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SAMPLING FOR INTERNAL AUDITORS - ISACA

By Mwenya P. Chitalu CIA SAMPLING FOR EFFECTIVE INTERNAL AUDITING EXPECTED PRESENTATION OUTCOMES Why Do AUDITORS Sample? SAMPLING Policy Statistical & Non-statistical SAMPLING Statistical Terminologies Statistical SAMPLING Plans External Auditing Standards Sample Selection Methods Illustrations DEMYSTIFYING STATISTICAL SAMPLING The Principle (or Law) of Parsimony: That things are usually connected in the simplest or most economical way. Reducing ideas to small, easy-to-write symbols & saying a lot in a small area covered by a formula. Eliminate the Greek, Arabic & Roman language barrier in symbols & Formulae that mystify Mathematics or Statistics. Just like any other audit , Probe Statistical Assertions-Life can be made easy with appropriate SAMPLING .

EXTERNAL AUDITING STANDARDS Internal & External Audit Work Coordination & Recognition: Statement on Auditing Standards (SA) No. 39: Audit Sampling & SAS No. 47: Audit Risk & Materiality in Conducting an Audit – AICPA. Audit Risk Model: Audit Risk: Issuing unmodified opinion on financial statements that are materially misstated. …

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Transcription of SAMPLING FOR INTERNAL AUDITORS - ISACA

1 By Mwenya P. Chitalu CIA SAMPLING FOR EFFECTIVE INTERNAL AUDITING EXPECTED PRESENTATION OUTCOMES Why Do AUDITORS Sample? SAMPLING Policy Statistical & Non-statistical SAMPLING Statistical Terminologies Statistical SAMPLING Plans External Auditing Standards Sample Selection Methods Illustrations DEMYSTIFYING STATISTICAL SAMPLING The Principle (or Law) of Parsimony: That things are usually connected in the simplest or most economical way. Reducing ideas to small, easy-to-write symbols & saying a lot in a small area covered by a formula. Eliminate the Greek, Arabic & Roman language barrier in symbols & Formulae that mystify Mathematics or Statistics. Just like any other audit , Probe Statistical Assertions-Life can be made easy with appropriate SAMPLING .

2 If it cannot be measured, then it cannot be managed economically, efficiently, & effectively. Mathematics or statistics is commitment to logical thinking. It squeezes the most learning about the population from limited sample data. WHY DO AUDITORS SAMPLE? International Standards for the Professional Practice of INTERNAL Auditing: Guides Information should be: Sufficient, Reliable, Relevant & Useful Acknowledges SAMPLING Techniques in Evidence Acquisition Opinions are NOT ABSOLUTE GUARANTEE but REASONABLE ASSURANCE of Accuracy Proficiency & Due Professional Care Cost-Benefit Considerations: The Economy, Efficiency & Effectiveness, .. Corroborating Evidence for Control Processes & Account Balances SAMPLING POLICY Written Policy Statement When to Sample?

3 Who Should Sample? How to Sample? Inappropriate Uses for SAMPLING : When a Total is easily Audited Inquiry & Observation Procedures Analytical Procedures STATISTICAL & NON-STATISTICAL SAMPLING Three Characteristics in Common: Both Require Auditor judgment in Planning, Implementing, & Evaluating the SAMPLING Plan Actual audit Procedures Performed are the same Both Non-Statistical & Statistical Techniques are Permitted by the IPPF STATISTICAL & NON-STATISTICAL SAMPLING Differences between Statistical & Non-statistical SAMPLING SAMPLING Risk is Controlled & Measurable Technical Training & Knowledge is Required Computer Accessibility STATISTICAL & NON-STATISTICAL SAMPLING In Summary, the following should be addressed.

4 What is the INTERNAL audit Department s Recommended Policy or Procedure? Is a Quantitative measure of SAMPLING Risk Desired? What is the relative Cost & Benefit of Statistical versus Non-statistical SAMPLING ? Is Technical Expertise Available? Is Computer Software Accessible or Expertise to Write a Program? STATISTICAL TERMINOLOGIES Confidence Level (C): Is the Reliability Level or Degree of Belief in the Obtained Results. Measure of Central Tendency: Mean ( ): The arithmetic average of a set of numbers. Median: The halfway value of raw data arranged in numerical order from lowest to highest. Mode: The most frequently occurring value. Standard Deviation ( ): The statistical measurement of the variability of values in a sample (the square root of the variance).

5 Range: The difference between the largest and smallest values of any group. Population (N): The total number of items from which the sample is drawn-It s the focus of interest comprising SAMPLING units. SAMPLING Unit: Individual items making up a Population. Sample (n): Collection of SAMPLING units on which audit procedures are performed. STATISTICAL TERMINOLOGIES STATISTICAL TERMINOLOGIES Logical Unit: Account or transaction selected to be sampled. Expected Population Deviation Rate ( ): Estimate of the actual deviation rate in the population, usually based on prior experience, inquiries, and observations. Precision (P): An assumed amount of possible unknown or the range of allowable error. Tolerable Misstatement: The auditor s assessment of materiality with respect to the population.

6 Upper Precision Limit: Upper limit on deviations expected in the population. STATISTICAL TERMINOLOGIES Tainting: Percentage of misstatement in a logical unit in a PPS sample. Upper Misstatement Limit (UML): Estimated maximum misstatement existing in the population at a specified reliability in PPS SAMPLING . SAMPLING Risk: Conclusions based on sample differing with conclusions that could be reached if the entire population were examined. Non- SAMPLING risk: Drawing incorrect conclusion for reasons other than SAMPLING due to poor judgment or failure to adhere to professional standards. STATISTICAL SAMPLING Advantages Disadvantages May yield desired results from minimum number of items Yields quantified data Includes measures of SAMPLING risk, confidence level.

7 And precision Is adaptable to computer testing Lends credibility to audit conclusions/recommendations Can be costly and time-consuming May require training and software costs May preclude experienced AUDITORS insights NON-STATISTICAL SAMPLING Advantages Disadvantages Flexibility Use of INTERNAL auditor s judgment Allows reasonable reliability at reasonable cost Results not statistically valid No objective measure of SAMPLING risk provided Chance of wrong sample size Effectiveness depends upon auditor s skill STATISTICAL SAMPLING PLANS SAMPLING (TESTS OF CONTROLS) Concerns binary, yes/no, or error/non-error populations It tests the effectiveness of controls. SAMPLING (SUBSTANTIVE TESTS) Concerns monetary amounts & other measures.

8 It assesses materially misstated account balances & .. PPS SAMPLING ( THE CAV SAMPLING ) Concerns primary engagement objective of few overstatements & not understatement. Difference & Ratio Estimations may not be efficient. EXTERNAL AUDITING STANDARDS INTERNAL & External audit Work Coordination & Recognition: Statement on Auditing Standards (SA) No. 39: audit SAMPLING & SAS No. 47: audit Risk & Materiality in Conducting an audit AICPA. audit Risk Model: audit Risk: Issuing unmodified opinion on financial statements that are materially misstated. Inherent Risk: Material misstatement occurring in the absence of appropriate controls. Control Risk: Controls ineffective & fails to prevent or detect material misstatement in a timely manner.

9 Detection Risk: Substantive procedures failing to detect a material misstatement. audit Risk = Inherent Risk x Control Risk x Detection Risk EXTERNAL AUDITING STANDARDS SAMPLING risk impacts the Efficiency & Effectiveness of an audit Components of SAMPLING Risk audit Test audit Efficiency audit Effectiveness Tests of Controls Risk of Assessing Control Risk Too High ( , not depending upon effective controls) Risk of Assessing Control Risk Too Low ( , depending upon ineffective controls) Substantive Tests Risk of Incorrect Rejection ( , rejecting a materially correct balance) Risk of Incorrect Acceptance ( , accepting a materially incorrect balance) Statistical Term Alpha Risk ( ) Beta Risk ( ) EXTERNAL AUDITING STANDARDS Non- SAMPLING Risk The audit failing to detect an INTERNAL control weakness or material misstatement for reasons other than the fact that SAMPLING was used.

10 Application of an inappropriate audit procedure Failure to recognize an error condition Omission of an essential audit step Materiality: Amount of difference tolerated by the auditor & concluding the assertion tested as reasonable: Tolerable deviation rate for tests of control Tolerable misstatement for substantive testing Materiality is inversely related to sample size Materiality assessment must be a cost versus benefit decision SAMPLE SELECTION METHODS Methods Appropriate for Both Statistical & Non-statistical SAMPLING : Simple Random SAMPLING : Items with equal chance of selection. Systematic SAMPLING : nth item selection with random start within the n interval. PPS uses systematic SAMPLING . Methods Used Only for Non-statistical SAMPLING : Haphazard Selection: Selecting sample items without intentional bias.


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