Audit Short Notes - Chapter 4 Part 2

Performing Audit Procedures (if there are 8% deviation in the sample, this will also become the rate of deviation

●​ The auditor shall perform audit procedures on each item in the population)

selected.
Evaluating Results Of Audit Sampling
●​ If a selected item is not appropriate for the application of the
The auditor shall evaluate:
audit procedure, the audit procedure is ordinarily performed on
●​ the results of the sample; and
a replacement item.
●​ determine whether the use of audit sampling has provided a
○​ Example: A cancelled cheque may be replaced.
reasonable basis for conclusions about the population that has
●​ If neither the procedure nor an alternative can be applied, treat
been tested.
the item as
○​ A deviation (in tests of controls), or
Sampling Risk
○​ A misstatement (in tests of details).
This arises from the possibility that the auditor's conclusion, based
●​ An example of a suitable alternative audit procedure might be on a sample, may be different from the conclusion reached if the
the examination of subsequent receipts when no reply has been entire population was subjected to the same audit procedure.
received in response to a positive confirmation request.
Sampling Risk in Test of Details
Nature And Cause Of Deviations And Misstatements

●​ When the auditor finds deviations (in controls) or The recorded value of population is
misstatements (in amounts) Auditor must investigate each
OK Not OK
deviation or misstatement to find the underlying cause.
●​ Then, evaluate how it impacts the purpose of the audit test and OK ●​ Correct ●​ Incorrect
other related areas. Decision Decision
●​ If several misstatements share a common feature (e.g., ●​ Risk of
location, product line), the auditor should extend testing to the The sample Incorrect
indicates that Acceptance
full group.
the population is ●​ Not effective
●​ These patterns could also signal intentional errors, meaning
possible fraud. Not OK ●​ Incorrect ●​ Correct
Decision Decision
●​ In the extremely rare circumstances when the auditor considers
●​ Risk of
a misstatement or deviation discovered in a sample to be an Incorrect
anomaly, the auditor shall obtain a high degree of certainty that Rejection
such misstatement or deviation is not representative of the ●​ Not Efficient
population.

●​ The auditor shall obtain a high degree of certainty by Sampling Risk in Test of Control
performing additional audit procedures to obtain sufficient
The actual operation of control is
appropriate audit evidence that the misstatement or deviation
does not affect the remainder of the population. OK Not OK
●​ Anomaly may be defined as a misstatement or deviation that is
OK ●​ Correct ●​ Incorrect
demonstrably not representative of misstatements or
Decision Decision
deviations in a population. (one-off event) ●​ Risk of Over
The sample
indicates that reliance
●​ Risk of
Projecting Misstatements

​When the auditor finds misstatements in a sample: the control in

operation in assessing the
●​ They must project those misstatements to the entire CR too low
population to estimate the full error. ●​ Not effective
●​ But this projection gives a broad view — it may not be used as Not OK ●​ Incorrect ●​ Correct
the exact adjustment amount. Decision​ Decision​
●​ If any misstatement is a an anomaly ●​ Risk of under ​
○​ It can be excluded from the projection, reliance ​
○​ But its impact must still be evaluated separately. ●​ Risk of ​ ​
●​ For the test of details → projection is mandatory. Assessing the ​
●​ For a test of controls → no projection needed. Sample CR too high
deviation rate = population deviation rate. ●​ Not Efficient

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 Audit Short Notes - Chapter 4 Part 2

Non-Sampling Risk 2.​ The sample selection is more objective and thereby more
“Non-sampling risk” arises from factors that cause the auditor to defensible.

reach an erroneous conclusion for any reason not related to the size 3.​ The method provides a means of estimating the
of the sample. ○​ minimum sample size associated with a specified risk.
For example, (Basically helps in determining the sample size depending
●​ ordinarily the auditor finds it necessary to rely on audit upon audit risk)
evidence that is persuasive rather than conclusive, 4.​ Allows calculation of sampling error (calculated risk)
●​ the auditor might use inappropriate audit procedures, or 5.​ Gives a better representation of large data sets when compared
●​ the auditor might misinterpret audit evidence and fail to to a non-statistical approach of sampling.
recognize an error. 6.​ Results of sampling can be evaluated and projected in a better
●​ Human Mistakes way

Tolerable Misstatement and Deviation Non-Statistical Sampling

Tolerable misstatement ●​ A sampling approach that does not have characteristics of

A monetary amount set by the auditor in respect of which the auditor random selection and use of probability theory is considered as
seeks to obtain an appropriate level of assurance that the monetary non-statistical sampling.
amount set by the auditor is not exceeded by the actual ●​ Based on auditor’s experience and judgement
misstatement in the population. ●​ This approach is simple.
●​ The sample may not be a true representative of the total
Tolerable rate of deviation population because of personal bias and no scientific method of
A rate of deviation from prescribed internal control procedures set selection.
by the auditor in respect of which the auditor seeks to obtain an ●​ For example,
appropriate level of assurance that the rate of deviation set by the ○​ April, August and March may be selected in year one and
auditor is not exceeded by the actual rate of deviation in the different months would be selected in the next year,
population. ●​ An attempt would be made to avoid establishing a pattern of
selection year after year.
Approaches To Sampling
●​ An element of surprise is maintained.
1.​ Non-statistical or ●​ It is a common practice to check large numbers of items
2.​ Statistical sampling approaches. towards the close of the year so that the adequacy of cut-off
procedures can also be determined.
●​ Also, because year end transactions are prone to high risk of
Statistical Sampling

●​ Based on random selection and probability theory

misappropriation.
●​ Uses mathematical methods to decide sample size
●​ More scientific, avoids personal bias
Problems with Non-Statistical Sampling
●​ Best suited when population has many similar items ●​ Not objective or scientific
●​ Commonly used in: ●​ Personal bias can’t be eliminated
○​ Compliance testing
●​ Projection may not be accurate
○​ Trade receivables confirmation
●​ Less defensible, as there’s no mathematical backing
○​ Payroll checking
●​ Auditor depends more on experience than on calculated methods
○​ Vouching invoices & petty cash
●​ Reliable projections can be made from sample to population.

Advantages of Statistical Sampling

1.​ The amount of testing (sample size) does not increase in

proportion to the increase in the size of the area (universe)

tested. (Smaller sample size gives a better representation of

the population, in judgemental or non statistical sampling
sample size is large still it does not give a fair representation
of the population ) - Tickmark Tiwari tests 120 vouchers from 10,000 and

only 140 from 20,000, as statistical sampling focuses on audit risk and

expected error, not just population size. Once a certain sample size is

reached, adding more items provides diminishing returns in terms of

statistical reliability.

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