SAMPLING AND ERROR EVALUATION RSM US LLP. All Rights Reserved.

Transcription

1

2 SAMPLING AND ERROR EVALUATION

3 SAMPLING

4 Sampling Factors to consider when sampling Population size and aggregate balance Tolerable misstatement Expected error Assurance factors Significant risk Reliance on controls Reliance on analytics

5 Sampling When selecting items from the population, two fundamental concepts to apply are: The sample items should be selected in a manner such that the resulting sample is expected to be representative of the population, and Every item in the population subject to sampling should have an opportunity to be selected for testing. Note this doesn t imply that items in the population should have an equal opportunity to be selected. As noted below, for example, a dollar unit technique increases the likelihood that higher dollar items will be selected.

6 Sampling Selection Options Dollar unit selection technique Random/haphazard technique

7 Dollar Unit Dollar unit selection provides an opportunity for each dollar within a recorded balance to be selected

8 Random Random Random number selection involves using random number selection methods and assumes a source of random numbers (such as a random number generator in a software package) and a series of population items which are numbered in such a fashion that there is a one-to-one correspondence between the selected random number and the selected sample item.

9 Haphazard Haphazard selection is a sample selection technique that approximates a random sampling approach by selecting sampling units without any conscious bias, that is, without any special reason for including or omitting items from the sample.

10 Differences in Selection Techniques Dollar Unit Characteristics Provides more coverage since higher dollar items are selected Selections weighted toward higher dollar items Well suited for tests where overstatement of the population is of primary concern Random/Haphazard Characteristics Compared to dollar unit provides less coverage The recorded amount of the items in the population is not part of the auditor s consideration of whether to select the item. Well suited for tests where selection of items with small, negative or zero recorded amounts are of the same concern as larger dollar items

11 Subsampling vs Subselecting Subsampling Once a selection is made, we realize that the selection is the total of several units. We would then just select one of these units. NOTE This is not allowed. Subselecting An advanced understanding of what the actual sub selection will be. The initial unit may be selected as the first step and then the subselection made as the 2 nd step. NOTE This is acceptable.

12 Can I Scope? Scoping is allowed if the remaining untested balance is subject to further procedures. Example The top 10 AR balances are selected for confirmation testing. Then the remaining population is subject to sampling

13 What happens when an error is identified? The error should be extrapolated over the entire population Very rare that an error is isolated Calls into question if the population is homogenous If we are isolating the error, then further procedures need to be performed. We cannot just rely on discussions with management. If the error is identified through attribute testing, the error cannot be extrapolated. Further procedures are required.

14 CONTROL DEFICIENCIES

15 Control Deficiency A deficiency in design exists when: A control necessary to meet the control objective is missing or An existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met

16 How are deficiencies identified? Deficiencies can be identified in many ways throughout the audit: Risk assessment procedures Prior audits Tests of controls Misstatements in the financial statements Client identified (management, internal auditor or the board of directors)

17 Evaluating Control Deficiencies Documentation must include: Description of the identified deficiency Account balance / class of transactions / disclosures / assertions impacted Uncorrected misstatements and adjusting entries Potential misstatement Compensating controls Identifying the component of internal control Indicators of a material weakness Conclusion on the classification of a control deficiency Evaluating of the sufficiency of audit procedures

18 Classification Characteristic Magnitude of the potential misstatement (after consideration of compensating controls) Material weakness indicators Merits attention of those charged with governance (TCWG) View of prudent official Control Deficiency Inconsequential (e.g., less than 20% of ML) Significant Deficiency Less than ML Material Weakness Greater than ML Not present Not present Present or not present No Yes Yes Would not merit attention of TCWG Would not be a material weakness Would be a material weakness

19 2016 RSM RSM US LLP. US LLP. All Rights All Rights Reserved. Reserved.

20 RSM US LLP Address City Phone This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. RSM US LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person. Internal Revenue Service rules require us to inform you that this communication may be deemed a solicitation to provide tax services. This communication is being sent to individuals who have subscribed to receive it or who we believe would have an interest in the topics discussed. RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. RSM and the RSM logo are registered trademarks of RSM International Association. The power of being understood is a registered trademark of RSM US LLP RSM US LLP. All Rights Reserved.