Sampling and overview of the risk response phase

Audit Sampling

Required when the auditor cannot test every single entry in the financial statement

Sample of items should be representative of the population

Sampling and non-sampling risk

Sampling risk

the risk that the chosen sample is not representative of the population, and causes the auditor to arrive at an inappropriate conclusion

Implications

Auditor assessed control risk: low

Auditor assessed control risk: high

Actual control risk: low

An increased audit effort (inefficient)

Actual control risk: high

auditor assessment is correct

Actual control risk: low

Auditor assessment is correct

Actual control risk: high

an increased audit risk (ineffective)

Non - sampling risk

Any risk that doesnt involved sampling

Auditor uses inappropriate audit procedures

rely too heavily on unreliable information

fail to gather evidence on most relevant assertions

spend to little time testing high risk accounts or critical controls

Statistical and non - statistical sampling

Statistical sampling

Involved random selection of sample based off probability

Advantage - allows measurement of sampling risk

Disadvantage - can be costly to use

Non - statistical sampling

allows auditor to use judgment to select sample,
More likely to be used for low risk accounts

1. Random selection

Each item has equal chance of being selected

Can be stratified to reduce total sample size required

2. Systematic selection

Choosing event nth interval of transaction, greater risk that items on list are listed every nth way

3. Haphazard sampling

Auditor simulates random sampling by choosing items at random

4. Block Selection

Select items in a group together

5. Judgmental selection

auditor chooses accounts to sample based purely off judgement, chooses high risk or common misstated accounts

Factors to consider when selecting sample

Assess control risk (CR)

Risk increases, sample size increases

Set detection risk

Set planning materiality

Select appropriate population for testing

Define tolerable error and confidence reqired

Audit Strategy

  1. Perform risk assessment procedures and identify risks
  1. Determine audit strategy
  1. Determine planned audit approach

Understand the entity and significant risks

Materiality, timing and team assignments

Controls and substantive approaches

Test of controls

Done to determine control risk in the understanding phase

Larger sampling size is chosen when

audit needs to rely more heavily on that control

auditor expects population to have higher rate of deviation for that control

Auditor requires greater confidence the control is operating effectively

Smaller or little change in sampling size is required when

auditor is willing to tolerate higher deviation rate for that control

the sample size has more sampling units

Substantive procedures

Substantive test of transactions

Substantive tests on balances

Analytical Procedures

E.g. Confirmation

Inspecting documents

Recalculation

Estimate depreciation

compare inventory balances from this year and last year

Estimate revenue of theatre by number of seats

Sampling size

Larger sampling size is required when:

Smaller sampling size is required when

HIgh IR or CR

Auditor using other substantive procedures fo the same assertions

Auditor is willing to accept greater total error

REquire greater confidence from results

Auditor is expecting to find greater misstatements within the population

Auditor uses stratification of the population

Documentation- audit work papers

Auditor must document each stage of the audit

Provide evidence that work is completed

Permanent file

client information that applies to more than one audit

Copies of previous financial reports

Main accounting policies

Long term contracts, key personel

Currents file

Information that applies just for this audit