Auditing is checking a company’s financial records to ensure the transactions are correct and honest. Because companies prepare their financial statements, there is a higher chance of errors or fraud in how the statements are made. Audit sampling means checking only part of an account balance or a group of transactions instead of reviewing every item. This helps the auditor gather enough information to form an opinion on the financial statements.
The auditor carefully selects a sample that represents the entire group. The findings from this sample are used to draw conclusions about the whole group. If the sample doesn’t truly reflect the larger group, the auditor might make a wrong judgment, increasing the chance of mistakes in the audit.
Types of Audits
An audit checks if a company’s financial records are accurate. Chartered Accountants do external audits, while companies may assign knowledgeable employees to handle internal audits. Audits can take longer if companies don’t follow accounting rules or keep proper paperwork. Audits can also vary depending on the company. Here are the two main types of audits:
Internal Audit
- Done by employees within the company.
- The results stay within the company and aren’t shared outside.
- It helps the company find any areas where mistakes or fraud could happen so that they can fix them.
External Audit
- Done by independent people, like chartered accountants or accounting firms.
- Gives an unbiased view of the company’s financial records.
- External auditors have no personal connection to the company, which helps them stay fair and objective.
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Objectives and Purpose of Audit Sampling
Auditing is a necessary process that helps auditors achieve their goals more easily, especially when they have a set time to finish the work. By checking a sample of records, auditors aim to provide a fair summary of all records. Here are the main objectives of the importance of audit sampling:
Objectives
- Collect evidence to give an audit opinion on time.
- Prove that the audit was done carefully and professionally, following all standards.
- To make the work easier, assign tasks to audit assistants and help the lead auditor gather evidence and form conclusions about the financial records.
Purpose
- Sampling helps the auditor form an opinion on the company’s financial records.
- It helps find any mistakes or fraud in the financial statements.
- Sampling allows the auditor to check details more efficiently and investigate more thoroughly by selecting a small group from all the records.
Process of Doing Audit Sampling
Once the audit goals and methods are clear, the auditor needs to carefully select items to check. This involves deciding on a sampling method, determining the sample size, and defining what counts as an error. Here’s a simple guide:
Plan the Sample
- Identify the Population: This is the complete set of data from which the sample will come. It could include transactions, account balances, or specific monetary amounts.
- Define the Sampling Units: Clearly outline what type of items (like transactions or balances) will make up the sample.
- Ensure Accuracy: The population must be complete and relevant to the auditor’s goals for a meaningful sample.
Determine the Sample Size
Auditors look at the differences in the data and any errors (like how often they happen and where they are found) to see if there are any patterns. For example, there might be more errors at the end of the year because of extra spending.
They also check if the audit sampling is large enough to represent the company well and if the items chosen are relevant to the audit year or match the level of importance set by the auditor. This means deciding what is acceptable for review.
Define Differences and Deviations
Auditors decide what counts as an error based on the type of audit and its goal. They limit how much error is acceptable for the entire data set. To calculate the sample size, auditors look at the expected error rate (for checking controls) and how many mistakes they think will be found (for detailed testing). They use their experience and judgment to make these decisions.
Types of Sampling in Audit Sampling
Here are the different kinds of audit sampling methods that auditors use:
1. Statistical Sampling
Auditors use random sampling when there are many goods or transactions to check. The main idea is that the auditor picks items at random, and conclusions are drawn based on the results. This method ensures that every item in the group has the same chance of being chosen.
Some common types of statistical sampling include:
- Random Sampling: Items are picked randomly from the group.
- Systematic Sampling: A pattern or system is followed to pick items.
- Multi-stage Sampling: Several steps are used to pick items, starting with a broad group and narrowing it down.
- Monetary-Unit Sampling: Items are selected based on the money value of transactions, with larger amounts given more importance.
- Stratified Sampling: The group is divided into smaller sections, and samples are taken from each section to ensure all parts are checked.
2. Non-Statistical Sampling
Non-statistical sampling occurs when the auditor uses judgement to select samples instead of statistical methods. This approach is often chosen because it’s practical and allows the auditor to use their expertise.
While flexible and practical, this method can be influenced by the auditor’s personal choices.
Some common types of non-statistical sampling include:
- Judgmental Sampling: The auditor picks samples based on their experience and understanding of the company.
- Haphazard Sampling: The auditor chooses items without any set pattern, but tries to be fair.
- Block Sampling: The auditor selects a group of items that share certain features, rather than picking items randomly.
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