In the accounting and finance sector, auditing is a very crucial procedure. Auditing is during most occasions performed by Certified Public Accountants (CPA). Audit Sampling is applied during auditing by these Certified Public Accountants. It refers to the application of an audit procedure on a selection of the items within a class of transactions or an account balance (Bragg, 2016). The method of sampling that is used is based on the nature of the audit. It should produce an equal probability should any and every unit featured in the sample could be chosen. Audit sampling is mostly used in sectors dealing with huge population sizes. In this scenario, Baker, a Certified Public Accountant is conducting an audit on Mill Company’s financial accounts and has applied sampling techniques. This paper analyses these sampling techniques used. The paper will describe each incorrect assumption, and statement and inappropriate application of attribute sampling that was used in this auditing.
One of the inappropriate uses was that Baker used a sample of 100 invoices when he selected the first twenty-five invoices from the first month in each fiscal quarter. According to the question, it is stated that Baker applied random sampling. This falls out of the scope of random sampling. This statement was inappropriate, as the sample was not randomly selected.
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The auditing procedure also depicts that the technique of discovery sampling was used which was not the case. In terms of discovery sampling, it consists of a method that is used to assess if the percentage error is not excessive to a specified population percentage. In this audit, the percentage error does not match. Hence, it can be derived that discovery sampling is not an appropriate sampling technique in this auditing application done through attribute sampling (Elder, Akresh, Glover, Higgs, & Liljegren, 2013).
Another incorrect statement is that it is stated that Baker calculated the allowance for the sampling risk and found it to be 5%, this result was obtained after the difference of the actual sample rate of deviation, which was 8%, and the error rate that was expected which was 3%. This statement is incorrect because the allowance for the sampling risk is not calculated in this manner. Baker wanted to assess the control risk at a level, which is low, and at a tolerable deviation rate. The Upper Precision Limit (UPL) that is acceptable, which was established, was 20%. The Upper Precision Limit that was recognized was too high such that it cannot be used to assess the control risk at a level that is low. Another reason is the fact that as Baker was carrying out the auditing procedure, he applied a statistical sample in the control test. This was done to remove the requirement for the judgement. This assumption is not correct, as the statistical sample used in this auditing procedure did not lead to an elimination of the need for judgement instead Baker was faced with a scenario that required his judgement.
Incorrect assumptions are also depicted when Baker decided to add the size of the population from 8000 to 10000. Baker thought that the increase in the size of the population would cause an effect when determining the size of the sample size. This was however not the case as the population size did not have any effect in determining the size of the sample. Another incorrect assumption is depicted when Baker assumed that the population size which was 10000 shipping documents and from which the 100 invoices, which were the sample sizes, were chosen was mistaken. This was not the case as Baker was expected to be sure of the population.
Baker also established that the €9 difference that was obtained from €10,443 and €10,434 was immaterial did not matter and could not be considered as an error. This is an incorrect statement, as Baker did not consider that even the smallest difference could not qualify to be an error. In sampling, it is believed that each result should be tested appropriately to qualify that result as immaterial. Once the result is depicted as immaterial, it should not be subjected directly as an error. Baker made another incorrect assumption when he made a decision to defer the consideration that was for the risk that was allowable and termed the consideration as low when assessing the control risk. This was expected to be that way until the sample results were evaluated. This statement assumes that deference in considering the allowable risk of evaluating the control risk caused the control risk to fail. This brings about errors in determining the size of the sample.
Baker also made a logical assumption that the rate of the actual sample deviation (8%) when added to the risk of sampling (5%) was less than the UPL (14%) which was achieved. This therefore means that the sample promoted a very low level or control risk. This logical decision was a vague generalization and the conclusion that followed concerning the sample was also incorrect, the conclusion stated that the sample promoted and supported a level of control risk that was low. This was not correct.
As discussed above sampling is at times used in auditing. However, in most occasions, numerous errors occur. Some of these errors are usually in the form of incorrect statements, incorrect assumptions and inappropriate applications. This has been illustrated by the case of Baker. During the application of sampling in auditing great care must be exercised.
References
Bragg, S. (2016, June 7). Audit Sampling . Retrieved June 8, 2017, from Accounting Tools: https://www.accountingtools.com/articles/audit-sampling.html
Elder, R. J., Akresh, A. D., Glover, S. M., Higgs, J. L., & Liljegren, J. (2013). Audit sampling research: A synthesis and implications for future research. Auditing: A Journal of Practice & Theory, 32(sp1) , 99-129.
