Apr 05, 2022

Strategic Audit Sampling

As a best practice, sampling should be a CPA’s last line of defense! Here’s why.

Do we always need to sample? That’s a question many CPAs ask themselves when getting ready to conduct audit engagement.

An important aspect of planning an audit is deciding the extent of which audit procedures to perform. Decisions about the extent of testing may be dependent on the number of client locations or components to be tested and/or the cutoff amount for individually significant items (ISI) and sample sizes.


Authoritative guidance applies when audit engagement teams decide to use audit sampling in performing audit procedures which can be found in Professional Standards of the American Institute of Certified Public Accountants (AICPA) - AU-C 530B, Audit Sampling. AU-C 530B addresses the engagement team’s use of statistical and nonstatistical sampling when: (a) designing and selecting the audit sample, (b) performing tests of details and tests of controls and (c) evaluating the sampling results.


Guidance requires that when audit engagement teams design tests of controls and/or tests of details, they should determine an approach to selecting items for testing that is effective in meeting the purpose of the audit procedure. Approaches to selecting items for audit testing are as follows: (a) selecting all items in the population (100% testing), (b) target items and (c) audit sampling. Engagement teams may apply any one or a combination of these approaches to selection depending on the facts and circumstances.


Audit sampling enables conclusions to be drawn about an entire population based on tests of a sample taken from that population. The ability to draw valid conclusions based on a sample depends on determining an appropriate sample size, having an appropriate sampling approach and method of selection, and appropriately following up on exceptions.


So, the answer to our opening question regarding whether auditors need to always sample, the answer is (drumroll, please); no! The biggest mistake we make as auditors is to automatically select a sample and perform detailed testing. We have to think about more efficient ways of gaining assurance over an account balance (or a class of transaction) and still ensure the risk is eliminated or appropriately mitigated to an acceptable level. As a best practice, sampling should be used as our last resort. However, in some situations, there may be no alternative but to sample. So, for example, where a population (or part of a population) is material to the audit, consisting of only low value similar items (or transactions), and where the nature of the account is such that analytical review procedures cannot be used, then audit sampling may be our only option in the absence of any suitable controls that could be tested.

 

Here are some upfront questions we should be asking ourselves:

  • Are there any controls at the client we can rely on?
  • What procedures are we performing on the account?
  • What is the level of assurance we will obtain from these procedures?
  • What is the remaining balance amount of the account?
  • Is the remaining balance a significant risk?

 

So, before sampling, it’s advisable to conduct target testing on high-risk transactions first. If you separate and test account balances identified as high risk (e.g., accounts that belong to customers the client has had difficulties with in the past or have unusually high dollar amounts), you may be able to reduce the sample size, or forgo audit sampling altogether. When you complete this type of target testing, you’re taking the inherent risk—the susceptibility of an account balance or class of transactions to material misstatement— from a high risk and bringing it down to a moderate risk.


Often, auditors forgo target testing and leave the inherent risk high, which in turn, causes your sample size to be higher. By target testing high-risk transactions first, you’ll achieve a greater efficiency in coverage.

Remember, you don’t always need to sample. Assess what additional procedures you can perform first before sampling. Your audit approach needs to be tailored based on the nature of the balance you’re testing and the related risks. If the remaining balance is immaterial and you have not raised a significant risk, then no further audit work is needed. It is important to reassess inherent risk over the remaining population in order to obtain sufficient appropriate audit evidence in the most efficient manner.

 


Collemi Consulting has significant expertise in the nuances of deciding whether engagement teams should perform audit sampling and if so, how to properly determine an adequate sample size. We recommend CPA firms and auditors to contact us before or during audit planning so we can assist with the sampling process to maximize efficiency and help ensure that you’ll able to issue an appropriate opinion under Professional Standards.

Learn More

Cultivating Connections

22 Apr, 2024
Follow these strategies to hone your face-to-face networking skills.

Training Time

03 Jan, 2024
Many public accounting firms don’t focus enough on training their professional staff on how to properly research. Don’t make this risky mistake!

Hook 'em! How to Deliver More Compelling Presentations

21 Dec, 2023
Prepping to give a presentation? Here’s a quick trick: Make sure your introduction is attention-getting, and you’ll help ensure your audience members are thoroughly engaged until the very end. If you’re giving a slide presentation, that means that your first three slides are critical. A recent survey of businesspeople by Storydoc, a business presentation company, revealed that 80 percent of audience members who are engaged in the first three slides of a presentation will likely stick with you until the end of your presentation. That’s critical, considering another Gallup study that revealed that 60% of businesspeople admit to being “indifferent” to presentations, while another 11% say they’re “actively disengaged.” So, what to include in those first three slides? The best strategy is to start off with a hook: an eye-catching photo, an impressive number, an agonizing problem that members of the audience are likely to face, or a shocking statistic. Adding that hook toward the beginning of your presentation will help reel the audience in. Here are some additional presentation best practices that we at Collemi Consulting recommend: Know your audience. Understanding who comprises your audience is critical so that you can ensure you’re covering the material that matters the most to them. If you’re speaking at a conference or training event, get a list of attendees ahead of time and see who they are and where they’re from so that you can get an idea of their background. If it’s possible to communicate with attendees beforehand, send them a note introducing yourself and ask them if there are specific issues, they’d like you to touch on during your presentation. Ask questions. If you don’t interact with your audience at the beginning of your presentation, people will settle into a passive “TV-watching” mode, and it will be difficult to keep them engaged. And asking questions can also help you zero in on what matters most to the audience. For instance, you might throw out a question like, “What keeps you up at night most, XX or XX?” (reference specific challenges). Or, ask people to raise their hands if they’ve struggled with a specific obstacle. Then, you can be sure to address the challenges that most audience members indicate they’ve faced. Another way to keep people engaged with questions is by throwing out “trivia” questions related to specific new accounting standards or something else that pertains to the content you’re covering. If you make participants feel like they’re part of the presentation, they’ll be much more likely to pay attention — and retain the information. Add visual appeal. While your presentation is likely filled with a lot of important content, it’s critical to remember not to overload your audience with pages and pages of text. Break up slides with text and simple photos or illustrations that support your message. A well-chosen image is a welcome break from text that can grab your audience’s attention and help reinforce your message. You can find professional stock images on sites like Shutterstock. Provide a next step. Don’t just end your presentation abruptly by thanking people for coming. Close by including a slide that mentions what you’d like the audience to do with the information you shared with them. Perhaps you’d like them to make a list of ‘to-dos’ that will help them implement the information you’ve shared with them. Or maybe you’ll invite them to reach out to you should they need your services. A solid closing will build rapport — and help audience members retain what they’ve learned. Collemi Consulting leverages almost three decades of experience in providing trusted technical accounting and auditing expertise when you need it the most. Salvatore A. Collemi, CPA, Managing Member & Founder, is regarded as an industry leader and subject matter expert by various organizations and media outlets. To schedule an appointment to see how we might work together, contact us at (732) 792-6101.

Marketing for Auditors: 4 Savvy Strategies

20 Nov, 2023
Want to know the difference between high-growth and average-growth firms in the public accounting profession? Here’s a hint: It begins with the letter “M.” If you guessed “marketing,” you’re correct. According to the 2023 High Growth Study by Hinge, public accounting and finance firms grew at a median rate of 11%, lagging behind many other professional services categories. But the study also uncovered that public accounting firms that focus on marketing as a top priority see regular, year-over-year growth of 20% or more! Here is the good news: You don’t have to be a Big 4 firm with extensive resources to leverage marketing to your advantage. Small-and mid-sized CPA firms, and even sole practitioners, can take some simple steps to differentiate themselves in their respective field. Many auditors & accountants and their firms are missing out on major opportunities to target clients using tools that are right at their disposal. Here are four strategies to build visibility for your practice and differentiate yourself from your competitors: Strategy #1—Public Speaking. Landing speaking gigs at industry conferences or on an industry podcasts or webinars are one of the best ways to position yourself and your firm as an expert in the field. Speaking gigs offer auditors a platform to showcase their knowledge, provide insights on relevant topics and establish themselves as an authority in the field while increasing their firm’s visibility. You can use speaking engagements to share best practices, identify emerging trends and offer solutions. To get started, do some research on upcoming conferences in your area where you might offer to contribute. Your State Society and local Chambers of Commerce may also have seminars or online events that offer speaking opportunities. Strategy #2—Create a newsletter. Some savvy CPA firms create email newsletters that provide valuable and relevant information to clients and prospects. Sending out periodic newsletters helps drive traffic to your website or blog (when you include links to relevant articles or resources), builds credibility by positioning yourself and your firm as a subject matter expert (SME), and encourages social sharing. If your content is engaging, it may prompt subscribers to share it on social media. Your newsletter doesn’t have to be lengthy: Two to three short articles, plus a call to action at the end, is enough to capture a reader’s attention. Strategy #3—Include lead magnets on your website. Lead magnets are incentives on your website that you offer potential clients in exchange for their contact information. For example, you might offer a white paper you’ve created on an important topic or a PDF that highlights important new information regarding the latest accounting rules. Creating these kinds of lead magnets can help you grow you email list and build a database of potential leads. Strategy #4—Amp up your social media. You may already be leveraging social sites like LinkedIn to promote yourself or your business, but are you gaining followers and increasing engagement? The best way to grow followers and generate more interaction is to share information of real value to those you want to target. It’s also important to post content frequently and interact regularly with followers. Remember that social media is all about dialogue (not sales pitches!). Approach it as a conversation; post content your followers are likely to share or comment upon, which will extend your reach to their connections. Be generous with your time and advice, and potential clients will want to work with you. Short on time? Pick one or two of these strategies to focus intently on in the upcoming year; the investment in time will be worth it. Collemi Consulting leverages nearly three decades of experience to provide trusted technical accounting and auditing expertise when you need it the most. We regularly work with CPA firm leadership to help them reduce risk and maximize efficiencies to grow their attest practices. To schedule an appointment, contact us at (732) 792-6101.
More Posts
Share by: