What is audit sampling?
Audit sampling refers to the procedure to less than 100% of the total population of items and an individual item in the population has the same opportunity to be selected. Audit sampling help auditor to have the principle to make a conclusion on the total population.
That means by using an audit sampling technique, auditors could make a conclusion on the total population based on the result of selected items.
In other words, auditors do not need to review all the items in the population to make a conclusion. Auditors still meet its objective with fewer works to perform.
However, if the sampling technique or procedure is incorrectly used or apply, the result of audit sampling does not actually represent the total population and auditors might have come to the conclusion that is not correct.
This is how sampling risk has happened.
ISA 530 Audit sampling that covers that audit sampling, sampling technique, and sampling risks.
We recommend reviewing this standard to get a full understanding related to audit sampling. Or you can check this article.
Now before we go to sampling risks, let us summary the audit risks so that you can have a clear picture of sampling risks.
Audit risks are the risks that auditor makes the incorrect conclusion and express the incorrect audit opinion on the financial statements.
For example, the auditor expresses the unqualified opinion to the financial statements that contain material misstatements.
Audit risks are the combination of three different risks including inherent risks, control risks, and detection. You might want to check this article for detail.
Sampling risks are the risks that make by auditors and it is part of detection risks.
If the auditor does not get fully understand the nature of transactions or events of the population, the auditor might design incorrect audit sampling or fail to apply the right sampling method.
This will result in increase sampling risks and subsequently audit risks.
Sampling Risks Vs Non-Sampling Risks:
Sampling risks refer to the risks that arise from the possibility that the auditor’s conclusion, based on a sample, may be different from the conclusion if the entire population was subjected to the same audit procedure.
For example, the sample that auditors decided to select is not large enough to be the population-representative and the result of testing from those sampling will lead the auditor to make the wrong conclusion.
For example, auditors test the control of issuing invoices by randomly select 20 invoices and found that five invoices (20%) were incorrectly issued. They conclude that this system is not effectively run.
However, another selection is 1,000 and found that 5 invoices were incorrectly issued. This is how sampling risk affects the conclusion.
The risk can affect both the control test and the substantive test. The control might conclude more effective or less effective than the actual.
Transactions, events, or account balance might also conclude by auditors as materially misstated or immaterially misstated while the actual is different.
Non-sampling risk arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the sampling risk.
For example, most audit evidence is persuasive rather than conclusive, the auditor might use inappropriate procedures, or the auditor might misinterpret evidence and fail to recognize an error.
Audit sampling is the application of audit procedures to less than 100% of the total population and all the items in the population have the same chance to be selected.
This is to ensure that the items selected represent the total population which enables auditors to draw their conclusion and express their opinion based on their predetermined objective.
Audit sampling is really important because it doesn’t only help auditors to gather sufficient and appropriate audit evidence to draw the audit’s opinion, but also plays a very important part in the audit’s works’ efficiency and effectiveness. That mean auditor is not required to check 100% of object or items to let them express their opinion.
To ensure that the selected items could represent the total population, the selection process and methods should not involve too much from human judgments and should be avoiding bias from auditors.
They only perform their review and verification on the selected items and then express their opinion on the entire population. In general, audit sampling can be performed in two different types.
First, statistical and second is a non-statistical sampling. These two types of sampling contain many other methods which will be discussed in detail in this article.
Now, before explaining the types of audit sampling and methods of audit sampling, let start with the purpose and objective of audit sampling.
Here they are,
Objectives And Purpose of Audit Sampling:
Audit sampling is a very important part of audit works. No matter it is a financial audit, internal audit and other kinds of audit, audit sampling still needs to be used by auditors. Audit sampling also part of the audit standards requirements and it could help auditors to meet their objective with less effort.
The following are the purposes and objectives of audit sampling:
- To gather audit evidence in order to conclude audit opinion.
- To reduce the works yet audit yet still help audit to reach its conclusion.
- To provide the basis for the auditor to conclusion audit opinion.
- To detect any kind of error or fraud that could happen in the company as well as financial statements.
- To prove auditors have done their jobs base on the required auditing standards.
- Use as a tool for investigations.
Two Types of Audit Sampling:
Statistic audit sampling:
Statistic audit sampling is the sampling approach where auditor uses random sampling to select the items from the total population use the probabilities technique to measure the result of the testing and make a conclusion.
Using statistical sampling is very important to help the auditor to manage and control the audit’s risk. This because statistics, we use data and probabilities to select the items from the total population and those data are not prejudged and unbiased by auditors.
This statistic sampling normally performs where the total population is more than 100 items. Based on experiences, there are many different tools available in the market that we use could use to perform audit sampling. And, if you don’t have the tool, you can use the function in excel instead of software.
For example, auditors verifying the addition of the fixed asset during the year and the total purchase transactions are more than 100 items. You are an auditor and is assigning to perform testing on fixed assets addition. Statistical sampling is highly recommended in the audit program. And random sampling is the method you decided to use.
In the statistical sampling, you can consider select 10 items from the total population randomly or you can set internal every item that reaches the interval set. That means every item among 100 items has the same chance to be selected for verification. Once you completed your testing, and got the result and then make a conclusion base on the result.
So, this is how statistical sampling looks like and how it is using. The two important things you need to remember about statistical sampling are the items are selected randomly and the conclusion is made based on the result of testing. If either of these two things is not meet, then the sampling is called non-statistic.
Non-statistic audit sampling:
Non-statistical sampling, by the way, is different from the statistic. Based on the theory from ISA, any method that not mean the criteria of the statistic is non-statistic. That means you have to be very clear and understand well about statistic audit sampling. There are two important things that you can use to identify whether the sampling is systematic or not.
The first one is the selection of data or items are not random. That means the selections are based on judgment. Second, the result of testing from that selections is not using to conclude for the nature of the entire population.
The auditor might not use statistic audit sampling to select items for testing. Instead, they might select the items based on
- Value of items, for example, the top ten highest value.
- Select the items that higher than a certain amount or value. For example, any items higher than 200,000 USD.
- Items that contain information or data they want to assess. For example, any purchasing transactions from supplier name Dalata Ltd.
These methods of sampling are called non-statistic.
Okay, now let talk about the types of sample methods that we normally use to perform audit testing
Five Methods of Audit Sampling Selection:
- Random selection: it is the type of sampling that provides an equal opportunity to all items or units in the total population. This kind of selection could use in excel or other generating tools.
- Systematic selection: involves selecting items using a constant interval between selections, the first interval having a random start. When using systematic selection, auditors must ensure that the population does not structure in such a manner that the sampling interval corresponds with a particular pattern in the population.
- Haphazard: selection may be an alternative to the random selection provided auditors satisfy that the sample is representative of the entire population. This method requires care to guard against making a selection that is biased, for example towards items that are easily located, as they may not be representative. It should not be used if auditors are carrying out statistical sampling.
- Block selection: maybe use to check whether certain items have particular characteristics. For example, an auditor may use a sample of 50 consecutive cheques to test whether cheques are signed by authorized signatories rather than picking 50 single cheques throughout the year. Block sampling may; however, produce samples that are not representative of the population as a whole, particularly if errors only occurred during a certain part of the period, and hence the errors found cannot be projected onto the rest of the population.
- Monetary Unit Sampling is a type of value-weighted selection in which sample size, selection, and the evaluation result in a conclusion in monetary amounts. Monetary unit sampling is a kind of systematic audit sampling.