Stratified Sampling in Auditing

This assignment delves into the application of stratified sampling in auditing. It discusses how stratification, based on characteristics like medium or commercial scale, helps reduce variability within accounts. The text examines the benefits and drawbacks of this technique, including cost considerations and potential for bias reduction. It emphasizes the importance of determining appropriate strata sizes for optimal accuracy and the role auditors play in selecting suitable stratification methods.

Running head: AUDITING
Auditing
Name of the student
Name of university
Authors note

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Table of Contents
Answer to Question 1.................................................................................................................2
Answer to Question 2.................................................................................................................4
Answer to Question 3:................................................................................................................6
Answer to Question 4:................................................................................................................8
References:...............................................................................................................................10

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Answer to Question 1.
John would be assisted in the audit of accounts receivable balances of Educational
Books Distributer Ltd in following ways:
1. Accounting software programs would help in scrutinizing the manual produced
figures for the total gross value of invoice purchase that is produced against that is
produced on screen. Software enable checking accuracy of data by performing
reasonable check, range check, character check and existence check (Boone et al.
2017).
2. Software has integrated test facilities that helps auditors in gaining audit evidence
and performing the task of audit efficiently. This is done by establishment of creating
dummy records such as accounts receivable to which there can be processing of
dummy data.
3. Such software has embedded audit facilities that are considerably designed to
perform audit functions and it can be activated and switched each time the programs
is used. Items that are unusual are spotted and recorded and audit codes are used for
marking transactions (Cannon et al. 2014). There will be perpetuated audit of
transactions with the embedded audit facilities in software programs.
4. The software provides a true revenue generating opportunities as this helps in
improving the cash flow of clients. Multiple accounts have streamlined reconciliation
that helps in facilitating seamlessness audit procedures (Glover et al. 2016).
5. Reconciliation of accounts receivable accounts is provided with internal control that
helps in providing reasonable assurance of work done by accountants while recording
the transactions of accounts receivable.

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Answer to Question 2.
A. Balance-related audit
objective
B. Preventive Internal
Control
C. Tests of details of balances
Audit Procedures
The balance related audit
objective relating to first
statement is to identify the cash
receipts that have been omitted
from recording.
Posting and summarization
Organizational control Scrutinizing the cash receipts
to identify whether they are
properly accounted for.
Bills have been received at
lower rate of the previous year
and it should be at present
year, so there is a material
misstatement of price figure
(DeFond and Zhang 2014).
Completeness
Accounting Proper classification of
accounts receivable and they
should be stated at realisable
value.
Confirmation of accounts
receivable because evidence
might be ineffective
Identifying the reason for
understatement in previous
financial year and
overstatement in next financial
year.
Accuracy
Agree all control accounts with
ledger balances
Reviewing all accounts for
determining necessary
provisions and all schedules
relating to several accounts.
Goods was returned in last year
and record of the same is done
in current financial year has
Physical control Transactional testing
Auditors are required to ensure
that there is a proper follow up

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understated the statement.
Audit related objective is to
ascertain the reason for over
stating the figures.
Timing
of outstanding returns by
senior managers and sales
staffs (William et al. 2014).
Amount of loan was recorded
in accounts receivable and
audit objective is to assess
whether loan can be granted to
related party of directors or
not.
Occurrences
Accounting and arithmetic Credit procedures, credit limit
and new accounts needs to be
properly authorized
Objective of audit is to check
whether company has
incorporated macro-economic
factors for ascertainment of the
doubtful debts (Kneche and
Salterio 2016).
Completeness
Authorization
Objective is to track down the
variances in the accounts
receivables due to
inappropriate tracking of
orders and breakdown of truck.
Posting and summarization
There should be pre numbering
and kept them for relating to
orders and sales invoices.
Accounts for sequence of
dispatching and shipping
documents.

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Answer to Question 3:
Examples of auditors using stratified random sampling:
The auditor might consider management of accounts receivables for different segment
of business by properly delegating duties to different individuals for each segments. In this
case, executives for accounts receivables are hereby divided in a particular group for each
business fragments. Therefore, the auditors is said to have utilized stratified sampling for
assessment of the accounts receivables of company.
Suppose, auditors wants to determine the errors or any material misstatement in accounts
payable. For this, auditors might use a random sample of several data in accounts payable.
Different attributes of sample contents of accounts are looked by auditors for which they use
proportional stratified random sampling where the stratum is proportional random sample in
population. Therefore, for the process of stratified random sampling, several strata will be
created by auditors. If the auditor is considering sample of different components of accounts
payable, the number of items in the stratum is for instances 10000 with a sample size of 500.
The populations are divided in sub groups such as strata and the selection of sample is
done according to population of proportion from where each stratum is selected. Members in
each strata has similar characteristics.
Different strata for different situations:
Auditors are required to state an opinion on reliability of balances that are required for
several accounts in financial statements. Auditors for determining test on accounts of
balances use audit samplings. There are two aspects of choosing the sample sizes with
different strata that involves maximizing given cost precision and minimizing survey cost of
specified precision (Hayes et al. 2014). There can be equal allocation and proportional
allocation for the different strata.

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In the first example, an equal sample sized from given strata can be drawn and in
other example, proportional sample sizes can be drawn from different stratum. The selection
of sample can be different between different strata. Sample sizes can be established with
different strata and they are different for different stratum.
The above two situations deals with determination of errors or testing accounts of
balances by auditors that require use of audit sampling procedures. Using the stratified
random sampling by auditors will help in achieving a greater precision if the auditors have
chosen the strata so that stratum members are similar to those of characteristics of interests.
Gain in precision will be more if differences between strata are more. A better coverage of
population is guaranteed by stratified random sampling that helps in making strata more
representative and thereby helps in accuracy of results obtained.
For the confirmation, auditors might select a sample of accounts receivable and sampling can
be done for analysing the differences in recording of data relating to accounts payable and
accounts receivable balances.
How sample selection different between different strata:
The desired level of accuracy and process of estimation is dependent upon the use of
statistical techniques and the amount of errors that auditors are willing to tolerate relating to
accounts. Since, stratification is the process of partitioning target data population to sub sets
that are homogenous depending upon characteristics such as medium, commercial, large,
subsistence and commercial. Needs of reducing the overall variability within several accounts
is reduced of effected by implementation of statistical techniques such as stratification under
simple stratified random sampling. Implementing the sampling stratification is sometimes
expensive and the entire sampling program should be covered by sampling programs
(Knechel and Salterio 2016). However, there should not be large numbers of strata as this can

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lead to serious implications on part of costs. There will not be any increase in overall
accuracy of estimates if collection of data from accounts is done at original level despite the
fact that there will be homogeneity is the results that are obtained from strata. Although,
auditors will be obtained better value by incorporating more strata but it will lead in greater
sampling costs.
Contribution of sample elected toward accuracy and effectiveness:
Stratified population will provide full benefits if for each new stratum, there is
determination of different sample sizes. In order to achieve desired level of accuracy,
sampling schemes should be modified and strata should be determined according to the size
of samples. Application of proper and appropriate stratification would help in reducing the
biasness and auditors in this are required to determine the nature of stratification (Louwers et
al. 2016).

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References list:
Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance
services. Pearson.
Boone, J.P., Khurana, I.K., Raman, K.K., Chen, L.H., Chung, H.H.S., Peters, G.F., Wynn,
J.P.J., Chen, Y., Knechel, W.R., Marisetty, V.B. and Truong, C., 2017. Auditing: A Journal
of Practice & Theory A Publication of the Auditing Section of the American Accounting
Association.
Cannon, N.H. and Bedard, J.C., 2016. Auditing challenging fair value measurements:
Evidence from the field. The Accounting Review, 92(4), pp.81-114.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of
Accounting and Economics, 58(2), pp.275-326.
Glover, S.M., Prawitt, D.F. and Messier, W.F., 2016. Auditing and Assurance Services: A
Systematic Approach 10th.
Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to
international standards on auditing. Pearson Higher Ed.
Jia, X., 2016. Auditing the auditor: secure delegation of auditing operation over cloud
storage. IACR Cryptology ePrint Archive, https://eprint. iacr. org/2011/304. pdf. Accessed 10
Aug.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015.
Auditing & assurance services. McGraw-Hill Education.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A
systematic approach. McGraw-Hill Education.