Advantages of a Statistical Approach

The primary advantage of using a statistical sampling approach is that risk is objectively determined.
Using statistical tables, the auditor might reach this conclusion in a substantive test: at 5 percent risk,
the amount of error in the population is between $5,000 and $9,000. The auditor is able to quantify the
risk that the conclu- sion is not valid: there is a 5 percent chance that the dollar amount of error is really
less than $5,000 or greater than $9,000 (or a 95 percent chance that the conclusion is valid).

In a test of controls, the conclusion might be: at 10 percent risk, the rate of deviation from the control
procedure does not exceed 4.2 percent. Here, there is a 10 percent chance that the true rate of
deviation in the population is 4.2 percent or greater (or a 90 percent chance that the rate of deviation is
less than 4,2%).

Many auditors believe that the ability to statistically measure the risk involved makes statistical sampling
more defensible. Because of cost constraints, the auditor is not able to examine 100 percent of the
population and must accept some risk that the sample does not exactly represent the population.
Statistical sampling allows the auditor to know and control the low level that risk is limited to in a
sampling application. Another advantage of statistical sampling is that the method optimizes the sample
size. Statistical methods allow the auditor to balance the effectiveness and efficiency of the sample. That
is, statistical methods produce a sample large enough to allow the auditor to gather sufficient evidence
to meet the audit objectives. A sufficient sample size is related to the effectiveness of the sample. The
sample size is also

Advantages of Non-statistical Sampling

One advantage of non-statistical sampling is that personnel do not have to be trained in statistical tech-
niques. Although both the professionals applying non- 1 statistical sampling in the field and the
reviewers must have a background in sampling concepts, they do not have to be able to work through
the mechanics of statistical methods. Also, statistical sampling software is not needed and computer
access is not necessary.

One of the advantages of statistical sampling men- tioned earlier was that many auditors believe it to be
I WPS AI

more defensible than a non-statistical approach. Other auditors believe just the opposite: that non-
statistical methods are more defensible. Professionals supporting statistical sampling cite the fact that
the risk associated with the sample is objectively measurable. Auditors favoring a non-statistical
approach believe that the use of professional judgment is a better defense-say in court-than a statistical
measure of risk. They would prefer to have expert witnesses explain how critical professional judgment
is on an audit than have a statisti- cian explain that there is a known chance, say 5 or 10 percent, that
the auditor's conclusion was incorrect.

Conclusion

While auditors receive training and gain

While auditors receive training and gain expertise in applying sampling concepts and specific sampling
methods, they many times fail to adequately consider whether a non-statistical or statistical test is most
appropriate for a particular test. When planning the procedures to be performed in an audit area, the
profes- sional must first determine whether sampling is appro- priate at all, and then whether to apply
non-statistical or statistical techniques,

Which sampling approach is best, statistical or non-

statistical? It depends! It depends on the type of results required and on the capabilities of the auditing
firm. If an objectively determined measure of risk is needed, a statistical approach is obvious. The
professional who prefers to rely on judgment would use a non-statistical method. If the upper error rate
or a range of the dollar amount of error is desired, the auditor most utilize a statistical method. A
statistical sample is more appro- priate than a non-statistical if the population is com- posed of a large
number of homogeneous transactions generated under a system of good control, Auditors not trained
in statistical techniques should use a non-statisti- cal approach. Firms with computer access and
sampling software would tend to employ statistical methods. If the population is made up of dissimilar
members or errors are difficult to define in advance, non-statistical sam- pling should be utilized.
Audit sampling is 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.1 This section provides guidance for planning, performing, and evaluating audit samples.

.02 The auditor often is aware of account balances and transactions that may be more likely to
contain misstatements.2 He considers this knowledge in planning his procedures, including audit
sampling. The auditor usually will have no special knowledge about other account balances and
transactions that, in his judgment, will need to be tested to fulfill his audit objectives. Audit sampling is
especially useful in these cases.

.03 There are two general approaches to audit sampling: nonstatistical and statistical. Both
approaches require that the auditor use professional judgment in planning, performing, and evaluating a
sample and in relating the evidential matter produced by the sample to other evidential matter when
forming a conclusion about the related account balance or class of transactions. Either approach to audit
sampling can provide sufficient evidential matter when applied properly. This section applies to both
nonstatistical and statistical sampling.

[.04] [Paragraph deleted.]

.05 The sufficiency of evidential matter is related to the design and size of an audit sample, among
other factors. 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.
10 10

Opportunities for fraud were facilitated through procedural weaknesses, such as not issuing receipts,
issuing non-official receipts or selling unnumbered tickets, and using hospital resources without
authorisation or payment. One option for managing risks around fundraising is to give responsibility for
this task to accounts payable or finance department staff who are familiar with the protocols for
handling cash and keeping financial records.

Common corruption risks around cash-handling include a public official:

Common corruption risks around cash-handling include a public official:

failing to record purchases properly in order to steal cash

stealing cash from a cash machine or while it is being transferred to the agency or a bank

accepting or soliciting money or a benefit to corruptly give the agency’s cash to a third-party

accepting or soliciting money or a benefit to provide a good or service to a third-party, without taking
the required cash payment from that party

artificially inflating the value of a good/service to misappropriate the additional cash.

Developing a strategy

Cash-handling procedures do not have to be long, detailed or complex. The main measures that should
be included in a cash-handling procedure are:

a centralised method for cash processing and storage

secure mechanisms to control access to cash and its transport

procedures for issuing receipts

regular cash reconciliation for control and audit purposes.

A written policy and procedures for handling cash helps ensure consistency in applying these measures,
but only if staff understand the policy, are able to comply and are motivated to comply. If cash-handling
is significant – either in monetary terms or because it involves high-profile activities such as fundraising
events – it should be included in your risk assessment programs.

Being able to reconcile cash collected with cash holdings is critical, as reconciliation is the basic test of
whether cash is being misappropriated. Recordkeeping around cash-handling is important for this
reason. Following a risk assessment of cash-handling, consider:

detailing the cash holdings allocated for each good/service

identifying whether each transaction was for cash or another means of payment

recording the date/time for all receipting, securing, transferring and banking that occurs, including cash
collection and dispensing by machine

centralising collection points for cash

using secure cash storage facilities and security for those transporting cash

requiring cash to be deposited separately by each collector to ensure accountability and to protect the
person collecting and depositing the cash

registering the identity and position of personnel with access to safes, cash registers or cash/card
operated machines

reconciling balances against corresponding bank deposits to account for all cash takings and to identify
anomalies

limiting the number of employees able to handle cash to minimise risk of theft to facilitate the tracking
of losses

performing criminal background checks on staff applying for positions that involve handling cash

monitoring and restricting access to computer systems involved in cash-handling

including delegations in the cash-handling procedures, and informing relevant personnel of any changes
in delegations.