Question

Audit sampling involves applying an audit procedure to less than 100 percent of the population for
the purpose of evaluating some characteristic of the population. The fact that an audit involves
sampling is noted in the scope paragraph of the auditor’s report, which contains the phrase “An
audit includes examining, on a test basis.” When an auditor uses sampling, an element of
uncertainty enters into the auditor’s conclusions.
Required:
a) Explain why auditor’s still use sampling techniques despite the uncertainties that are
inherent in audit conclusions drawn on samples.
b) As an auditor what will be your justification for using statistical sampling instead of nonstatistical sampling in auditing account receivables. Give three justifications
c) Outline five quality control procedures the auditor may implement to ensure that the
auditors work is of standards.
d) You overheard the following comments during a conversation between Auditor Kaakaba
and Auditor Kasanga about a specific sampling application.
i. “Using non-statistical sampling is so much easier than using statistical sampling.
Statistical sampling requires far too many judgments. Under non-statistical
sampling, I can just pick items, evaluate them, and make my decision.”
ii. “I wish non-statistical sampling were allowable in generally accepted auditing
standards audits. In some cases, the additional time required by statistical sampling
just isn’t worth the benefits.”
iii. “Once we control the sampling risk, we’re home free. Assuming we select a
representative sample, there’s nothing else that we need to worry about.”
iv. “Be careful if you try to set sampling risk at too low a level. You will need to select
more items, which will increase the amount of audit time.”
v. “Those transactions with Wimbey are always so difficult to audit. Let’s exclude
them from our sampling frame. We can pick other items and have a sufficiently
large sample to meet generally accepted auditing standards.”
vi. “I’m about to perform a walkthrough on Flushing’s processing of sales transactions
to understand their nature. What level of sampling risk should I consider in planning
my sample of transactions?”
Required:
With reference to appropriate professional standards and practices state whether each of the
above statements is valid or not a valid and why you think so. Your responds must be very
brief.
e) The following is a set of situations that may or may not involve sampling.
1. An auditor is examining loan receivables at a local bank. The population of loans
contains two strata. One stratum is composed of 25 loans that are each greater than
$1 million. The second stratum contains 450 loans that are less than $1 million. The
auditor has decided to test all loans greater than $1 million and 15 loans less than $1
million.
2. Assume the same facts as number 1 except that the auditor decides to apply
analytical procedures to the second stratum of loans.
3. An auditor has haphazardly selected 30 sales invoices to be examined for proper
pricing of the goods purchased by the customer.
4. The prepaid insurance account is made up of four policies that total $45,000. The
auditor has decided that this account is immaterial and decides that no policies will
be examined.
Required:
Indicate whether each of the above situations involve no audit sampling, statistical sampling, or
non- statistical sampling and why you think so.

That is all

Answer 1

a) Auditors still use sampling techniques to-

i) Collect audit evidences for framing an audit opinion

ii) Detect any material misstatements caused by any fraud or error

iii) Act as a tool for any further investigations

iv) Serve as documentation that the auditors have performed their duties as per the relevant auditing standards

b) Reasons for statistical sampling-

i) Under statistical sampling, items are selected from the total population on the basis of some statistical methods like probabilities technique.

ii) Statistical sampling is unbiased and free from any personal judgement of the auditor because every item has the same & equal opportunity of getting selected randomly from the total population for the purpose of verification.

iii) Conclusion is derived on the basis of the result of the testing performed.

c) Five quality control procedures

i) Independence, Objectivity & Integrity

ii) Personnel management

iii) Acceptance & continuance of clients and engagements

iv) Engagement performance

v) Monitoring

d) i) NOT VALID, because non-statistical sampling is completely dependent upon the judgement up of the auditor.

ii) VALID, because sometimes in case of a small population size, it would not be prudent to devote extra time for setting up a statistical sample.

iii) NOT VALID, because apart from sampling risk, there are many other risks for whom an auditor has to worry about like control risk, detection risk etc.

iv) VALID, because higher the number of items, lesser are the sampling risk and vice-versa which obviously consumes auditor's time and resources

v) NOT VALID, because the purpose of audit is to frame an independent audit opinion which is representative of the whole population, without excluding anything.

vi) The level of sampling risk should be low