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DefinitionAudit sampling is the application of audit procedures to less than 100 % of items in a population, so that all individual items ("sampling units") in the population should have a chance of selection. In order to be able to form conclusions about certain defined characteristics of the population (e.g. eligibility, measurement) without testing the whole population, the sample drawn should be representativeof the population and free from bias. The sampling population is the entire data set from which the sample will be drawn and about which the auditor wishes to draw conclusions. PrinciplesWhen deciding which items to test, there are three main approaches available to the auditor:
The choice of method is a matter for the auditor's professional judgement, based on risk assessment, materiality, audit efficiency and cost. The method chosen should allow us to meet the purpose of the audit procedure effectively and efficiently. When designing the sample, the auditor should consider the objectives of the audit procedure and the characteristics of the population. Selecting all itemsSelecting all items is appropriate when the number of items is small, when the risk is high, or when computer-assisted audit techniques allow all items to be tested effectively. It is more common for substantive testing (tests of details) rather than tests of controls. Statistical samplingStatistical sampling aims at representativity (i.e. the sample is similar to the population, especially in characteristics that are pertinent to the audit) in practice meaning that the sample is big enough, balanced and free from bias. Every element in the population has a chance of being selected, depending on the characteristics of the element and the sampling method. While the results of statistical samples can be projected to the population, the results of judgemental sampling can only be used as an indication, but cannot be [multi-link title="extrapolated" link_1="%2Faware%2FCA%2FPages%2FExamination%2FEvaluating-tests-results.aspx" title_1="Compliance%20audit" link_2="%2Faware%2FFA%2FPages%2FExamination%2FEvaluating-tests-results.aspx" title_2="Financial%20audit" /] to the population. The auditor performs audit procedures appropriate to the particular audit objective on each item selected. Statistical sampling methods and approaches frequently used in the ECA audits are[toggles] [toggle title="Monetary%20unit%20sampling%20(MUS)"] The monetary unit sampling method (MUS) is a method of statistical sampling in which every euro has an equal chance of selection. The practical implementation of the MUS method uses a random starting point and then an average sampling interval (ASI) for progression through the expenditure. MUS is a form of “probability proportional to size” (PPS) sampling, with the monetary value as a sampling unit. Larger transactions involve the payment of a larger number of euros, represent a larger share of potential “hit euros” and are thus more likely to be tested in the sample. The ASI is determined by dividing the population total by the planned number n of transactions to be audited. The resulting ASI is then used to select n evenly spread euros in the population. (ASI = total budget / planned sample size n). The population is thus cut into ”slices” of equal size in euro. For each slice one euro is selected which determines the item to be tested. These n euros selected by MUS are called “hit euros". The transactions to which they belong are called “hit transactions" and collectively they form the sample to be audited. The individual error rate of the i-th audited “hit transaction" is called ti. After the audit of all transactions is finished and when all individual error rates ti are available, the Estimated Level of Error (ELE), which is the estimated result for the whole population, is calculated as follows: At the lowest level of testing, we check a subsample of at least 10 cost items. This allows efficiency savings to be made and ensures that the audit results provide a reasonably good view of the expenditure checked. These 10 cost items do not constitute an error rate for the project, but contribute to the audit conclusion of the [link title="specific%20assessment" link="%2Faware%2FCA%2FPages%2FReporting%2FSpecific-assessments.aspx" /] . [/toggle][toggle title="Simple%20random%20sampling"] In simple random sampling (SRS), each item from the whole population has an equal chance of selection. This often results in many small amounts to be tested and is likely to produce high standard deviations or a higher sample size. SRS is suited to populations where the constituent individual items bear a similar level of audit risk. As compared to MUS it is therefore often less efficient. [/toggle] [toggle title="Stratification"] Stratified MUS divides the population into several sub-groups (strata). The strata have to be pre-defined according to different characteristics within the population, e.g. according to risk, monetary value, age of receivables. The auditor should use professional judgement when determining these characteristics, including his/her knowledge of the population subject to audit. In each stratum, a number of items is selected with MUS. The number of items to be selected can be different in every stratum. However, stratification does not allow us to conclude for an individual stratum where the sample size is too small. Stratification can be also used with simple random sampling method. [/toggle] [toggle title="Multi-stage%20sampling"] One form of multi-stage sampling is “cluster sampling”. This method can be useful when transactions are processed or records held at a number of locations, so that a sample cannot be extracted from across the whole population. In most cases, the locations are too numerous for them all to be visited. Therefore, the auditor first determines the number of locations to be visited, and secondly the number of items to test at those locations. Statistical qualities of this method are not optimal, but it represents a practical solution where other statistical methods are not feasible. The quality of the sample can be improved by increasing the number of clusters (rather than the number of second stage hits). This method can be used together with all other sample selection methods. [/toggle] [/toggles] Selecting specific items (judgemental sampling)Judgemental sampling involves an auditor using their judgement to select items from a population in accordance with pre-determined and documented criteria. These are typically high-value or high-risk items (e.g. relatively high amounts, negative value items, etc.) or items that represent a large proportion of the area under review. Selecting specific items is useful for tests of controls and substantive testing, and also to gain an understanding of the entity or to confirm the auditor's risk assessment. This selection method cannot be used if the objective of the sample is to extrapolate the results. Where judgemental sampling is used, the auditor can normally not generalise to the non-audited part of the population. InstructionsAfter having established the audit objectives to be achieved and the audit procedures which are most likely to achieve them;
Define deviations (errors)Establish criteria as to what constitutes an error, depending on the type of audit and audit objective. For example, for the sample on the reliability of accounts the criteria as to what constitutes an error depend on the type of audit objective for the specific balance sheet item being audited (see [link title="examples%20of%20potential%20misstatements%20in%20financial%20audit" link="%2Faware%2FDocuments%2FPotential-misstatements-in-financial-audit-examples.docx" icon="file-word-o" /] ). Make an assessment of the expected rate of error (for tests of control) and expected amount of error (for substantive tests of details) in order to determine a[link title="sample%20size" link="%23Determine-the-sample-size" /] .Determine the sampling populationDetermine the sampling population and sampling units: e.g. [link title="transaction" link="%2Faware%2FCA%2FPages%2FConcepts%2FUnderlying-transactions.aspx" /] , account balance or monetary unit. Check that the population is appropriate, complete and accurate for the specific audit objectives; auditors may need to obtain further evidence to ensure completeness and accuracy. As sampling does not provide evidence of completeness, to satisfy this assertion always supplement the audit work with analytical review and/or evidence of the operation of controls vis- à-vis completeness. In financial audit, the populations to be tested include the following accounts or groups of accounts:
Any heading in the balance sheet in particular (e.g. "short-term pre-financings"), and the annual accounts in general, may comprise more than one single general ledger account. For example, there are more than 20 general ledger accounts constituting the balance-sheet heading "Short-term pre-financing". The population from which the sample will be drawn therefore often contains a number of accounts. The population can be the number of final individual amounts which constitute the year-end balance of those several accounts at 31/12/N (e.g. final balance of individual pre-financings per contract), or some specific movements (e.g. debit movements or credit movements of individual pre-financings during the year). Explore the nature of the populationIn order to choose the appropriate sample selection method and the optimal sample size, gain as much information as possible about the population. Investigate the degree of variation in population items, what is known about errors in the population (their nature, frequency, and distribution throughout the population), the existence of patterns (e.g. more errors at year-end due to increased effort to spend commitments) and the location of items (e.g. multiple member states). Ascertain the appropriateness of the population for sampling. For instance check that:
[toggles] [toggle title="Brexit-considerations"] Following Brexit payments to UK-based beneficiaries and revenue received from UK continue to be part of the population of underlying transactions for [link title="Statement%20of%20Assurance" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FReporting%2FStatement-of-Assurance.aspx" /] on legality and regularity. Transactions selected using MUS method are statistically representative of the population from which they have been sampled. Deselecting transactions linked to the UK would affect the representativeness of the sample and thus the quality of the results obtained. [/toggle][/toggles] Select the sampling method and approachThe sampling method to be used should match the characteristics of the population. The following flowchart represents the
process of arriving at the most suitable sampling method and approach. Determine the sample sizeWhen using a [link title="statistical%20sampling" link="%23Statistical-sampling" /] method, determine the minimum sample size using ECA's Assurance model (based on the hypothesis that the samples are randomly selected). The minimum statistical sample size to have a robust sample is 30 items for each population or sub-population for which a conclusion is to be drawn (unless the population or sub-population is around or less than 30, in which case the full population or sub-population is examined). In general, larger and stratified samples improve the precision. Adjust the sample sizes depending on materiality and required confidence in any given case. The sample size should be sufficient to allow the auditor to conclude, at an appropriate level of[a-glossary term="Sampling%20risk"]sampling risk[/a-glossary] , that:
Consider reducing the confidence level when drawing a representative sample for substantive testing if it is offset by using other substantive procedures (e.g. key and high-value item testing, analytical procedures, third party confirmation). ResourcesTransactions and subsampling[icons-list icon-size="2" separator="line" icon-vertical-alignment="middle" vertical-alignment="middle"] [icon-list-item title="Underlying%20transactions%20in%20statement%20of%20assurance%20-%20legality%20and%20regularity" description="" link="%2Faware%2FCA%2FPages%2FConcepts%2FUnderlying-transactions.aspx" icon="simple-directions" /] [/icons-list] [/toc-this] How do you audit Tests of controls?Audit sampling methods for tests of controls. Inquiry: At the first stage, auditors may ask clients to explain their control processes. ... . Observation: The test may involve observing a business process or transaction while it's happening, taking note of all relevant control elements.. How are test of control sample sizes determined?Determine the sample size
for tests of controls, the total rate of deviation does not exceed the tolerable rate of deviation (the rate of deviation the auditor will accept) ; for substantive tests of details, the monetary amount of the deviation does not exceed that which the auditor is willing to accept.
Why is audit sampling used?Audit sampling enables auditors to make conclusions and express fair opinions based on predetermined objectives without having to check all of the items within financial statements. The auditors will only verify selected items, and through sampling, can infer their opinion on the entire population of items.
What are the five procedures used for Tests of controls?There are five main methods to walk through and test each control in place at the service organization. These methods include (listed in order of complexity from lowest to highest): inquiry, observation, examination or inspection of evidence, re-performance, and computer assisted audit technique (CAAT).
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