Which are the stages in audit sampling?

a) Planning the sample
When planning how to carry out sampling, the auditor considers the following:
i. Objectives of tests and combinations of audit procedures which are likely to achieve the objectives e.g. objective to verify compliance of the debtors balances.
ii. The population and sampling units should be appropriate to the objectives of sampling e.g. if auditors objective is to test overstatement of debtors, an appropriate population would be a list of total debtors.
iii. Definition of errors is substantive testing and deviation in compliance testing. Before performing testing on a chosen sample, the auditor should define clearly test results and conditions that will be considered errors or deviations by reference to audit objective. For substantive testing, the auditor should project errors found in the sample to population and consider the effect of projected errors on a particular test objective.

b) Determination of sample size.
The auditor needs to determine the appropriate size of the sample on which audit procedures will
be applied. Sample size is determined by;
i. The tolerable error. The larger the tolerable error, the smaller the sample size required for a given test.
ii. A uditor’s assessment of the inherent risk. The higher the assessment of inherent risk, the larger the sample size is required. Higher inherent risk implies that there is a greater risk of an account balance being misstated and this may be reduced by testing a larger sample.
iii. A uditor’s assessment of control risk. A higher control risk implies that little reliance can be placed on effectiveness of operations of internal controls and the sample size needs to be increased.
iv. Auditor’s required confidence level. The greater the degree of confidence level the auditor requires, the larger the sample size needs to be so that the results of the sample are in fact representative of the actual amount of error in the population.

c) Selecting items to be tested.
The sample selected should be a true representative of the population so that the auditor can draw conclusions about the entire population. All sampling units should have an equal chance of being selected. Common sampling methods are;
i. Random sampling. This is done by use of random number tables or use computers to select sampling units
ii. Systematic selection. In this type of sampling, units in the population are divided by the sample size to give sampling intervals e.g. if the population to be sample has 600 items and sample size is 50, the sampling interval will be 12. One of the first 12 items will be selected as the starting point and thereafter, every twelfth item will be selected i.e. if the first item selected is third item, every 15th, 27th, 39th and so on items will be picked.
However, the auditor needs to determine that sampling units within the population are not structured in a way that sampling intervals corresponds to a particular pattern in the population.
iii. Haphazard selection. The auditor selects a sample without following structured techniques. The auditor should avoid conscious bias and predictability in selecting items in attempt to ensure that all items in the population have a chance of being selected. This technique is not suitable for statistical sampling.
iv. B lock selection. This involves selecting a group of continuous items within the population e.g. all sales transactions for August. Block sampling cannot be ordinarily used in audit sampling because most populations are structured such that items in a sequence can be expected to have similar characteristics therefore the sample selected may not be representative of the population.

d) Testing. After selecting the sample items the auditor should carry out the predetermined test on each item.

e) Evaluating results of the test.
The following procedures should be followed.
i. The auditor should estimate the expected error or deviation rate in the whole population by projecting the results of the sample to the population. This is then compared with the tolerable error.
ii. The auditor should assess the risk of an incorrect conclusion. In general, expected error is rarely a precise measure of the actual error in the population. Actual error may be greater or smaller than projected error. The auditor most therefore consider on the basis of his sample results and relevant evidence from other sources, the possible levels which actual error or deviation might take.

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Wilfykil answered the question on April 11, 2019 at 13:58