Hanrick Curran Audit Training - Sampling for Audit Evidence - June 2013

Sampling for Audit Evidence
(ASA 530 / ISA 530)
June 2013

Objectives for today
• A look at the requirements for audit evidence (ASA 500 / ISA 500)
• An overview of different types of audit sampling
• Building a conceptual framework for determining sample sizes
• Using the CaseWare workpapers
Audit Training - Sampling - June 2013

Today’s presenters
– Matthew Green CA
Contact details: matthew.green@hanrickcurran.com.au
0447 724 595
(07) 3218 3900
Twitter: @matthewjgreenca
LinkedIn: http://au.linkedin.com/in/matthewjgreenca
Web: www.hanrickcurran.com.au

AUDIT RISK
The Fundamental Basis of Australian Auditing Standards
Source for this section: GAAP Consulting

Overview of the audit risk model
 Audit risk is the risk that the auditor will give an inappropriate
audit opinion when the financial report is materially
misstated.
 Before issuing an opinion on the financial
report, the auditor needs to reduce audit risk to an acceptable
level to ensure the opinion is reliable.

Reducing audit risk
 An auditor reduces audit risk by performing audit procedures
until there is sufficient appropriate evidence for each assertion
of each significant transaction class or account balance to
provide reasonable assurance that the financial reports are
not materially misstated
 The audit risk model focuses audit effort on those classes of
transactions or balances (and the particular assertions) that
are likely to contain material misstatements

Components of audit risk (AR)
Inherent risk (IR):
– Susceptibility of an assertion to material
misstatement BEFORE consideration of related
controls
Control risk (CR):
– Risk that material misstatement might not be
prevented or detected and corrected by internal
control procedures
Detection risk (DR):
– Risk that auditors’ procedures will not detect a
material misstatement

Audit Risk
IR
CR
DR
Client controlled risks
Auditor controlled risks

Audit Risk

Remember the formula?
IR x CR x DR = AR
or
Likelihood x Impact = IR x CR = RR
RR x DR = AR

Another way to look at it

ICAA Audit Manual on Risk Assessment
Review Chapter 29.3 of the audit manual . . .
Note the risk assessment comments
and table on pp. 456 & 457!

AUDIT EVIDENCE
Understanding the requirements of ASA 500

ASA 500 – Requirements for audit evidence
4. The objective of the auditor is to design and perform audit
procedures in such a way as to enable the auditor to obtain
sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s
opinion.

5(b). Appropriateness means the measure of the quality of
audit evidence; that is, its relevance and its reliability in
providing support for the conclusions on which the
auditor’s opinion is based.
5(e) Sufficiency means the measure of the quantity of audit
evidence. The quantity of the audit evidence is affected
by the auditor’s assessment of the risks of material
misstatement and also by the quality of such audit
evidence.

9. When using information produced by the entity, the
auditor shall evaluate whether the information is
sufficiently reliable for the auditor’s purposes, including
as necessary in the circumstances:
(a) Obtaining audit evidence about the accuracy and
completeness of the information; and
(b) Evaluating whether the information is sufficiently
precise and detailed for the auditor’s purposes.
“ASIC’s Top 10 issues for auditors includes
a failure to apply professional scepticism
and document work. Audit Training - Sampling - June 2013

11. if:
(a) audit evidence obtained from one source is
inconsistent with that obtained from another; or
(b) the auditor has doubts over the reliability of
information to be used as audit evidence,
the auditor shall determine what modifications or
additional to audit procedures are necessary to resolve
the matter, and shall consider the effect of the matter, if
any, on other aspects of the audit.

A2. … procedures to obtain audit evidence can include
 Inspection
 Observation
 Confirmation
 Re-calculation
 Re-performance
 Analytical procedures
 Enquiry

A52. … The means available to the auditor for selecting items
for testing are:
(a) selecting all items (100% testing)
(b) selecting specific items
(c) audit sampling
Testing
All items
Specific items
Sampling

AUDIT SAMPLING
Understanding the requirements of ASA 530

ASA 530 – Requirements for audit sampling
5(a). Audit sampling means the application of audit procedures
to less than 100% of items within a population of audit
relevance such that all sampling units have a chance of
selection in order to provide the auditor with a reasonable
basis on which to draw conclusions about the entire
population.
5(b) Population means the entire set of data from which a
sample is selected and about which the auditor wishes to
draw conclusions.

5(c). Sampling risk means the risk that the auditor’s
conclusions based on a sample may be different from the
conclusion if the entire population were subjected to the
same audit procedure.
5(d) Non-sampling risk means the risk that the auditor
reaches an erroneous conclusion for any reason not
related to sampling risk.

5(e). Anomaly means a misstatement or deviation that is
demonstrably not representative of misstatements or
deviations in a population.

5(g). Statistical sampling means an approach to sampling that
has the following characteristics:
(i) Random selection of sample items; and
(ii) The use of probability theory to evaluate sample
results, including measurement of sampling risks.
A sampling approach that does not have characteristics
(i) and (ii) is considered non-statistical sampling.

5(i). Tolerable misstatement means a monetary amount set by
the auditor in respect of which the auditor seeks to obtain
an appropriate level of assurance that the monetary
amount set by the auditor is not exceeded by the actual
misstatement in the population.
“Typically this would be the amount determined
as materiality, specifically the performance
materiality, or a lower amount.

12. The auditor shall investigate the nature and cause of any
deviations or misstatements identified, and evaluate their
possible effect on the purpose of the audit procedure and on
other areas of the audit
13. In the extremely rare circumstances when the auditor considers
a misstatement or deviation discovered in a sample to be an
anomaly, the auditor shall obtain a high degree of certainty that
such misstatement or deviation is not representative of the
population. The auditor shall obtain this degree of certainty by
performing additional audit procedures to obtain sufficient
appropriate evidence that the misstatement or deviation does
not affect the remainder of the population.

Sample selection methods (ASA 530.App 4)
(a) Random selection (applied through random number
generators or random number tables)

(b) Systematic selection, in which the number of sampling units
in the population is divided by the sample size to give a
sampling interval, for example 50, and having determined a
starting point within the first 50, each 50th sampling unit
thereafter is selected. Although the starting point may be
determined haphazardly, the sample is more likely to be truly
random if it is determined by use of a computerised random
number generator or random number tables. When using
systematic selection, the auditor would need to determine that
sampling units within the population are not structured in such
a way that the sampling interval corresponds with a particular
pattern in the population.

(c) Monetary Unit Sampling is a type of value-weighted selection
(as described in Appendix 1) in which sample size, selection and
evaluation results in a conclusion in monetary amounts.
“Also known as Dollar Unit Sampling (DUS) or
Constant Monetary Amount (CMA) sampling.

(d) Haphazard selection, in which the auditor selects the sample
without following a structured technique. Although no
structured technique is used, the auditor would nonetheless
avoid any conscious bias or predictability (for example, avoiding
difficult to locate items, or always choosing or avoiding the first
or last entries on a page) and thus attempt to ensure that all
items in the population have a chance of selection. Haphazard
selection is not appropriate when using statistical sampling.

(e) Block selection involves selection of a block(s) of contiguous
items from within the population. Block selection cannot
ordinarily be used in audit sampling because most populations
are structured such that items in a sequence can be expected to
have similar characteristics to each other, but different
characteristics from items elsewhere in the population. Although
in some circumstances it may be an appropriate audit procedure
to examine a block of items, it would rarely be an appropriate
sample selection technique when the auditor intends to draw
valid inferences about the entire population based on the
sample.

DETERMINING A SAMPLE
SIZE
Using the ICAA Audit Manual

Using a confidence factor
Sampling can be completed by using a confidence factor to help
set the sample size. Confidence factors are described in the
ICAA Australian Audit Manual (p.497)

Determine a selection interval

Determine a sample size

Determine a sample size
Using CaseWare’s template:

How do I select a confidence factor?
“professional
judgement.

Lets discuss some practical questions?
Need more information, see the ICAA Aust. Audit Manual:
- Chapter 29
- Chapter 31
- Chapter 32

About Hanrick Curran
Our client base is mainly located in South East Queensland, but also
extends to Northern New South Wales, Western Queensland, Sydney,
Melbourne, Darwin, Townsville and Mackay as well as other regional
areas.
Hanrick Curran are a member firm of the international Alliott Group,
which is a worldwide alliance of independent firms that combine to work
on engagements and who refer work where local knowledge is a
requirement.
Hanrick Curran’s Client Base

This document contains information in summary form and is therefore intended
for general guidance only. It is not intended to be a substitute for detailed
research or the exercise of professional judgement. It does not purport to be
comprehensive or to render professional advice. The reader should not act on
the basis of any matter contained in this publication without first obtaining
specific professional advice.
We believe that the statements made by us in this document are accurate but no
warranty of accuracy or reliability is given. Our conclusions are based on
interpretations of accounting standards and other relevant professional
pronouncements and legislation current as at the date of this document. Should
the interpretations, accounting standards, other relevant professional
pronouncements or legislation change, our conclusions may not be valid. We are
under no obligation to update the matters considered in this document after its
publication.
© Hanrick Curran, June 2013
All rights reserved
Disclaimer
Liability limited by a scheme approved under
professional Standards Legislation

Thank you
www.hanrickcurran.com.au
Hanrick Curran
t. (07) 3218 3900
f. (07) 3218 3901
Level 11
307 Queen Street
Brisbane Qld 4000
GPO Box 2268
Brisbane Qld 4001

Hanrick Curran Audit Training - Sampling for Audit Evidence - June 2013

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Hanrick Curran Audit Training - Sampling for Audit Evidence - June 2013