Audit Sampling

CELT October 2004

Statistics as an Audit Tool

Auditors use inferential statistics to draw conclusions about populations based on samples of data.
Why do auditors use samplesusually too costly and time-consuming to examine entire universe

Sampling Techniques
Sampling techniques include: Judgment sampling: subjective selection of sample size and items (target high-risk transactions) Statistical sampling techniques: Random sampling: each item has equal probability Block sampling: randomly selected clusters Systematic sampling: random start and then take every nth item

Audit Sampling and Tests

Substantive testing and variables sampling selecting samples of values measuring quantifiable magnitudes (e.g., costs, number of units sold)
Tests of controls and attributes sampling selecting sample of transactions from data population to test for presence or absence of certain qualities.

Materiality and Precision

Materiality and precision are related concepts that also affect sample size. Materialitya 10 percent misstatement in the accounts receivable balance is probably material; but a 10 percent misstatement in the office supplies account balance might not be. If testing accounts receivable balances, well need to look at a larger sample if we want to have an estimate that falls within 10 percent, than if our desired precision was only 20 percent.

Confidence
Confidence is also important in determining sample size. The greater the confidence, the larger the sample size. So if we want to be 95 percent confident that the estimated accounts receivable balance falls within 10 percent of the true value, we will need a larger sample than if we only needed to be 80 percent confident.

Calculating Precision (Variable Sampling)

Calculating precisionneed to know:
(1) Standard deviation (a measure of how much variability there is in the population) (2) The t-value associated with the desired level of confidence, and (3) A proposed sample size.

Calculating Precision (continued)

(1) Standard deviation is a measure of how much variability there is in the population of data.
(x x )2 (n 1) x is the value of the sampling unit, x is the mean (average), and n is the sample size Standard deviation can be calculated in ExcelSTDEV

Calculating Precision (continued)

(2) t-values are multipliers based on level of confidenceany standard statistics textbook will have a table of t-values. A commonly used confidence level is 95 percent, which has an associated t-value of 1.96. (3) In our example, assume were looking at accounts receivable balances and were using a sample of 30 balances. Our sample size (n) is 30.

Calculating Precision (continued)

Sampling Error of the Mean =
t = 1.96, SD = 48.71, and n = 30 Sampling Error (or precision) = $17.43. If we assume that there are 100 transactions in the population, we can be 95 percent confident that our estimate of the total value is within $1,743 of the true value.

t * SD n

Calculating Sample Size (Variable Sampling)

Assume we want better precisionwe want our estimate to fall within $1,400 of the true total.
n = t 2 * SD 2 (E)2

Again, t = 1.96, SD = 48.71, E (or Error) = $14 n = 47

Determining Confidence Interval for Proportion (Attribute Sampling)

Calculate the percentage of the sample that has the attribute (e.g., 12 of 40 approval forms were not signed properly = 30 percent). For 95 percent confidence: Multiply 1.96 by Standard Error of the Proportion and add to and subtract from 30 percent to get high and low end of interval.

Standard Error of the Proportion

SE = p * (1 p) n

Where p is the proportion (or 30 percent in our example), 1 p = 70 percent, and n is the sample size (or 40).
Standard Error in this example = 0.072

Confidence Interval for Proportion

So we add (1.96 * 0.072) to 0.30 to get high end of 95 percent confidence interval, and subtract same amount from 0.30 to get low end. Confidence interval is from 0.16 to 0.44. In plain English, this means that we can be 95 percent confident that the proportion of all approval forms that were not properly signed falls between these two values.

Calculating Sample Size (Attribute Sampling)

n = (1.96)2 * p * (1 p) E2 Again, n is the sample size and p is the proportion E is the level of precisioni.e., do we want to be within 2 percent or within 5 percent of the true proportion? If we want to be 95 percent confident our estimate falls within 5 percent, the sample size would have to be 323.

General Tips: Planning the Analysis

Conduct pre-sampling research to better understand the process being testedinterview audit clients and others involved in the process and document system controls Define the objective so results will add value Define the populationwhat is the population you want to draw conclusions about (e.g., what time period, what range of dollar values, etc.)

General Tips: Conducting the Analysis

Determine level of acceptable risk and calculate sample sizesample size will depend on population size, acceptable risk, variability in population, and tolerable misstatement/deviation from what is expected Review the sampleidentify deviations from prescribed control in test of controls, or use descriptive statistics for substantive testing Document, document, document! Document sampling methodology, calculations, and results

Additional Resources
US General Accountability Office, Using Statistical Sampling, May 1992.
General Statistics Information: http://www.go2hill.com/ResearchDevelopment/St atistics/zd_ebstat.htm or http://edis.ifas.ufl.edu/PD006 Random number generator: http://www.random.org/