Audit sampling is a technique used by auditors to test a subset of transactions or account balances in order to draw conclusions about the entire population. The main purpose of audit sampling is to provide sufficient audit evidence to support the auditor’s conclusions and opinions about the financial statements while keeping the audit work efficient and cost-effective.
There are two main types of audit sampling:
- Statistical sampling: In this method, auditors use statistical techniques to select a random sample from the population. The results from the sample are then extrapolated to estimate the characteristics of the entire population. Statistical sampling allows auditors to quantify sampling risk, which is the risk of drawing incorrect conclusions from the sample results.
- Non-statistical sampling: This method involves selecting a sample based on the auditor’s professional judgment rather than using statistical techniques. Non-statistical sampling does not allow for the quantification of sampling risk, and the auditor relies on their experience and understanding of the client’s business to choose an appropriate sample.
In both methods, the auditor examines the selected items and performs audit procedures to gather evidence. The results of the sample testing are then analyzed, and conclusions are drawn about the entire population. If the sample results indicate a material misstatement, the auditor may need to perform additional audit procedures or recommend adjustments to the financial statements.
Example of Audit Sampling
Let’s consider an example of audit sampling for the accounts payable of a company.
Assume that Company XYZ has a total of 10,000 accounts payable transactions during the year. The auditor wants to test the accuracy and completeness of these transactions to ensure that they are properly recorded in the financial statements.
Instead of examining all 10,000 transactions, which would be time-consuming and inefficient, the auditor decides to use audit sampling to test a subset of the transactions.
- Statistical sampling: The auditor uses a statistical sampling method, such as random sampling or systematic sampling, to select a sample of 200 transactions from the 10,000 total transactions. After testing these 200 transactions, the auditor identifies 4 transactions with errors. The auditor then projects the error rate (4/200 or 2%) to the entire population of 10,000 transactions, which suggests that there could be approximately 200 transactions with errors in total.
- Non-statistical sampling: The auditor selects a sample of 200 transactions based on their professional judgment, considering factors such as transaction size, complexity, and known risk areas. After testing the selected transactions, the auditor identifies 6 transactions with errors. The auditor then uses their professional judgment to assess whether these errors are indicative of potential misstatements in the entire population of accounts payable transactions.
In both cases, the auditor evaluates the sample results and determines whether the identified errors are material to the financial statements. If the errors are material, the auditor may perform additional audit procedures, recommend adjustments to the financial statements, or modify their audit opinion accordingly.