Auditor provides an assurance that the financial statements are True and Fair, based on the audit evidence collaborated on the sample data for an entity.
Audit Sampling is an important audit technique since it enables the auditor to select some transactions out of a large mass of similar transactions. Because it is impossible to verify each line of transactions processed during the year, which can be in Millions. Audit inferences are drawn from the result of the audit procedure on the transactions taken for the sample.
Standards on Auditing (SA) – 530 issued by the Institute of Chartered Accountants of India deals with the Auditor’s consideration of sampling of data during the course of the audit. As a result, these selected data enable the auditor to provide assurance on the balances and understand whether internal control procedures are in place.
Audit sampling in the context of an Audit
Financial reporting frameworks discuss audit sampling in different terms, which includes
- Sampling, including omissions, if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken based on the financial statements;
- Judgements about sampling are made in the light of surrounding circumstances and are affected by the size or nature of a misstatement, or a combination of both; and
- The common financial information needs of users as a group.
The objective of the auditor is to apply the concept of sampling appropriately in the selection of samples for performing audit procedures.
Sampling Risk
Selection of population is associated with Sampling Risk. Sampling could lead to two types of erroneous conclusions. First, where controls are more effective than they are and material misstatement does not exist when in fact, it does. The second is that where controls are less effective than they are and material misstatement exists when in fact, it does not.
For example:
The control procedure for inventory verification includes the Goods Inward register, Weighment slip, Goods outward register, and physical inventory. On verifying physical stock, observing a difference in value by 0.01% with the value in ERP can be accepted if it is within the tolerable audit risk limit.
Selection of items for testing
The population can be selected based on the whole mass of transactions, the physical existence of tangible assets, confirmation from external sources, the system of internal control and other relevant information.
Sample size shall be selected based on the acceptable margin of error, amount of variability and confidence level of the results obtained from the sample lies in the associated precision. For example, 95% confidence may provide a forceful conclusion.
Types of audit sampling
Audit Sampling is a technique used to select items in a population.For example, in the selection process of 75 items out of 500 transactions. The probability of being a sample would be 75/500, i.e., 0.15 or 15% for a transaction.
- Statistical Sampling – Random selection of sample population. Use of probability theory to evaluate the sample results, including measurement of the sample.
- Non-Statistical Sampling – Selection of high-value or high-risk transactions based on the auditor’s knowledge of the area under consideration.
Methods in the selection of sample
Statistical Method:
- Random Selection, where random numbers are generated for sample selection.
- Systematic Selection, where Sampling units in the population are divided by the sample size to give a sample interval. E.g., Selection of every 50th transaction.
- Stratification is grouping the data, thus reducing the variability among items within each stratum.
- In Value weighted selection, the data are stratified based on the Monetary value. Audit effort shall be directed to the more significant value of items, as these may contain the greatest potential misstatement.
For example,
When testing the allowance for a doubtful debt in the valuation of accounts receivable, it can be stratified by the age of receivable. Testing the 20% of the items in a population that make up to 90% of the account balance value.
Non-statistical Method:
- Haphazard Selection, where the Auditor consciously selects the sample, ensuring that all the items in the population have a chance of selection.
- Block selection involves the selection of a block of contiguous items from within the population. For example, the selection of data falling from 4th to 20th in the population.
- Judgement selection involves the selection of samples based on certain judgements. For example, in the PY, misstatement is observed for a particular debtor; hence the same debtor is selected this year.
Revision of audit procedure and sampling
The auditor shall perform an audit procedure appropriate for each item selected. If unable to perform the procedure, then he shall perform the procedure on the replacement item.
For example, the cancelled cheque is selected for testing the payment evidence to ensure whether it has been properly cancelled. If it constitutes deviation, an appropriately chosen replacement can be examined.
For the test of details, the auditor shall project the material misstatements for the population to obtain a broad view of the scale of misstatement. For examination of control, projection is not required since the sample deviation rate is the projected deviation rate of the population. When deviations from controls are observed, the auditor shall make specific inquiries to understand the matters and their potential sequences.
| Audit risk due to | Effect on audit |
| Material Misstatement | Increase sample size |
| Increase sample size | Increase test of controls |
| Increase in Tolerable rate of deviation | Increase in Tolerable rate of deviation |
| An increase in the expected rate of deviation of the population tested | Larger sample size |
Documentation
The documentation includes an explanation as to how the judgements were made in determining sampling, including,
- Method used in the selection of sample
- Selection of items for testing
- Use of judgements
If the potential misstatements are above the tolerable limit and the auditor concludes the audit sampling has not provided a reasonable basis for conclusions, he may:
- Request management to investigate
- Tailor the nature, extent and timing of further audit procedures to achieve the required assurance.
How does AssureAI help?
AssureAI would aid the auditors in selecting veracious audit samples among the humongous data. AssureAI voucher verification module enables single click sample selection as per SA-530 compliance sampling techniques such as random sampling, stratified sampling or systematic sampling. Besides, AssureAI helps for ‘in-app’ verification of vouchers and maintains a log of every voucher verified. Once voucher verification is complete, the user can generate a voucher verification summary report containing a summary of the population Vs. Sample against each head and highlight the errors, corrected and uncorrectemisstatementsts to help the CA o quantify the uncorrected misstatements and proceed with a further course of action. All documentatiorequirementsnt as per SA 530 can be fulfilled through our software, making your entire audit paperless.
