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MF-0013

MF-0013

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Published by Sumit Chhugani

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Published by: Sumit Chhugani on Dec 01, 2012
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Master of Business Administration
 –
MBA Semester 3MF0013
 –
Internal Audit and Control
 –
4 Credits(Book ID: B1211)Assignment Set
 –
1 (60 Marks)Q.1 Explain the use of Sampling technique in Internal audit [SA500].
Ans:- Use of Sampling Techniques in Internal Audit SA500:-
„Audit Evidence
issued by the Institutes of Chartered Accountant of India says:
“The audit evidence should, in total, enable the auditor to form an opinion on the financial
information. In forming such an opinion, the auditor does not normally examine all theinformation that is available to him because he can reach a conclusion about an account balance,
class of transactions or a control by way of judgmental or statistical sampling procedures.”
 Statistical sampling technique is a well accepted audit techniques now-a-days. Statistical samplingin auditing means forming an opinion about a group of items on the basis of examination of a fewof the items. Statistical sampling technique add scientific flavor to old, generally accepted by
auditing professional, of „test checking
. Statistical sampling techniques are based on theprobability theory.
The Institute of Chartered Accountants of India has issued SA 530: “Audit sampling” which is
mandatory in nature and applicable
to all kinds of audit.” The following is the text of SA 530
modified as per our requirement:
Introduction
1. The purpose of this standard is to establish standards on the design and selection of an auditsample and the evaluation of the sample results. This standard applies to statistical and non-statistical sampling methods. Either method, when properly, applied can provide sufficientappropriate evidence.2. When using either statistical or non statistical sampling methods, the auditor should design andselect an audit sample. Perform audit procedures thereon, and evaluate sample results so as toprovide sufficient appropriate audit evidence.3. Auditing sampling means the application of audit procedure to less than 100% of an item withinan account balance or class of transactions to enable the auditor to obtain and evaluate auditevidence about some characteristics of the items selected in order to form or assist in forming aconclusion concerning the population.4. It is important to recognize that certain testing procedures do not come within the definition of sampling. Tests performed on 100% of the items within a population do not involve sampling,
 
likewise, applying audit procedures to all items within a population which have a particularcharacteristics (for example all items over a certain amount) does not qualify as audit samplingwith respect to the portion of the population examined, nor with regard to the population as awhole, since the items were not selected from the total population on a basis that was expectedto be representative.
Design of the sample
5. When designing an audit sample, the auditor should consider the specific audit objectives, thepopulation from which the auditor wishes to sample, and the sample size.
 Audit objectives
6. The auditor would first consider the specific audit objectives to be achieved and the auditprocedures which are likely to best achieve those objectives. Consideration of the nature of theaudit evidence sought and possible error conditions or other characteristics relating to that auditevidence will assist the auditor in defining what constitutes an error and what population to usefor sampling. For example, when performing tests of control over an entity
s purchasingprocedures, the auditor will be concerned with matters such as whether an invoice was clericallychecked and properly approved on the other hand, when performing substantive procedures oninvoice processed during the period, the auditor will be concerned with matters such as theproper reflection of the monetary amounts of such invoices in the financial statements.
Population
7. The population is the entire set of data from which the auditor wishes to sample in order toreach a conclusion. The auditor will need to determine that the population from which the sampleis drawn is appropriate to the specific objective. For example, if the auditors objective were totest for overstatement of accounts receivable, the population could be defined as the accountsreceivable listing, on the other hand, when testing for understatement of accounts payable, thepopulation would not be accounts payable listing, but rather subsequent disbursements, unpaidinvoices, suppliers
statements, unmatched receiving reports or other populations that wouldprovide audit evidence of understatement of accounts payable.8. The individual items that make up the population are known as sampling units. The populationcan be provided into sampling units in a variety of ways, for example, if the auditor
s objectiveswere to test the validity of accounts receivable, the Sampling unit could be defined as customerbalance or individual customer invoices. The auditor defines the sampling unit in order to obtainan efficient and effective sample to achieve the particular audit objectives.
Stratification
9. To assist in the efficient and effective design of the sample stratification may be appropriate.Stratification is the process of dividing a population into sub population, each of which is a groupof sampling units, which have similar characteristics (often monetary value). The strata need to beexplicitly defined so that each sampling unit can belong to only one stratum. This process reduces
 
the variability of the items within each stratum. Stratification therefore, enables the auditor todirect audit efforts towards the items which for example, contain the greatest potential monetaryerror. For example, the auditor may direct attention to larger value items for accounts receivableto detect overstated material mis-statements. In addition, stratification may result in a smallersample size.
Sample size
10. When determining the sample size, the auditor should consider sampling risk, the tolerableerror, and the expected error. Examples of some factors affecting sample size are contained.
Sampling risk 
11. Sampling risk arises from the possibility that the auditor
s conclusion, based on a sample,may be different from the conclusion that would be reached if the entire population weresubjected to the same audit procedure.12. The auditor is faced with sampling risk in both tests of control and substantive procedures asfollows:(a)
Tests of Control:
i) Risk of Under Reliance: The risk that, although the sample result does not supports the auditorsassessment of control risk, the actual compliance rate would support such an assessment.ii) Risk of Over Reliance: The risk that, although the sample result supports the auditor
’s
assessment to control risk, the actual compliance rate would not support such an assessment.(b)
Substantive Procedures:
i)
Risk of Incorrect Rejection:
The risk that, although the sample result supports the conclusionthat a recorded account balance or class of transactions is materially mis-stated, in fact it is notmaterially mis-stated.ii)
Risk of Incorrect Acceptance:
The risk that, although the sample result supports the conclusionthat a recorded account balance or class of transactions is not materially mis-stated, in fact it ismaterially mis-stated.13. The risk of under reliance and the risk of incorrect rejection affect audit efficiency as theywould ordinarily lead to additional work being performed by the auditor, or the entity, whichwould establish that the initial conclusions were incorrect. The risk of over reliance and the risk of incorrect acceptance affect audit effectiveness and are more likely to lead to an erroneousopinion on the financial statements that either the risk of under reliance or the risk of incorrectrejection.14. Sample size is affected by the level of sampling risk the auditor is willing to accept from theresults of the sample. The lower the risk the auditor is willing to accept, the greater the sample

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