Clarified Auditing Standards: Audit Sampling (AU-C Section 530) – Part 1by
When SAS No. 39, Audit Sampling, was issued, concepts of risk and materiality had not been adequately discussed in the professional literature. In fact, SAS No. 47, which contained risk and materiality concepts, was not issued until sometime later. Without it, many practitioners could not understand SAS No. 39 and its implementation took many years.
To understand sampling, an auditor must first understand concepts of risk and materiality. This article will build upon previous discussions of these subjects.
SAS No. 39, amended by SAS No. 111 and redrafted in the clarified auditing standard, Audit Sampling (AU-C Section 530), defines audit sampling as the application of an audit procedure to â€œless than 100 percent of the itemsâ€ 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.
AU-C Section 530 provides guidance relating to the auditor's judgment about establishing tolerable misstatement (similar to performance materiality) for specific audit procedures and on the application of sampling to tests of controls. It directs auditors to use tolerable misstatement calculated at the account classification level (rather than at the financial statement level) when calculating sample sizes.
Deciding to Sample or Not to Sample
A sampling population is the recorded population (account balance, class of transaction, units, etc.) minus the aggregate sum of the amounts 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, or the account classification level for smaller audits.
Individually Significant Items
Selecting individually significant items is the process by which the sampling population is derived. Individually significant items, instructs AU-C Section 530, 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 of individually significant items 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 (individually significant items) 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 procedures, or analytical procedures performed during planning that were considered in setting tolerable misstatement (performance materiality) at the financial statement and assertion levels.
Some of these factors and their impact on the determination of individually significant items are:
- Risk of material misstatement at the financial statement level. High risk will lower tolerable misstatement and cause more items to be considered individually significant items. Low risk will result in fewer individually significant items.
- Risk of material misstatement at the financial statement classification/assertion level. High risk in the financial statement classifications will result in lower tolerable misstatement and more individually significant items; low risk will produce the opposite.
- Tolerable misstatement (performance materiality) levels. Lower levels of tolerable misstatement for financial statement classifications will produce more individually significant items (i.e., a greater percentage of a classification would be subjected to auditing procedures). Higher levels of tolerable misstatement will permit lesser coverage of account balances.
If the sampling population is less than the lower limit for individually significant items, the sampling requirements of AU-C Section 530 will not normally 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 individually significant items, sampling will normally be performed unless performing other analytical or tests of balances procedures can be used to evaluate applicable assertions more efficiently.
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