Sample Selection

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Sample Selection Audit Case Example: ABC Manufacturing Company

Context

Under the conditions of selecting a limited sample size of 10 transactions without allowing for any deviations, the audit strategy for ABC Manufacturing Company must be particularly focused. This approach involves identifying transactions that are inherently significant either due to their size, nature, or risk level, ensuring that the sample chosen is representative of the broader transaction population and touches upon multiple financial statement assertions.

Audit Objective

To select a sample of 10 transactions that will provide sufficient, appropriate audit evidence regarding the accuracy, existence, completeness, valuation, rights and obligations, and presentation and disclosure of transactions within ABC Manufacturing Company’s financial statements, under the constraints of no deviations from the selected items.

Types of Audit Evidence and Documentation for Sample Selection Assertions

1. Existence

• Case: Choose transactions with physical assets or direct external confirmation possibilities to test existence.

• Documentation: Document the rationale for selecting specific transactions that are verifiable through physical inspection or external confirmation, noting the assertion of existence as the primary focus.

2. Completeness

• Case: Include transactions that are part of routine business processes where completeness is often challenged, such as sales near the reporting period end.

• Documentation: Justify the selection of transactions that inherently test the completeness assertion, explaining how these transactions are representative of broader processes within the company.

3. Accuracy

• Case: Select transactions with complex calculations or significant estimates that are prone to error.

• Documentation: Outline the reasons for including transactions that will test the accuracy of financial recording, especially those involving significant judgments or estimations.

4. Valuation and Allocation

• Case: Focus on transactions involving the valuation of assets and liabilities, such as impairment reviews or inventory valuations.

• Documentation: Document the selection criteria that led to choosing transactions impacting the valuation and allocation assertion, detailing the relevance to the company’s financial situation.

5. Rights and Obligations

• Case: Incorporate transactions that can verify the company’s rights to assets and obligations for liabilities, such as loan agreements.

• Documentation: Explain the inclusion of specific transactions to test the rights and obligations assertion, highlighting how these transactions provide evidence of the company’s legal rights or obligations.

6. Presentation and Disclosure

• Case: Choose transactions that involve significant disclosures or are critical for the correct presentation of financial statements, like related party transactions.

• Documentation: Motivate the choice of transactions that address the presentation and disclosure assertion, emphasizing their impact on the transparency and understanding of the financial statements.

Approach for No Deviations

Given the strict limitation of no deviations, each selected transaction must be:

• Highly relevant to testing the targeted assertion.

• Clearly documented in terms of selection criteria and expected audit evidence contribution.

• Considered for its potential to cover multiple assertions, enhancing the overall efficiency of the sample.

Conclusion

In this constrained scenario, careful transaction selection becomes paramount to the audit’s success. By documenting the selection process and the rationale behind each choice, auditors ensure that despite the small sample size and no deviation allowance, the audit procedures performed on these transactions can provide a reasonable basis for assessing the relevant financial statement assertions. This targeted approach helps mitigate the risk of material misstatement and supports the auditor’s opinion on the financial statements.