Chapter 9 – Audit Sampling c.

Objectively evaluate sample result

Selective testing – Performing audit procedures These benefits can only be obtained with
only to those with particular significance additional costs
Audit sampling – assumption on the sample Audit Sampling Plan
selected for testing is representative of the
population. - May be used in preforming test of
controls or substantive tests
 Uncertainty of not detecting the material - Auditor may use either attribute
errors in account balances or class of sampling plan or variable sampling
transactions arises because of sampling plan
and non-sampling risks
 Attribute Sampling – frequency of
Sampling risk – auditor’s conclusion might be occurrence of the characteristic in a
different to the results if the population is to be population; generally used in tests of
audited with the same audit procedure if it is controls to estimate rate of deviations from
based on a sample. internal policies or procedures prescribed
1. Alpha Risk  Variable Sampling – used to estimate
- Test of control if internal control is not numerical measurement such as peso
reliable value; perform substantive tests to
- Substantive test if material estimate the amount of misstatement in
misstatement exists when in fact it the fs
does not exist Steps in Audit Sampling
2. Beta Risk
- Test of control if internal control is not 1. Define the objective
effective and cannot be relied upon - Determines the audit procedures to be
- Substantive test if material applied
misstatement does not exist when in 2. Determine the procedure
fact it does - Define the population and
characteristics to be tested
Non-sampling risk – incorrect conclusions 3. Determine the sample size
because of human errors; includes all aspects of - How many units to include in the
audit risk not due to sampling sample
Auditors control risks in terms of: - Sample size based on formula is
statistical sampling
Sampling risk by: - Sample size based on the
professional’s judgement with non-
1. Increasing sample size
statistical sampling
2. Use an appropriate sample selection
4. Select the sample
method
- Sample selection technique should be
Non-sampling risk by: designed in a way that all items in the
population will have the chance to be
1. Proper planning selected
2. Adequate direction, review and 5. Apply the procedures
supervision of the audit team - After selection, apply planned audit
General Approaches to Audit Sampling procedures
6. Evaluate the results
1. Statistical sampling - Sample result must be evaluated to
- Random based selection determine whether sufficient evidence
- Statistics (law of probability) has been obtained to satisfy the
2. Non-statistical sampling objective
- Purely uses the auditor’s judgement
Steps 1, 2, 5, and 6 should be performed
Only difference with these two methods are the regardless of whether the auditor uses audit
sampling risks to measure or quantify the sampling or not.
sampling risk
Difference between audit sampling and 100%
Statistical sampling helps auditor to: examination:
a. Design an efficient sample a. Determination of sample size
b. Measure sufficiency of evidence b. Selection of sample
 c. Projection of errors in evaluating the Evaluation of result (both the qualitative and
sample results quantitative factors should be considered)
Sampling test of controls Anomalous errors are errors from isolated
events and not a representative of errors in the
- Appropriate when application of the population.
control leaves evidence of
performance
- IF no documentary evidence, inquiries
and observations re more appropriate
Determination of sample size
1. Acceptable sampling risk
- Inherent in audit sampling application
- Size of sample depends on what level
of risk the auditor is willing to accept
- Inverse relationship between
acceptable sampling risk and sample
size (smaller risk, larger size)
2. Tolerable deviation rate
- Maximum rate of deviation without
modifying planned degree of reliance
on internal controls
- Tolerable rate is inversely related to
the sample size; decrease in deviation
rate will cause sample size to increase
- Professional judgement and
consideration of importance of the
control & degree of reliance to be
place on such control
3. Expected deviation rate
- Expected to find in population before
testing begins
- Develop expectation based on the
prior year’s results (pilot sample)
- Expected population deviation rate
should not exceed tolerable deviation
rate
- Omit testing if exceeded then seek
assurance by testing other relevant
internal control policy/procedures or
assess control risk at a high level
Sample selection method
3 principal methods of selecting
samples
a. Random number selection – match
random numbers; each item ha equal
opportunity to be selected
b. Systematic selection – sampling
interval
c. Haphazard Selection – useful for
non-statistical sampling
o Voided documents replace by
another sample item
o Missing documents should be
treated as a deviation for the
purpose of evaluating sample
results
Code of Ethics for Professional Accountants
in the Philippines Principles

Common Characteristics of Professions:

a. Responsibility to serve the public - The
CPA is a representative of the public -
creditors, stockholders, consumers,
employees, and others – in the financial
reporting process. The role of the
independent attester is to ensure that
information is fair to all parties
b. Complex body of knowledge - Any
practitioner or student of accounting has
only to look at the abundance of
authoritative pronouncements governing
financial reports to realize that accounting
is a complex body of knowledge.
c. Standards of Admission to the
Profession - Attaining license to practice
as a CPA requires an individual to meet
minimum standards for education and
experience.
d. Need for Public Confidence - To the
CPA, public confidence is of special
significance. The CPA’s product is
credibility. Without public confidence in the
attestor, the attest function serves no
useful purpose.
 Part A - establishes the fundamental
principles of professional ethics for
professional accountants and provides a Threats and Safeguards
conceptual framework for applying those
principles. This also provides guidance on
fundamental ethical principles
 Part B and C - illustrate how conceptual
framework is to be applied in specific
situations. It provides safeguards appropriate
to address threats to compliance with the
fundamental principles and situations where
safeguards are not available to address
threats and consequently the activity
relationship creating the threats should be
avoided.
Part B - applies to professional accountants in
public practice
Part C - applies to professional accountants in
business.
 - Processing or obtaining experience
with relevant regulatory or reporting
requirements.
- Using experts where necessary.
- Agreeing on a realistic time frame for
the performance of the engagement.
“” in case of conflict of interests
a. Notifying the client of the firm’s business
interest or activities that may represent a
conflict of interest, and obtaining their
consent to act in such circumstances; or
b. Notifying all known relevant parties that
the professional accountant in public
practice is acting from two or more parties
in respect of a matter where their
respective interests are in conflict, and
obtaining their consent to so act; or
c. Notifying the client that the professional
accountant in public practice does not act
exclusively for any one client in the
provision of the proposed services.

Safeguard adopted by CPAs as to level of fees and

service
- Making the client aware of the terms of
the engagement and the basis on
which fees are charged and which
services are covered by the quoted fee
- Assigning appropriate time and
Parts of the resolution process that should be qualified staff to the task.
considered in case of ethical conflicts Factors to be considered in connection with
- Relevant facts fees charged for assurance engagements:
- Ethical issues involved - the skill and knowledge required for
- Fundamental Principles related to the the type of work involved
matter in question - the level of training and experience of
- Established Internal Procedures the persons necessarily engaged on
- Alternative Course of action the work
- the time necessarily occupied by each
person engaged on the work
Part B – Safeguards used by CPA’s in public
- the degree of responsibility and
practice to eliminate or reduce threats to
urgency that the work entails.
acceptable level
Safeguards applied in the custody of client assets
- Acquiring an appropriate - Keep such assets separately from
understanding of the nature of the personal firm assets.
client’s business, the complexity of its - Use such assets only for the purpose
operations and the nature and scope for which they are intended.
of work to be performed. - Comply with all holding of and
- Acquiring knowledge of relevant accounting for such assets.
industries or subject matters. - At all times, be ready to account for
- Assigning sufficient staff with the those assets and any income,
necessary competencies. dividends or gain generated, to any
- Complying with quality control policies person entitled to such accounting.
and procedures designed to provide Safeguards applied in the fundamental principle
reasonable assurance that specific of objectivity
engagements are accepted only when - Withdrawing from the engagement
they can be performed completely. team
- Supervisory procedures
 - Discussing the issue with those 6. Direct financial interests - A financial
charged with governance of the client interest: -owned directly by and
- Terminating the financial or business under the control of an individual or
relationship giving rise to the threat entity; or -beneficially owned
- Discussing the issue with higher levels through a collective investment
of management within the firm
vehicle, estate, trust or other
 Independence in Mind - The state of mind that
intermediary over which individual
permits the expression of a conclusion without
or entity has control.
being affected by influences that compromise
7. Engagement partner - The partner or
professional judgment, allowing an individual to
other person in the firm who is
act with integrity, and exercise objectivity and
responsible for the engagement and
professional skepticism.
its performance, and for the report
 Independence in Appearance - The avoidance
that is issued on behalf of the firm,
of facts and circumstances that are so significant
and who, where required, has the
that a reasonable and informed third party,
appropriate authority from a
having knowledge of all relevant information,
professional, legal or regulatory body
including safeguards applied, would reasonably
The following shall not be allowed on advertising
conclude a firm, or a member of the assurance
and promotions for the practice of accountancy
team’s integrity, objectivity or professional
in the Philippines:
skepticism had been compromised
- Self-laudatory statements
- Discrediting, disparaging, or attacking other
Definitions
firms or CPA practitioners
1. Advertising - The communication to
- Referring to, using or citing actual or
the public of information as to the
purported testimonials by third parties
services or skills provided by
- Publishing and comparing fees with other
professional accountants in public
CPAs or CPA firms or comparing those
practice with a view to procuring
services with those provided by another firm
professional business.
or CPA practitioner
2. Assurance client - The responsible
- Giving too much emphasis on competitive
party that is the person (or persons)
differences
who: (a) In a direct reporting
- Using words or phrases which are hard to
engagement, is responsible for the
define and even more difficult to
subject matter; or (b) In an assertion-
substantiate objectively
based engagement, is responsible for
- Publishing services on billboards (e.g.,
the subject matter information and
tarpaulin, streamers, etc.)
may be responsible for the subject
The following examples are illustrative of
matter circumstances in which publicity is
3. Assurance engagement - An acceptable:
engagement in which a professional
accountant in public practice - Awards
expresses a conclusion designed to - Professional accountants seeking
enhance the degree of confidence of employment or professional business
- Directories
the intended users other than the
- Books, articles, interviews, lectures, radio
responsible party about the outcome and television appearances
of the evaluation or measurement of - Training courses, seminars, etc.
a subject matter against criteria. - Booklets and documents containing
4. Assurance team (a) All professionals technical information
participating in the assurance - Staff recruitment
engagements;(b) All others within a - Publicity on behalf of client
firm who can directly influence the - Brochures and firm directories
outcome of the assurance - Stationery and nameplates
engagement - Announcements
5. Contingent fee - A fee calculated on a - Inclusion of the name of the professional
predetermined basis relating to the accountant in public practice in a
document issued by client
outcome or result of a transaction or
- Anniversaries
the result of the work performed
- Websites