Employee_Embezzlement

Explain the process and benefits of audit sampling-Stephanie Smith-Jeffries Sampling is typically used when the question of interest has the following two characteristics: The need for exact information is not important and the number of items comprising the population is large (Louwers, Ramsay, Sinason & Stawser, 2008). Audit sampling trades effectiveness for efficiency thus it sampling allows an individual to obtain information about a population of interest in a fraction of the time it would take to examine the entire population. In other words, sampling is more efficient. However, because the individual is not examining all items in the population, there is a chance that sampling will not provide the correct answer to the question being examined (Louwers, 2008).. Audit sampling is used when the gains associated with efficiency exceed the losses associated with effectiveness. In addition, certain types of sampling plans allow the losses associated with reduced effectiveness to be quantified and limited to relatively low levels. Statistical sampling plans allow the risk to be measured and controlled to acceptable levels. These plans apply the laws of probability to selecting sample items for examination and evaluating sample results. Specifically, statistical sampling plans provide the auditor with the ability to make quantitative statements about the results and to measure the sufficiency of evidence gathered then evaluate the results in such a way to control sampling risk. Nonstatistical sampling plans differ in terms of how sample size is determined and how the results are evaluated. In some circumstances, it is not necessary to use the laws of probability to select sample items with nonstatistical sampling (Louwers, 2008). Generally accepted auditing standards (GAAS) do not require the use of statistical sampling procedures. In fact, a survey of practicing auditors in public accounting, industry, and government revealed that 85 percent of all samples were selected using nonstatistical procedures and 64 percent of all samples were evaluated using nonstatistical evaluation methods. The use of nonstatistical sampling methods is often justifiable when the costs of using statistical sampling methods exceed the benefits of doing so. However, nonstatistical sampling should not be used as a means to reduce sample sizes (Louwers, 2008).. Sampling can be viewed in the following three major steps: planning, performing and evaluating. Planning refers to determining the objective, defining the characteristic of interest, and also defining the population (Louwers, 2008).. The performing step refers to determining the sample size. While many factors are considered in determining the appropriate sample size, the acceptable level of sampling risk is one important factor. Recall that an advantage of statistical sampling plans is that they allow determining a sample size that measures sampling risk. Lastly, to evaluate the sample results, the sample average must be adjusted to control for the acceptable level of exposure to sampling risk. This is done by forming a range of estimates that have a certain probability of including the true population value. The following three conditions must be met for an application to be classified as audit sampling: 1. Less than 100 percent of the items composing the population must be examined. 2. The results of the sample must be projected to the population being examined. 3. The projected results must be compared to some existing criterion. With respect to the study and evaluation of the client’s internal control, the auditor’s objective is to determine whether important control policies and procedures are functioning effectively to prevent or detect financial statement misstatements. In making this evaluation, the auditor is interested in determining whether the rate at which internal control procedures are not functioning exceeds some rate permissible by the auditor. The use of sampling in this context is referred to as attribute sampling. Attribute sampling is used when the auditor examines a subset of items within a population to determine the extent to which a particular attribute exists within that population (Louwers, 2008). When used in substantive procedures, the auditor’s objective is to determine whether an account balance or class of transactions is recorded and presented according to generally accepted accounting principles. In making this evaluation, the auditor is interested in determining whether the amount of dollar misstatement in the account balance or class of transactions exceeds some permissible amount. The end result of the auditor’s substantive procedures is the determination as to whether the client’s account balances are fairly stated according to generally accepted accounting principles. The use of sampling in this context is referred to as variables sampling. Variables sampling is used to examine a population when auditors want to estimate the amount of some characteristic of that population. Auditors use variables sampling when performing substantive procedures to evaluate the fairness of an account balance or class of transactions (Louwers, 2008).