Why auditors have to sample test on clients accounting records?
Auditors are required to carry out walk through tests on clients accounting records to verify the clients have sufficient internal control in place to ensure all transactions are recorded correctly, complete and free from material errors before auditors can express their opinions whether the clients' financial statements are giving a true and fair view. The facts about auditors opinions on these financial statements are based on audit tests carried out on sample basis are reported in the auditors report.
How sample of transactions are selected?
The overall objective of sampling is to gather sufficient appropriate audit evidence. Auditor may select specific items from a population for testing, such as those items that are deemed to be high value or key items. However, such limited selection does not constitute sampling. The results from testing such items cannot lead to valid conclusions in respect of the whole population. Therefore, the auditor must obtain sufficient appropriate audit evidence in respect of the residual population where it is material.
The auditor should decide whether to use statistical or non-statistical sampling approach considering the size of the sample and the manner in which the sample should be selected.
The fundamental requirements in audit sampling are:
The auditor should ensure sampling risk is reduced to an acceptably low level when determining the sample size.
The auditor should select items for the sample with the expectation that all sampling units in the population have a chance of being selected.
ISA (UK and Ireland) 530 is particularly useful in explaining how to use the results of sampling, considering the nature and cause of errors found in the sample, projecting errors onto the whole population, where appropriate, and evaluating the sample results.
The auditor should consider whether the results of the sampling and the investigation of any errors found are sufficient to enable him or her to reach a conclusion.
What kind of internal control system should be implemented by businesses owners?
A good internal control system referred to good operational system where reliability can be placed on by business managers for daily operational decisions and auditors can rely on the system to reasonably regarded the accounting records are free from materials errors therefore no substantive testing are to be carried out.
Below are a few examples of good internal control systems:
- Purchase invoices are properly authorized by line manager before cheques are issued for payment
- Cheques are signed by two signatories if big amount is involved
- There is a system of stock control and recording including regular in-house stock take
- Sales invoice is issued once sales has taken place and there is a system on monitoring the debt, credit check is carried out on new customer before granting credit terms.
- Monthly bank reconciliations if practicable and at the same time to update debtors and creditors balances.
- Segregation of duties between staff
- Proper recording and filing system are maintained for easy retrieval of records
