When performing an audit of a private company, a CPA firm / sole practitioner bases his/her opinion about whether the financial statements are free from material misstatement based on a variety of testing procedures performed on material account balances (or classes of transactions). Some of these balances may be tested 100% but, more often than not, such as is the case with revenue, the engagement team will likely use audit sampling to obtain sufficient appropriate evidence.
Audit sampling involves the application of audit procedures to less than 100% of items within a class of transaction or account balance such that all sampling units have an equal chance of being selected.
Audit sampling is mainly used for sampling substantive audit procedures. Audit sampling introduces the concept of sampling risk which arises from the possibility that an auditor’s conclusions might be different from those that would have been reached if the test were applied in the same way to 100% of the items in the account balance or class of transactions. Sampling risk includes the risk of assessing control risk too low or too high and the risk of incorrect acceptance and the risk of incorrect rejection.
Before sampling, engagement teams may want to consider if sufficient appropriate audit evidence has been gained through other substantive procedures such as substantive analytical procedures, dual purpose tests performed when testing the effectiveness of internal controls (e.g., performing substantive procedures on the items selected for testing the effectiveness of internal controls), or other substantive procedures performed such as testing of significant or unusual items.
We will explore these issues as well as properly performing preliminary analytical review procedures, final analytical review procedures and so much more!