Question

1. What are other sampling considerations mentioned in PSA 530?

2. When is projection necessary?

3. Discuss the following projection techniques:

a. Difference estimation
b. Ratio estimation
c. Mean-per-unit estimation

4. What is probability-proportional-to-size (PPS) sampling?

Answer 1

Answer : Question 1:

Sampling Considerations Mentioned in PSA 530

Philippine Standards on Auditing (PSAs) are to be applied in the audit of financial statements. PSAs are also to be applied, adapted as necessary, to the audit of other
information and to related services. PSAs contain the basic principles and essential procedures (identified in bold type black lettering) together with related guidance in the form of explanatory and other material. The basic principles and essential procedures are to be interpreted in the context of the explanatory and other material that provide guidance for their application.
To understand and apply the basic principles and essential procedures together with the related guidance, it is necessary to consider the whole text of the PSA including explanatory and other material contained in the PSA not just that text which is black lettered.
In exceptional circumstances, an auditor may judge it necessary to depart from a PSA in order to more effectively achieve the objective of an audit. When such a situation arises, the auditor should be prepared to justify the departure. PSAs need only be applied to material matters.

The PSAs issued by the Auditing Standards and Practices Council (Council) are based on International Standards on Auditing (ISAs) issued by the International Auditing
Practices Committee of the International Federation of Accountants. The ISAs on which the PSAs are based are generally applicable to the public sector,
including government business enterprises. However, the applicability of the equivalent PSAs on Philippine public sector entities has not been addressed by the
Council. It is the understanding of the Council that this matter will be addressed by the Commission on Audit itself in due course. Accordingly, the Public Sector Perspective set out at the end of an ISA has not been adopted into the PSAs.

“Audit sampling” (sampling) involves the application of audit procedures to less than 100% of items within an account balance or class of transactions such that all sampling units have a chance of selection. This will enable the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in order to form or assist in forming a conclusion concerning the population from which the sample is drawn. Audit sampling can use either a statistical or a non-statistical approach.

For purposes of this PSA, “error” means either control deviations, when performing tests of control, or misstatements, when performing substantive procedures. Similarly, total error is used to mean either the rate of deviation or total misstatement.

“Anomalous error” means an error that arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of errors in the population.

“Population” means the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions. For example, all of the items in an account balance or a class of transactions constitute a population. A population may be divided into strata, or sub-populations, with each stratum being examined separately. The term population is used to include the term stratum.

“Sampling risk” arises from the possibility that the auditor’s conclusion, based on a sample may be different from the conclusion reached if the entire population were subjected to the same audit procedure. There are two types of sampling risk:

(a) the risk the auditor will conclude, in the case of a test of control, that control risk is lower than it actually is, or in the case of a substantive test, that a material error does not exist when in fact it does. This type of risk affects audit effectiveness and is more likely to lead to an inappropriate audit opinion; and

(b) the risk the auditor will conclude, in the case of a test of control, that control risk is higher than it actually is, or in the case of a substantive test,that a material error exists when in fact it does not. This type of risk affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect. The mathematical complements of these risks are termed confidence levels.

“Non-sampling risk” arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the size of the sample. 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.

“Sampling unit” means the individual items constituting a population, for example checks listed on deposit slips, credit entries on bank statements, sales invoices or debtors’ balances, or a monetary unit.

“Statistical sampling” means any approach to sampling that has the following characteristics:

(a) random selection of a sample; and

(b) use of probability theory to evaluate sample results, including measurement of sampling risk. A sampling approach that does not have characteristics (a) and (b) is considered non-statistical sampling.

“Stratification” is the process of dividing a population into subpopulations, each of which is a group of sampling units which have similar characteristics (often monetary value).

“Tolerable error” means the maximum error in a population that the auditor is willing to accept.

Audit Evidence

In accordance with PSA 500 “Audit Evidence”, audit evidence is obtained from an appropriate mix of tests of control and substantive procedures. The type of test to be performed is important to an understanding of the application of audit procedures in gathering audit evidence.

In accordance with PSA 400 “Risk Assessments and Internal Control” tests of control are performed if the auditor plans to assess control risk less than high for a particular assertion.

Based on the auditor’s understanding of the accounting and internal control systems, the auditor identifies the characteristics or attributes that indicate performance of a control, as well as possible deviation conditions which indicate departures from adequate performance. The presence or absence of attributes can then be tested by the auditor.

Audit sampling for tests of control is generally appropriate when application of the control leaves evidence of performance (for example, initials of the credit manager on a sales invoice indicating credit approval, or evidence of authorization of data input to a microcomputer based data processing system).

Substantive Procedures

Substantive procedures are concerned with amounts and are of two types: analytical procedures and tests of details of transactions and balances. The purpose of substantive procedures is to obtain audit evidence to detect material misstatements in the financial statements. When performing substantive tests of details, audit sampling and other means of selecting items for testing and gathering audit evidence may be used to verify one or more assertions about a financial statement amount (for example, the existence of accounts receivable), or to make an independent estimate of some amount (for example, the value of obsolete inventories).

Risk Considerations in Obtaining Evidence

In obtaining evidence, the auditor should use professional judgment to assess audit risk and design audit procedures to ensure this risk is reduced to an acceptably low level.

Audit risk is the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. Audit risk consists of inherent risk – the susceptibility of an account balance to material misstatement, assuming there are no related internal controls; control risk – the risk that a material misstatement will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems; and, detection risk – the risk that the material misstatements will not be detected by the auditor’s substantive procedures. These three components of audit risk are considered during the planning process in the design of audit procedures in order to reduce audit risk to an acceptably low level.

Sampling risk and non-sampling risk can affect the components of audit risk. For example, when performing tests of control, the auditor may find no errors in a sample and conclude that control risk is low, when the rate of error in the population is, in fact, unacceptably high (sampling risk). Or there may be errors in the sample which the auditor fails to recognize (non-sampling risk). With respect to substantive procedures, the auditor may use a variety of methods to reduce detection risk to an acceptable level. Depending on their nature, these methods will be subject to sampling and/or non-sampling risks. For example, the auditor may choose an inappropriate analytical procedure (non-sampling risk) or may find only minor misstatements in a test of details when, in fact, the population misstatement is greater than the tolerable amount (sampling risk). For both tests of control and substantive tests, sampling risk can be reduced by increasing sample size, while non-sampling risk can be reduced by proper engagement planning, supervision, and review.

Procedures for Obtaining Evidence

Procedures for obtaining audit evidence include inspection, observation, inquiry and confirmation, computation and analytical procedures. The choice of appropriate procedures is a matter of professional judgment in the circumstances. Application of these procedures will often involve the selection of items for testing from a population.

Selecting Items for Testing to Gather Audit Evidence

When designing audit procedures, the auditor should determine appropriate means of selecting items for testing. The means available to the auditor are:

(a) Selecting all items (100% examination);

(b) Selecting specific items, and

(C)Audit sampling