bea2004 slides unit 5 audit sampling

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• Publié par: Ennu
• Nombre de lectures: 32
• Langue: English

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Audit sampling

Testing all of the transactions entered into by an audit client would clearly be both impractical and uneconomic – consequently auditors have always had recourse to sampling in the course of gathering sufficient and appropriate audit evidence to support their audit opinion

Audit sampling

It may be that in the nineteenth century auditors were able to test a higher proportion of transactions than they do today – but even then there was reference (in London and General Bank ) to the choice for testing of ‘a few cases haphazard, see that they are right, and assume that others like them are correct also’

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Audit sampling

Sampling techniques may be applied when testing control systems (compliance testing) - normally in terms of attribute sampling designed to test the likely error rate in the population: or when testing actual transactions/financial statement balances (substantive testing) – when forms of estimation sampling (or MUS as described below) may be used

Audit sampling

The relevant ISA (ISA UK & I 530) distinguishes between ‘statistical’ and ‘non-statistical’ sampling

Statistical sampling means any approach to sampling which has the following characteristics:

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Audit sampling

a) Random selection of a sample

b) Use of probability theory to evaluate the results including measurement of sampling risk

Any sampling approach which does not have these characteristics is considered to be non-statistical sampling

Audit sampling

Note that in practice although sampling procedures may have characteristics of a ‘statistical sampling’ approach, for example in terms of random selection of items to be tested, full ‘statistical sampling’ in terms of the formal evaluation of error based upon the sample results is today unusual in the audit context

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Audit sampling

The standard also distinguishes between ‘sampling risk’ and ‘non-sampling risk’

Sampling risk has two components a) The risk that the auditor will conclude on the basis of the evidence that the controls are not working/that material error does exist when the controls are working/material error does not exist (type 1 error)

Audit sampling

b) The risk that the auditor will conclude on the basis of the evidence that the controls are working/that material error does not exist when the controls are not working/material error does exist (type 2 error)

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Audit sampling

Non-sampling risk is when an auditor reaches an erroneous conclusion for reasons unconnected with the sampling procedures – for example in circumstances where the auditor tests an item which is in error but does not appreciate that it is in error

Audit sampling

For a number of reasons accounting populations are problematic in terms of evaluation by formal statistical techniques

Particular issues include:

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Audit sampling

• The lack of a clear link between evaluation of controls and material misstatement in the financial statements • The highly skewed nature of many accounting populations • Problems of sampling for ‘missing’ items, e.g. liabilities • Aggregation issues • The association between misstatement and year end adjustment/estimation/accounting policy choice

Audit sampling

While testing of controls may show that in the great majority of instances controls work as they are intended it may be that only one control breakdown is necessary to cause material error

Also control failure does not necessarily lead to misstatement/financial loss

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Audit sampling

Conventional estimation sampling is inefficient for populations which are highly skewed and which have low error rates (and skewed error values)

In that many accounting populations, for example accounts receivable, are highly skewed auditors usually adopt some form of stratified sampling procedure or sampling based upon monetary values so that each ‘pound’ in the sample has an equal chance of selection

Audit sampling

Monetary unit sampling (MUS) is a form of attribute sampling designed to enable a monetary estimate of the limit on overall error (a bound) to be made.

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Audit sampling

The sampling unit is the individual pound and the auditor tests whether the error rate in the population is less than a certain amount typically setting the sample size so that the discovery of zero errors provides the appropriate level of confidence that the chosen error rate is not exceeded

Monetary unit sampling

Operational difficulties with monetary unit sampling include i) The setting of the link between error and misstatement (a conservative approach is to assume all errors are 100% errors) ii) What to do when the sample does uncover errors (there is an extensive literature on the calculation of appropriate bounds)

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Audit sampling

There is also the problem that although MUS might work quite well for testing populations, such as accounts receivable, inventory where the primary audit concern is that they are overstated it is much less well suited to testing populations, i.e. accounts receivable, where the concern is that items have been omitted

Audit sampling

Aggregation is also problematic both from a technical and practical perspective. Combining ‘bounds’ derived from testing separate sub-populations is a technical problem within MUS – and in real life it may well be that errors across these sub- populations are not independent

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Audit sampling

For example the DTI report into the Leasco takeover of Pergamon identified a number of separate mechanisms whereby the Pergamon profits were overstated – not all of these were material in themselves but taken together they contributed to a material overstatement of income

Audit sampling

These included: • write backs of previous obsolescence provisions for stock • classification of overseas stock at cost not net realisable value • failure to provide adequately for returns, • inappropriate early income recognition • inadequate provisions for bad debts • inappropriate classification of expense items as assets

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Audit sampling

A more general issue is that many of the issues which are of key significance in making audit judgements are not those which are amenable to discovery or solution by means of sample based audit testing

Audit sampling

For example Andersen were well aware of the majority of issues associated with the Enron financial statements including • The extensive use of mark to market accounting • The existence of options written by SPEs designed to support the mark to market valuations • The ‘sale’ of assets to SPEs and the recording of income and cash flow thereby • The use of ‘prepays’ (loans disguised as sales) to sustain the operating cash flow figures

– but failed to make the appropriate judgements in relation to these issues

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