Sample Sizes

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Sample Size Calculation Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company engages in thousands of transactions annually across various accounts, making it impractical to test every transaction. Therefore, auditors use sampling techniques to test a representative subset of these transactions or account balances.

Audit Objective

To determine appropriate sample sizes for testing various financial statement assertions associated with account balances or classes of transactions within ABC Manufacturing Company, providing a basis for drawing conclusions about the entire population.

Types of Audit Evidence and Documentation for Sample Size Calculation

1. Determination of Sampling Method

• Case: Decide between statistical and non-statistical sampling methods based on the audit objectives, the nature of the population, and the auditors’ professional judgment.

• Documentation: Document the chosen sampling method for each audit area, including the rationale for the choice and how it aligns with the audit objectives.

2. Assessment of Risks and Desired Assurance Level

• Case: Assess the inherent and control risks associated with each significant account or transaction class. Higher risks require a larger sample size to achieve the same level of assurance.

• Documentation: Summarize the risk assessment for each account or transaction class and how it impacts the desired level of assurance and, consequently, the sample size.

3. Consideration of Tolerable and Expected Misstatement

• Case: Determine the tolerable misstatement (related to materiality) and the auditor’s expectation of misstatements in the population. A lower tolerable misstatement or higher expected misstatement increases the sample size.

• Documentation: Document the tolerable misstatement and expected misstatement for each account or transaction class, explaining how these were considered in the sample size calculation.

4. Sample Size Calculation

• Case: Calculate the sample size using appropriate formulas or software, incorporating the assessed level of risk, the desired assurance level, tolerable misstatement, and expected misstatement.

• Documentation: Provide detailed calculations of the sample sizes for each significant account or transaction class, including all inputs to the calculation and the rationale for any assumptions made.

5. Selection of Items for Testing

• Case: Based on the calculated sample size, select specific items for testing. The selection method (random, systematic, haphazard) should be appropriate for the audit objectives and population characteristics.

• Documentation: Document the selection method and the process used to select the sample items, ensuring the selection is representative of the population.

6. Adjustments Based on Preliminary Findings

• Case: If preliminary testing results indicate a higher than expected level of misstatement or deviation rate, the auditor may need to adjust the sample size to obtain sufficient appropriate audit evidence.

• Documentation: Document any adjustments made to the sample size, including the reasons for the adjustments and how the revised sample size was determined.

7. Evaluation of Results and Extrapolation

• Case: After testing the selected sample, evaluate the results and, if applicable, extrapolate findings to the entire population.

• Documentation: Summarize the results of the sample testing, including any misstatements identified, and document how these results were extrapolated to draw conclusions about the entire population.

Conclusion

Calculating and documenting sample sizes is a systematic process that ensures audit tests are both efficient and effective. By carefully considering risk, materiality, and the characteristics of the population, auditors can design sampling procedures that provide reasonable assurance about the financial statements. Documentation of the sample size calculation and selection process is essential for audit transparency and supports the auditor’s conclusions and opinion on the financial statements.