Specific Independent Auditing Standard No.4 - Audit Sampling

Specific Independent Auditing Standard No. 4 - Audit Sampling Chapter 1 General provisions Article 1 This standard is prepared in accordance with the General Independent Auditing Standard to establish standards for Certified Public Accountants ("CPAs") on the application of audit sampling techniques during an audit, to improve audit efficiency and to ensure a high standard of professional work. Article 2 The term "audit sampling" in this standard refers to the CPA’s performance of tests on a certain number of sample items selected from the population when the CPA performs the audit procedures. The CPA then projects the characteristics of the population based on the results of the tests. Article 3 The CPA should apply professional judgement in compiling and selecting a sample and evaluating the sample result. Article 4 This standard does not apply when CPAs perform full comprehensive tests or audits on all items with particular importance selected from the population. Chapter 2 Design of the sample Article 5 When designing an audit sample, the CPA should consider the following basic factors: (1) the audit objectives; (2) the population and the sampling units; (3) the sampling risk and non-sampling risk; (4) the confidence level; (5) the tolerable error; (6) the expected overall error; (7) the stratification; and (8) other factors. Article 6 The CPA should, according to the specific audit objectives, consider the features of the required audit evidence and the criteria which determine what constitutes an error to determine the audit sampling technique to be adopted and design the sample accordingly. Article 7 The population is the entire set of accounting and other information from which the CPA in an audit wishes to select a sample to draw an audit conclusion. When determining the population, the CPA should ensure its relevance and completeness. Article 8 The sampling units are the individual items that make up the population. The CPA should define the sampling units in accordance with the audit objectives and the entity’s actual circumstances. Article 9 The CPA should, according to different requirements, ’use appropriate methods and select certain sampling units from the, population to form a sample which is both effective and appropriate in quantity. Article 10 When designing a sample, the CPA should maintain professional scepticism and consider the sampling risk inherent in the sample and the non-sampling risk arising from other factors. Article 11 Sampling risk arises from the possibility that the (PA’s conclusion drawn from the sample result may be inconsistent with the characteristics of the population. The sampling risk has an inverse relationship with the sample size. The larger the sample size, the lower the sampling risk and vice versa. Article 12 When performing compliance tests, the CPA should pay attention to the following sampling risks: (1) the Risk of Under Reliance: the risk that, because of the sample result, the CPA does not adequately rely o the internal controls which could actually be relied upon; and (2) the Risk of Over Reliance: the risk that, because of the sample result, the reliance the CPA places on the internal controls exceeds the reliance that should actually be placed on them. Article 13 When performing substantive tests, the CPA should pay attention to the following sampling risks: (1) the Risk of Incorrect Rejection: the risk that, although the sample result supports the conclusion that an account balance is materially misstated, in fact it is not materially misstated; and (2) the Risk of Incorrect Acceptance: the risk that, although the sample result supports the conclusion that an account balance is not materially misstated, in fact it is materially misstated. Article 14 The risk of under reliance and the risk of incorrect rejection reduce audit efficiency as they would ordinarily lead to additional audit procedures being performed by the CPA. The risk of over reliance and the risk of incorrect acceptance are more likely to lead to an incorrect audit conclusion being drawn by the CPA and the CPA should pay particular attention in this regard. Article 15 Non-sampling risk refers to the possibility of not detecting material errors because of various reasons, such as the CPA’s use of inappropriate audit procedures or methods, misinterpretation of audit evidence etc. The CPA should reduce non-sampling risk effectively through appropriate planning, direction and supervision. Article 16 The confidence level is usually expressed as a percentage showing how representative the expected sample result is of the characteristics of the population. The higher the confidence level required, the greater the sample size the CPA needs to select. Article 17 Tolerable error is the maximum error in the population that the CPA would be willing to accept and still conclude that the result from the sample has achieved the audit objectives. The CPA should determine the tolerable error during the audit planning stage in accordance with the principle of audit materiality. The smaller the tolerable error, the larger the sample size will need to be. Article 18 In compliance tests, the tolerable error is the maximum deviation the CPA would be willing to accept without altering the level of reliance placed on the internal controls. In substantive tests, the tolerable error is the maximum monetary error in an account balance or class of transactions that the CPA would be willing to accept to enable him to conclude with reasonable assurance that there are no material misstatements. Article 19 When determining the expected error in a population, the CPA should consider such matters as the error rate identified in previous audits, changes in the entity’s business and operating environment, the results of the evaluation of internal control systems and analytical procedures etc. If expected error exists, the CPA should adopt a larger sample size. Article 20 Stratification is the process of dividing a population into subpopulations which have similar characteristics. Stratification may enable the CPA to direct audit efforts towards the items which contain the larger potential monetary error and may result in a smaller sample size. 　 Chapter 3 Selection of the sample Article 21 When selecting a sample, the CPA should ensure that all items in the population have the opportunity to be selected so that the sample is representative of the population. Article 22 The CPA may adopt statistical sampling or nonstatistical sampling methods to select the sample and, provided lie applies them appropriately, he can obtain sufficient appropriate audit evidence by so doing. Article 23 The CPA may apply the following methods to select the sample: (1) random selection, which ensures that all items in the population or subpopulations have an equal chance of selection; (2) systematic selection, which involves calculating a selection interval, determining the starting point for selection and selecting the sample using a constant interval between selections; and (3) haphazard selection in which the sample items are selected arbitrarily without conscious consideration for the monetary amount, the difficulty in obtaining the information or any personal preference. Chapter 4 Evaluation of sample results Article 24 After performing the necessary audit procedures on the sample, the CPA should evaluate the sample result as shown in the following steps: (1) analyse any errors detected in the sample; (2) project the errors found in the sample to the population; (3) reassess the sampling risk; and (4) draw an audit conclusion. Article 25 In analysing the errors detected in the sample, the CPA should determine whether an item in question is in fact an error, based on the criteria that constitute an error as defined in advance by the CPA. Article 26 When the CPA is unable to obtain audit evidence regarding a specific item in the sample while acting in accordance with the planned audit procedures, he should perform alternative audit procedures to obtain relevant audit evidence. If the CPA does not, or is unable to, perform alternative audit procedures, the relevant item would be treated as an error. Article 27 The CPA should consider as a whole all sample items which contain errors of a common nature, apply relevant audit Procedures to them, and separately evaluate the results. Article 28 The CPA should, using appropriate methods, project the errors found in the sample to the population. Article 29 When performing compliance tests, if the CPA concludes that the sample result does not support the expected level of reliance on the internal control systems being tested, he should consider increasing the sample size or revising the substantive procedures. Article 30 If the error projected by the CPA exceeds the tolerable error and, after reassessing, the sampling risk is unacceptable, the CPA should increase the sample size or perform alternative audit procedures. If the error projected by the CPA approaches the tolerable error, he should consider whether to increase the sample size or perform alternative audit procedures. Article 31 The CPA should, according to the evaluation of the sample result, determine whether the audit evidence is sufficient to verify the characteristics of a population. Chapter 5 Supplementary provisions Article 32 The Chinese Institute of Certified Public Accountants is responsible for the interpretation of this standard. Article 33 This standard takes effect from 1 January 1996.