ACC3600 Week 6: Audit Sampling & Documentation

Risk Assessment Phase

Auditor gains client understanding, identifies risks, assesses materiality, and develops audit strategy.

Risk Response Phase

Auditor performs tests of controls and substantive testing to address identified risks.

Reporting Phase

Auditor evaluates evidence, forms conclusions, issues audit opinion, and communicates significant deficiencies.

Audit Sampling

Testing less than 100% of a population to improve efficiency while providing sufficient evidence.

Where is audit sampling used?

In tests of controls and substantive tests.

Sampling Risk

The risk that the selected sample is not representative of the population, leading to an incorrect conclusion.

Non-Sampling Risk

The risk of reaching an incorrect conclusion for reasons unrelated to sampling, such as poor procedures.

How to reduce non-sampling risk

Through due professional care, proper supervision, staff training, and effective audit planning.

Statistical Sampling

Uses random selection and probability theory to measure sampling risk objectively.

Non-Statistical Sampling

Relies on auditor judgement without probability theory; less costly and easier to apply.

Random Selection

Sampling method where every item has an equal chance of being chosen, often using a random number generator.

Systematic Selection

Selecting every nth item after calculating an interval and choosing a random starting point.

Haphazard Selection

Selecting items arbitrarily without a structured method, introducing potential personal bias.

Judgemental Selection

Non-statistical method where the auditor deliberately chooses items believed to be significant.

Block Selection

Selecting a cluster of consecutive items; non-statistical due to potential sequence bias.

Stratification

Dividing a population into similar groups before sampling to reduce variability and target high-risk groups.

Sample Size Factors: Tests of Controls

Assessed control risk, tolerable deviation rate, and expected deviation rate.

Sample Size Factors: Substantive Testing

Detection risk, planning materiality, expected misstatement, and tolerable misstatement.

Deviation (Audit)

An instance where a control is not operating as prescribed.

Tolerable Deviation Rate

The maximum control failure rate the auditor is willing to accept.

Tolerable Misstatement

The maximum monetary misstatement the auditor is willing to accept in a population.

Evaluating Tests of Controls Results

If sample deviation rate exceeds the tolerable rate, controls are ineffective and more testing is required.

Evaluating Substantive Testing Results

Identify sample misstatements, project them to the population, and compare with tolerable misstatement.

Audit Working Papers Purpose

Document audit procedures, record evidence obtained, and support audit conclusions.

Permanent vs Current Files

Permanent files contain multi-year info; current files contain info relevant only to the current audit.