For the past few years, there have been significant changes in audit approaches and procedures when carrying out audit work, especially in the case of internal control of financial reporting process, as this changes have the ability to change the nature and extent of audit sampling techniques in both public and private sector. According to ISA 530, “Audit Sampling” involves the application of audit procedures to less than 100% of items within an account balance or class of transactions, so all items should have an equal chance to be selected. The use of sampling is widely adopted in auditing because it offers the opportunity for the auditor to obtain the minimum amount of audit evidence, which is both sufficient and appropriate, in order to form valid conclusions on the population.
The objectives of the study are to identify the sampling method necessary in the audit of financial statements, find out the advantages and disadvantages of the two known sampling methods, and also ascertain how the application of sampling methods reduced cost, saves time and effort of the team of auditors. The research design employed for generating information and analysing data, in order to make relevant findings and recommendation is Ex-post facto research design while secondary source of data collection was fully employed and considered appropriate.
The researcher concludes that more recent research on audit sampling show low rates of sample errors in many sampled populations, indicating that some sampling concerns may be mitigated in the post-Sarbanes-Oxley (SOX) environment. The research recommend that Audit firms should always adopt sampling procedure in their audit process so as to provide concrete audit reports that are objective, free from bias, express true and fair view of the reporting and which can also be defensible while larger and small audit firms should adopt probability sampling techniques in their audit processes so as to provide an estimate of error when carrying out audit assignment.
1.0. BACKGROUD OF THE STUDY
Certain changes in the audit profession after Sarbanes-Oxley, including mandatory audits of internal control procedures over financial reporting and NFRB oversight and inspection of audit work, have changed the nature and extent of audit sampling in various accounting firms.
For the past few years, there have been significant changes in audit approaches and procedures when carrying out audit work, especially in the case of internal control of financial reporting process, as this changes have the ability to change the nature and extent of audit sampling techniques in both public and private sector.
In the field of Auditing, forensic, Investigation and Control, the connotation theory of “true and fair” is one of the major expressions used in the financial industry today. It is not only used to describe the required standard of financial reporting but also equally used to justify decisions, which require a certain amount of arbitrary judgement making (Parker and Nobes, 2010). Previous studies have demonstrated that true and fair view is the principle that is used in guidelines ranging from auditing and financial standards (Lee, 2001). It is the principle of true and fair view which enhances the process of auditing by enabling audit reports to ascertain the validity of original transactions, confirm the completeness and accuracy of recording transactions and ensuring that the financial statements of an organization has been prepared in agreement with the available records of the organization (McMonnies, 1987). Essentially, the aim of the financial statement of a company is to report to the shareholders on the financial position at the year-end, and the performance of the company over the year (Parker and Nobes, 2010).
Generally, the decision to apply a particular audit sampling application to a particular audit test is a matter of cost effectiveness in most audit firm. Moreover some of this sampling methods and applications usually require more training for prospective auditors and more time to apply. Many of the reason why most audit department in both public and private industry utilizes a form of sampling procedure called non-statistical random sampling procedures.
When planning an audit exercise, the audit team gathers and generate information or necessary evidence about the entity’s economic environment, the complexity of transactions and operations of the entity. In a financial year an entity that is required by current regulations to be audited has, in most cases, have large populations of data and information. If the audit would require testing all elements of the population, this would mean that the audit team has to make a long and sustained effort for all tests, hence the need for audit sampling.
According to ISA 530, “Audit Sampling” involves the application of audit procedures to less than 100% of items within an account balance or class of transactions, so all items should have an equal chance to be selected. The use of sampling is widely adopted in auditing because it offers the opportunity for the auditor to obtain the minimum amount of audit evidence, which is both sufficient and appropriate, in order to form valid conclusions on the population. Audit sampling is also widely known to reduce the risk of ‘over-auditing’ in certain areas, and enables a much more efficient review of the working papers at the review stage of the audit. For example, if the auditor tests only 20% of trade receivables for existence at the reporting date by confirming after-date cash, this is hardly representative of the population, whereas, say, 75% would be much more representative. There are two general approaches to audit sampling: nonstatistical and statistical. Both approaches require that the auditor use professional judgment in planning, performing, and evaluating a sample and in relating the evidential matter produced by the sample to other evidential matter when forming a conclusion about the related account balance or class of transactions. Either approach to audit sampling can provide sufficient evidential matter when applied properly.
Many audit programs in both the public and private sector have developed standard sampling approaches which use predetermined allowances for acceptable sampling risk, expected and tolerable error. These approaches reduce the time and effort required to determine the sample size and evaluate results. The cost of these approaches is that they usually generate sample sizes somewhat larger than necessary to allow a margin for variance. Hence, when carrying out any sampling approach, the auditor must evaluate the population that is being tested, must determine if any stratification should be done, must evaluate the cause of any exceptions and must apply the results from the sample to the remaining portion of the population.
Generally, the audit standard state that auditors will not ordinarily test all the information available to them because this would be impractical as well as uneconomical, instead they are expected to use sampling as an audit technique in order to arrive at a logical and reasonable conclusions. It is necessary at the outset to understand that some audit procedures which the auditor adopt do not involve audit sampling, 100% testing of items within a population, for example. Auditors may deem 100% testing appropriate where there are a small number of high value items that make up a population, or when there is a significant risk of material misstatement and other audit procedures will not provide sufficient appropriate audit evidence.
Another issue of basis review is the case of uncertainty and audit sampling, alternatively some degree of uncertainty is implicit in the concept of “a reasonable basis for an opinion” referred to in the third standard of field work. The justification for accepting some uncertainty arises from the relationship between such factors as the cost and time required to examine all of the data and the adverse consequences of possible erroneous decisions based on the conclusions resulting from examining only a sample of the data. If these factors do not justify the acceptance of some uncertainty, the only alternative is to examine all of the data. Since this is seldom the case, the basic concept of sampling is well established in auditing practice.
A globalization of business, and as a consequence, the occurrence of large volumes of financial data, led to the problem of studying a huge number of audit evidences sources. In the nineties several research studies were devoted to the use of sampling techniques in auditing, while a little years later, several researchers have been investigated the problem of the quality of audit sampling, all of which prompt the author motive to carry out a comprehensive research on this study.
Requirements for auditors have become more stringent: the need to coordinate their actions with the Audit Committee, including the main provisions of accounting to be used in the audit, various options for assessing the financial information under GAAP. These requirements, ultimately, focus an attention on the problem of the quality of audit services. Up until now questions of the qualitative sampling, as one of the most important procedures during the audit are remaining unsolved. Several of these judgments may be influenced by environmental factors, such as regulation, litigation, competition, culture, and technology, and there are a number of research opportunities available in exploring how these environmental factors influence audit sampling decisions.
To be necessary means to be useful, indispensable for a particular purpose. For the purpose of this research study, the following tentative research questions were asked to guide the research study:
- To what extent is the sampling method necessary in the audit of financial statements?
- What are advantages and disadvantages of the two known sampling methods?
- Does the application of sampling methods reduced cost, saves time and effort of the team of auditors?
- Ascertain the relationship between the audit risk and the methods of the unit’s selection?
- What are the effect of the use of audit sampling for internal control testing and substantive procedures?
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