Auditing Special Purpose Frameworks: To Sample or Not to Sample?
SAS No. 39, amended by SAS No. 111 and included in the Clarified SAS, Audit Sampling (AU-C 530), defines audit sampling as the application of an audit procedure to "less than 100% of the items" within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class. Tests of controls, accounts receivable confirmations, inventory observations, pricing and clerical tests, vouching fixed assets and expense account balances, and tests of purchases and sales cutoffs are a few examples of procedures in which sampling applications may occur.
Evaluating a Sampling Population
A sampling population is the recorded population (account balance, class of transaction, units, etc.) minus the aggregate sum of individually significant items. The sampling requirements in the Clarified Auditing Standards are applicable when sampling populations are material and other analytical and tests-of-balances procedures are not used to satisfy audit objectives. Material sampling populations are normally those in excess of the lower limit of individually significant items at the assertion level.
Individually Significant Items
Selecting individually significant items is the process by which the sampling population is derived. Individually significant items must be audited 100 percent. For accounts receivable, a 100 percent audit would mean sending a positive confirmation and/or performing alternative procedures such as examining subsequent collections and shipping documents for an account to evaluate the existence and valuation assertions.
For inventories, a 100 percent audit includes observation of the physical inventory taking procedures, making sufficient test counts and performing price testing and clerical testing to evaluate the existence and valuation assertions. For tests of completeness of accounts payable, an auditor may select major suppliers' transaction records for confirmation and/or examine support for all subsequent disbursements over a percentage of the applicable lower limit for individually significant items at the assertion (account classification) level for several weeks or months.
Deciding which items are individually significant requires reconsideration of the risk assessment procedures and any tests of controls, systems walk-through or analytical procedures performed during planning that were considered in calculating tolerable misstatement (performance materiality) at the financial statement and assertion levels during planning. Some of these factors and their affect on the determination of individually significant items (ISIs) are:
- Risk of material misstatement at the financial statement level—high risk will lower tolerable misstatement and cause more items to be considered ISIs. Low risk will result in fewer ISIs.
- Risk of material misstatement at the financial statement classification/assertion level—high risk in the financial statement classifications being audited will result in lower tolerable misstatement and more ISIs; low risk will produce the opposite.
- Tolerable misstatement (performance materiality) levels—lower levels of tolerable misstatement for individual financial statement classifications will produce more ISIs. That is, a greater percentage of a classification would be subjected to audit. Higher levels of tolerable misstatement will permit lesser coverage of account balance amounts.
If the sampling population is less than the lower limit for individually significant items, AU-C 530 will not apply unless the population has some unusual characteristics such as a separate class of transactions or related party transactions. If the sampling population is greater than the lower limit of ISI, AU-C 530 will apply unless performing other analytical or tests of balances procedures can be used to evaluate relevant assertions more efficiently.
Planning a Strategy Not to Sample
Because audit sampling applications may take more time than performing non-sampling procedures, some auditors are planning strategies not to sample on all engagements other than certain audits of regulated industries or governments, which require some form of sampling. For some recorded populations, instead of sampling, it may be more cost effective to audit individually significant items covering a significant portion of the recorded population.
The dollar amount of the recorded population that is considered significant depends on the monetary amounts of the account balances, on the risks of misstatements at the assertion level, on the relative difficulty of auditing a majority of a population, and on the consideration of tolerable misstatement (performance materiality) for the financial statements as a whole. For example, confirmation of 70 percent to 80 percent of accounts receivable balances may be necessary when risk of misstatement at the financial statement and/or assertion level is high; 60 percent or less may be sufficient when these risks are moderate or lower.
Auditors will usually audit lesser amounts of inventories than of, say, receivables or fixed assets because of the relative cost of obtaining evidence. In doing so, less evidence is obtained supporting the opinion on the financial statements taken as a whole and thereby causes evidence requirements for other account classifications to be greater. This subjective consideration will also affect decisions about the necessary audit coverage of the other account classifications.
Consistent with this reasoning, less audit coverage of account classifications that are more difficult and costly to audit may be possible if larger amounts of less costly substantive evidence can be obtained from other account balances such as cash, fixed assets, etc. Depending on the relative amounts of these other account balances, it may be possible to audit individually significant items covering 10 percent to 20 percent of inventories, even if risks are high, and still not sample the remaining population. Risk assessment and analytical procedures may provide significant amounts of substantive evidence for all account classifications, also reducing the need for more costly tests of balances procedures.
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