 in this presentation we will discuss audit evidence and audit sampling and discuss when sampling might be first a word from our sponsor well actually these are just items that we pick from the youtube shopping affiliate program but that's actually good for you because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you these are things that we actually researched purchase and use ourselves. Ugg slippers. 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If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses you can purchase one at a time or have a subscription model given you access to all the courses courses which are well organized have other resources like excel files and pdf files to download and no commercials used when it may not be used and provide some examples first we'll take a look at some situations where audit sampling is often used in other words sampling will typically be used in these circumstances and then we'll take a look at circumstances where audit sampling is not often used so when would we use sampling methods typically we're going to use some type of sampling if we have inspection of tangible assets if we're going to go out and inspect the tangible assets then we're not going to inspect all of them we're going to have to do some type of sampling methods we're going to take some sampling method decide which of those tangible assets we need to go inspect and then we'll go inspect those particular tangible assets and get an idea of whatever type of assertion we're looking for with regards such as existence of those types of assets and then be able to apply them to the population as a whole inspection of records or documents and obviously this is going to be one of the main items that we're going to use sampling for if we want to inspect some type of documents such as invoices or bills we are clearly not going to be doing that for all of the invoices or bills we're going to have to use some type of sampling method in order to determine which items we want to sample pull those items which of course the client loves when we go and tell them we want these basic shipping dock humans we want these invoices and these particular bills and then inspect some type of sample in those circumstances. Reperformance if we're going to re-perform something as the auditor we're going to go through the calculation again for some type of item that is necessary to see a calculation to see if the calculations are done properly we're not going to do that for every type of transaction that requires that type of calculation we will pick some sample of them re-perform the calculation see if they're done correctly and hopefully be able to apply that to the population as a whole. Recalculation it's going to be similar if we're going to recalculate something or re-perform something we're going to do that for some type of sample of the population and then a confirmation so confirmations are typically going to be done with some sample we typically think of confirmation that with things like accounts receivable possibly accounts payable if we want to go through it and test the accounts receivable we may confirm that with particular customers we probably aren't going to confirm all of the customers to see if if money was owed or try to send out a confirmation for all of them what we will do is pick some type of sample make determinations from that audit sampling is not often used for these type of items including analytical procedures those are the things that we could think of basically in the office so if we're thinking about we're in the office we're doing analytical procedures we're comparing last year to this year we're seeing the dollar changes we're seeing the percentage type changes we're comparing to industry standards we're doing ratio analysis that type of things we don't typically do a sampling method we're basically comparing numbers and and we're doing the analytical type of procedures so we're not usually picking just some type of sample to test we're basically testing the relation of the numbers on the financials and related documentation scanning similar type of process so we don't typically have the the sample method for scanning inquiry if we're going to do an inquiry process and have questions about about some type of assertion then of course we're not going to basically randomly sample you know who we're going to inquire about it we're going to determine what it is we want to know who's the best person to talk to and then we're going to inquire that particular person observation we may not do as much in terms of observation as well for a sample we might go out and observe what is happening at that point in time so let's take a look at a process for example the inspection of tangible assets so if we're going to go out and we're going to inspect tangible assets tangible meaning they're physical you could touch them then and we're going to go out and test them possibly testing at least for existence do they act are they actually there they're on the financial statements we found them are they actually out there so we could think about us you know getting a list of these tangible assets that represent numbers on the financial statement and then randomly choosing in some way picking some sample of them that we get to go out there and then physically look at to make sure that they actually are there so auditors typically participate in the business's year-end inventory count so obviously this is one of the physical assets we want to look at if they have inventory is inventory typically companies will count the inventory at the end of the year we're going to want to be present at the end of the year and we want to be there for that physical count when there are a large number of items in inventory the auditor will select a sample to physically inspect and count so we're going to go out there we can imagine us basically randomly picking or picking in some sample fashion the types of inventory we want to go out and count then we go out there and count it it could be kind of funny a lot of auditors have different experiences with going out and counting the inventories for example I've gone out and counted inventory and basically you know pull had the people pull out boxes of inventory that they just counted it has the it has the number of inventory on the side and I have to tell them to open it up and recount the inventory as the person that just counted it's looking at me going you know I just counted that at the numbers right on the side and we've also had things where you know if you're telling them that you need this specific item of inventory and you go to a warehouse of it it may be the inventory box way in the back shelf of course that you randomly selected as the type of inventory that you want to inspect so they got to you know pull out the forklift and get to that box in the back in the back of the inventory area but we need to randomly basically account these to verify the count that is being given to us in our reports and then if we test the sample on that then we have inspected it and we could have more assurance that the total hopefully the whole population is correct inspection of records or documents certain controls may require the matching of documents the procedure can take place many times a day the auditor can gather evidence on the effectiveness of the control by testing a sample of the documentation packages so we could pick up the packages we could see whether or not those relationships exist therefore we could say hey this we need a sample of these basic packages given the information and then once we're in so that that would mean that the auditor or the company would have to pull the sample items that we have requested given our data and then we would go through those packages and see if the relationships do indeed exist within them re-performance publicly traded entities must document and test controls over important assertions for significant accounts to comply with pcaob the auditor may re-perform a sample of the tests performed by the entity in other words the auditor will look at the control procedures that are in place and basically re-perform or re-enact go through basically those control procedures that are listed confirmation rather than confirm all customer accounts receivable balances the auditor can select a sample of customers so a confirmation basically would mean that something like accounts receivable if we have the receivable on the books that's how much money is owed to the organization from customers we take a look at the sub ledger sub ledger by customer breaking out by customer who is owing money at the point in time of the financial statements then we want to confirm that we're not going to confirm all customers but we're going to send out some confirmation so we're going to send out those confirmations to the actual customers possibly and see and see whether or not they agree with the fact that they owe the company money and we could format those confirmations in different formats we'll discuss that later but the the point is that we're not going to send a confirmation typically to all receivables we're going to pick a sample of them and then confirm some sample in that format that hopefully will be representative of the entire accounts receivable so that we can then say that the accounts receivable does look like it's fairly stated now we're going to talk about testing items with a particular characteristic we can have a few different scenarios one we can have a few large items that we're testing when an account or class of transactions is made up of a few large items the auditor can examine all the items in the account or class of transactions so if we only have a few things and they're large for example if we have a property plant and equipment and we only have a few large purchases of equipment then we can go through and we could say we don't need to take a sample of those of course there's not many of those large purchases that are going on we're going to go through and take a look at all of them in that and then we could have a circumstance where there's a small number of large items in other words we might have more kind of transactions that are going on but we have a few of those transactions that are going to be very big in relation to the total well clearly if that's the case we might not want to do just a random sample we're not going to say hey you have all these items and there's three these three huge items however out of the population of 500 items that make up the bulk of the total amount in this in this account well we're probably going to look at those larger items we're not just going to randomly sample at that point we're going to take a look at those items that are making up the bulk of the balance so when a small number of large transactions make up a relatively large percent of an account or class of transactions orders will typically test all the transactions greater than a particular dollar amount so we're going to say hey there's a lot of transactions here but we can see that they're not evenly distributed some of these transactions are very large as compared to the other types of transactions within it for example we might be looking at payroll or something like that and we might we might notice that there's some very highly paid individuals that make up the bulk of the payroll well we might go through there and say we're going to test uh within the payroll we're going to test everything that's going to be over a certain dollar amount in some case and test that amount the same could be with property planting equipment we might have some smaller purchases of property planting equipment and then some very large purchases that make up the bulk of the property planting equipment and we might have some type of dollar limitation uh in those items as well testing one or just a few odd items automated information systems will process transactions consistently unless the system or program are changed the auditor can test the general controls over the system and any program changes while testing only a few transactions processed by the IT system so in other words if we're thinking about an IT type system notice that the IT system will process transactions routinely and correctly given the fact that the way the computers will process the transaction if the inputs are input correctly given that what's our job as the auditor the auditor can test the general controls over the system so we're going to test the controls of the system in general because if the system is processing well then uh then the number should be good given the fact that the computer will accurately you know give the number given the proper inputs and then we're going to look at any program changes so what we want to think about is when does when the change happens that's the point in time that we want to test what those changes are while testing only a few transactions uh so we can do that of course by testing much fewer transactions given the fact that we're we're accounting for uh the computer's ability to record transactions accurately looking at those points where the changes would happen within the way the computer will calculate