Selecting the items for audit testing
Auditors do not normally examine all the
information available to them, as it would be impractical to do so. Auditors
may select items for testing by following means:
(a) Selecting all items (100% examination).
(b)
Selecting specific items; and
(c) Audit sampling.
The application of any one or combination of
these means depends on the particular circumstances, for example, the risks of
material misstatement related to the assertion being tested, and the
practicality and efficiency of the different means.
Selecting all items
Auditors are unlikely to test 100% of tests of
controls; however, it is more common for tests of details. 100% examination may
be appropriate when, for example:
● The
population constitutes a small number of large value items.
● There is a significant risk and other means
do not provide sufficient appropriate audit evidence; or
● The
repetitive nature of a calculation or other process performed automatically by an
information system makes a 100% examination cost effective.
Selecting Specific Items
In making this decision, factors that may be relevant include the auditor’s understanding of the entity, the assessed risks of material misstatement, and the characteristics of the population being tested. Specific items selected may comprise:
· High value or key items. (Items of high value, or items that are suspicious, unusual, particularly risk-prone or that have a history of error).
· All items over a certain amount (items whose recorded values exceed a certain amount so as to verify a large proportion of the total amount of a class of transactions or account balance).
· Items to obtain information (about matters such as the nature of the entity, or the nature of transactions)
Despite selective examination of specific items
from a class of transactions or account balance is an efficient means of
obtaining audit evidence, it does not constitute audit sampling. The results of
audit procedures applied to items selected in this way cannot be projected to
the entire population.
Auditors use audit sampling to obtain audit
evidence concerning the remainder of the population.
Audit
sampling
Audit
sampling is one
of the means of selected items for testing.
Audit sampling
is designed to enable the auditor to draw conclusions about an entire
population, on the basis of testing a sample drawn from it.
Audit
sampling (sampling) is the application of audit procedures to less than 100% of
items within a population of audit relevance such that all sampling units have
a chance of selection in order to provide the auditor with a reasonable basis
on which to draw conclusions about the entire population.
Population
– The entire set of data from which a sample is selected and about which the
auditor wishes to draw conclusions.
Audit
sampling can be performed using either statistical sampling or non-statistical
sampling methods.
Statistical
sampling – An approach to sampling that has the following characteristics:
(i)
Random
selection of the sample items; and
(ii) The use of probability theory to evaluate
sample results, including measurement of sampling risk.
A sampling
approach that does not have characteristics (i) and (ii) is considered
non-statistical sampling.
The
principal methods of selecting samples are presented in the table below:
|
Statistical
sampling |
Non-statistical
sampling |
|
Random sampling |
Haphazard sampling |
|
Systematic sampling |
Block selection |
|
Monetary unit
sampling |
|
The audit
procedures performed on the items in the sample will be the same whether statistical
or non-statistical approach is used, however extrapolation can only occur from
a statistical sample which has been selected randomly.
Sample
Design, Size, and Selection of Items for Testing
When designing an audit sample, the auditor performs the following things:
(a) Considering the purpose of the audit procedure and the characteristics of the population from which the sample will be drawn. The auditor’s consideration of the purpose of the audit procedure includes a clear understanding of what constitutes a deviation or misstatement. In considering the characteristics of a population, the auditor makes an assessment of the expected rate of deviation or misstatement in the population.
(b) Determining a sample size sufficient to reduce sampling risk to an acceptably low level. The level of sampling risk that the auditor is willing to accept affects the sample size required. The lower the risk the auditor is willing to accept, the greater the sample size will need to be.
(c) Selecting items for the sample in such a way that each sampling unit in the population has a chance to be selected. Because the purpose of sampling is to provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected, it is important that the auditor selects a representative sample, free from bias, by choosing sample items that have characteristics typical of the population.
Determining a sample size
The sample size can be determined by the
application of a statistically-based formula or through the exercise of
professional judgment.
When using a statistical approach to sampling,
the sample size could be produced using the special audit software or an excel
file with a built-in macro.
When designing a sample, the auditor determines
tolerable misstatement in order to address the risk that may cause the
financial statements to be materially misstated. Tolerable misstatement is the
application of performance materiality, to a particular sampling procedure.
Tolerable misstatement may be the same amount or an amount lower than
performance materiality.
The auditor may consider the following factors that influence the sample size for tests of details:
- An increase in the auditor’s assessment of the risk of material misstatement (sample size increases).
- An increase in the use of other substantive procedures directed at the same assertion (sample size decreases)
- An
increase in the auditor’s desired level of assurance that tolerable
misstatement is not exceeded by actual misstatement in the population (sample
size increases).
The
stages of the audit sampling process
The audit sampling process comprise the following stages:
(a) Designing an audit sample and selection items for testing
(b) Performing audit procedures
Once the sample has been selected, the auditor must perform appropriate audit procedures on each item in the sample. If the audit procedure is not applicable to the selected item, the test must be performed on a replacement item. If the auditor is unable to apply the designed audit procedures to a selected item, the auditor shall treat that item as a deviation from the prescribed control, in the case of tests of controls, or a misstatement, in the case of tests of details. An example of when the auditor is unable to apply the designed audit procedures to a selected item is when documentation relating to that item has been lost.
(c) Investigation of nature and cause of deviations and misstatements
Once the sample has been tested, the auditor must investigate the nature and cause of any deviations or misstatements found and evaluate their possible effect on the purpose of the audit procedure and on other areas of the audit. In rare cases, a deviation or misstatement may be considered an anomaly, in these cases the auditor must obtain a high degree of certainty that this is not representative of the population, by carrying out additional audit procedures.
(d) Projecting misstatements
For tests of details, the auditor shall project misstatements found in the sample onto the population to obtain a broad view of the scale of the misstatement, but this may not be enough to determine an amount to be recorded. Misstatements established as anomalies can be excluded when projecting sample errors to the population. However, the effect of any uncorrected anomalies still needs to be considered. For tests of controls, no explicit projection of errors is necessary because the sample deviation rate is also the projected deviation rate for the population as a whole.
(e) Evaluating results of audit sampling
The auditor evaluates whether the
use of audit sampling has provided a reasonable basis for conclusions about the
population that has been tested. If the audit sampling has not provided a
reasonable basis for conclusions about the population that has been tested, the
auditor may:
· Request
management to investigate misstatements and to make any necessary adjustments;
or
· Tailor the nature, timing and extent of
further audit procedures to best achieve the assurance required.
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