Auditing Standards for Stratified Sampling

From Open Risk Manual


Auditing Standards for Stratified Sampling as suggested by the AQR Manual

Standards on auditing from the International Federation of Accountants (“IFAC”), namely International Standards on Auditing (“ISA”), have been taken into account. In particular, the following are relevant considerations, summarised below:

ISA 530, A4: Audit sampling enables the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in order to form or assist in forming a conclusion concerning the population from which the sample is drawn. Audit sampling can be applied using either non-statistical or statistical sampling approaches.

  • Auditing a sample is an acceptable technique to draw conclusions about a population; and
  • Both statistical and non-statistical sampling approaches can be applied.

ISA 530, A10: The level of sampling risk that the auditor is willing to accept affects the sample size required. The lower the risk the auditor is willing to accept, the greater the sample size will need to be.

  • Acceptable level of sampling risk has to be defined; and
  • Sample size has to be defined in light of the acceptable sampling risk.

ISA 530, A12: With statistical sampling, sample items are selected in a way that each sampling unit has a known probability of being selected. With non-statistical sampling, judgment is used to select sample items. Because the purpose of sampling is to provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected, it is important that the auditor selects a representative sample, so that bias is avoided, by choosing sample items which have characteristics typical of the population.

  • The sample has to be representative and unbiased; and
  • If statistical sampling is applied, this is ensured through the use of random sampling.

ISA 530, Appendix 1, Para 1: Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete sub-populations which have an identifying characteristic. The objective of stratification is to reduce the variability of items within each stratum and therefore allow sample size to be reduced without increasing sampling risk.

  • Stratification may be used to increase the feasibility and credibility (“improve efficiency”) of the exercise.

ISA 530, Appendix 1, Para 2: When performing tests of details, the population is often stratified by monetary value. This allows greater audit effort to be directed to the larger value items, as these items may contain the greatest potential misstatement in terms of overstatement. Similarly, a population may be stratified according to a particular characteristic that indicates a higher risk of misstatement, for example, when testing the allowance for doubtful accounts in the valuation of accounts receivable, balances may be stratified by age.

  • Exposure size and riskiness are often the stratification criteria.

Additional standards have been taken into account, in particular:

  • ISA 200 – Overall objectives of the independent auditor and the conduct of an audit in accordance with International Standards on Auditing;
  • ISA 315 – Identifying and assessing the risks of material misstatement through understanding the entity and its environment;
  • ISA 320 – Materiality in planning and performing an audit;
  • ISA 330 – The auditor’s responses to assessed risks;
  • ISA 450 – Evaluation of misstatements identified during the audit; and
  • ISA 500 – Audit evidence.