11.2 Designing and Executing Audit Samples

Audit sampling is a crucial technique in auditing, allowing auditors to draw conclusions about entire populations by examining only a portion. This section explores the design and execution of audit samples, covering objectives, sample size determination, selection methods, and procedures for sample items.

Proper sampling helps auditors balance efficiency with risk management. We'll learn how to select representative samples, apply appropriate audit procedures, and evaluate results. Understanding these concepts is key to conducting effective audits and forming reliable conclusions about financial statements.

Audit Sample Objectives and Scope

Defining Audit Sampling and Its Objectives

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• Audit sampling applies audit procedures to less than 100% of the population of transactions or account balances to obtain evidence and draw conclusions about the entire population
• Audit sampling objectives:
  • Obtain sufficient appropriate evidence
  • Reduce sampling risk to an acceptable level
  • Apply audit procedures to the sample to form a conclusion about the population
• The scope of an audit sample is determined by:
  • Specific audit objectives
  • Population size and characteristics
  • Expected misstatement
  • Sampling method used

Understanding Sampling and Non-Sampling Risk

• Sampling risk is the possibility that the auditor's conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure
• Non-sampling risk can also impact the auditor's conclusion which arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to sample size (auditor bias, misinterpretation of evidence)

Sample Size Determination

Factors Influencing Sample Size

• Sample size is influenced by:
  • Auditor's assessment of the risks of material misstatement
  • Tolerable misstatement (maximum error in the population that the auditor is willing to accept and still conclude that the result from the sample has achieved the audit objective, typically set at less than performance materiality)
  • Expected misstatement (amount of misstatement the auditor expects in the population, higher expected misstatement will require a larger sample size)
  • Assurance needed from substantive procedures
• The auditor may use statistical or non-statistical sampling approaches
  • Statistical sampling allows the auditor to measure sampling risk and provides a more objective basis for determining sample size

Balancing Sampling Risk and Audit Efficiency

• Increasing the sample size reduces sampling risk but increases audit effort and cost
• The auditor must balance the level of sampling risk with audit efficiency (cost-benefit considerations)
• Factors to consider:
  • Significance of the audit area
  • Complexity of transactions
  • Effectiveness of internal controls
  • Prior audit experience

Representative Sample Selection

Sampling Techniques for Representative Samples

• The sample should be representative of the population, such that it has approximately the same characteristics as the population from which it was selected
• Simple random sampling selects sample items such that each sampling unit has an equal chance of selection (requires homogeneous sampling units)
• Systematic selection involves selecting items using a constant interval between selections, with the first interval having a random start (risk of bias if population is structured in a pattern matching the sampling interval)
• Monetary Unit Sampling (MUS) is a form of value-weighted selection in which sample size, selection and evaluation results in a conclusion in monetary amounts (each individual monetary unit, such as a dollar, has an equal chance of selection)

Non-Statistical Sampling Techniques

• Haphazard selection is a non-statistical technique in which the auditor selects the sample without following a structured technique, avoiding any conscious bias or predictability (cannot be used to project misstatements to the population)
• Block selection involves selecting contiguous items from within the population (cannot be used to draw statistical inferences about the entire population)
• These techniques may be appropriate for small populations or when the auditor's professional judgment determines that statistical sampling is not necessary

Sample Item Audit Procedures

Applying Appropriate Audit Procedures

• The auditor should perform audit procedures that are appropriate to the particular audit objective on each sample item
• For tests of controls, the auditor should:
  • Inspect documents
  • Observe processes
  • Re-perform client procedures on the sampled items to determine if the controls are operating effectively
• For substantive procedures, the auditor applies appropriate procedures to each sample item to determine if a misstatement exists and its quantitative impact, which may involve:
  • Tracing to supporting documents
  • External confirmation
  • Recalculation

Handling Inappropriate Items and Misstatements

• If a selected item is not appropriate for the application of the designed audit procedure, it may be replaced with another item using an unbiased selection process
• Misstatements or deviations identified in the sample must be investigated to determine:
  • Their nature and cause
  • Their potential effect on the purpose of the audit procedure
  • Their potential effect on other areas of the audit
• The auditor should consider the qualitative aspects of misstatements (indicators of fraud, misstatements that may indicate a significant deficiency or material weakness in internal control)

Sampling Process Documentation

Required Documentation Elements

• The audit documentation should include:
  • Sampling objectives
  • Definition of the population and sampling unit
  • Sample size
  • Method of sample selection
  • Listing of items tested
  • Misstatements or deviations identified
  • Conclusions reached
• For statistical samples, the documentation should also include:
  • Risk of incorrect acceptance
  • Tolerable misstatement
  • Expected misstatement
  • Population size
  • Sampling interval and starting point (for systematic selection)

Audit Software and Working Paper Considerations

• The working papers should be sufficient for an experienced auditor, with no prior connection to the audit, to understand the nature, timing, extent and results of the procedures performed, evidence obtained and conclusions reached
• If audit software is used, relevant inputs and outputs should be retained as part of the audit documentation (screenshots, exported reports)
• The auditor should ensure the completeness and accuracy of any system-generated reports or data used in the sampling process

Evaluating Sample Results

• Evaluation of sample results involves:
  • Determining whether the initial assessment of relevant risks remain appropriate
  • Determining whether additional testing is needed
  • Determining whether misstatements are material, individually or in aggregate
• The auditor should consider the nature and cause of any misstatements detected and their possible effect on other audit areas or financial statement assertions
• If the sample results suggest a previously unidentified risk of material misstatement, the auditor should revise the audit plan accordingly