Question

One of the partners at your firm has asked you to develop an office training presentation to familiarize your audit team with sampling models that can be used for auditing monetary balances. The partner wants you to include the following information in your presentation:

The relationship of sample sizes to population sizes.

Estimated population exception rate.

The acceptable guidelines for establishing tolerable misstatement.

Answer 1

Hey there,

We first need to understand what is audit sampling.

We can define Audit sampling as 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.

There are two general approaches to audit sampling: Non statistical and Statistical.

There are many methods of selecting a sample, but it considers five principal methods of audit sampling as follows :

• Random selection
• Systematic selection
• Monetary unit sampling
• Haphazard selection, and
• Block selection

Random selection

This method of sampling ensures that all items within a population stand an equal chance of selection by the use of random number tables or random number generators.

Systematic selection

The method divides the number of sampling units within a population into the sample size to generate a sampling interval.

Monetary unit sampling

The method of sampling is a value-weighted selection whereby sample size, selection and evaluation will result in a conclusion in monetary amounts.

Haphazard sampling

When the auditor uses this method of sampling, he does so without following a structured technique. Care must be taken by the auditor to avoid any conscious bias or predictability.

Block selection

This method of sampling involves selecting a block (or blocks) of contiguous items from within a population. Block selection is rarely used in modern auditing merely because valid references cannot be made beyond the period or block examined.

Relationship of Sample Sizes to Population sizes :

The size of a sample necessary to provide sufficient evidential matter depends on both the objectives and the efficiency of the sample. For a given objective, the efficiency of the sample relates to its design; one sample is more efficient than another if it can achieve the same objectives with a smaller sample size. In general, careful design can produce more efficient samples.

It is important to understand that some procedures that the auditor may adopt do not involve audit sampling, 100% testing of items within a population, for example. Auditors may deem 100% testing appropriate where there are a small number of high value items that make up a population, or when there is a significant risk of material misstatement and other audit procedures will not provide sufficient appropriate audit evidence.

Estimated Population Exception Rate (EPER) – Exception rate that the auditor expects to find in the population before testing begins. It is necessary to plan the appropriate sample size.

Acceptable guidelines for establishing tolerable misstatements :

A tolerable misstatement is the amount by which a financial statement line item can differ from its true amount without impacting the fair presentation of the entire financial statements.

The tolerable misstatement that an auditor allows is a judgment call, based on the proportion of planning materiality for an audit. If the perceived risk level is high, the tolerable misstatement will be a smaller percentage of the planning materiality, such as 10-20%. Conversely, if the perceived risk level is low, the tolerable misstatement can be a much higher percentage of the planning materiality, such as 70-90%.

The hope this in depth explanation is clear to you. Do let me know f you have any concerns...i'll be happy to help....All the best :)