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Audit Testing (Sampling) Under A-133

Beth A. Wood NC Office of State Auditor

Audit Testing (Sampling) Under A-133

Single Audit GAGAS

Internal Controls Compliance

GAAS

Internal Controls Compliance Internal Controls

1

Audit Testing (Sampling) Under A-133

Developing Audit Strategy in a GAAS & GAGAS Audit

Gain and Document Understanding of Internal Control Evaluate Design Determine if Controls in Place Determine Controls are Effective (Test Controls)??? Audit Compliance (GAGAS Audit,if applicable) Plan Substantive Tests Perform Tests and Evaluate Results Issue Audit Report

Audit Testing (Sampling) Under A-133

Developing Audit Strategy in a Single Audit

Gain and Document Understanding of Internal Control Evaluate Design Determine if Controls are in Place Determine if Controls are Effective (Test Controls)!!!! Plan Substantive Tests Perform Tests and Evaluate Results Audit Compliance (Laws, Regs, Contracts, Grants) Issue Audit Report(s)

2

Audit Testing (Sampling) Under A-133

Audit Sampling - "the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class."

Audit Testing (Sampling) Under A-133

Audit Sampling - "the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class."

3

Audit Testing (Sampling) Under A-133

Procedures Not Involving Sampling: Inquiry and Observation Analytical Procedures Procedures Applied to Every Item In Population Test of Controls When Application of Control is Not Documented Procedures that do not Evaluate Characteristics

Audit Testing (Sampling) Under A-133

Sampling in Single Audit

When Performing Tests to Determine if Controls are Being Applied as Prescribed (Reduce Substantive Tests of Compliance?) When Performing Substantive Tests of

Compliance

4

Audit Testing (Sampling) Under A-133

Sampling in Single Audit Statistical Sampling VS Non Statistical Sampling

Audit Testing (Sampling) Under A-133

Sampling in Single Audit AICPA Audit Sampling Guide: Nonstatistical as effective as Statistical, if properly designed.

5

Audit Testing (Sampling) Under A-133

Requirements That Apply To All Single Audit Samples

Planning Define the Population Define Sampling Unit Selection Representative Selection Evaluation Projecting Sample Results

Audit Testing (Sampling) Under A-133

Sampling in Tests of Controls When to use Sampling?

6

Audit Testing (Sampling) Under A-133

Test of Controls Using Audit Sampling

1)

Identify Suitable Controls; Consider Reduction of Related Substantive Tests

2) 3) 4) 5) 6) 7)

Consider Whether Testing is Practical Select Appropriate Tests of Controls Perform Tests of Controls Evaluate Results of Tests of Controls Assess Control Risk Document Tests Performed/Conclusions

Audit Testing (Sampling) Under A-133

Step 1

Identify Suitable Controls; Consider Reduction of Related Substantive Tests

7

Audit Testing (Sampling) Under A-133

Step 2

Consider Whether Testing is Practical

Audit Testing (Sampling) Under A-133

Step 3 and Step 4 Select Appropriate Tests of Controls Perform Tests of Controls

Define Population and Deviations Determine Tolerable Rate of Deviations Determine Allowable Risk of Assessing Control Risk too Low Determine Expected Rate of Deviation Determine Sample Size Determine Sample Selection Method

8

Audit Testing (Sampling) Under A-133

Step 5

Evaluate Results of Tests of Controls

Audit Testing (Sampling) Under A-133

Step 6

Assess Control Risk Step 7 Document Tests Performed and Conclusions Reached

9

Audit Testing (Sampling) Under A-133

Substantive Tests of Transactions When is Audit Sampling Appropriate?

Compliance Requirements Have Documentation of Compliance, Compliance Requirements Involve Large Populations.

Audit Testing (Sampling) Under A-133

Sampling in Substantive Tests of Transactions Statistical Versus Nonstatistical

10

Audit Testing (Sampling) Under A-133

Sampling in Substantive Tests of Transactions Statistical If:

Specific Program Requirements, Large Amount of Compliance Exceptions.

Audit Testing (Sampling) Under A-133

Requirements That Apply To All Single Audit Samples

Planning Define the Population Determine Sample Size Selection Representative Selection Evaluation Projecting Sample Results

11

Audit Testing (Sampling) Under A-133

Sampling in Substantive Tests of Transactions Define the Population

Audit Testing (Sampling) Under A-133

Determine Sample Size

Assess Inherent Risk and Control Risk. Determine Tolerable Noncompliance. Estimate Expected Noncompliance. Assess Risk That Other Substantive Tests Failed to Detect Material Noncompliance. Estimate Recorded Amount of Population after Individually Significant Items Removed. Adjust for Variance in Population.

12

Audit Testing (Sampling) Under A-133

Determine Sample Size

Factors Affecting Determination of Sample Size: Assessment of Inherent Risk and Control Risk

AR or DAR = IR * CR* DR

AR = Audit Risk DAR = Desired Audit Risk IR = Inherent Risk CR = Control Risk DR = Detection Risk

Audit Testing (Sampling) Under A-133

Determine Sample Size

Assessment of Inherent Risk

Size of Program Program Maturity at the Federal Agency Complexity Extent of Contracting Use of Subrecipients Level of Oversight Prior Audit Findings

13

Audit Testing (Sampling) Under A-133

Determine Sample Size

Assessment of Control Risk Based on Control Testing Control Risk Assessed at: Maximum Moderate Low

Audit Testing (Sampling) Under A-133

Sample Selection

Must be Representative of Population Ensure Population Includes all Items Comprising the Balance Tested

14

Audit Testing (Sampling) Under A-133

Evaluate Sample Results

Project Misstatement Results Determine Amount of Likely Questioned Costs Consider Sampling Risk

Audit Testing (Sampling) Under A-133

Substantive Tests of Compliance

Nonstatistical Sampling Approach

15

Audit Testing (Sampling) Under A-133

Questions ?

Audit Testing (Sampling) Under A-133

Considering Sampling Risk

Does projected noncompliance exceed expected noncompliance?

Does projected noncompliance exceed 1/3 of tolerable noncompliance?

16

Please note this workpaper has been developed using a nonstatistical sampling model described in AICPA's Audit Practice Release on Audit Sampling . These workpapers are intended for use in North Carolina's Single Audit work beginning in 2005. The workpapers have not been tested for all possible scenarios and any user of the workpaper should satifsy themselves in accordance with AICPA guidance.

55b Wood / WP Qualification

55b Wood / WP Qualification

Major Program Name Plan for Substantive Test of Transactions

Please see qualification for these workpapers on previous page.

This worksheet is designed to help the auditor plan substantive tests of compliance for federal programs, including a nonstatistical sample. The worksheet also allows the auditor to project results to the overall population to draw an overall conclusion. Complete each section below as instructed and the required information on other worksheets.

Describe the objective and nature of the test(s).

Define the population and sampling unit, including a description of the physical representation of the population and how the auditor considered the completeness of the population.

Define the error conditions.

Describe the auditor's consideration of individually significant items.

Describe the auditor's consideration of tolerable noncompliance, sampling risk, expected error, evidence from other tests in determining sample size, and variation in the population. Sample size had been determined using a model described in the AICPA Auditing Practice Release on audit sampling. The model is based on statistical theory underlying probability-proportional-to-size (PPS) sampling. Since this is not a PPS sample, allowances have been made in determining the sample size as described below. Our sample size calculation appears on the worksheet called Size.

55b Wood / Plan

Major Program Name Plan for Substantive Test of Transactions

Please see qualification for these workpapers on previous page.

In calculating sample size, we have used tolerable noncompliance determined to be 5% of total expenditures for the program being tested. In calculating the sample size we have considered the risk of material noncompliance (questioned cost) based on a combination of inherent risk and control risk for the program. The auditor must assess the risk of material noncompliance and the assessment determines the appropriate risk factor to be used in the calculation of sample size. As mentioned above, the sample size calculation is based on PPS theory. It is also based on a highly stratified sample to reduce variation in the population. The sample size determined by the calculation in the AICPA model has been increased by 25% assuming a relatively large variation in the population. Sampling risk is considered once the results of the sample have been evaluated.

Define the sampling technique. Nonstatistical.

Describe the method of sample selection.

Describe the performance of the sampling procedures and errors identified.

Evaluate the sample results. See worksheet called Evaluate.

55b Wood / Plan

Major Program Name Plan for Substantive Test of Transactions

Population Verification

Demonstrate on this worksheet that the population of items in the population agree or reconcile with the amount(s) being audited.

Amount per

Major Program Name Plan for Substantive Test of Transactions

PleIndividually Significant Items

Description Total Population (Total Program Expenditures) Tolerable Noncompliance (per planning workpapers) Individually Significant Items Unusual Items Individually Significant Item Coverage

Amounts

Source Enter amount.

(1)

Enter amount. Enter amount. Enter amount Calculated.

0.00 0.00

(2)

(3)

#DIV/0!

Note: The auditor will generally need to test the remaining balance unless both of the following criteria are met: (a) The risk of material noncompliance of the remaining balance is "low", AND (b) Individually significant and unusual items represent a substantial portion of the total program expenditures, i.e., 65% or more.

If the auditor decides to test the remaining balance he/she should consider "Expected Noncompliance" in the population to be sampled and enter below. If the amount of likely (expected/projected) noncompliance is expected to exceed one-third of tolerable noncompliance, sampling normally is not appropriate. Expected Noncompliance No Sample Enter amount.

(1) Tolerable Noncompliance is calculated at 5% of total program expenditures. Amount may be adjusted based on auditor judgment. If an amount other than 5% of total program expenditures is used the information on the "Plan" worksheet should be adjusted. (2) Individually Significant items are calculated as 1/3 of Tolerable Noncompliance . Other amounts may be used based on auditor judgment. (3) Unusual Items are items that, due to their nature, are prone to noncompliance. Unusual items may be identified based on: Prior experience, Results of analytical procedures, Unusual characteristics

55b Wood / SigItems

Major Program Name Plan for Substantive Test of Transactions

Please s Sample Size Determination

Description Total Population (total program expenditures) Less individually significant and unusual items tested 100%

Amounts 0.00 0.00

Source From "SigItems." From "SigItems."

Population to be sampled Tolerable Noncompliance Enter the Risk of Noncompliance. (Risk of Noncompliance is the combination of inherent risk and control risk.) Use table below to determine. The Computed Sample Size Is: Increase Factor Due to Variation in the Population Finall Sample Size Adjust for Items Previously Tested Additional Items to be Sampled

0.00 0.00

Calculated. From "SigItems."

Enter Moderate or Low Error 1.25 #VALUE! Calculated. Fixed amount. Calculated. Enter amount #VALUE! Calculated

Instructions and Explanations: Once data has been entered into the worksheet called "SigItems", the only data that needs to be entered in this sheet is the Risk of Noncompliance . The Risk of Noncompliance is based on a combination of Inherent Risk and Control Risk based on table below:

Combined Risk of Material Noncompliance Inherent Risk Assessment High Moderate or Low Control Risk Assessment Maximum Moderate High High Moderate Low

Low Moderate Low

The sample size is computed using the formula: (Population Amount / Tolerable Noncompliance) X Risk Factor. The risk factors depend on the combination of inherent risk and control risk: Assurance Factor 3.0 2.3 1.9

Combined Risk High Moderate Low

The computed sample size is then increased by 25% because the sample will not be stratified. This computation results in a sample size that is comparable to what would be used in a statistical sample.

55b Wood / Size

Major Program Name Plan for Substantive Test of Transactions

PleEvaluation of Test Results

Description Total Population (total program expenditures) Total Value of Items Tested (includes indiviudally significant and unusual items and sampled items) Amount of Sample Question Costs Projected Population Questioned Costs

Amounts 0.00

Source From "SigItems."

Enter amount. Enter amount. #DIV/0! Determined by formula.

Instructions and Explanations: Enter the total value of items tested and the net value of errors detected. The known error is then projected to the population by calculating the percent of error in the population tested and applying it to the total population. The projected error should be evaluated along with projected errors in other accounts to determine whether an audit adjustment or opinion qualification is indicated. Auditors should be aware that due to sampling risk, the actual error could be more or less than the estimate determined here.

55b Wood / Evaluate

Please note this workpaper has been developed using a nonstatistical sampling model described in AICPA's Audit Practice Release on Audit Sampling . These workpapers are intended for use in North Carolina's Single Audit work beginning in 2005. The workpapers have not been tested for all possible scenarios and any user of the workpaper should satifsy themselves in accordance with AICPA guidance.

NOTE: This workpaper has numbers entered to demonstrate how the workpaper might be used.

55c Wood / WP Qualification

55c Wood / WP Qualification

Major Program Name Plan for Substantive Test of Transactions

Please see qualification for these workpapers on previous page.

This worksheet is designed to help the auditor plan substantive tests of compliance for federal programs, including a nonstatistical sample. The worksheet also allows the auditor to project results to the overall population to draw an overall conclusion. Complete each section below as instructed and the required information on other worksheets.

Describe the objective and nature of the test(s).

Define the population and sampling unit, including a description of the physical representation of the population and how the auditor considered the completeness of the population.

Define the error conditions.

Describe the auditor's consideration of individually significant items.

Describe the auditor's consideration of tolerable noncompliance, sampling risk, expected error, evidence from other tests in determining sample size, and variation in the population. Sample size had been determined using a model described in the AICPA Auditing Practice Release on audit sampling. The model is based on statistical theory underlying probability-proportional-to-size (PPS) sampling. Since this is not a PPS sample, allowances have been made in determining the sample size as described below. Our sample size calculation appears on the worksheet called Size.

55c Wood / Plan

Major Program Name Plan for Substantive Test of Transactions

Please see qualification for these workpapers on previous page.

In calculating sample size, we have used tolerable noncompliance determined to be 5% of total expenditures for the program being tested. In calculating the sample size we have considered the risk of material noncompliance (questioned cost) based on a combination of inherent risk and control risk for the program. The auditor must assess the risk of material noncompliance and the assessment determines the appropriate risk factor to be used in the calculation of sample size. As mentioned above, the sample size calculation is based on PPS theory. It is also based on a highly stratified sample to reduce variation in the population. The sample size determined by the calculation in the AICPA model has been increased by 25% assuming a relatively large variation in the population. Sampling risk is considered once the results of the sample have been evaluated.

Define the sampling technique. Nonstatistical.

Describe the method of sample selection.

Describe the performance of the sampling procedures and errors identified.

Evaluate the sample results. See worksheet called Evaluate.

55c Wood / Plan

Major Program Name Plan for Substantive Test of Transactions

Population Verification

Demonstrate on this worksheet that the population of items in the population agree or reconcile with the amount(s) being audited.

Major Program Name Plan for Substantive Test of Transactions

PleIndividually Significant Items

Description Total Population (Total Program Expenditures) Tolerable Noncompliance (per planning workpapers) Individually Significant Items Unusual Items Individually Significant Item Coverage

Amounts 306,000.00 15,300.00 86,000.00

(1)

Source Enter amount. Enter amount. Enter amount. Enter amount Calculated. 15,300.00 5,100.00

(2)

(3)

28%

Note: The auditor will generally need to test the remaining balance unless both of the following criteria are met: (a) The risk of material noncompliance of the remaining balance is "low", AND (b) Individually significant and unusual items represent a substantial portion of the total program expenditures, i.e., 65% or more.

If the auditor decides to test the remaining balance he/she should consider "Expected Noncompliance" in the population to be sampled and enter below. If the amount of likely (expected/projected) noncompliance is expected to exceed one-third of tolerable noncompliance, sampling normally is not appropriate. Expected Noncompliance 6,000.00 No Sample Enter amount.

(1) Tolerable Noncompliance is calculated at 5% of total program expenditures. Amount may be adjusted based on auditor judgment. If an amount other than 5% of total program expenditures is used the information on the "Plan" worksheet should be adjusted. (2) Individually Significant items are calculated as 1/3 of Tolerable Noncompliance . Other amounts may be used based on auditor judgment. (3) Unusual Items are items that, due to their nature, are prone to noncompliance. Unusual items may be identified based on: Prior experience, Results of analytical procedures, Unusual characteristics

55c Wood / SigItems

Major Program Name Plan for Substantive Test of Transactions

Please s Sample Size Determination

Description Total Population (total program expenditures) Less individually significant and unusual items tested 100%

Amounts 306,000.00 86,000.00

Source From "SigItems." From "SigItems."

Population to be sampled Tolerable Noncompliance Enter the Risk of Noncompliance. (Risk of Noncompliance is the combination of inherent risk and control risk.) Use table below to determine. The Computed Sample Size Is: Increase Factor Due to Variation in the Population Finall Sample Size Adjust for Items Previously Tested Additional Items to be Sampled

220,000.00 15,300.00

Calculated. From "SigItems."

Moderate 33 1.25 41

Enter Moderate or Low Calculated. Fixed amount. Calculated. Enter amount

41

Calculated

Instructions and Explanations: Once data has been entered into the worksheet called "SigItems", the only data that needs to be entered in this sheet is the Risk of Noncompliance . The Risk of Noncompliance is based on a combination of Inherent Risk and Control Risk based on table below:

Combined Risk of Material Noncompliance Inherent Risk Assessment High Moderate or Low Control Risk Assessment Maximum Moderate High High Moderate Low

Low Moderate Low

The sample size is computed using the formula: (Population Amount / Tolerable Noncompliance) X Risk Factor. The risk factors depend on the combination of inherent risk and control risk: Assurance Factor 3.0 2.3 1.9

Combined Risk High Moderate Low

The computed sample size is then increased by 25% because the sample will not be stratified. This computation results in a sample size that is comparable to what would be used in a statistical sample.

55c Wood / Size

Major Program Name Plan for Substantive Test of Transactions

PleEvaluation of Test Results

Description Total Population (total program expenditures) Total Value of Items Tested (includes indiviudally significant and unusual items and sampled items) Amount of Sample Question Costs Projected Population Questioned Costs

Amounts 600,000.00

Source From "SigItems."

60,000.00 500.00 5,000.00

Enter amount. Enter amount. Determined by formula.

Instructions and Explanations: Enter the total value of items tested and the net value of errors detected. The known error is then projected to the population by calculating the percent of error in the population tested and applying it to the total population. The projected error should be evaluated along with projected errors in other accounts to determine whether an audit adjustment or opinion qualification is indicated. Auditors should be aware that due to sampling risk, the actual error could be more or less than the estimate determined here.

55c Wood / Evaluate

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