Question

Description of attribute sampling for an Operation Audit, a Compliance Audit, and a Financial Statement Audit.

Answer 1

Attribute sampling is a statistical process used in audit procedures that aims to analyze the characteristics of a given population. This practice is often used to test whether or not a company's internal controls are being correctly followed. Without the ability to rely on controls, it would be very difficult and exceedingly costly to conduct a meaningful audit.

For an operational audit, attribute sampling could be described in terms of in a particular process or an operation whether a particular point can be checked for the correctness or not. i.e., a step in that process or operation can be used and sample can be tested on that attribute to make an opinion on the entire population.

Example: In a motor manufacturing industry if the steel sheets have to be cut into pieces and cleaned and then sent for further operations the attribute has to be checked in terms of cleaning the sheets which will help us determine the quality of the operation.

For a compliance audit, basically the attribute sampling is done to check a few compliance with the actual documentation and which will help in deciding whether the compliance has been made rightly or not

Example: Certain monthly compliance to be followed has to be checked with the attribute of actual follow up.

For a financial statement audit, the focus is on the control aspect in terms of recording the transactions. A detailed note is given below.

Let's say an auditor wants to test the effectiveness of a company's rule that purchases of more than $10 must be authorized with a purchase order. Since examining every vendor invoice over $10 is often not feasible, the auditor will take a sample. The size of the sample must be large enough to provide an accurate picture of the entire population of purchase orders over $10, though that accuracy is always a matter of degree and must be tested. In examining the sample, the auditor may discover that 5% of the vendor invoices over $10 were not authorized by a purchase order.

On the other hand, 5% may be deemed acceptable. Because the auditor has taken a sample and was not able to examine the entire population of vendor invoices, she must do an additional analysis because any time a sample is taken, a phenomenon known as “sampling error” occurs.

A sampling error occurs when the values of the sample do not match those of the entire population from which the sample was taken. So if additional analysis shows that the margin of error is 2.5%, then a 5% non-compliance rate would be acceptable because the confidence interval is 5% plus or minus 2.5%, and the tolerable 3% rate falls within that range.

This 5% non-compliance rate may be acceptable or not, depending on the rate the auditor has determined to be a tolerable figure. If the auditor believes a 3% rate is tolerable, 5% would consequently appear to be too high and would indicate that the company's internal controls were not effective. In this scenario, additional investigation by the auditor would be necessary. This data might also suggest that additional controls are necessary in the future.

Consider an election poll, where sample data indicated that 49% of those surveyed say they plan to vote for Candidate A, and 51% of those surveyed say they plan to vote for Candidate B. In this case, the 2.5% sampling margin of error is greater than the 2% differential between the figures, which would throw the veracity of the poll results in question.

Types of Questions Asked in Attribute Sampling

Many items may be studied using attribute sampling. A partial list includes:

• Does the shipment of goods always come before billing?
• Are goods only purchased from approved vendors?
• Are credit sales made to consumers with approved credit?
• Are all checks signed by an authorized person?