The auditor does not have the physical ability to verify all business transactions of serious concern when the number of operations for the reporting period is significant. In such situations, if the company has a sufficient system of internal control, it has the right to choose a test check instead of total control of all transactions. This auditing approach acceptable by standards almost everywhere replaces a continuous documentary audit of the financial and business operations of a subject.
Current audit practice
Monitoring all transactions and business records has been common practice in previous years. In modern auditing, this is considered obsolete and practically does not apply. The auditor is not required to check all transactions, he at his level decides on the extent to which documentary verification should be applied in a particular organization.
The audit sampling method is based on the postulates of probability theory. It is assumed that each sample has nearly identical characteristics of the complete data that it represents. The selection and verification of part of the accounting records from the total amount of similar data provides the auditor with reasonable grounds for issuing an objective opinion on the reliability of the financial statements of the organization.
Custom scan
At the planning stage, the auditor is aware of account balances and accounting entries that are more likely to contain misstatements. This knowledge is used in the selection of certain reporting items, balance sheets and classes of operations in respect of which control procedures will be carried out.
The concept of an audit sample refers to a certain part of the accounting records selected for documentary verification. The percentage of items or transactions examined in detail is determined by one’s own, based on professionalism and experience, judgment of the auditor and correlation of the data obtained during the analysis of the sample with other evidence.
Selection of operations for tests
International and national standards of the “Audit sample” allow the collection of audit evidence on the basis of both a statistical set of records for analysis and the selection of elements based on materiality, materiality or professional judgment of the auditor without applying a given system algorithm.
Audit Standard 530 “Audit Sampling” establishes the following conditions for the selection of transactions for detailed verification:
- the purpose of the control procedures and the characteristics of the class of operations should be taken into account;
- the number of entries should be sufficient for an acceptably low level of risk;
- any accounting operation from the general set of records has equal opportunities for inclusion in the sample.
Selection of items for documentary verification
The selection method used should ensure that each unit in the sample is essential for obtaining statistically reliable listening results:
- a representative number of records of each class of operations should be selected;
- Client employees do not need to know and understand the verification method adopted by the auditor;
- the same method should not be used during the audit of the next year;
- the sample should cover the entire period and all sections of typical financial transactions;
- when selecting transactions, the concept of materiality should be applied;
- more attention is paid to records where fraud or errors are likely;
- if the reliability of the evidence is low, it is necessary to increase the sample size.
The purpose of the ISA audit sampling method is to evaluate the veracity of certain aspects of accounting information. The standard is applied when the number of transactions is large, since the total study of all operations in such conditions will be extremely inefficient and labor-intensive. The amount of data selected for verification should be sufficient to obtain reasonable assurance about the accuracy of the financial statements submitted by the audit client.
Criteria for the validity of conclusions
The following types of audit sample are distinguished - representative and unrepresentative. Correct audit evidence can be obtained only as a result of tests of a selected group of records in which the characteristics of the elements of interest for the study correspond to the structure of the global data set.
If the totality of all transactions contains significant distortions, but the operations selected for the audit procedures are practically without distortions, the sample is unrepresentative and may lead to erroneous conclusions.
The use of non-representative samples during the audit significantly increases the risks of the audit sample.
Methods for selecting transactions for verification
The following auditing methods for ISAs are as follows:
- Block sampling. For detailed study, a sequential series of elements is selected. Although this method can be very effective, there is a risk that the block of operations will not reflect the characteristics of all transactions.
- Random sampling. There is no structured approach to the selection of elements.
- Personal judgment. The auditor uses his own judgment to select, perhaps, in favor of transactions that have the most significant cost and a high level of risk associated with it.
- Sampling using a random number generator. This approach is the most theoretically correct, but may require more time to select operations.
- Stratified sampling. The auditor divides the operations into different sections (for example, high and low cost), and then selects from each section.
- Systematic sampling. It includes elements located in the logbook at fixed intervals, for example, every 20th element. This is usually a fairly effective selection method.
Risk minimization
Any sampling method does not completely exclude risks. They are divided into:
- related to the selection of records for detailed verification;
- not related to it.
What is the risk of the audit sample in its non-representativeness? The wrong method of formation or an insufficient number of elements can be selected and applied. A transaction that has a significant effect on the balance sheet item or account balance may be skipped. These risks can be minimized by increasing the number of records included in the sample.
The risk of incorrect audit findings exists both during selective and total documentary checks. The reason may be insufficient knowledge of the specifics of the company’s business, the use of ineffective or inadequate audit procedures, or improper execution of the procedure. Risk is minimized solely by increasing the competence of auditors.
Stages of the formation of the audit sample
The stages of creating a sample necessary to assess the reliability of balance sheet items and financial statements, both in the case of statistical methods and in the case of non-statistical methods, are as follows:
- determination of sample size;
- selection of elements in the sample and their testing;
- evaluation of the results.
Optimal sample size
Choosing the right size is extremely important, because only on the basis of representative data can conclusions be drawn that are valid for the entire set of reporting elements.
The size of the audit sample is calculated according to the formulas, and the main variables in them are the sampling risks, permissible and expected errors.The determination of its size is affected by the purpose of the audit, the identification and assessment of possible errors, the determination of the entire set and sampling units.
Conclusions from the results of control testing
After testing the elements of the sample, the following conclusions are made:
- The effectiveness of the internal control system is evaluated. Audit tests consist in checking the availability of documents certifying the organization and functioning of the internal control system.
- Obtaining evidence of the absence of significant errors in the account balance based on the results of significant tests.
- Evaluation of the elements necessary for an independent assessment of the audited entity (through significant testing) independent of customer management.
- Identification and assessment of possible errors. Depending on the purpose of the audit procedure, it is possible to determine the type and number of errors, many of which were not expected by the auditor at the planning stage of the audit. For example, sampling invoices and reconciling them with the invoice journal can lead to the identification of incorrect VAT calculations. Control tests reveal deviations from expected behavior, and significant tests establish registration errors.
Determining the fit of the population and sampling units
To do this, the auditor must make sure that the elements for testing are homogeneous, as they were selected according to the established criterion. Generally, the larger the balance currency in monetary terms, the larger the sample size. Size criterion is the most used.
Another criterion is the degree of risk, depending on which assets are classified: assets with a high or low risk of theft, for example, cash on hand - fixed assets. Regardless of the criteria, proper attention will be given to certain elements from the audit sample. For example, bonds that have expired will be tested in detail regardless of their materiality.
The procedure for issuing an opinion on the results of testing a sample is relevant only if the errors found in it are approximately similar to errors in the general population.
According to probability theory, the sample size is determined as follows:
- for a set of less than 5000 operations, the entire set of elements is taken into account;
- for a population of more than 5,000 transactions, the size is set taking into account the following criteria: required levels of security and accuracy, margin of error, standard deviation, etc.
An important criterion for determining the size of the audit sample is the level of guarantee of the reliability of the issued opinion. The 20 items selected for testing from each class of operations will not be representative of the 90% guarantee level. Conclusions based on such a sample may turn out to be false.