this case, the interval is:
To start the selection process a number between 0 and the sampling interval
is selected from a random number table. If this number is 9570 then, the sample is
selected as follows:
b. Add to the negative amount the value of the first and each succeeding
payment in the order they were provided, until the sub-total reaches
zero or a positive amount.
c. Mark off the payment where the sub-total becomes zero or positive. This
is selected payment.
d. Deduct from the sub-total the sample interval of 15,300; his will cause
the sub-total again to turn negative in most cases. If the figures remains
positive, deduct the sample interval of 15,300 again. Such payments
and the errors observed during the audit should be recorded each time
the payment was selected.
e. Repeat steps (b) to (d) until the auditor has added through the whole
population. This should result in a sample of 200 vouchers.
The auditor is now ready to test 200 vouchers. For the compliance test,
this might involve reviewing whether or not:
In our hypothetical example; suppose the test showed that all transactions
were properly processed except for the following: a) compliance errors - for three
payments there was no evidence that the claim had been investigated, for two
payments no approval was evident and one payment was recorded incorrectly; b)
substantive errors - payments on claims supported by voucher numbers 0057 and
6302 amounting to 3,000 and 500 pesos, respectively should not have been
made because of some recently approved amendments to the insurance policies.
Also, payments on the following claims were incorrectly calculated: Voucher Nos.
1257, 3708, 7401, 9321, 9871 had book values of 2000, 300, 12327, 826 and 625.
A B C D=B-C E=D/B
Voucher Book Audited Absolute Percentage
Number Value Value Error Error
* The cumulative error includes all errors regardless of whether they are over
or under statements. This is done on the assumption that the
government auditor is concerned with the absolute rather than the net
amount of errors.
The 4.05 cumulative error noted in the audit was below the maximum
number of substantive errors that are tolerable in accordance to the COA-
Sampling-Card. On the basis of the 200 payments verified and relating to the
population of 2950 out of 3000 items, the auditor concluded that the error rate in
the population was acceptable to him. The conclusion on the other 50 items was
based on full information and not on the statistical sample. If the result of either the
compliance or the substantive test had shown the cumulative error above the
threshold stated on the COA-Sampling-Card, the auditor would have had to verify
the remaining 2750 vouchers and base his conclusion on full information.
Sampling risk is the possibility that the conclusion derived from a test differs
from the conclusion that would have been obtained by examining the whole
population with equal diligence. Sampling can lead to incorrect conclusions of two
types. On one hand, the auditor may conclude from the sample that the error rate
of the population is below the tolerable error rate when, in reality, it is not. On the
other hand, the auditor may consider the inconclusive although the error rate in the
whole population is actually below the tolerable error rate. The auditor is willing
to accept these risk in exchanged for the economy of sampling, provide that the
extent of the risk can be controlled and quantified.
Tolerable error is the threshold value for undetected errors that the audit
institution is willing to accept in the population. For a compliance test, this
threshold would be expressed as the maximum percentage of transactions that
have not been completed in conformity with relevant laws, rules and procedures.
For a substantive audit test, the tolerable error would be maximum amount that is
accurate, valid or properly recorded. It can be stated as an absolute amount or a
percentage of the monetary value of all transactions in the population subject to
audit.
Max. error
Compliance:
Substantive:
EXHIBIT 4
% Error
Rates
:
:
8 :
:-------------------------------------------------------------- Tolerable Error (7%)
6 :
:
4 : Maximum error rate allowable
: in the sample before audit
2 : results become inconclusive.
:
0 :-------+--------+--------+--------+--------+--------+--------+ Sample
Sizes
100 200 300 400 500 600 700
This curve shows that for small samples (under 100) a few errors would
make a test inconclusive. For larger samples (over 300) this would not be the case.
The maximum percentage of errors that would make the test inconclusive, hardly
changes once the curve flattens out. Based on this curve, the following sampling
sizes are recommended for sampling risk of ten percent and tolerable error of
seven percent:
Transactions
in Populations Point on the curve Sample Sizes
CONCLUSION
Specifically, it is hoped the paper will enable institutions like the Commission
on Audit to significantly reduce their post-audit work without sacrificing quality.
The use of the statistical sampling often improves the quality of audit because the
work is less repetitive, larger values are emphasized, and work papers tend to be
better prepared.
COA-SAMPLING-CARD
Parameters:
High value -
Audit Risk -
150 Maximum number of
Old Transactions 1% 12 compliance error
Current Transactions 10% 5.97 that may be de-
tected in sample
Tolerable error - during audit.
Parameters:
Old Transactions 1%
Current Transactions 10% 150 Maximum number
of 16
7.18 compliance errors
Tolerable Error - that may be de-
tected in sample
Compliance Test 15% during audit.
Substantive Test 8%
Crucial to the success of the validation and the monitoring thereof, is the
availability of an expert with know-how of Statistics for Auditors and a statistical
expert with know-how of Auditing who can provide guidance and revolve
problems encountered by the auditing units as well as serve as the mechanism
to transfer the technology from the researcher to the COA staff. These two expert,
will work in close collaboration with the administrative expert, the project researcher
and the auditing teams involved. These individuals will liaise with COA and other
government officials concerned. Both shall render service from January 1, 1985 to
May 1, 1985.
The principal duties shall include but not be limited to the following:
3. Prepare for the researcher and the COA Chairman the necessary
correspondence and assist in the writing of interim and final reports as
well as the revision, if any, of the COA policy paper on statistical
sampling methodology.