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Thread: 05 Standard on Internal Audit - SIA 5 Sampling

  1. #21
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    Default Analysis of Errors in the Sample of internal audit

    Analysis of Errors in the Sample

    31. In analysing the errors detected in the sample, the internal auditor will first need to determine that an item in question is in fact an error. In designing the sample, the internal auditor will have defined these conditions that constitute an error by reference to the audit objectives. For example, in a substantive procedure relating to the recording of accounts receivable, a mis-posting between customer accounts does not affect the total accounts receivable. Therefore, it may be inappropriate to consider this an error in evaluating the sample results of this particular procedure, even though it may have an effect on other areas of the audit such as the assessment of doubtful accounts.

    32. When the expected audit evidence regarding a specific sample item cannot be obtained, the internal auditor may be able to obtain sufficient appropriate audit evidence through performing alternative procedures. For example, if a positive account receivable confirmation has been requested and no reply was received, the internal auditor may be able to obtain sufficient appropriate audit evidence that the receivable is valid by reviewing subsequent payments from the customer. If the internal auditor does not, or is unable to, perform satisfactory alternative procedures, or if the procedures performed do not enable the internal auditor to obtain sufficient appropriate audit evidence, the item would be treated as an error.

    33. The internal auditor would also consider the qualitative aspects of the errors. These include the nature and cause of the error and the possible effect of the error on other phases of the audit.

    34. In analysing the errors discovered, the internal auditor may observe that many have a common feature, for example, type of transaction, location, product fine, or period of time. In such circumstances, the internal auditor may decide to identify, all items in the population which possess the common feature, thereby producing a subpopulation, and extend audit procedures in this area. The internal auditor would then perform a separate analysis based on the items examined for each sub population.

  2. #22
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    Default Projection of Errors in internal audit

    Projection of Errors

    35. The internal auditor projects the error results of the sample to the population from which the sample was selected. There are several acceptable methods of projecting error results. However, in all the cases, the method of projection will need to be consistent with the method used to select the sampling unit. When projecting error results, the internal auditor needs to keep in mind the qualitative aspects of the errors found. When the population has been divided into sub population, the projection of errors is done separately for each sub population and the results are combined.

    36. For tests of controls, no explicit, projection of errors is necessary since the sample error rate is also the projected rate of error for the population as a whole.

  3. #23
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    Default Reassessing Sampling Risk of internal audit

    Reassessing Sampling Risk

    37. The internal auditor needs to consider whether errors in the population night exceed the tolerable error. To accomplish this, the internal auditor compare the projected population error to the tolerable error taking into account the results of other audit procedures relevant to the specific control or financial statement assertion. The projected population error used for this comparison in the case of substantive procedures is net of adjustments made by the entity. When the projected error exceeds tolerable error, the internal
    auditor reassesses the sampling risk and if that risk is unacceptable, would consider extending the audit procedure or performing alternative internal audit procedures.

    38. If the evaluation of sample results indicate that the assessment of the relevant characteristic of the population needs to be revised, the internal auditor, may:

    (a) Request management to investigate the identified errors and the potential for any further error, and to make necessary adjustments, in cases where management prescribes the sample size; and / or

    (b) Modify the nature, timing and extent of internal audit procedures. In case of tests of controls, the internal auditor might extend the sample size, test an alternative control or modify related substantive procedures; and / or

    (c) Consider the effect on the Internal Audit Report.

  4. #24
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    Default Documentation of internal audit

    Documentation

    39. Documentation provides the essential support to the opinion and/ or findings of the internal auditor. In the context of sampling, the internal auditor's documentation may include aspects such as:

    Relationship between the design of the sample vis a vis specific audit
    objectives, population from which sample is drawn and the sample size.

    Assessment of the expected rate of error in the population to be tested vis a vis auditor's understanding of the design of the relevant controls.

    Assessment of the sampling risk and the tolerable error.

    Assessment of the nature and cause of errors.

    Rationale for using a particular sampling technique and results thereof.

    Analysis of the nature and cause of any errors detected in the sample.

    Projection of the errors found in the sample to the population.

    Reassessment of sampling risk, where appropriate.

    Effect of the sample results on the internal audit's objective(s).

    Projection )f sample results to the characteristics of the population.

  5. #25
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    Default Effective Date of Internal Audit

    Effective Date

    40. This Standard on Internal Audit is applicable to all internal audits commencing on or after ________. Earlier application of the SIA is encouraged.

  6. #26
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    Default Appendix 1 Examples of Factors Influencing Sample Size for Tests of Controls

    Examples of Factors Influencing Sample Size for Tests of Controls
    The following are some factors which the internal auditor considers when determining the sample size required for tests of controls (TOC). These factors need to be considered together assuming the internal auditor does not modify the nature or timing of TOC or otherwise modify the approach to substantive procedures in response to assessed risks.
    Factor to be considered by Internal Auditor Effect on sample size
    An increase in the extent to which the risk of material mis-statement is reduced by the operating effectiveness of controls Increase
    An increase in the rate of deviation from the prescribed
    control activity that the internal auditor is willing to accept
    Decrease
    An increase in the rate of deviation from the prescribed
    control activity that the internal auditor expects to find in the population
    Increase
    An increase in the internal auditor's required confidence level Increase
    An increase in the number of sampling units in the population Negligible effect
    Notes -
    1. Other things being equal, the more the internal auditor relies on the operating effectiveness of controls in risk assessment, the greater is the extent of the internal auditor's tests of controls, and hence the sample size is increased.
    2. The lower the rate of deviation that the internal auditor is willing to accept, the larger the sample size needs to be.
    3. The higher the rate of deviation that the internal auditor expects, the larger the sample size needs to be so as to make a reasonable estimate of the actual rate of deviation.
    4. The higher the degree of confidence that the internal auditor requires that the results of the sample are indicative of the actual incidence of errors in the population, the larger the sample size needs to be.
    5. For large populations, the actual population size has little effect on sample size. For small populations, sampling is often not as efficient as alternative means of obtaining sufficient appropriate audit evidence.

  7. #27
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    Default Appendix 2 Examples of Factors Influencing Sample Size for Tests of Details (TOD)

    The following are some factors which the internal auditor considers when determining the sample size required for tests of details (TOD). These factors need to be considered together assuming the internal auditor does not modify the nature or timing of TOD or otherwise modify the approach to substantive procedures in response to assessed risks.


    Factor to be considered by Internal Auditor Effect on sample size
    An increase in the internal auditor's assessment of the risk of material misstatement Increase
    An increase in the use of other
    substantive procedures by the internal auditor, directed at the same assertion
    Decrease
    An increase in the total error that the internal auditor is willing to accept (Tolerable Error) Decrease
    Stratification of the population when appropriate Decrease
    An increase in the amount of error which the internal auditor expects to find in the population Increase
    An increase in the internal auditor's required confidence level Increase
    The number of sampling units in the population Negligible effect

  8. #28
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    Default Appendix 3 Methods of Sample Selection

    The principal methods of sample selection are as -

    1. Using a computerised random number generator or through random number tables.

    2. Systematic selection - In this method, the number of sampling units in the population is divided by the sample size to give a sampling interval, for example 20, and having thus determined a starting point within the first 20, each 20th sampling unit thereafter is selected. Although the starting point may be haphazardly determined, the sample is likely to be truly random if the same is determined by using a computerised random number generator or random number tables. In this method, the internal auditor would need to determine that sampling units within the population are not structured in such a way that the sampling interval corresponds with any particular pattern within the population.

    3. Haphazard selection - In this method, the internal auditor selects the sample without following any structured technique. The internal auditor should attempt to ensure that all items within the population have a chance of selection, without having any conscious bias or predictability. This method is not appropriate when using statistical sampling technique.

    4. Block selection - This method involves selection of a block(s) of adjacent or contiguous items from within the population. Block selection normally cannot be used in internal audit sampling because most populations are structured in such a manner that items forming a sequence can be expected to have similar characteristics to each other, but different characteristics from items elsewhere in the population. This method would not be an appropriate sample selection technique when the internal auditor intends to draw valid inferences about the entire population, based on the sample.

  9. #29
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    Default Appendix 4 Frequency of Control Activity and Sample Size

    Appendix 4
    Frequency of Control Activity and Sample Size
    The following guidance related to the frequency of the performance of control may be considered when planning the extent of tests of operating effectiveness of manual controls for which control deviations are not expected to be found. The internal auditor may determine the appropriate number of control occurrences to test based on the following minimum sample size for the frequency of the control activity dependant on whether assessment has been made on a lower or higher risk of failure of the control.


    Frequency of control activity Minimum sample size
    Risk of failure
    Lower Higher
    Annual 1 1
    Quarterly (including period-end, i.e., +1) 1+1 1+1
    Monthly 2 3
    Weekly 5 8
    Daily 15 25
    Recurring manual control (multiple dines per day) 25 40

    Note
    Although +1 is used to indicate that the period end control is tested, this does not mean that for more frequent control operations the year end operation cannot be tested.

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