Types of Audit Sampling

 

Types of Audit Sampling

Types of Audit Sampling

The audit is the most critical function for any business to ascertain the reliability of its financial statements and other documents. Thus, most companies, whether small or big, get their financial statements and other activities audited by certified accountants or accounting firms. 

The audited accounts create confidence in the investors, banks, financial institutions, tax authorities and others who are concerned with the affairs of the company in making necessary investments and other decisions.  Now the question arises of how the audit is to be conducted.

There are three types of companies viz. small, medium and big companies mainly measured by their turnover and number of transactions. In the case of small companies where the number of transactions is very limited, the auditors can check all the transactions of the company whereas, in the case of medium and big companies.

It is very difficult for the auditors to conduct a hundred per cent checking of all the transactions of the company.  Under this situation, the auditors select some transactions out of each type of transaction for checking.

As there are no statutory or other types of restrictions on auditors to select the quantum of transactions for checking the auditors select it by their judgment and experience.  The transactions selected by the auditors for checking are called audit sampling. 

Types of Audit Sampling

Meaning of Audit Sampling

Audit sampling is based on the thought that all the transactions from which the sample for audit checking is selected are the same i.e. in case 20,000 payments are made during a year for the purchase of a particular type of raw material but only 2000 transactions are selected for test check out of all the 20,000 transactions.

Then the audit sample for this type of payment transaction will be these 2,000 transactions and the ratio of test check of the audit will be 10%.  The result of the audit checking of these 2,000 transactions will be applied to the entire 20,000 payment transactions and the auditors will incorporate in their report that their findings are based on a 10% test check of payment transactions.

The test check audit is generally applied to organizations where there is an efficient internal control system duly appreciated by the professionals is applicable because this system itself decreases the chances of error, fraud, leakage etc. to the minimum level.

 Types of Audit Sampling

How to Select Audit Sampling

At the time of selecting the audit sampling, the auditors have to take utmost care in applying their mind and judgement after keeping in view the nature, size and number of transactions to be checked.  Generally, the totals of all transactions and all transactions of the big amount must be checked in full.

The primary purpose of the test check as disclosed by the auditors in their audit report save them from any error, fraud, misappropriation or any other shortcomings found later in the unchecked transactions and will not affect the truth and fairness of the financial accounts of the company.  The following are some methods based on which audit samples are selected.

1. Simple Random Audit Sampling Method

Under this sampling method, each unit is given an equal chance of selection. For this purpose, each team is assigned a number and then randomly selects a number out of the entire numbers for test check.  

By this method, the chances of bias become zero but the main disadvantage of this method is that the unit for selection is not selected on auditor’s judgement and experience basis.

2. Systematic Audit Sampling Method

Under this method, the total number of units is divided by the number of units to be selected for test check i.e. in case there are 500 units and 25 are to be selected for test check then every 20th unit will be selected for test check ( 500 / 25 = 20 ).

3. Block Audit Sampling Method

Under this method, a block of transactions/units is selected for test check, for example, the most recent block, middle block, and last block. Under this method, the testing will include 100 per cent of the selected block items.

4. Haphazard Audit Sampling Method

This method of sampling is almost the same as the simple random sampling method. Under this method, random numbers for checking are generated without using any tools or without any kind of bias. Moreover, the auditors must take every care in the selection and application of the above methods of sampling.

The selection of sampling must be free from all bias. The auditors should apply their judgment and experience to a selection of audit sampling.  The transactions must be classified into suitable heads and sub-heads. In case any fraud, error, or misappropriation is found, the entire transaction should be checked thoroughly.

5. Statistical Audit Sampling Method 

Under this system of sampling method, the samples are selected by various gadgets, tools and software. The software does a random selection of units sample size and number for test check.

6. Non-Statistical Audit Sampling Method 

This method is based on auditors’ judgment and experience in the selection of the size of the sample for checking. 

CONCLUSION 

No doubt, as far as possible, all the financial statements and other documents should be checked by the auditors but it is not possible in the case of medium or large scale companies.  To resolve this problem the audit and accounts, experts found a way to test check audit which was accepted by all accounting rules and procedures.  

The main problem for the test check audit was the selection of audit sampling. Various statistical and non-statistical methods were developed to solve this problem as discussed above but these methods are not enough and the work is still going on to develop new scientific methods to make this system more and more effective. 

At the time of selecting the audit sampling, the auditors have to take utmost care in applying their mind and judgement after keeping in view the nature, size and number of transactions to be checked. Generally, the totals of all transactions and all transactions of the big amount must be checked in full.  

The primary purpose of the test check as disclosed by the auditors in their audit report save them from any error, fraud, misappropriation or any other shortcomings found later in the unchecked transactions and will not affect the true and fairness of financial accounts of the company.  

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