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Recorded on: 16-April-2013

Intermediate (IPC) Course
Paper 6 : Auditing and Assurance

Chapter 3 : Preparation for an Audit -Audit Sampling

CA .Kamal Garg

© The Institute of Chartered Accountants of India

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Podcasts and Video lectures on ICAI Cloud The lecture recordings are made Campus aim to supplement the according to the syllabus and Study Material. Material Hence. there is including Supplementary Study likely to be some time gap Material. This e-Lecture was Recorded on: Important Note April 16. Practice Manual laws existing/ applicable as on the and Supplementary Study date of recording. provisions/ amendments required for forthcoming examination. and other between these changes and the relevant legislation for latest recording of updated lectures. PPT. © ICAI. 2013 3 . students are advised to refer to the Study Material Due to changes in law. 2013 The e-Lectures. if any.

2013 .Learning Objectives Sampling and Types of sampling Test checking Techniques of test checks © ICAI.

Test checking is concerned with selecting and examining a representative sample from a large number of similar items.Key Concepts As per SA 530 on "Audit Sampling". it means the application of audit procedures to less than 100% of the items within an account balance or class of transactions to enable the auditor to obtain and evaluate audit evidence. 2013 . There is no hard and fast rule of selecting item for the test checking © ICAI.

Details): valid and accurate © ICAI. Substantive • designed to ensure that Procedures transactions processed by (Tests of accounting system are complete. 2013 . (Test of effective and efficient on a Controls): continuing basis.Audit Procedures Compliance • designed to ensure that internal Procedures control system is existing.

arithmetically correct amounts © ICAI.Elements of Substantive Procedures Completeness • i. transactions are recorded in compliance with regulatory requirements Transactions and financial reporting framework.e.e. Validity of • i. Accuracy of • i.e. transactions are recorded at Transactions. 2013 . transactions which should have been of Transactions recorded are factually being recorded.

non- recurring items. The sample selected for test checking should be representative in character and the transactions should be of homogeneous nature. if any. The system of test checking should be reviewed from time to time so that necessary improvements.Precautions before applying Sample Checking The auditor must review the system of internal controls existing in the enterprise. No element of bias should be present in selecting a sample. etc. Test checking should be avoided in case the internal control system is weak or ineffective. 2013 . for example. The auditor should identify those areas where test checking is not suitable. bank reconciliation statement. can be made. © ICAI. transactions of a seasonal industry. opening and closing entries. other areas where the compliance with the applicable law is required such as managerial remuneration under Companies Act.

Judgmental Sampling. 2013 . and Statistical Sampling © ICAI.Methods of Determining Sampling Size There are two main methods for determining the size of sample viz.

the sample size is determined on the basis of the personal experience and the knowledge of the auditor. The risk of personal bias in selection of sample is always present. 2013 .Judgmental Sampling In this method. is neither scientific nor objective. Thus. It may be noted that this method. It is one of the simple methods of sampling. though simple in its applicability. an element of subjectivity does prevail in this method © ICAI.

use of random number tables etc. 2013 . But it may also be noted that the auditor need not require having an in depth understanding of the statistical techniques because published statistical tables are available which indicate the sample size based on predetermined criteria © ICAI. It involves application of mathematical techniques like theory of probability.Statistical Sampling This method is more scientific in its approach than the method of judgmental sampling.

three methods commonly used are: Interval sampling or Random selection. This requires that all items in the population have an opportunity of being selected.Methods Auditor should select sample items in such a way that the sample can be expected to be representative of the population. © ICAI. While there are a number of selection methods.Selecting the Sample . Haphazard selection Systematic selection. 2013 .

© ICAI. example. 2013 . by use of random number tables.Random Selection Method • which ensures that all items in Random the population have an equal chance of selection. for selection.

© ICAI. the first interval having a random start. the auditor would need to determine that the population is not structured in such a manner that the sampling interval corresponds with a particular pattern in the population.g. When using systematic selection.000 increase in the cumulative value of the population). of the sales of that particular branch.Interval Sampling Method Interval sampling or Systematic selection.g. every Rs 1. a particular branch's sales occur only as every 100th item and the sampling interval selected is 50. the result would be that the auditor would have selected all. which involves selecting items using a constant interval between selections. or none. if in a population of branch sales. The interval might be based on a certain number of items (e. every 20th voucher number) or on monetary totals (e. For example. 2013 .

care needs selection to be taken to guard against making a selection that is biased. When the auditor uses this method. 2013 .Haphazard Selection Method • which may be an acceptable alternative to random selection. as they may not be representative © ICAI. for example. towards items which are easily located. provided that the auditor attempts to draw Haphazard a representative sample from the entire population with no intention to either include or exclude specific units.

2013 . In a way. This method involves dividing the whole population into separate groups.Stratified Sampling One another method which is used is Stratified Sampling. © ICAI. Each stratum is treated as if it was a separate population and the proportionate of items is selected from this stratum. The sample is taken from these strata. These groups are called strata. this method is an extension of random sampling.

000. and balances below Rs.000 – Rs. 1. balances in the range of Rs. 25. 75.000.000.00.Example :Stratified Sampling For example. 2013 .000 © ICAI. 25. balances in the range of Rs. 1.000 – Rs. debtors’ balances may be divided into following strata: balances in excess of Rs. 75.00.

Audit risk has three components: Inherent Risk Control Risk Detection (IR). and Risk (DR) © ICAI. (CR).Audit Risk "Audit risk" means the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. 2013 .

that could occur in an account balance or class of transactions and that "Control could be material. will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems.Components of Audit Risk • is the susceptibility of an account balance or class of "Inherent transactions to misstatement that could be material. • is the risk that an auditor's substantive procedures will "Detection not detect a misstatement that exists in an account balance or class of transactions that could be material. • is the risk that a misstatement. either individually or when aggregated with risk" misstatements in other balances or classes. assuming that there were no related internal controls. risk" either individually or when aggregated with misstatements in other balances or classes © ICAI. 2013 . either individually or when aggregated with misstatements in other balances or risk" classes.

2013 . AR = RMM (x) DR.Mathematical Model of Audit Risk Audit Risk (AR) is the function of Risk of Material Misstatements (RMM) and Detection Risk. or • = IR (x) CR (x) DR The range of AR lies in between ZERO to One (0% to 100%) © ICAI.

The auditor may conclude that material misstatements exist. Auditor can lower the sampling risk by increasing the sampling size © ICAI. in fact they do not. 2013 .An Introduction Sampling risk represents the possibility that auditor's conclusion based on a sample is different from that reached if the entire population were subject to audit procedure.Sampling Risk . or material misstatements do not exist but in fact they do exist.

Changing of the sampling size would not reduce non-sampling risk © ICAI.Non Sampling Risk Non-sampling risk includes factors that cause auditors to reach a conclusion other than the sampling size. 2013 . Misinterpretation of evidence and inappropriate procedures are good examples of non-sampling risks.

Sampling Risk Risk that auditor’s conclusion based on sample may be different from the conclusion if the entire population were subjected to same audit procedure Leads to two typesof erroneous conclusions Test of Controls – More effective than actually are Test of Controls – Less effective than actually are Test of details – Material Misstatement does not exist when it does Test of details – Material Misstatement exists whenIn fact it does not Leads to inappropriate Audit opinion Leads to additional work © ICAI. 2013 .

Audit Sampling Audit Sampling Application of audit procedures to less than 100% of the items Sampling Risk Risk of Risk of Risk of Risk of Under Reliance Over Reliance Incorrect Rejection Incorrect Acceptance Methods to select Sample Random Systematic Selection Selection © ICAI. 2013 .

Tolerable Error Tolerable error is the maximum error in the population that the auditor would be willing to accept and still concludes that the result from the sample has achieved the audit objective. 2013 . Tolerable error is considered during the planning stage and. is related to the auditor's judgment about materiality. © ICAI. for substantive procedures.

4 they have no defence and they are liable for their reporting? © ICAI. 2013 .Review Questions • Sampling technique is essentially dependent upon application of 1 compliance procedures alone? • If Internal Control System is sound then auditors choose a larger 2 sample size? • Sample checking is mandatory for an audit examination? 3 • If due to sampling risk the auditors have given inappropriate opinion.

Thank you © ICAI. 2013 .