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    Behind the Numbers: Insights into Large Audit Firm Sampling...
    research summary posted July 27, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.02 Sample Selection – use of statistical sampling 
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    Title:
    Behind the Numbers: Insights into Large Audit Firm Sampling Policies.
    Practical Implications:

    Given the limited evidence on firms’ sampling policies after Sarbanes-Oxley, these findings contribute to the current literature on audit sampling and provide insights into sampling policies and procedures that are important for researchers, educators, regulators, and practitioners to better understand the application of audit sampling in the current audit environment. This study provides evidence on current sampling practices and identifies important differences in sampling policy among the largest audit firms. Responses represent firm policy, and although the sampling experts indicate that they believe that firm guidance is followed in the field, actual sampling practices may vary.

    Citation:

    Christensen, B. E., Elder, R. J., & Glover, S. M. 2015. Behind the Numbers: Insights into Large Audit Firm Sampling Policies. Accounting Horizons 29 (1): 61-81.

    Keywords:
    audit misstatements, audit sampling, materiality, statistical sampling
    Purpose of the Study:

    This study addresses a number of research questions regarding the current state of audit sampling. Audit sampling is a fundamental audit testing procedure. Over the last two decades there have been significant changes in audit approaches, including strategic systems auditing in the 1990s and federally mandated audits of internal control over financial reporting for large public companies as a result of the Sarbanes-Oxley Act of 2002 (SOX). Revisions to audit approaches have the potential to change the nature and extent of audit sampling techniques used by accounting firms. For instance, the requirement to audit internal control over financial reporting has necessarily increased the extent and importance of tests of controls, many of which are performed using sampling. Additionally, the Public Company Accounting Oversight Board (PCAOB) has identified sampling as an area needing more emphasis, and inspection reports have identified multiple issues regarding audit sampling, including small and non-representative samples and incorrect or lack of error projection, among others.

    The study focuses on the policies in place at the firms and not necessarily how these policies are implemented in the field. However, due in part to internal firm and federal oversight, discussions with firm experts indicate that audit teams are expected to comply with firm sampling guidance. 

    Design/Method/ Approach:

    The survey asked respondents a number of open-ended questions regarding sampling policies and practices currently in place at the Big 4 and two other international accounting firms. The authors worked in coordination with the participating firms. A version was sent by email in Spring 2013 to one of the Big 4 firms for completion and feedback, after which some additional clarifications were made before distributing electronically to the other firms.

    Findings:
    • The sampling methods differ significantly among the largest auditing firms; while some emphasize statistical methods, others use nonstatistical methods.
    • Firms frequently use different inputs to these sampling models, thus resulting in relatively different sample sizes.
    • The authors find variation in the planned level of expected error, and they also find differences in error projection methods used and how firms respond to identified errors and misstatements.
    • Sampling approaches and parameters within most firms are identical for large public and smaller private companies despite the likely differences in business and engagement risk.
    • Some firms have significantly changed their approach to revenue testing due to PCAOB inspections, relying more heavily on substantive testing using sampling than other substantive testing such as analytical procedures.
    • Some firms have significantly changed their approach to revenue testing due to PCAOB inspections, relying more heavily on substantive testing using sampling than other substantive testing such as analytical procedures.
       
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Sample Selection – use of statistical sampling