Why audit is based on sampling?
DefinitionAudit sampling is defined as the application of an audit procedure to less than 100% within a population of the audit. Population refers to any group of records or documents in the audit relevance that belongs in a specific category. Show Audit sampling is usually performed in a way that all sampling units in the population have a chance of selection in order to provide us with a reasonable basis on which to make conclusions about the entire population. It is impossible to review every record of the client. Hence, auditors need to determine how many records they should look at and what kind of records are more important to examine. This is where the audit sampling comes in to play an important role as auditors need to determine what is their sample of the records and documents to review. Purposes of Audit SamplingAuditors usually perform the audit sampling on both the test of controls and substantive audit procedures. In the test of controls, auditors use the sampling method to evaluate whether the client’s internal controls work effectively. In substantive audit procedures, they use the sampling method to estimate the amount of misstatement in an account balance. Also, auditors usually design audit sampling that provides them a reasonable basis to draw conclusions about the population from which the sample is selected. Hence, it saves them a lot of time and effort comparing to auditing the entire population of an account balance. Usually, in an applicable auditing standard, e.g. in ISA 530, auditors need to follow the audit sampling guideline, so performing audit sampling can be considered as a basis of compliance with the required auditing standard. Moreover, the audit sampling method is usually used when auditors want to make an investigation on a specific matter that comes up when performing the audit work. In summary, purposes of audit sampling include:
2 Types of Audit SamplingStatistical audit sampling and non-statistical audit sampling are the two common approaches of audit sampling. Both statistical and non-statistical audit sampling can provide auditors a reasonable basis to draw conclusions on the population in order to form an audit opinion. Either approach of audit sampling can provide auditors sufficient audit evidence when applied properly. Statistical Audit SamplingStatistical audit sampling is the sampling method that involves the application of probability theory and statistical inference. Auditors usually statistical sampling along with their professional judgment to assist them in deciding an appropriate sample size and evaluating the sample result. Auditors usually apply statistical sampling by using tables or formulas to compute the sample size they need to select. It allows them to control and measure the risk of making an incorrect inference about the population from which the sample is taken. In statistical sampling, each item in the population has a calculable chance of being selected as a sample to be examined. A commonly held misconception about statistical sampling is that it removes the need for auditors’ professional judgment. However, this is not true because before the sample size can be determined, auditors need to use their professional judgment to consider many factors such as materiality, the expected error rate or amount, the risk of over-reliance or the risk of incorrect acceptance, audit risk, inherent risk, control risk, standard deviation, and population size. For example, auditors have 500 items in the population and need to select a sample to examine. In statistical sampling, after using their professional judgment to consider the above factors, auditors determine to have 10% as the sample sizes which are 50 items. In this case, they may select 50 items randomly from the population or they may decide to select items from a fixed interval from the first item to the second item and onward. Hence, any item among the 500 has a chance to be selected. Non-Statistical Audit SamplingNon-statistical audit sampling is the sampling method that auditors do not rely on the application of probability theory or statistical inference. Also, they do not use tables, formulas, or statistical percentages to compute the sample size. Instead, auditors rely solely on their professional judgment in determining the sample size and selecting the items to sample. The number of records or items they select for examination will be based on their professional judgment and experiences as well as the policy in their firm. It is useful to note that if auditors use non-statistical sampling to determine the sample size and select the sample to test, the sampling risk cannot be measured or controlled. Also, each item in the population does not have an equal chance to be selected into the sample at all. For example, the firm policy may state that if the control risk is high, auditors need to select from 100 to 150 records. If control risk is moderate, they may select from 50 to 100 records and if the control risk is low, they can select from 20 to 50 records to be examined. However, this is just an example; in many cases, the policy in the firm is usually just a guideline and the different number of records may be selected based on auditors’ professional judgment. Auditors’ decisions are based on many factors such as inherent risks, control risks, audit risks, and population size, etc. 5 Types of Sampling MethodsThe five types of sampling methods include random selection, systematic selection, monetary unit sampling, haphazard sampling, and block selection.
What does sampling mean in audit?01 Audit sampling is the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.
Is audit sampling required?Audit sampling is needed when population sizes are large, since examining the entire population would be highly inefficient. There are multiple ways to engage in audit sampling, including the methods noted below.
Why do auditors sample instead of examining every transaction?Sampling is performed because it is more efficient than testing 100% of a population. In tax audits, if the taxpayer and the Department can agree on a representative sample, it can save both parties time and money. By definition, any procedure that does not examine 100% of the items in question is a sampling procedure.
Is audit a sampling activity?Audit sampling can be applied using either non-statistical or statistical sampling approaches. Statistical sampling is an approach to sampling that has the random selection of the sample items; and the use of probability theory to evaluate sample results, including measurement of sampling risk characteristics.
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