Question

Explain how data analysis is used in the determination of sampling method and audit universe.

Answer 1

Audit Sampling

1. Audit sampling is the application of an audit procedure where less than 100 percent of the items within an account balance or class of transactions are evaluated. The auditor often is aware of the transactions that may be more likely to contain misstatements and accordingly he uses the knowledge for sampling.
2. There are two types of approaches to audit sampling as - non-statistical and statistical.
3. The auditor must concern with two aspects of sampling risk - The risk of incorrect acceptance and the risk of incorrect rejection.
4. The auditor must concerned with two aspects of sampling risk in performing tests of controls - The risk of assessing control risk too low and he risk of assessing control risk too high

Data analysis used in the determination of sampling method

1. Planning - it involves developing a strategy for conducting an audit. The auditor should consider the following details while making the planning for sampling.

• The relationship of the sample to the relevant audit objective.
• Tolerable misstatement levels.
• The auditor's allowable risk of incorrect acceptance levels.
• Characteristics of the population sampled.

The auditor may consider the specific audit objective to be achieved and should determine that the audit procedure, or combination of procedures, to be applied will achieve that objective.

2. Materiality- The auditor should determine tolerable misstatement for the population to be sampled for purposes of designing the sampling plan. Tolerable misstatement for the population to be sampled ordinarily should be less than tolerable misstatement.

3. Understanding of the internal control structure - To plan the audit and to determine the nature, timing, and extent of tests to be performed, the auditor performs substantive tests to restrict detection risk to an acceptable level. As the assessed levels of inherent risk, control risk, and detection risk for other substantive procedures directed toward the same specific audit objective.
4. Grouping - separating items subject to sampling into relatively homogeneous groups on the basis of some characteristic related to the specific audit objective
5. Tolerable misstatement - To determine the number of items to be selected in a sample for a particular substantive test of details, the auditor should take into account tolerable misstatement for the population.
6. Analytical Procedure - Sample items should be selected in such a way that the sample can be expected to be representative of the population. Therefore, all items in the population should have an opportunity to be selected.
7. Frequency and amounts of monetary misstatements - consideration should be given to the qualitative aspects of the misstatements. These include (a) the nature and cause of misstatements, such as whether they are differences in principle or in application, are errors or are caused by fraud, or are due to misunderstanding of instructions or to carelessness, and (b) the possible relationship of the misstatements to other phases of the audit. The discovery of fraud ordinarily requires a broader consideration of possible implications than does the discovery of an error.
8. The auditor should relate the evaluation of the sample to other relevant audit evidence when forming a conclusion about the related account balance or class