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Audit Sampling Training Guide

The document outlines an agenda for a sampling training which includes an overview of sampling techniques for tests of controls and tests of details, as well as discussing sampling tools and practical sampling examples, with the overall objectives being to promote consistency in applying sampling guidance and improving sampling strategy and knowledge.

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Cuong Nguyen
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781 views38 pages

Audit Sampling Training Guide

The document outlines an agenda for a sampling training which includes an overview of sampling techniques for tests of controls and tests of details, as well as discussing sampling tools and practical sampling examples, with the overall objectives being to promote consistency in applying sampling guidance and improving sampling strategy and knowledge.

Uploaded by

Cuong Nguyen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
  • Introduction and Objectives: Outlines the goals of the sampling training, promoting methodology consistency and practical application of sampling techniques.
  • General Understanding about Audit Sampling: Introduces the conceptual framework for audit sampling and its use in audit testing procedures.
  • Audit Testing Framework: Details the audit testing decision flow where sampling can be used effectively.
  • Methods for Selecting Items for Testing: Explains various strategies for item selection during testing, including statistical and judgmental methods.
  • Audit Sampling: Discusses characteristics of a representative audit sample and how to avoid selection bias.
  • Overview of Sampling Techniques - TOC: Covers the development of sampling plans for tests of controls and essential sampling techniques for audits.
  • Overview of Sampling Techniques - TOD: Describes substantive audit procedures and the selection of key and representative items for testing.
  • Sample Size Determination Techniques - TOD: Explores methods for sample size determination in tests of detail, including qualitative and quantitative approaches.
  • Sampling Tools: Introduce tools and software used for handling sampling strategies and selection processes.
  • Practical Sampling Discussion: Discusses common questions and challenges faced in audit sampling and provides insight on control and detail tests.
  • Summary: Summarizes the key points on sampling techniques and the essentials of documentation.

Sampling Training

October 2012
Sampling Training
Objectives

► Promote consistency in the application and interpretation


of our sampling guidance – The Sampling Supplement
► Improve the effectiveness and resolution of sampling
related issues
► Promote the use of an efficient and methodology
compliant sampling strategy
► Improve knowledge of sampling techniques and tools
► Provide practical application experience in order to
facilitate effective sampling in banking audit

2
Sampling Training
Agenda

► General understanding about audit sampling


► Overview of sampling techniques – Tests of Control
► Overview of sampling techniques – Tests of Detail
► Sampling tools
► Practical sampling discussion

3
General understanding about audit sampling
Audit Testing Framework

Perform tests of controls


Where sampling
Perform mandatory PSPs can be used
and analytical review
procedures

Do analytical
procedures and
Mandatory PSPs YES
YES alonprovide sufficient
audit evidence?

Assess remaining Perform other


Perform risk NO risk and perform mandatory
Rely on
assessment controls? other test of procedures:
procedures details JE testing and
PGAP
NO
Perform mandatory PSPs
and analytical review
procedures

Re-assess risks in light of results of the procedures performed

5
Methods for selecting items for testing

6
Audit sampling

Entire set of data Sampling units

Population
Audit Representative
sampling sample: A sample
that is free from
selection bias and
contains sampling
items that have
Selected items characteristics
typical of the
population.
Sample

7
Overview of Sampling Techniques - TOC
Sampling plan for TOC

Determine a sampling plan for test of controls by:


► Determining the audit objectives, including defining control
exception conditions

► Defining the population

► Considering the minimum sample size

► Considering factors that influence our sample size

► Determining the sample selection method

► Performing the audit procedures

► Evaluating and concluding on the sample results

9
TOC- Minimum sample sizes

Nature of control and frequency Minimum number of items to test


of performance
Manual control, performed daily or 25 (or 60, if only one control per
many times per day assertion is selected to be tested)
Manual control, performed weekly 5
Manual control, performed monthly 2
Manual control, performed quarterly 2
Manual control, performed annually 1
Application control Test one application control for each type
of transaction and processing alternative
if ITGCs effective (otherwise test 25)
ITGCs Follow above guidance for manual and
automated aspects of ITGCs

10
TOC- Minimum sample sizes

If the number of control occurrences:


► Ranges from 50 to 250 occurrences, our minimum sample size is
10% of the number of occurrences
► Is less than 50 occurrences, we select a minimum sample size of 5
items, or 100% examination if the population is less than 5
occurrences

If we plan to test only one control related to a relevant assertion,


we select a larger sample to obtain more assurance for that one
control:
► For manual controls, performed daily or many times per day: 60
items, selected without bias.
► For all other controls: we use professional judgment to determine how
many additional items we test above the minimum sample size.

11
TOC - Sample selection method

Sample Size Determination

Minimum sample
sizes per EY GAM
(plus factors that influence
increases)

Haphazard Random Systematic


SM_2.4.3 SM_2.4.1 SM_2.4.3

Sample Selection Method

12
FS Seniors Sampling Training
Documentation

In Design tests of controls, we document:


► The nature, timing and extent of our planned tests of controls, including:
► The period covered by our tests of controls
► The population covered by our tests of controls
► How we plan to select our sample and the sample size

In Execute tests of controls, we document:


► Details of the sample items subjected to testing
► The results or findings of those procedures performed and the conclusion
reached
► Control exceptions identified (if any), including the causes and implications of
the control exception and our audit response
► Changes to our audit strategy or modification to our planned substantive
procedures when our original audit strategy is no longer appropriate as a
result of identified control exceptions and deficiencies

13
Overview of Sampling Techniques - TOD
TOD

15
TOD
Key items

We select key items by identifying transactions or balances that:

► Are above a testing threshold (some percentage of TE) and


therefore individually important because of their size, or

► Meet a qualitative criteria that indicates that they are more


likely to contain material misstatements (either individually or in
the aggregate)

16
TOD
Key items

► There are no magical mathematical formulas for establishing


our scopes and thresholds. Rather, when we make our
judgments regarding scopes and thresholds, we consider:
► The composition of the population
► Our experience as audit professionals
► The engagement team’s collective understanding of the entity
► Our CRA
► The nature of the procedures being performed
► The amount of audit evidence desired from the procedures

17
TOD
Ref items

The following table summarizes the factors above and the


effect they have on our sample sizes:

18
Sample size determination techniques – TOD

Judgmental Statistical
Sample Size Determination

SM_4.5.1 SM_4.5.2

Qualitative Quantitative
Qualitative/
Quantitative

Variables
Professional judgment Discovery Random Monetary unit
SM_4.5.2.3 SM_4.5.2.2 SM_4.5.2.1 estimation
SM_4.5.2.4

19
Judgmental sampling

► We apply professional judgment to determine sample sizes for tests


of details. We consider factors such as our understanding of the
entity’s business, preliminary assessments of inherent and control
risks and the characteristics of the population being tested.
► We document the basis on which we determined the judgmental
sample to be appropriate
► We document the factors that influence our sample size which are:
► The CRA
► TE compared to the population value that we are testing
► The level of evidence we have obtained or expect to obtain from
other substantive procedures
► Our expectation of misstatements

20
Statistical sampling
Monetary unit

► MUS assists in selecting sampling units proportional to their size in


the population and to express a conclusion as a monetary value
rather than as a rate of occurrence.
► Appropriate when we:
► Have the hypothesis that larger items contain larger monetary errors
► Expect few, if any, errors
► MUS is often used for testing asset accounts when our primary audit
concern is with overstatement or liability accounts when our primary
concern is with understatement under certain circumstances.
► Advantages:
► Selects sample items in proportion to their monetary value
► Highly efficient when we expect and find no misstatements
► Disadvantages
► No zero or negative balances (or have manageable plan to handle)
► Requires obtaining a electronic listing of items with monetary values

21
Statistical sampling
Random

► Random sampling is a sampling technique whereby each item in the


population is given an equal or known chance of selection regardless
of size.
► Appropriate when we:
► Expect few, if any, errors
► Advantages:
► Can be used when MUS cannot be used efficiently (population listing
not in electronic format or presence of null/negative items without the
ability to manage them)
► Disadvantages
► Sample sizes larger than MUS

22
Statistical sampling
Discovery

► Discovery sampling is a statistical sampling that reaches a conclusion


about a population in terms of rate of occurrence. Discovery Sampling
is a type of attribute sampling.
► Appropriate when:
► Expect no or very few errors. CRA is Minimal and expected and
tolerable error rates are small
► Need to conclude whether a critical attribute is present/absent (i.e.,
objective is to obtain a specified level of assurance that the rate of
occurrence of an error is not above a specified limit)
► Advantages
► Useful when the population we are testing has a high monetary value
with a large number of very small items
► Disadvantages
► Does not provide alone sufficient evidence to conclude on a balance.
We only conclude on the rate of error in the population

23
Statistical sampling
Variables

► Variables estimation sampling can be used when we


have assessed a high error rate within the population,
and we wish to estimate their potential monetary effects.
► When variables estimation sampling is appropriate,
engagement teams should involve a local sampling
specialist for further guidance and assistance.

24
Key Question: Which representative sampling
method is most efficient and effective ?

► Do people use MUS or Random sampling techniques on


their engagements? Why?
► MUS is a more efficient and effective representative audit
sampling technique
► Random has an additional “Loading Factor”
► Loading factor is reduced when there is an expectation of no
errors

25
Random v. MUS sample sizes

Plan for no errors Plan for errors

► Random sample sizes are ► Random sample sizes are


5% larger than MUS 25% larger than MUS

MUS is more statistically accurate

26
Microstart computed representative sample
sizes less than 5

Minimal or low CRAs Low+SC and higher CRAs


► We may decide to accept a slight ► We cannot accept the increase in
increase in our overall detection risk our detection risk at these CRAs
and not test these items, but we
► We test the items
also consider testing key items or
other procedures
► For A/R existence, we may only
accept additional risk if we have
tested key items; otherwise we test
the items

27
Key Question
When should be “plan for errors” when using EY Microstart

► Minimal/low CRA – expectation would be that you would


not need to plan for errors
► Moderate/high CRA – expectation would be that you
should plan for errors
► Planning for errors results in a more statistically accurate
extrapolation

28
Representative Sampling Techniques
Practical Steps

► Re-evaluate representative sampling techniques currently


employed and ensure they are appropriate
► Challenge using Random vs MUS on all engagements
(significant audit efficiencies to be gained)
► Challenge very large sample sizes, consider the
“hierarchy of audit evidence” and other substantive audit
procedures
► Consider appropriateness and implications for “planning
for errors” when using EY Microstart

29
Sampling tools
Sampling tools

• Sampling Strategy Advisor


Strategy (Excel-based)

Sample • EY/MicroStart (can also be used


size for Evaluation)

Sample • EY/Random
• EY/Sampling Assistant
selection • ACL

31
Practical sampling discussion
Some practical sampling questions
Tests of controls

► A retail bank has multiple branches in operation and the head office
has strong controls over the branch's operations, and the processes
have substantially the same design in terms of the flow of
transactions and related controls can the transactions entered into
by different branches be treated as a single population (“the single
population approach”) instead of a representative site approach?

► Can we split our minimum sample for tests of controls between


interim and period end (e.g., for a minimum sample size of 25, to test
22 at interim and the remaining 3 at period end)?

► Do we need to document our evaluation of the factors that increase


the sample size above the minimum?

33
Some practical sampling questions
Tests of controls

► When we audit and issue a half year audit report as well as a full
year audit report, how do we determine the sample sizes for each
audit report? (the half year opinion is for the first 6 months and the
full year opinion is for the first and second 6 months)

► If the client changes a system during the second half year, how do
we determine the sample size?

► An engagement team is engaged to give an opinion on the overall


effectiveness of internal control over financial reporting under China
SOX, in addition to a statutory audit opinion on the Financial
Statements. For an integrated audit, how might the nature, timing,
and extent of our tests of controls relating to significant classes of
transactions be different?

34
Some practical sampling questions
Tests of detail

► What factors should we consider when determining testing


thresholds for substantive audit procedures?

► Do we send bank confirmations for all bank balances, including


those with zero balances?

► Since PM is normally set at 5% of PBT for financial institutions


operating in a regulated industry, the resultant TE is very small as
compared to the balance sheet account balances. In this case,
when EY/MicroSTART is used in determining a sample size for tests
of details, it might generate an unreasonable large sample size of
representative samples. Is there an alternate testing approach that
could be used?

35
Practical sampling questions and responses
Tests of detail

► Design test of details - sampling approach for credit review to assess


debtors’ creditworthiness and loan recoverability which is a
subjective estimation process. Where we have a low TE which can
result in an extremely large number of key items, how can we
improve audit effectiveness of our testing approach?

Microsoft Office
Word Document

36
Summary

► Sample size determination for TOC

► Sampling selection for TOC

► Sample size determination TOD

► Necessary documentation

37
Thank you

Common questions

Powered by AI

When determining the sample size for tests of controls, auditors must consider various factors: the nature and frequency of the control, the need to rely on controls for the audit, the size of the population, the acceptable level of risk, and the potential for control exceptions. Additionally, the method of sample selection (e.g., haphazard, random, systematic) and the professional judgment of the auditors are also crucial .

A high potential error rate necessitates using variables estimation sampling, as it can estimate the potential monetary effects of errors. High error rates suggest the need for a sample method that can account for significant variances and allow for accurate error rate assessments, often requiring statistical sampling approaches to ensure reliable extrapolation and conclusions. In such cases, professional guidance and localized sampling expertise are recommended .

Discovery sampling is advantageous for audits where the objective is to ascertain if a critical attribute is present or absent in a population, especially when expecting very few errors. It is efficient in high-value populations with many small items. However, it does not provide sufficient evidence alone to conclude on monetary balances, as it only allows conclusions on the rate of occurrence of an error .

The choice between random sampling and MUS impacts audit efficiency and accuracy. MUS is often more statistically accurate when few errors are expected, as it weights samples by monetary value, making it efficient for audits with few large errors. Random sampling, while providing equal selection chances for each item, might require larger sample sizes if errors are expected, impacting efficiency negatively. The Loading Factor also affects sample sizes differently between the two methods .

The Sampling Supplement promotes consistency in banking audit sampling by providing clear guidance on sampling strategies and methods, standardizing the interpretation and application of sampling guidelines, and ensuring that sampling techniques and tools are uniformly applied across audits. It aims to improve the effectiveness of resolving sampling-related issues and enhance auditors' knowledge and practical application of sampling techniques .

When a client changes systems mid-year, auditors should assess the impact on controls and reassess risk levels. The sample sizes for the half-year and full-year audit reports should reflect the need to test both the old and new systems adequately. The sampling strategy may involve a proportional distribution of samples between the systems based on their period of operation, considering system-specific risks and the effectiveness of controls in each system .

With a low CRA, the expectation is that fewer errors will occur, allowing some flexibility in not planning for errors. However, auditors may accept a slight increase in detection risk, avoiding testing altogether if key items or other substantive procedures address the risks. If the risk levels are moderate or high, auditors must plan for errors, leading to more accurate extrapolation of results .

Professional judgment is crucial in determining sample sizes for tests of details, as it involves considerations of the auditor's understanding of the client's industry, preliminary risk assessments, audit evidence expectations, and characteristics of the population being tested. This judgment is documented by considering how these factors influence the sample size and the level of assurance needed from the audit procedures .

Random sampling is recommended over MUS when there is no electronic listing of items with monetary values, or when the audit involves populations with zero or negative balances, which MUS cannot handle efficiently. It is also suggested when a slight increase in sample size is manageable and when MUS is less effective due to the presence of null or negative items without the capability to manage them effectively .

Monetary Unit Sampling (MUS) is more effective for testing asset accounts with concerns of overstatement because it selects sample units in proportion to their size, focusing more on larger items that are more likely to contain significant errors. MUS is highly efficient when few errors are expected, allowing auditors to conclude on monetary values rather than error rates, making it suitable for auditing assets where overstatement is a primary concern .

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