Aneta Wilk-Lys, Consultant, CFRR

Transcription

1 Aneta Wilk-Lys, Consultant, CFRR Vienna 15 March 2016 Audit Training of Trainers Road to Europe: Program of Accounting Reform and Institutional Strengthening EU-REPARIS is funded by the European Union and is a part of WB EDIF.

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4 When designing audit procedures, the auditor should determine appropriate means for selecting items for testing so as to gather sufficient and appropriate audit evidence to meet the objectives of the audit procedures. 4

5 »The decision as to which approach to use will depend on the circumstances:»selecting all items (100% examination)»selecting specific items»audit sampling The decision as to which means, or combination of means, to use is made on the basis of the risk of material misstatement related to the assertion being tested and audit efficiency. 5

6 »Appropriate to the objective of the audit procedure»complete 6

7 » The auditor may decide that it will be most appropriate to examine the entire population of items that make up a class of transactions or account balance (or a stratum within that population).» 100% examination is unlikely in the case of tests of controls; however, it is more common for tests of details. For example,100% examination may be appropriate when:» the population constitutes a small number of large value items,» there is a significant risk and other means do not provide sufficient appropriate audit evidence,» the repetitive nature of a calculation or other process performed automatically by an information system makes a 100% examination cost effective, for example, through the use of computer-assisted audit techniques (CAATs). 7

8 » The auditor may decide to select specific items from a population based on such factors as the auditor s understanding of the entity, the assessed risk of material misstatement, and the characteristics of the population being tested.» The judgmental selection of specific items is subject to non-sampling risk.» Specific items selected may include:» High value or key items.» All items over a certain amount.» Items to obtain information.» Items to test control activities. The results of audit procedures applied to items selected in this way cannot be projected to the entire population. The auditor considers the need to obtain sufficient appropriate audit evidence regarding the remainder of the population when that remainder is material. 8

9 9-9» Applying a procedure to less than 100% of a population of items within a class of transactions or account balance such that all sampling units have a chance of selection.» To estimate some characteristic of the population» Qualitative» Quantitative 9

10 » Sampling risk and non-sampling risk can affect the components of the risk of material misstatement. For example, when performing tests of controls, the auditor may find no errors in a sample and conclude that controls are operating effectively, when the rate of error in the population is, in fact, unacceptably high (sampling risk). Or there may be errors in the sample which the auditor fails to recognize (non-sampling risk). For both tests of controls and substantive tests of details, sampling risk can be reduced by increasing sample size, while non-sampling risk can be reduced by proper engagement planning, supervision and review. 10

11 »The auditor may decide to apply audit sampling to a class of transactions or account balance.»audit sampling can be applied using:» non-statistical audit sampling and other means of testing» statistical sampling methods 11

12 » Use of a computerized random number generator (through CAATs) or random number tables.» 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.» Monetary units sampling (MUS)- probability weighted seletion» Block selection involves selecting a block(s) of contiguous items from within the speified. 12

13 » Haphazard selection, in which the auditor selects the sample without following a structured technique» Judgemental selection based fully on auditors judgement 13

14 9-14» When planning the sample consider:» The relationship of the sample to the relevant audit objective» Materiality or the maximum tolerable misstatement or deviation rate» Allowable sampling risk» Characteristics of the population» Select sample items in such a manner that they can be expected to be representative of the population» Sample results should be projected to the population» Items that cannot be audited should be treated as misstatements or deviations in evaluating the sample results» Nature and cause of misstatements or deviations should be evaluated 14

15 9-15» Determine the objective of the test» Define the attributes and deviation conditions» Define the population to be sampled» Choose an audit sampling technique» Specify:» The risk of assessing control risk too low» The tolerable deviation rate» Estimate the population deviation rate» Determine the sample size» Select the sample» Test the sample items» Evaluate the sample results» Document the sampling procedure 15

16 9-16 Large Sample Size (above 250 items) and 0 deviations expected Inherent Risk: Significance Inherent Risk: Likelihood Minimum Sample Size High High 60 High Medium 40 Medium High 40 Medium Small 25 Small Sample Size (below 250 items) and 0 deviations expected Frequency Minimum Sample Size Quarterly 2 Monthly 2-4 Semi-monthly 3-8 Weekly

17 9-17» Identify deviations. Place each sample item into one of two classifications: deviation or no deviation» Cosider nature and cause of each deviation.» Consider sampling risk. If deviations have been found, consider if reliance on control effectivenessshould be reduced, the sample size extended or alternative procedures performed. THERE IS NO POINT IN TESTING CONTROLS IF DEVIATIONS ARE LIKELY TO BE FOUND 17

18 9-18» The results of the sample can be evaluated by comparing the maximum tolerable deviation rate to what is called the upper deviation limit. The upper deviation limit is approximated by the following formula: Upper deviation limit = adjusted confidence factor/sample size.» Adjusted confidence factor can be based on the numer of deviations found: Adjusted confidence factor for number of deviations found Confidence level required % % % %

19 9-19» Let s assume sampling of 30 items (using 90% confidence level and 10% maximum tolerable deviation rate) and two deviations were found. The upper deviation limit would be calculated as follows: Adjusted confidence factor (5.3)/sample size (30) = upper deviation limit (17%)» The result 17% is much higher than the maximum tolerable deviation rate of 10%. This means that reliance on control effectiveness would have to be reduced.» However, if it was decided to increase the sample size, it would have to be extended to 60 items and no further deviations found. This would reduce the upper deviation limit (as calculated below) to an acceptable level of ca. 9% Adjusted confidence factor (5.3)/sample size (60) = Upper deviation limit (9%)» However, if further deviations are found, it would require another extensiojn of a sample to try for desired results. This would not be effective use of audit time, as yet another deviation could well be found. Adjusted confidence factor (6.7)/sample size (75)=Upper deviation limit (9%) 19

20 » Conclusions?» Decisions?» Professional judgement 20

21 9-21» Determine the objective of the test» Define the population and sampling unit» Choose an audit sampling technique» Define tolerable misstatement» Determine the sample size» Select the sample» Test the sample items» Evaluate the sample results» Document the sampling procedure 21

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23 » Monetary Unit Sampling (MUS), also known as probability proportional-to-size sampling (PPS) or dollar unit sampling (DUS), is a statistical sampling method used to determine the accuracy of financial account balances.» Each individual dollar (i.e. monetary unit) in an account balance is considered a sampling unit, thus accounts in the population with a higher balance have a proportionately higher chance of being selected. 23

24 » The sample size can be determined by using MUS sampling tables (e.g. AICPA or IFAC audit guides) or statistical audit sampling software. The inputs required are:» Population Value (PV): the book value or monetary value of the population.» Tolerable Misstatement (TM): the tolerable margin of error or precision for the sample estimate of the population value (i.e. performance materiality).» Expected Misstatement (EM): the expected amount of misstatement in the population value.» Confidence Level (CL): the level of assurance required (i.e. complement of risk of incorrect acceptance). 24

25 » Assuming: PV= , TM= , EM=0 and CL=95%» Specific items (subject to separate review) » Determine the Confidence Factor from the MUS sampling tables:» Ratio of Expected-to-Tolerable Misstatement (EM/TM) = 0.00» Match to the Confidence Level of 95% (i.e. 5% Risk of Incorrect Acceptance)» MUS confidence factor = 3» Calculate the sample size using the MUS formula : Sample Size = Confidence Factor (PV/TM)» = 3 [( )/15 000)] = 28» Calulate the sampling interval using the formula: PV/sample size = ( )/28 =

26 »Select the sample using calculated interval. Each amount in the population is added to a cumulative total. The amount which causes the cumulative total to equal or exceed the random start ($436) is selected as the first sample. The remaining samples are selected from subsequent amounts which cause the cumulative total to equal or exceed each increment of the sampling interval (i.e. $5 436, etc). Customer Accounts receivable balance Cumulative total Sampling interval Inlude in sample? Customer A Yes Customer B Yes Customer C No Customer D Yes Customer E No Customer F Yes 26

27 » Calculate thevalue of misstatement in each item. (eg. Balance found 50, but should have been 60, the misstatement is 10, ie 17% of the total.» Add up misstatements netting overstatements and understatements.» Calculate the average percentage misstatement per item sampled by dividing the total misstatement percentages by the numer of all items sampled (with and without misstatements).» Multiply the average percentage misstatement by the total representative population monetary value (excluding high value and key items tested separately). 27

28 » For example, sample of 50 items selected from a population of EUR contained the following three misstatements: Consider anomalies Correct value (EUR) Audited value (EUR) Misstatement (EUR) Misstatement % % % % Total percentage error 37.86% Average misstatement 37.86%/50 (sample size) % Projected misstatement %* ,

29 » Conclusions?» Decisions?» Professional judgement 29

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31 »Use template 9 to perform a Sample calculation for Accounts Receivable confirmations using MUS selection»work in Groups for 15 minutes»the following sampling parameters are given: Population book value Sampling Parameters EUR Number of items 30 Sampling Interval (Performance Materiality / Confidence Factor) EUR / 3 = 2,8 Random number (between 1 and sampling interval) 2 31