Sampling methods
Required:
(a) Describe the population(s) that would be relevant to Bob’s sample selection.
(b) Which sample selection methods would be appropriate for choosing sales invoices for substantive testing at RGHF? Explain the factors that would influence your choice.
(a) Bob is conducting substantive testing of sales invoices. In order to gather evidence about existence, Bob would need to sample the entries in the sales journal and then vouch to the underlying documents. This would also allow evidence to be gathered about the details of the sales transactions that is relevant to the accuracy, classification and cut-off assertions.
In order to gather evidence about completeness of the accounting records, Bob would sample the invoices, and then trace the details of the transactions to the sales journal. This would also provide evidence relevant to the accuracy, classification and cut-off assertions. In this case, Bob has to be careful about which invoices he samples. The conditions in which the boxes of sales invoices are stored appear to be unsatisfactory. He will have difficulty identifying the boxes of sales invoices relevant to the current year. He will also have to be careful not just to sample the invoices that are in boxes near the door or otherwise easy to access, because this would introduce bias to his sampling and potentially invalidate his conclusions.
(b) As noted above, there is an issue about identifying and accessing the sales invoices because of the unsatisfactory conditions in the storage shed. Other information relevant to sampling is the difficulties in the administration department. There have been periods of staff shortages. The auditor should consider stratifying the sample and making sure that they sample from the periods where staff conditions were different. This would provide evidence about the effectiveness of controls under different conditions. The auditor would consider the patterns in customer complaints – do they relate to specific periods, or specific types of sales? Do the complaints suggest greater risk would apply to different parts of the year? Overall, controls over sales invoices appear to be poor and substantive testing should be extensive.