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Audit Sampling Manual

Auditing Ch 1
of 16
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   ANUAL AUDIT SA PLING Sampling is the application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of all the items within the balance or class of transactions.Much of the information included in this manual was taken from the Statement on Auditing Standards No. 3on Audit Sampling which provides guidance on the use of sampling in an audit of financial statements. !hisinformation has been adapted to fit the circumstances most often encountered in ta auditing. HISTORY !he #epartment has used sampling in its audit procedures for man$ $ears. !hat sampling for the most parthas been block sampling. !hat is taking a period of time and testing 100% of the records during that time.&ntil 10 the #epartment's polic$ on sampling was to take 100% samples from three test months per $ear selected for being the high low and average months of the $ear. (rom 10 forward the #epartment hasadopted other s$stematic or random sampling techni)ues. *andom sampling techni)ues are both convenient and accurate when performed properl$ for these reasonssampling is the rule rather than the e ception in most audits performed b$ the #epartment. !he convenienceand accurac$ e tends to ta pa$ers as well. Audits based on sampling have been challenged. +hen challengedwe have allowed the ta pa$er to present detailed information to refute the results of the sample. PURPOSE OF AUDIT SA PLING Sampling is performed because it is more efficient than testing 100% of a population. ,n ta audits if theta pa$er and the #epartment can agree on a representative sample it can save both parties time and mone$.-$ definition an$ procedure that does not e amine 100% of the items in )uestion is a sampling procedure. WHEN NOT TO SAMPLE !here are man$ audit procedures which do not involve sampling.,n)uir$ and bservation/*eviewing records for the method of accounting and other information.bserving accounting procedures.#iscussing methods of accounting and reporting with ta pa$er.Scanning documents for possible issues.Anal$tical *eview rocedures/omparing records reports and other information.*ecomputing or estimating amounts.*eviewing trends in reporting.omparing similar businesses.ne2undred ercent 4 amination/*eviewing all fi ed asset purchases where appropriate.4 amining all contracts where there are a small number.*econciling each $ears gross receipts to ,! A sales factors or Schedule  receipts.5ero ercent 4 amination/age 1 of 16  !his occurs when the auditor determines that a t$pe of receipt deduction e emption or other item does not need to be tested. Note: Even though 100% examination may be done where appropriate. It is not mandatory for anyparticular taxpayers or tax programs. ampling procedures discussed below may be more cost effective. SAMPLING RISK verall ta audit risk is made up of the risk of inaccurate records and the risk of misapplication of the ta law.-oth of these risks are made up of two components as well.1.*isk that there are errors 7inherent risk8.9.*isk that procedures will not find errors 7audit risk8.Audit risk in turn is made up of two components the risk that a procedure is not effective and sampling risk.Sampling risk is the probabilit$ that the sample results are not representative of the entire population. ,ngeneral factors that ma$ lessen sampling risk include/1.!aking larger si:e samples9.&sing random sample selection methods3.Stratif$ing the sample;.roperl$ defining the test ob<ective=.roperl$ defining a deviation6.4 clusion of non2recurring non2s$stematic errors.>.roperl$ evaluating errors. STATISTICAL VS. NON-STATISTICAL SAMPLING !he difference between statistical and non2statistical sampling is that statistical sampling allows the user tomeasure the sampling risk associated with the procedure. Statistical sampling applies the laws of probabilit$ todetermine the percent likelihood that the sample does not accuratel$ reflect the population.,n essence the laws of probabilit$ sa$ that large relativel$ homogeneous populations have similar distributions and other features so that if a random sample is taken it will consistentl$ reflect the populationwithin certain limits. ,n order for the sample to be a ?statistical@ sample the results must be evaluated and twocalculations made. !hese calculations tell the user how likel$ it is that the sample results are within a givenrange of the actual population. (or instance a statistical sample would not onl$ tell $ou that disallowed deductions are estimated at =000 but that $ou have a =% likelihood 7confidence8 of being within =0 7precision8 of the actual disalloweddeductions.A properl$ designed and applied non2statistical sample can provide results that are accurate and effective butwill not measure the sampling risk.Benerall$ the decision to appl$ a statistical or non2statistical sampling application to a particular audit test is amatter of cost effectiveness. Statistical applications usuall$ re)uire more training for auditors and more time toappl$. !he department utili:es non2statistical random sampling procedures.Man$ audit programs in both the public and private sector have developed standard sampling approacheswhich use predetermined allowances for acceptable sampling risk e pected and tolerable error. !heseapproaches reduce the time and effort re)uired to determine the sample si:e and evaluate results. !he cost of these approaches is that the$ usuall$ generate sample si:es somewhat larger than necessar$ to allow a marginfor variance. !he New Me ico !a ation and *evenue #epartment has elected to use fi ed sample si:es of 9=0and =00 items of interest for variable sampling. !he sample si:es appl$ to homogeneous and non2age 9 of 16  homogeneous populations respectivel$. Stratification of a population can reduce sample si:e in most cases.rovisions for sampling units based on time periods is also provided. ,n an$ sampling approach the auditor must evaluate the population that is being tested must determine if an$stratification should be done must evaluate the cause of an$ e ceptions and must appl$ the results from thesample to the remaining portion of the population. DESIGNING A SA PLING APPLICATION !here are several steps in designing a sampling application for an audit or investigation. !he steps arediscussed in detail in the ne t pages.1 .#efine the ob<ectives of the test9.#etermine the t$pe of test to be performeda.Cariables Sampling b.Attribute Sampling3.#efine the deviation conditions;.#efine the populationa.#ecide what period will be covered b$ the test b.#efine the sampling unitc.onsider the completeness of the populationd.onsider how the error rate will be e trapolated=.#etermine the method of selecting the samplea.*andom2Number sampling b.S$stematic samplingc.ther sampling6.#etermine the sample si:ea.Cariables Sampling b.Attribute Sampling>.erform the sample a.ompare the sample to the population before completing the sampleD.4valuate the sample resultsa.,nterpret results b.4 trapolate results.onsider the )ualitative aspects of the deviationsd. *eaching an overall conclusion about the population 9. #ocument the sampling procedure DEFINE THE OBJECTIVES OF THE TEST-STEP 1 !he auditor must have a definite )uestion to be answered b$ the test. 4 amples of )uestions to be answeredare.1.#oes the Sales Summar$ contain all invoices and is information recorded accuratel$E9.ow often are invoices voided without e planationE3.#oes the ta pa$er record all supplies pulled from inventor$ in the inventor$ logE;.#oes the sales supervisor correctl$ batch sales b$ destination so that the$ can be recorded b$state in the summar$ <ournalE=.+hat is the amount of deductions not supported b$ N!!'sE6.+hat is the percentage of sales of services to the government relative to total salesE>.+hat percentage of supplies are pulled from inventor$ held for sale each monthED.+hat percentage of supplies purchased outside NM have not had ta paid or accruedEAuditors should record the ob<ective of the test within the audit narrative andF or other workpapers. Not onl$does that help the reviewer but it also clarifies the ob<ective for the auditor so that the proper audit procedureand sampling application can be defined. ,f the auditor can create a one sentence )uestion like the ones aboveage 3 of 16  to be answered he or she is less likel$ to perform an inappropriate procedure or use the wrong samplingapplication. DETERMINE THE TYPE OF TEST TO BE PERFORMED-STEP 2 !he t$pe of sampling application whether statistical or non2statistical is usuall$ defined b$ the conclusionwhich the auditor is attempting to reach. @Cariables sampling@ is used to reach a conclusion about a populationin terms of an amount. Cariables sampling is commonl$ used to determine the dollar si:e of a population or todetermine if the stated dollar si:e is correct.   ! ttribute sampling!  is used when the auditor is onl$ concerned with acceptance or re<ection of a h$pothesis.,t is used to reach a yes or no answer  about a )uestion.!he reason that defining the t$pe of application is so important is that sample si:e is dependent on which t$peof application is being performed. -elow is the same list of )uestions given on the previous page and ane planation of the t$pe of application re)uired for each.  #$IN& $$I' (I)N N *I +,E(I)N () -E NE/E(*$E ) $$I' (I)NE2$ N (I)N #oes the Sales Summar$ contain allinvoices and is information recordedaccuratel$EAttribute!he auditor doesnGt want to knowwhat percentage or how much onl$$es or no.ow often are invoices voided withoute planationECariablesere the auditor wants to know aspecific amount.#oes the ta pa$er record all supplies pulled from inventor$ in the inventor$logEAttributeresumabl$ if there are supplies notrecorded the auditor will not?acceptH the inventor$ record.#oes the sales supervisor correctl$ batch sales b$ destination so that the$can be recorded b$ state in the summar$ <ournalEAttribute!his is a $es or no )uestion whichwill result in accepting or re<ectingthe data in the summar$ <ournal.+hat is the amount of deductions notsupported b$ N!!GsECariables!he auditor needs to know a specificdollar amount.+hat is the percentage of sales of services to the government relative tototal salesECariables,f the auditor asked the )uestion ?,sthe percentage 90%H attributesampling could be used. -ut here theauditor wants to know the e act rate.+hat percentage of supplies are pulledfrom inventor$ held for sale eachmonthECariablesSame as above+hat percentage of supplies purchasedoutside NM have not had ta paid or accruedECariables Same as aboveSampling applications can also be classified b$ the t$pe of audit procedure in which the$ are used.?ompliance testsH are tests which determine whether controls are being complied with. !he answer to acompliance test is $es or no. ?Substantive testsH are tests which determine the amount of some class of items.Attribute sampling is most often used in compliance tests and variables sampling is most often used insubstantive tests.age ; of 16


Jul 23, 2017
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