What is Audit Sampling?
Audit sampling is an investigative tool in which less than 100% of the total items within the population of items are selected to be audited. It is an auditing technique that provides supporting evidence that allows auditors to issue audit opinions without having to audit every single item and transaction.
Auditing is the process by which a company’s financial records are verified and examined. It is to ensure that the transactions on the financial records are accurately and fairly represented.
Since financial statements are prepared internally by companies and organizations, there is a high risk of manipulation and fraudulent behavior surrounding the preparation of the statements.
Types of Auditing
Auditing is important in ensuring that companies are representing their financial statements fairly and accurately. There are three types of auditing:
- Internal audits are performed by the internal employees of an organization, but they are usually not distributed outside of the company.
- External audits are performed by external parties that are seen as having more unbiased opinions since internal audits may be influenced by conflicts of interest.
- Government audits are performed by government entities to ensure that financial statements have been prepared accurately. In the U.S., the Internal Revenue Service (IRS) performs audits that verify the accuracy of a taxpayer’s tax returns. The IRS’s counterpart in Canada is the Canada Revenue Agency (CRA).
Financial statements are prepared per accounting standards and are meant to provide useful information for relevant decision-makers. However, the information provided needs to be accurate and fairly presented.
Auditing is important to ensure that entities are not misrepresenting their financial statements so that relevant stakeholders do not make decisions based on faulty financial statements. It is important in establishing trust and efficiency within the financial system.
Purpose of Audit Sampling
No matter what kind of audit is being performed – internal, external, or government – audit sampling needs to be used so that auditors can complete their audits without wasting resources in checking every single item. The objectives of audit sampling are as follows:
- Gather enough evidence to conclude an audit opinion
- Reduce the number of resources used
- Provide the basis for auditors to issue a conclusive audit opinion
- Detect any errors or fraud that can occur
- Prove that auditors have completed their audit fully in accordance with auditing standards
- Used as a tool for investigating
Audit Sampling Importance
When auditing financial statements, it is not feasible to audit and check every single item within the financial statements. It will be very costly and will take a lot of resources and time to do so.
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.
There are two forms of sampling:
1. Statistical audit sampling
Statistical audit sampling involves a sampling approach where the auditor utilizes statistical methods such as random sampling to select items to be verified. Random sampling is used when there are many items or transactions on record.
Consider a company with more than 100 inventory transactions on its records. Using statistical sampling is recommended due to the high number of transactions.
For example, with statistical sampling, ten items are selected from the total population randomly. Every single item within the 100 has an equal probability of being selected and tested for accuracy as a result. Again, it benefits auditors since they can still make an audit opinion but do not have to check all 100 transactions.
2. Non-statistical audit sampling
In contrast to statistical audit sampling, non-statistical audit sampling items are not chosen randomly. Instead, they are chosen based on the auditor’s judgment, and the result of the testing from the selections is not used to infer the conclusion for the entire population.
In the example earlier, ten inventory transactions can be used to infer the opinion on all 100 transactions. In non-statistical audit sampling, the auditors may choose to select items based on criteria such as:
- The value of items (e.g., items greater than $100,000)
- Items with specific information (e.g., items related to a certain company)
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: