Question

Olivia Kirtley is an internal auditor in a small manufacturing company’s internal audit function. She recently completed a continuing professional education (CPE) course on statistical sampling. She applied her newly gained knowledge in the audit she is assigned. She used attribute sampling when she performed the test of controls over the company’s procurement transactions.

Olivia figured that a tolerable deviation rate of 10 percent and a 5 percent risk of assessing control risk too low were appropriate for the tests she planned to perform. She had no idea how many deviations actually might exist in the population, so she set the expected deviation rate at 2 percent to be conservative. Olivia selected a sample of 100 items.

Because Olivia believed larger items deserved more attention than smaller items, she selected 75 items with values greater than or equal to $2,500 and 25 items with values less than$2,500. She thought it would be most appropriate to select transactions near the end of the fiscal year, so she randomly selected items for testing from the last two months.

Olivia was relieved when she found only six deviations from prescribed controls. One deviation was a missing vendor’s invoice, so Olivia called the vendor to make sure the transaction was in fact valid. Three deviations were missing signatures by an authorized manager. The manager explained that he had not approved the invoices because he had been out of the office on the date the invoices were prepared. He reviewed the invoices and told Olivia there were no problems with them. The other two deviations involved dollar errors. One was an error in the extension of an invoice, and the other was a mis-classification error between expenses, which did not affect net income. Olivia considered these two dollar errors to be the only two actual control deviations. She determined that the achieved upper deviation limit was 7 percent at a 5 percent risk of assessing control risk too low.

Based on these results, Olivia concluded that procurement transactions for the year were unlikely to contain more deviations than the allowable rate. Accordingly, she concluded that controls over procurement transactions were effective and could be relied on management.

identify and explain any deficiencies you note in Olivia’s attribute sampling application.

Answer 1

Audit Sampling:- Audit sampling means application of audit process for less than 100% of items within a population of Audit relevance such that all sampling units have a chance of selection in order to provide the Auditor the reasonable basis on which to draw conclusion about the entire population.

The auditor should select sample in such a way that sample can be representative of the population. This requires that all the items in population should have opportunity to be selected.

There are two major methods for selection of sample:-

1. Statistical sampling:- Scientific Basis
2. Non statistical sampling:- Based on personal judgment

Other methods are Random selection, Haphazard selection, Block selection, monetary unit selection, Systematic selection

Sampling Risk can lead to two types of erroneous conclusions:-

1. In the case of test of control, that control are more effective than they actually are, or in the case of test of details, that a material misstatement does not exist when in fact it does. The auditor is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely to an inappropriate audit opinion.
2. In the case of test of control, that control are less effective than they actually are, or in the case of test of details, that a material misstatement exist when in fact it does not. This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish that initial conclusion was incorrect.

In the instant case following errors were taken:-

1. Choosing very small time period i.e. two months than total population of twelve month.
2. Again from two months only 100 items chosen.
3. Missing invoices and unauthorized transaction are indication of probable big fraud hence these should not be checked on sample basis. These are real control deviations.
4. Inexperienced decision taken too early. Need to be consult with seniors