Statistical Sampling For Auditors

STATISTICAL SAMPLING FOR AUDITORS
APIPA 2009
Jeanne H. Yamamura
OBJECTIVES
Review of sampling concepts Types of sampling
Attribute sampling
Steps Nonstatistical attribute sampling Compliance auditing
Monetary unit sampling

Steps Nonstatistical monetary unit sampling
Classical sampling
Ratio estimation Difference estimation
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AUDIT SAMPLING
Application of an audit procedure to less than 100% of the items in a population
Account balance Class of transactions
Examination on a test basis Key: Sample is intended to be representative of the population.

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SAMPLING RISK
Possibility that the sample is NOT representative of the population As a result, auditor will reach WRONG conclusion Decision errors
Type I Risk of incorrect rejection Type II Risk of incorrect acceptance
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TYPE I RISK OF INCORRECT REJECTION

Internal control: Risk that sample supports conclusion that control is NOT operating effectively when it really is
AKA Risk of underreliance, risk of assessing control risk too high
Substantive testing: Risk that sample supports conclusion that balance is NOT properly stated when it really is
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TYPE II RISK OF INCORRECT ACCEPTANCE

Internal control: Risk that sample supports conclusion that control is operating effectively when it really isnt
AKA Risk of overreliance, risk of assessing control risk too low
Substantive testing: Risk that sample supports conclusion that balance is properly stated when it really isnt
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WHICH RISK POSES THE GREATER DANGER TO AN AUDITOR?

Risk of incorrect rejection
Efficiency
Risk of incorrect acceptance

Effectiveness
Auditor focus on Type II

Also provides coverage for Type I
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NONSAMPLING RISK
Risk of auditor error
Sample wrong population Fail to detect a misstatement when applying audit procedure Misinterpret audit result
Controlled through
Adequate training Proper planning Effective supervision
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SAMPLE SIZE FACTORS

Desired level of assurance (confidence level) Acceptable defect rate (tolerable error) Historical defect rate (expected error)
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CONFIDENCE LEVEL
Complement of sampling risk
5% sampling risk, 95% confidence level
How much reliance will be placed on test results The greater the reliance and the more severe the consequences of Type II error, the higher the confidence level needed Sample size increases with confidence level (decreases with sampling risk)
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TOLERABLE ERROR AND EXPECTED ERROR

Precision the gap between tolerable error and expected error AKA Allowance for sampling risk Sample size increases as precision decreases
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WHEN DO YOU SAMPLE?

Inspection of tangible assets, e.g., inventory observation Inspection of records or documents, e.g., internal control testing Reperformance, e.g., internal control testing Confirmation, e.g., verification of AR balances
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WHEN IS SAMPLING INAPPROPRIATE?

Selection of all items with a particular characteristic, e.g., all disbursements > $100,000 Testing only one or a few items, e.g., automated IT controls, walk throughs Analytical procedures Scanning Inquiry Observation
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WALKTHROUGHS
Designed to provide evidence regarding the design and implementation of controls Can provide some assurance of operating effectiveness BUT
Depends on nature of control (automated or manual) Depends on nature of auditors procedures to test control (also includes inquiry and observation combined with strong control environment and adequate monitoring)
Walkthough = sample of 1
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STATISTICAL VS NONSTATISTICAL SAMPLING

Statistical sampling
Statistical computation of sample size Statistical evaluation of results
Nonstatistical sampling Sample sizes should be approximately the same (AU 350.22) Sample sizes must be sufficient to support reliance on controls and assertions being tested
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WHEN IS SAMPLING NONSTATISTICAL?

If sample size determined judgmentally If sample selected haphazardly If sample results evaluated judgmentally
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TYPES OF SAMPLING
Attribute sampling Monetary unit sampling Classical variables sampling
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ATTRIBUTE SAMPLING
Used to estimate proportion of a population that possesses a specific characteristic Most commonly used for T of C Can also be used for dual purpose testing (T of C and Substantive T of T)
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MONETARY-UNIT SAMPLING
AKA probability proportional to size (PPS) sampling, cumulative monetary unit sampling Used to estimate dollar amount of misstatement
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CLASSICAL VARIABLES SAMPLING

Uses normal distribution theory to identify amount of misstatement Useful when large number of differences expected
Smaller sample size than MUS
Effective for both overstatements and understatements Can easily incorporate zero balances
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IN-CLASS EXERCISE NO. 1
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Test Involves Sampling? Attribute / Variable / MUS / NA
1 2 3 4 5 6
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Yes No Yes No No No
Attribute (ST of T) NA Attribute (T of C) NA NA (Could be MUS if large population) NA

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Test Involves Sampling? Attribute / Variable / MUS / NA
7 8 9 10 11
Yes Yes No Yes No
Attribute (T of C) MUS NA Attribute (T of C/ST of T) NA
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STEPS IN STATISTICAL ATTRIBUTE SAMPLING APPLICATION

Planning
1. Determine the test objectives 2. Define the population characteristics 3. Determine the sample size
Performance
4. Select sample items 5. Perform the auditing procedures
Evaluation
6. Calculate the results 7. Draw conclusions
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STEP 1: DETERMINE THE TEST OBJECTIVES

Objective for T of C: To determine the operating effectiveness of the internal control
Support control risk assessment below maximum
Identify controls to be tested and understand why they are to be tested

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TESTS OF CONTROLS
Concerned primarily with
Were the necessary controls performed? How were they performed? By whom were they performed?
Appropriate when documentary evidence of performance exists
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STEP 2: DEFINE THE POPULATION CHARACTERISTICS

Define the sampling population
Assertion Completeness
Define the sampling unit

Determined by available records
Define the control deviation conditions
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STEP 3: DETERMINE THE SAMPLE SIZE

Determine factors
Desired confidence level (direct) Tolerable deviation rate (inverse) Expected population deviation rate (direct)
Desired confidence level

If planning to rely on controls, would be 90 to 95% Significance of account and importance of assertion affected by control being tested
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Tolerable deviation rate
Maximum deviation rate that auditor willing to accept and still consider control effective
Control would be relied upon
Why any errors acceptable?

Control deviation = Misstatement Assessed importance of control Highly important Moderately important
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Tolerable deviation rate 3-5% 6-10%

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Expected population deviation rate
Rate expected to exist in population Based on prior years results or pilot sample If expected population deviation rate > tolerable rate, DO NOT TEST
SAMPLE SIZE TABLES
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Testing multiple attributes on the same sample
Select largest sample size and audit all of them for all attributes Result is some overauditing BUT may take less time than trying to remember which sample items need to be tested for which attribute
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FINITE POPULATION CORRECTION FACTOR

When population size < 500 Apply finite population correction factor 1-(n/N)
Where n = sample size from table and N = number of units in population
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STEP 4: SELECT THE SAMPLE ITEMS

Sample must be selected to be representative of the population Each item must have an equal opportunity of being selected
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Random number selection
Unrestricted random sampling without replacement (once selected cannot be selected again)
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Random number table
Need to document
Correspondence: relationship between population and random number table Route: selection path, e.g., up or down columns, and right to left (must be consistent) Starting point: starting row, column, digit Stopping point: to enable adding more sample items if needed
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RANDOM NUMBER TABLE ILLUSTRATION

Select a sample of 4 items from prenumbered canceled checks numbered from 1 to 500. Start at row 5, column 1, digit starting position 1. Select three-digit numbers. Items selected are:
145 (sample item #1) 516 (discard because checks numbers do not exceed 500) 032 (sample item #2) 246 (sample item #3) 840 (discard)181 (sample item #4)
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To minimize discards, table numbers > 500 can be reduced by 500 to produce a sample item within the population boundary of 1 to 500. The four sample items selected are:
145 (sample item #1) 016 (sample item #2 = 516 500 = 016) 032 (sample item #2) 246 (sample item #3) 340 (sample item #4 = 840 500 = 340)
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Select 4 sales invoices numbered from 5000 to 12000. Start at row 21, column 2, digit starting point 1. Rather than use a 5-digit number, which produces a large number of discards, add a constant to get a population with 4 digits. If a constant of 3000 is used, the usable numbers selected from 2000 to 9000 are:
6,043 (sample item #1 = 3043 + 3000) 10,120 (sample item #2 = 7120 + 3000) 10,212 (sample item #3 = 7212 + 3000) 5,259 (sample item #4 = 2259 + 3000)
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STEP 4: SELECT THE SAMPLE ITEMS - EXCEL

Excel
Select Tools Select Data Analysis Select Sampling
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STEP 4: SELECT THE SAMPLE ITEMS - EXCEL
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Input Range Enter the references for the range of data that contains the population of values you want to sample. Microsoft Excel draws samples from the first column, then the second column, and so on. Labels Select if the first row or column of your input range contains labels. Clear if your input range has no labels; Excel generates appropriate data labels for the output table. Sampling Method Click Periodic or Random to indicate the sampling interval you want. Period Enter the periodic interval at which you want sampling to take place. The period-th value in the input range and every period-th value thereafter is copied to the output column. Sampling stops when the end of the input range is reached.
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Number of Samples Enter the number of random values you want in the output column. Each value is drawn from a random position in the input range, and any number can be selected more than once. Output Range Enter the reference for the upper-left cell of the output table. Data is written in a single column below the cell. If you select Periodic, the number of values in the output table is equal to the number of values in the input range, divided by the sampling rate. If you select Random, the number of values in the output table is equal to the number of samples.
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Systematic selection
Determine sampling interval = Population / Sample Size Ensure population is in random order Select random starting number (within first interval)
Better to use multiple random starting points to reduce risk of missing systematic deviations
Select every nth item Continue sample selection until population is exhausted
(Last sample selected + sampling interval) > Last item in population In other words, dont stop when desired sample size reached
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STEP 5: PERFORM THE AUDITING PROCEDURES

Conduct planned audit procedures What if?
Voided documents - if properly voided, not a deviation; replace with new sample item Unused or inapplicable documents replace with new sample item Inability to examine sample item deviation Stopping test before completion large number of deviations detected
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Deviations observed
Investigate nature, cause, and consequence of every exception
Unintentional error? Or fraud? Monetary misstatement resulted? Cause misunderstanding of instructions? Carelessness? Effect on other areas?
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STEP 6: CALCULATE RESULTS

Summarize deviations for each control Calculate sample deviation rate and computed upper deviation rate
Sample deviation rate + Allowance for sampling risk = Computed upper deviation rate Statistical sampling results evaluation tables
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STEP 7: DRAW CONCLUSIONS

If Computed Upper Deviation Rate > Tolerable Rate, control is ineffective and cannot be relied upon. If Computed Upper Deviation Rate < Tolerable Rate, control is effective
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EVALUATION OF EXPOSURE
In a sample of 25 manual control operations from a population of 3,000 control operations, 1 deviation was identified. The sample was designed with an expectation that 0 deviations would be found. Looking up the results (in 90% confidence level table): Computed upper error limit = 14.7%
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EVALUATION OF EXPOSURE
The sample did not meet its design criteria, so there is a higher than desired risk that the control will fail to prevent or detect a misstatement. To assess the magnitude of the exposure: Identify the gross exposure of the account or process. This is based on the volume of dollars processed through the control. The upper limit on the control deviations was 14.7%. The adjusted exposure is $735,000 (14.7% * $5,000,000). The $735,000 exposure may assist the auditor in evaluating the severity of the control deficiency.
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IN-CLASS EXERCISES NO. 2 & NO. 3
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Problem 1: Prenumbered sales invoices where the lowest invoice number is 1 and the highest is 6211. Sampling unit Population numbering system Random number table correspondence Sales invoice 1 to 6211 Use 4 digits with random start at 0029-05 going down and then right
First 5 items in sample

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3553 0081 4429 0484 4881

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Problem 2: Prenumbered bills of lading where the lowest document number is 21926 and the highest is 28511. Sampling unit Bill of lading Population numbering system Random number table correspondence First 5 items in sample
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21926 to 28511 Use last 4 digits with random start at 0005-07 7744 7632 8120 3736 4091
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Problem 3: Accounts Receivable on 10 pages with 60 lines per page except the last page, which has only 36 full lines. Each line has a customer name and an amount receivable.
Sampling unit Population numbering system Random number table correspondence First 5 items in sample
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Each line 9 * 60 = 540 + 36 = 576 lines Add 2000 (2001 to 2576) Use last 4 digits with random start at 00040-01 going down and then right 2240 2055 2094 2087 2608
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Problem 4: Prenumbered invoices in a sales journal where each month starts over with number 1. (Invoices for each month are designated by the month and document number.) There is a maximum of 20 pages per month with a total of 185 pages for the year. All pages have 75 invoices except for the last page for each month.
Sampling unit Population numbering system Random number table correspondence First 5 items in sample
Page of invoices Starting with January, first page is 1 (up to 185) Random start at 0008-03 going down then right, subtract random number from next 1000 4000 3982 = 18; 7000 6847 = 153; 5000 - 4956 = 44; 6000 5985 = 15; 5000 4941 = 59
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For which of these auditing procedures can attribute sampling be conveniently used?
1 2 3 4 5a 5b
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No No No Yes Yes Yes

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For which of these auditing procedures can attribute sampling be conveniently used?
5c 5d 5e 6
Yes Yes Yes Yes
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2. Considering the audit procedures to be performed, what is the most appropriate sampling unit for conducting most of the audit sampling tests?
Sales invoice
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For each T of C or ST of T, identify the attribute being tested and the exception condition. Attribute Exception Condition 4. Existence of the sales No record of the sales invoice number in the invoice number in the sales journal sales journal 5a. Amount and other The amount recorded in data in MF agree with the MF differs from the the sales journal entry amount recorded in the sales journal.
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For each T of C or ST of T, identify the attribute being tested and the exception condition. Attribute Exception Condition 5b. Amount and other Customer name and data on the duplicate account number on the sales invoice agree with invoice differ from the the sales journal entry information recorded in the sales journal
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For each T of C or ST of T, identify the attribute being tested and the exception condition. Attribute Exception Condition 5b. Evidence that Lack of initials indicating pricing, extensions, and verification of pricing, footings are checked extensions, and footings. (initials and correct amounts).
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For each T of C or ST of T, identify the attribute being tested and the exception condition. Attribute Exception Condition 5c. Quantity and other Quantity of goods shipped data on the bill of lading differs from quantity on agree with the duplicate sales invoice sales invoice and sales journal
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For each T of C or ST of T, identify the attribute being tested and the exception condition. Attribute Exception Condition 5d. Quantity and other Quantity on the sales data on the sales order order differs from quantity agree with the duplicate on the duplicate sales sales invoice invoice 5e. Quantity and other Product number and data on the customer description on the order agree with the customer order differ from duplicate sales invoice information on the duplicate sales invoice APIPA 2009
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For each T of C or ST of T, identify the attribute being tested and the exception condition. Attribute Exception Condition 5e. Credit is approved Lack of initials indicating credit approval 6. For recorded sales in BL is not attached to the the sales journal, the file duplicate sales invoice of supporting documents and the customer order. includes a duplicate sales invoice, BL, sales order, and customer order. APIPA 2009
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See Solution
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STEPS IN NONSTATISTICAL ATTRIBUTE SAMPLING APPLICATION

Planning
Performance
Evaluation
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Consider desired confidence level, tolerable deviation rate, and expected population deviation rate Judgmentally determine sample size NOTE: Check against statistical sample size tables to verify adequacy
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Guidelines for nonstatistical sample sizes for tests of controls If any errors found, increase sample size or increase control risk
Desired level of controls reliance Low Moderate High Sample size 15-20 25-35 40-60
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STEP 4: SELECT SAMPLE ITEMS

Random sample Systematic sample (with random start) Haphazard selection
Still desire representative sample Avoid unusual, large, first or last
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STEP 6: CALCULATE THE RESULTS

No computed upper deviation rate If sample deviation rate > expected population deviation rate, control not effective
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COMPLIANCE AUDITING
Performance of auditing procedures to determine whether an entity is complying with specific requirements of laws, regulations, or agreements Governmental entities and other recipients of governmental financial assistance
Compliance with laws and regulations that materially affect each major federal assistance program
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COMPLIANCE AUDITING OF FEDERAL ASSISTANCE PROGRAMS

Definition of population for testing of an internal control procedure that applies to more than one program
Define items from each major program as a separate population, OR Define all items to which control is applicable as a single population Second choice usually more efficient
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COMPLIANCE AUDITING EXAMPLE

Federal financial assistance for Island City
Three major federal financial assistance programs Four nonmajor programs
Control: Transaction review to ensure that only legally allowable costs are charged to each program
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COMPLIANCE AUDITING EXAMPLE

More efficient to select one sample from population of all transactions (major and nonmajor programs) Confidence level = 95% Tolerable deviation rate = 9% Expected population deviation rate = 1% Sample size: 51 1 allowable deviation
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SMALL POPULATIONS AND INFREQUENTLY OPERATING CONTROLS

Small Population Sample Size Table
Control Frequency and Population Size Sample Size
Quarterly (4) Monthly (12) Semimonthly (24)
2 2-4 3-8
Weekly (52)
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5-9
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Selected Payroll T of C
1. Examine the time card for approval of a supervisor 2. Account for a sequence of payroll checks in the payroll journal 3. Recompute hours on the time card
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Moderately critical affects E/O of S& W Very critical affects E/O of S&W
Moderately critical affects V of S&W

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4. Compare the employee name in the payroll journal to personnel records 5. Review OT charges for approval of a supervisor Very critical affects E/O - affects E/O of S& W; also an area subject to fraud Moderately critical affects E/O and V of S&W
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Selected Cash Disbursement T of C
6. Examine voucher for supporting invoices, receiving reports, etc. 7. Examine supporting documents for evidence of cancellation (paid) Very critical affects E/O of purchase transactions Moderately critical affects validity of purchase transactions and relates to double payment
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8. Ascertain whether cash discounts were taken 9. Review voucher for clerical accuracy Least critical affects V of purchase transactions; amounts usually minor Moderately critical affects V of purchase transactions
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10. Agree purchase order price to invoice Moderately critical affects V of purchase transactions
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MONETARY UNIT SAMPLING

Uses attribute sampling theory to express conclusions in dollar amounts
Estimates the percentage of monetary units in a population that might be misstated Multiples the percentage by an estimate of how much the dollars are misstated
Developed by auditors Assumes little or no misstatements Designed primarily to test for overstatements
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ADVANTAGES
When no misstatements expected, results in smaller (more efficient) sample size than classical variables sampling No need to compute/identify standard deviation Automatically stratifies sample
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DISADVANTAGES
Zero or negative balances must be tested separately Assumes audited amount of sample items is not in error by more than 100% When more than 1 or 2 misstatements found, allowance for sampling risk may be overstated
Auditor more likely to reject balance and overaudit
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STEPS IN MONETARY UNIT SAMPLING APPLICATION

Planning
Performance
Evaluation
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STEP 1: DETERMINE THE TEST OBJECTIVES

Substantive testing: To test the reasonableness of an amount, i.e., that an amount is fairly stated To test the assertion that no material misstatements exist in an account balance, class of transactions, or disclosure component of the financial statements
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STEP 2: DEFINE THE POPULATION CHARACTERISTICS

Define the sampling population
Monetary value of an account balance Verify completeness of population
Define the sampling unit - Each individual dollar Define the logical unit - The account or transaction that contains the sampling units Define a misstatement The difference between the book value and the audited value
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Determine factors (effect on sample size)
Desired confidence level (direct)
To increase confidence, more work is required! (larger sample size)
Tolerable misstatement (inverse) Expected misstatement (direct) Population size (direct)
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Computing sample sizes using the attribute sampling tables
Select desired confidence level Compute tolerable misstatement as percentage of book value Compute expected misstatement as percentage of book value Look up sample size in attribute sampling table
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Systematic selection approach called probability proportional to size (PPS) Calculate sampling interval
Book value / sample size
From random start (within first interval), select every nth dollar
Logical unit included only once even if includes more than one sample unit
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Conduct planned audit procedures on logical units What if?
Missing document consider to be a misstatement
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Projected misstatement: Projection of the errors to the population Upper limit on misstatement: Adds an allowance for sampling risk to the projected misstatement
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Sort misstatements into two groups
Group 1: Logical unit equal to or greater than the sampling interval Group 2: Logical unit less than the sampling interval
For Group 2, compute the tainting factor for each misstatement

Tainting factor = Book value Audit value Book value
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Place the Group 2 items in rank order by tainting factor (from largest to smallest) Compute the projected misstatement Calculate the upper limit increments (using the Monetary Unit Sampling Confidence Factors for Sample Evaluation table) Calculate upper misstatement for each Group 2 item Add differences for Group 1 Total = Upper misstatement limit
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STEP 6: CALCULATE RESULTS - EXAMPLE

Book value = $3,100,000 Tolerable misstatement = $150,000 Expected misstatement = $25,000 Desired confidence level = 95% Tolerable misstatement rate = 4.8%,round to 5% Expected misstatement rate = .8%, round to 1%
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Sample size = 93 Sampling interval = $33,333 Expected misstatement = $25,000
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Item Book Value Audited Value Difference
Item 1
12,000
3,120
8,880
Item 2
Item 3
35,000
1,400
32,000
0
3,000
1,400
Item 4
Item 5
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45,200
740
41,000
555
4,200
185
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Item Book Value Audited Value Difference
Group 1: BV > SI (33,333)
Item 2
Item 4
35,000
45,200
32,000
41,000
3,000
4,200
7,200
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Item Difference Book Value Tainting Factor
Group 2: BV < SI (33,333)
Item 1
Item 3 Item 5
8,880
1,400 185
12,000
1,400 740
.74
1.0 .25
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Item Tainting Factor Sampling Interval Projected Misstatement (Tainting Factor * SI)
Item 3 Item 1 Item 5
1.0 .74 .25
33,333 33,333 33,333
33,333 24,666 8,333
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Item Projected Misstatement 95% Upper Limit Increment Upper Misstatement
Item 3 Item 1 Item 5
33,333 24,666 8,333
3.0 1.7 1.5
99,999 41,932 12,500 154,431
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Item Projected Misstatement 95% Upper Limit Increment Upper Misstatement
Group 2 Group 1 Upper Misstatement Limit
154,431 7,200 161,631
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STEP 7: DRAW CONCLUSIONS

If Upper Misstatement Limit > Tolerable Misstatement, balance is materially misstated. If Upper Misstatement Limit > Tolerable Misstatement, balance is not materially misstated
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IN-CLASS EXERCISES NO. 5 TO NO. 6
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1. Sampling interval: 746,237 / 10 = 74,624
Loan # 1 3 Recorded Amount 141,100 66,600
5
11 20 24
10,230
4,350 16,530 2,950
26
27 32
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131,200
50,370 5,900
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2. Sampling items always included:
The loans > the sampling interval Loan #1 141,100 Loan #26 131,200
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Recorded amount of accounts receivable = $400,000
Tolerable misstatement: $20,000; 20,000 / 400,000 = 5% Risk of incorrect acceptance: 5% Expected misstatements: 0
Sample size = 59 Sampling interval = 400,000 / 59 = 6,780

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Error Recorded Amount Audit Amount Difference Tainting %
1 2 3
400 500 7,000
320 0 6,500
80 500 500
20% 100% NA
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Error Tainting % Sampling Interval Projected Misstatement Upper Limit Increment Upper Limit Misstatement
Logical unit BV < Sampling Interval 2 100 6,780 6,780 1.7 11,526
20
6,780
1,356
1.5
2,034
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Logical unit BV > Sampling Interval 3 NA NA 500 NA 500
Basic Precision: 3.0 * 6,780 = 20,340
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Logical unit BV < Sampling Interval Logical unit BV > Sampling Interval Basic Precision Upper Misstatement Limit
13,560 500 20,340 34,400
Conclusion: The account is materially misstated. The upper misstatement limit of 34,400 exceeds the tolerable misstatement of 20,000.
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NONSTATISTICAL SAMPLING BALANCE TESTING

Differences in
Identifying individually significant items Determining sample size Selecting sample items Calculating sample results
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IDENTIFYING INDIVIDUALLY SIGNIFICANT ITEMS

Selected due to large size Tested 100% Results similar to PPS selection For example, selecting all items > $100,000
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DETERMINING SAMPLE SIZE

Sample size = Sampling Population BV * Assurance (Tolerable Expected Factor Misstatement) where Sampling Population BV excludes individually significant items
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DETERMINING SAMPLE SIZE

Desired Level of Confidence Assurance Factors Assessment of RMM Maximum Slightly below maximum Moderate Low Maximum Slightly below maximum Moderate Low
3.0 2.7 2.3 2.0
2.7 2.4 2.1 1.6
2.3 2.0 1.6 1.2
2.0 1.6 1.2 1.0

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DETERMINING SAMPLE SIZE - EXAMPLE

Book value = $3,100,000 Individually significant items = $1,500,000 Tolerable misstatement = $150,000 Expected misstatement = $25,000 Desired confidence level = Maximum Risk of MM = Maximum Sample size = 1,600,000 * 3.0 (150,000 25,000) = 38.4, round to 39
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SELECTING SAMPLE ITEMS

Random selection Systematic selection Haphazard selection
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CALCULATING SAMPLE RESULTS

Sample misstatement MUST be projected to population Two acceptable methods
Apply sample misstatement ratio to population (ratio estimation) Apply average misstatement $ of each item in sample to all items in population (difference estimation)
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CLASSICAL SAMPLING
Ratio estimation Difference estimation
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RATIO ESTIMATION
Sample misstatements = $19,000 Sample book value = $175,000 Sample error rate = 10.9%, round to 11% Total population BV = $1,840,000 Projected misstatement = $1,840,000 * 11% = $202,400 Compare projected misstatement to tolerable misstatement
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DIFFERENCE ESTIMATION
Sample misstatements = $19,000 # of sample items with misstatements = 5 Average misstatement per sample item = $3,800 # items in population = 256 Projected misstatement = $3,800 * 256 = $972,800 Compare projected misstatement to tolerable misstatement
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Nonstatistical Sample Results: Errors in accounts > $10,000 Errors in accounts < $10,000: Total errors $ 4,350 Sample BV $81,500 Error rate 5.34% Applied to population: 2,760,000 (465,000) 2,295,000 * 5.34% Total estimated error Tolerable misstatement Conclusion: Account materially misstated
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33,000
122,553 155,553 81,500

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IN-CLASS EXERCISE NO. 7 - PPS

PPS Sample Results: Accounts receivable recorded balance: $2,760,000 Accounts > $10,000 (tested separately) (465,000) Accounts receivable population PPS $2,295,000 Tolerable misstatement $ 81,500
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Sample and sampling interval: Tolerable rate: 81,500 / 2,295,000 = 3.55%, round to 4% Expected rate: 0 5% risk of overreliance (since IR and CR are both high) Sample size: 74 Sampling interval: 2,295,000 / 74 = 31,014
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Recorded Value
Item 12 Item 19 Item 33 Item 35 Item 51 Item 59 Item 74
APIPA 2009
Audited Value
4,820 385 250 3,875 1,825 3,780 0
Difference
300 100 1,000 100 25 420 2,405
Tainting %
5.85 20.6 80 25.2 1.4 10 100
125
5,120 485 1,250 3,975 1,850 4,200 2,405

# of Overstatement Misstatements
0 5% 3.00 Upper Limit Increment
1
2 3 4 5 6
APIPA 2009
4.75
6.30 7.76 9.16 10.52 11.85 13.15
1.75
1.55 1.46 1.40 1.36 1.33 1.30
126

Tainting %
Item 74 Item 33 Item 35 Item 19
Sampling Interval 31,014 31,014 31,014 31,014
Projected Misstatement 31,014 24,811 7,816 6,389
Upper Limit Factor 1.75 1.55 1.46 1.40
Upper Misstatement 54,275 38,457 11,411 8,944
100 80 25.2 20.6
Item 59 Item 12
Item 51
10 5.85
1.4
31,014 31,014
31,014
3,101 1,814
434
1.36 1.33
1.30
4,218 2,413
564 120,282
APIPA 2009
127

Items < Sampling Interval: 120,282 Items > Sampling Interval: None Basic precision: 3.0 * 31,014 = 93,042 Upper misstatement limit = 213,324 Conclusion: Account is materially misstated. Upper misstatement limit 213,324 > tolerable misstatement 81,500
APIPA 2009
128
RESOURCES
Audit Sampling: An Introduction, 3rd Edition, Guy, Carmichael & Whittington Audit Guide: Audit Sampling, New Edition as of May 1, 2008, AICPA Auditing & Assurance Services, 6th Edition, Messier, Glover, & Prawitt Auditing & Assurance Services, 12th Edition, Arens, Elder & Beasley
APIPA 2009 129
THE END!
APIPA 2009
130

Statistical Sampling For Auditors

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Statistical Sampling For Auditors

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STATISTICAL SAMPLING FOR AUDITORS

Monetary unit sampling

Examination on a test basis Key: Sample is intended to be representative of the population.

TYPE I RISK OF INCORRECT REJECTION

TYPE II RISK OF INCORRECT ACCEPTANCE

WHICH RISK POSES THE GREATER DANGER TO AN AUDITOR?

Risk of incorrect acceptance

Auditor focus on Type II

SAMPLE SIZE FACTORS

TOLERABLE ERROR AND EXPECTED ERROR

WHEN DO YOU SAMPLE?

WHEN IS SAMPLING INAPPROPRIATE?

STATISTICAL VS NONSTATISTICAL SAMPLING

WHEN IS SAMPLING NONSTATISTICAL?

CLASSICAL VARIABLES SAMPLING

IN-CLASS EXERCISE NO. 1

IN-CLASS EXERCISE NO. 1

Attribute (ST of T) NA Attribute (T of C) NA NA (Could be MUS if large population) NA

IN-CLASS EXERCISE NO. 1

Yes Yes No Yes No

Attribute (T of C) MUS NA Attribute (T of C/ST of T) NA

STEPS IN STATISTICAL ATTRIBUTE SAMPLING APPLICATION

STEP 1: DETERMINE THE TEST OBJECTIVES

Identify controls to be tested and understand why they are to be tested

Appropriate when documentary evidence of performance exists

STEP 2: DEFINE THE POPULATION CHARACTERISTICS

Define the sampling unit

Define the control deviation conditions

STEP 3: DETERMINE THE SAMPLE SIZE

Desired confidence level

STEP 3: DETERMINE THE SAMPLE SIZE

Why any errors acceptable?

Tolerable deviation rate 3-5% 6-10%

STEP 3: DETERMINE THE SAMPLE SIZE

SAMPLE SIZE TABLES

STEP 3: DETERMINE THE SAMPLE SIZE

FINITE POPULATION CORRECTION FACTOR

STEP 4: SELECT THE SAMPLE ITEMS

STEP 4: SELECT THE SAMPLE ITEMS

STEP 4: SELECT THE SAMPLE ITEMS

RANDOM NUMBER TABLE ILLUSTRATION

RANDOM NUMBER TABLE ILLUSTRATION

RANDOM NUMBER TABLE ILLUSTRATION

STEP 4: SELECT THE SAMPLE ITEMS - EXCEL

STEP 4: SELECT THE SAMPLE ITEMS - EXCEL

STEP 4: SELECT THE SAMPLE ITEMS

STEP 4: SELECT THE SAMPLE ITEMS

STEP 4: SELECT THE SAMPLE ITEMS

STEP 5: PERFORM THE AUDITING PROCEDURES

STEP 5: PERFORM THE AUDITING PROCEDURES

STEP 6: CALCULATE RESULTS

STEP 7: DRAW CONCLUSIONS

IN-CLASS EXERCISES NO. 2 & NO. 3

IN-CLASS EXERCISE NO. 2

First 5 items in sample

3553 0081 4429 0484 4881

IN-CLASS EXERCISE NO. 2

IN-CLASS EXERCISE NO. 2

IN-CLASS EXERCISE NO. 2

IN-CLASS EXERCISE NO. 3

No No No Yes Yes Yes

IN-CLASS EXERCISE NO. 3