Audit Sampling

Audit sampling is a technique used by auditors to select a representative sample of data from a larger population to obtain reasonable assurance that the financial statements are free of material misstatements. This approach reduces the cost and time of conducting a full audit on the entire population.

Benefits of audit sampling include reducing the cost and time of the audit, providing reasonable assurance, and complying with auditing standards. In contrast, disadvantages include the risk of not detecting material misstatements and the possibility of incorrect conclusions.

• Audit sampling is a technique used by auditors to select a representative sample of data from a larger population to obtain reasonable assurance that the financial statements are free of material misstatements.
• The audit sampling process involves three main phases: planning, execution, and evaluation.
• There are two main methods of audit sampling: statistical sampling and non-statistical sampling.
• Advantages of audit sampling include reducing the cost and time of the audit, providing reasonable assurance, and complying with auditing standards. In contrast, disadvantages include the risk of not detecting material misstatements and the possibility of incorrect conclusions.

The audit sampling process involves conducting audit of financial statements in three phases - planning, execution, and evaluation.

1. In the planning phase, the auditor determines the sample size, selects the sampling method, and identifies the sample selection criteria.
2. During the execution phase, the auditor collects the data from the selected sample, analyzes it, and draws conclusions based on the results.
3. Finally, in the evaluation phase, the auditor assesses the results and determines the level of confidence that can be placed on the financial statements.

There are two main methods of audit sampling: statistical sampling and non-statistical sampling. Statistical sampling involves using probability theory to select a sample representative. Non-statistical sampling, on the other hand, involves using auditor judgment to select a sample representative of the population.

#1 - Statistical Sampling

Statistical sampling is a method that uses probability theory to select a sample that is representative of the population. First, the auditor determines the sample size and selects the sample using a random or systematic selection process. Then, the auditor calculates the sample size using statistical methods, such as a confidence level and a margin of error, to ensure that the sample is large enough to provide reasonable assurance that the results of the sample can be projected to the population.

#2 - Non-Statistical Sampling

Non-statistical sampling, on the other hand, involves using auditor judgment to select a sample representative of the population. The auditor selects items from the population based on materiality, risk, or unusual transactions. Non-statistical sampling can be further classified into haphazard sampling and block sampling. Haphazard sampling involves selecting items without any specific method, while block sampling involves selecting items in a contiguous block.

Auditors use audit sampling for several reasons, including to reduce the cost and time of conducting a full audit on the entire population, to obtain reasonable assurance that the financial statements are free of material misstatements, and to comply with auditing standards.

#1 - Efficiency

Audit sampling can help auditors to complete an audit more efficiently. For example, the auditor can select a representative sample for testing instead of examining every transaction or item in the population. This can save time and resources, especially when the population is large or complex.

#2 - Cost-Effectiveness

Conducting a full audit of a large population can be costly. Audit sampling can reduce an audit's cost by allowing the auditor to examine a smaller population subset.

#3 - Risk Management

Audit sampling helps auditors manage audit risk as it reasonably assures that the sample results represent the population. By testing a sample of transactions, the auditor can gain insight into the population and identify potential risks or errors.

#4 - Objectivity

Using statistical sampling methods gives the auditor an objective basis for selecting a sample. This can increase the reliability and credibility of the audit results.

#5 - Compliance

Auditors must often use audit sampling by professional standards, such as those set by the International Auditing and Assurance Standards Board (IAASB) and the American Institute of Certified Public Accountants (AICPA). Using audit sampling can help ensure that the audit complies with these standards.

Let us look at the following examples o understand the concept.

Example #1

Suppose a company has 10,000 transactions in a given year, and the auditor determines that a sample size of 100 is appropriate. Therefore, the auditor decides to use probability proportional to size (PPS) sampling, which involves selecting items from the population based on their size.

The auditor obtains a list of all 10,000 transactions and their dollar amounts. The auditor then calculates the sampling interval by dividing the total dollar amount of the population by the sample size. In this case, the sampling interval would be $100,000 (i.e., $10,000,000 / 100).

The auditor randomly selects the first item from the population and selects every 100th item afterward. So, for example, if the first item selected was the 47th transaction, the auditor would select every 100th transaction after that, resulting in a sample of transactions with the following item numbers: 47, 147, 247, 347, and so on, up to the 10,000th transaction.

The auditor then tests each of the transactions in the sample, looking for errors or irregularities. If errors or irregularities are found in the sample, the auditor must decide whether to expand the sample size, examine the entire population, or take other appropriate actions.

By using audit sampling, the auditor can gain a reasonable level of assurance about the accuracy and completeness of the financial statements while also saving time and resources compared to examining every transaction in the population.

Example #2

Suppose an auditor conducts an inventory count for a company with a large warehouse with thousands of products. The auditor uses haphazard sampling, randomly selecting items without any particular order.

The auditor begins by dividing the warehouse into sections, each with a similar number of products. Then he selects a random section and begins the inventory count, selecting items at random within that section until the desired sample size is reached.

For example, suppose that the auditor wants to test 50 items from the warehouse with ten sections. The auditor selects section 4 randomly and begins counting items, selecting every 10th item until 50 items have been counted. If the 50th item is not in section 4, the auditor would select another random section and continue sampling until the 50 items have been counted.

During the inventory count, the auditor would look for discrepancies between the inventory count and the actual physical count. If discrepancies are found in the sample, the auditor must decide whether to expand the sample size, examine the entire inventory, or take other appropriate actions.

By using haphazard sampling, the auditor can gain insight into the accuracy and completeness of the inventory without having to count every single item. This can save time and resources while still providing a reasonable level of assurance about the inventory.

The advantages and disadvantages of audit sampling are summarized in the following table:

This has been a guide to what is Audit Sampling. We explain the topic in detail with its methods, examples, advantage & disadvantages, and reasons. You can learn more about accounting from the following articles –

• Stratified Sampling
• Attribute Sampling
• Sampling Error Formula