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Audit file issues – sampling

Mercial Blog Audit File Issues

Mercia carries out hot and cold audit file reviews for a significant number of firms and there are often themes or audit areas which we observe as part of those reviews which cause firms difficulty.  Sampling is an area which regularly generates comments.

Introduction

The introductory paragraph in ISA 530 states “This International Standard on Auditing (UK) (ISA (UK)) applies when the auditor has decided to use audit sampling in performing audit procedures.”  There are few audits where sampling does not apply.  Sample sizes will be a key determinant in whether or not the evidence gathered can be assessed as sufficient.  We are seeing regulatory reviews take an increasing interest in sampling, particularly in the audit of revenue.

How much is enough?

Rather than answer the question from this perspective, it is perhaps better to consider it from the opposite direction and ask when a sample is not sufficient.  Audit methodologies will calculate sample sizes but it is important not to become mechanical and lose track of the need to exercise professional judgment.  On a recent file review, a sample size came out at three items for a population which comprised hundreds of low value stock lines.  Stock was very much material and it is hard to say that such a small sample is sufficient and representative.  The audit staff in this case decided to increase the sample judgmentally because it would look rather poor turning up at the client’s premises for a relatively short period of time to count such a small number of items.  Although the reasoning is perhaps questionable, the result was to increase the sample to something altogether more acceptable because the sample appeared too low.

Where the stated audit approach is to use a sampling methodology this should be applied correctly.  That is to say samples should not be reduced simply because the resulting sample is more than the auditor would like.  In one recent example observed, a sample size was calculated appropriately and the commentary on the file was along the lines of this being “over-auditing” and promptly reducing the sample to a third of that calculated with no clear justification for the reduction.

I often suggest that firms should consider a minimum sample size “guideline” for their audits.  That is not to say that an acceptable sample cannot be lower than the guideline but rather there is a clear requirement to justify a sample below that level.  It is the exercise of professional judgment which is key rather than simply accepting an automatically generated sample which could be the result of an overly-optimistic risk assessment.

Don’t be too mechanical

Even where a sample is determined and justified there is sometimes a lack of willingness to question whether the exercise of judgment can achieve a better outcome.  An example from a recent file review concerns trade debtors where a sample was calculated using the planner within the audit programme generating a sample of four; this covered approximately 40% of the total debtor population.  However, the largest nine items covered over 80% of the total trade debtor balance with the remainder being below performance materiality which illustrates the point that sometimes the exercise of judgment can achieve a much more effective result than mechanical adherence to sampling methodology.

Control testing and analytical review

Mainstream audit methodologies permit deductions within sample planners for evidence from control testing and analytical review procedures.  It is important that such deductions are validly taken.  There is often an assumption at the planning stage that evidence will be obtained by these methods across the board which doesn’t follow through to the fieldwork.  Control testing is often not undertaken at all and analytical review evidence is either absent or very weak.

Summary

Sampling runs throughout the audit process and is worth considering in sufficient detail at the planning stage of the audit and, where there will be evidence from alternative procedures, to justify reductions in substantive samples.  Above all else, some common sense in assessing whether a sample looks reasonable can be a useful addition to the audit file making it clear that the auditor is considering their approach to sampling.

How can we help?

We offer a wide range of independent reviews to help you comply with the many regulations now facing accountants and auditors.  Our experienced team are able to review your audit files to assess audit quality and compliance with audit regulations and standards.

We are also able to offer regulatory reviews in specialist areas such as Practice Assurance and Designated Professional Body Investment Business.

For more information, visit our website.