Your Auditor gets paid for their independent opinions on your financial statements and company accounts. This is their job. For this purpose, they collect sample transactions for audit.
Before your Auditor could express their opinions on whether your company accounts and financial statements give a true and fair view of the state of your business affairs, they would have to do their audit first.
It would be unreasonable to expect your Auditor to check every single transaction on your accounting records for accuracy. They can do it if you want them to but that’s going to cost you a lot. You better off hired an in house accountants with past auditing experience to lead your finance department.
Your Auditor sample your business transactions for audit tests based on the level of risks they identified in your business operations. The auditor is prudent in their audit approach because if someone relies on your financial statements based on their opinions and disaster happened and someone may sue your Auditor. That’s why Auditor can be a pain sometimes. Forgive them. They are just doing their job and you pay them for it, is it not?
Audit sampling methods
First and foremost, your Auditors would have audit objectives set to achieve in their audit. For this purpose, they would use a combination of the following audit sampling methods when come to selecting samples of transactions for audit tests.
All of your business transactions may not be 100% audited. However, every single transaction has an equal chance of being picked for audit testing.
Sample transactions using Haphazard method
First is the Haphazard audit sampling. For this, simply choosing items subjectively but avoiding bias. Bias might come in with the tendency to favour items in a particular location or an accessible file or conversely in picking items because they appear unusual.
In short, this method is acceptable for non-statistical sampling but is insufficiently rigorous for statistical sampling.
Second is the simple random. With this audit method, all items in the population have (or are given) a number. Numbers are selected by a means which gives every number an equal chance of being selected. This is done using random number tables or computer or calculator generated random numbers.
Stratified audit method is dividing the population into subpopulations (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 is sampled.
Next audit sampling method is useful when data is maintained in clusters (in groups or bunches). For example, wage records are kept in weeks or sales invoices in months. The idea is to select a cluster randomly. Subsequently, to examine all the items in the cluster selected. However, the problem with this method is that this sample may not be representative.
Random systematic audit sampling involves making a random start. thereafter, taking every item at the determined interval. This is a commonly used method which saves the work of computing random numbers.
However, the sample may not be represented as the population may have some serial properties.
Multi-stage audit sampling 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. Then, the second stage is to randomly select stock items from the chosen shops.
Block sampling audit method is 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 popular or recommended.
Value weighted selection
Valve weighted selection audit sampling 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.
Permanent file audit
Your auditors will check your confirmation statement in the permanent agreed to the Companies House register.