What Businesses Requires Audit?
Companies with sales and/or business assets more than £6.5 million and £3.26 million respectively are required by the company law to have their accounts audited by registered auditors.
Auditors will approach their auditing by carrying out audit tests on samples of transactions randomly and evaluate internal control systems before they express their opinion on whether the accounts give a true and fair view.
Audit Sampling Methods
To achieve audit objectives, auditors often use combination of the following sampling methods when come to selecting samples for testing.
Haphazard
Simply choosing items subjectively but avoiding bias. Bias might come in by tendency to favour items in a particular location or m an accessible file or conversely in picking items because they appear unusual. This method is acceptable for non-statistical sampling but is insufficiently rigorous for statistical sampling.
Simple random
All items in the population have (or are given) a number. Numbers are selected by a means which gives every number unequal chance of being selected. This is done using random number tables or computer or calculator generated random numbers.
Stratified
This means dividing the population into sub populations (strata = layers) and is useful when parts of the population Have higher than normal risk such as high value items, overseas debtors. Frequently high value items form a small part of the population and are 100% checked and the remainder are sampled.
Cluster sampling
This is useful when data is maintained in clusters (= groups or bunches) as wage records are kept in weeks or sales invoices in months. The idea is to select a cluster randomly and then to examine all the items in the cluster selected, The problem with this method is that this sample may not be representative.
Random systematic
This method involves making a random start and then taking every item at the determined interval thereafter. This is a commonly use method which saves the work of computing random numbers. However the sample may not be representative as the population may have some serial properties.
Multi stage sampling
This method is appropriate when data is stored in two or more levels. For example stock in a retail chain of shops. The first stage is to randomly select a sample of shops and the second stage is to randomly select stock items from the chosen shops.
Block sampling
Simply choosing at random one block of items such as all June invoices. This common sampling method has none of the desired characteristics and is not recommended.
Value weighted selection
This method uses the currency unit value rather than the items as the sampling population . It is now very popular and it is also known as Monetary Unit Sampling.
Concise Accountancy – Understanding how auditors audit small businesses
