Audit risk model based on sampling recomended by the minimal audit standards.

Rotaru, Horatiu ; Potecea, Valeriu ; Zuca, Marilena 等

1. INTRODUCTION

Our paper is structured in three main chapters and proposes an improved audit model based on sampling that diminueshes the audit risk.

The first chapter presents the assessment of the audit risk but using the statistical methods recommended by The Minimal Audit Standards.

The second chapter presents a study case based on the algorithm of determining the audit risk recommended by The Minimal Audit Standards and work sheets of assessing the risks form audit risk equation based on statistical methods.

The last chapter represents the conclusions of the authors towards economic and audit failure.

2. DETERMINING THE AUDIT RISK BASED ON SAMPLING ACCORDING WITH THE MINIMAL AUDIT STANDARDS

This model is similar with the one presented by SAS 107 with the exception that the audit risk is influenced directly not only by the inherent risk (IR) and control risk (CR), but also by the risk of not detecting errors unlinked with sampling (RDUS) and by the risk of not detecting errors linked with sapling (RDLS), the formula that represents the audit risk becoming:

AR = IR x CR x RDUS x RDLS (1)

The factors considered adequated and influence the ihnerent risk are presented in table 1 (Chamber of Financial Auditors of Romania, 2007).

Concerning the risk of not detecting errors linked with sampling we must highlight that in some sections it is possible to set a high level of assurance of revised analitycal procedures; this implies the comparison of the estimated results with the real ones, the analisys of tendencies and the explination of the variation of the tendencies. Where the degree of safty is represented by the analitycal procedures, the audit activity should be clearly documented and the degree of analitycal revision should be corectly registred.

The list of implied sections is presented in table 2, where the normal limits of the safty level for each section are set.

Because it is necessary to estimate the risk factors at the begining of the audit in order to elaborate the engagement plan efectively, revised analitycal procedures must be used in order to elaborate or not a satisfying method of obtaining the audit evidence. The risk of not detecting errors unasociated with sampling risk is presented in table 3.

Concerning control risk (CR) we must highlight that if the client elaborates internal controls that the auditor wants to use, it is necessary first of all to evaluate these controls and then to test them in order to prove a degree of safety.

The safty degree supplied by the internal controls depends of the error rate descovered when testing the way those are applyied, control tests (Graham & Messier, 2006). The control risk factors are presented in the table 4.

Concerning the risk of not detecting errors by using the sampling technique (RDLS) we must underline that it is in inverse proportion with the extent of the samples, and is determined using the risk broadband represented by the multiplication of:

IR x RDUS x CR (2)

Marked as Y, thus the equation of risk becomes:

AR = Y x RDLS (3)

The audit risk (AR) is a variable that the auditor determines from the beginning of the audit, usually not greater than 5%, Y is found in the tables below established using statistic models and differs depending on the extent of the sample population.

The risk bandwidth (RDLS) is determined as according with the population it represents in the table 5 from above.

3. DETERMINING THE AUDIT RISK USING THE SAMPLING ALGORITHM--STUDY CASE

By applying the algorithm of establishing the extent of sampling recommended, the auditor should use the following professional judgement (Chamber of Financial Auditors of Romania, 2007).

1) Audit risk assesment (AR) The auditor accepts a maximum audit risk of 5%. Thus, all the risks that influence the audit risk (ihnerent, control and the risk of not detecting errors) must be estimated according with the maximum accepted audit risk (Rotaru, 2008).

2) Ihnerent risk assesment (IR) The ihnerent risk is determined by completing the audit sheets of general ihnerent risk and specific ihnerent risk, for each audit section (William & Lizabeth, 2005)

2.a.) General ihneret risk assessment is set at a low level becuse the risk associated with management was apreciated as low (high degree of profesionalism and responsabiliy),the accounting risk as low (due to good organisation and implicaton of accounting department), the activity risk as medium because the domanin of activity is one with few risks and audit risk as low due to the managemnt transparency, cooperation and fair registration of all economic events.

2.b. Specific ihnerent risk assessment The specific risks, diferentiated on sections, are identified responding to six questions, in such a manner that a positive response represents a risk. Based on table 2 presented earlier and taking into concern the general ihnerent risk set as low, the auditor associated a risk percentage for each audit section. Table 6 presents the audit documentation of ihnerent specific risk.

3) Control risk assesment (CR). The auditor depends on the control system of the audited company (Fogarty, Graham, & Schubert, 2006) so, the auditor should complete the column corresponding from the below audit work sheet based on table

4. In the situation where, for certain elements, the auditor can not depend on the control system of the client, the control risk (CR) is not to be used in the equation, it should be 1 or 100%.

4) Risk of not detecting errors without sampling The determination of the risk on not detecting erors based on sampling (RDUS) represents the risk that the analytical procedures do not conduct in finding errors or dissacords in the financial situations. RDUS is determined based on the information presented in table 5, described earlier.

5) Determining the samples to be tested (RDLS) risk of not detecting errors linked with sampling. The dimension of the samples is determined taking in concern the extent of the population, using the following algorithm, with the specification that the maximum audit risk accepted is 5%.

a. The risk bandwidth determination is:

RISK = IR x CR x RDUS (4)

b. Selecting the dimension of the samples according with the risk bandwidth determined base on table 5 depending on the extent of the population.

4. CONCLUSION

We consider that this work presented an audit model based on sampling that an auditor should use to reduce the audit risk, audit failure and economic failure. The audit model proposed shall be applied in the future financial audits of the authors and depending on the results shall be improved in order to diminuish wrong audit opinion expressed by the auditor due to misapplying of the audit risk model (Arens & Loebbecke, 2008).

5. REFERENCES

Arens, A. & Loebbecke, J. (2008). Auditing: An Integrated Approach, Prentice Hall, ISBN 13: 978-0130827357

Chamber of Financial Auditors of Romania (2007). The Minimal Audit Standards, Economic Publishing House, ISBN 9735905299, Bucharest

Fogarty, J.; Graham, L. & Schubert, D. (2006). Assessing and Responding to Risks in a Financial Statement Audit, Journal of Accountancy, Vol. 202, Iss. 1, p.43

Graham, L. & Messier, W. (2006). Audit Risk and Materiality in Conducting an Audit, Journal of Accountancy, Vol. 201, Iss. 5, p. 116-119

Rotaru, H. (2008). Audit risk and initiatives of improvement, Annals of DAAAM 2008, Katalinic, B. (Ed.) ISSN 17269679, DAAAM International Publishing House, p. 1195-1196

William M. Jr & Lizabeth A. (2005). Inherent risk and control risk assessments, Auditing, Vol. 19, Iss. 2.

Tab. 1. Factors that influence the inherent risk

 General inherent risk level
Number of specific
 inherent risks Very low Low Medium High

0, 1 or 2 risks 23% 50% 70% 100%
3 or 4 risks 50% 70% 100% 100%
5 or 6 risks 70% 100% 100% 100%

Tab. 2. Normal salty limits level tor each section

Audit section Degree of safety
Merchandise Moderate / zero
Debitors, creditors Moderate / zero
Sales, aquisitions, costs High / moderate / zero
Salaries, bonuses High / moderate / zero

Tab. 3. Risk of not detecting elements unassociated with
sapling risk factors

Degree of safty Zero 100%
of analitycal revision Moderate 56%
 High 31%

Tab. 4. Control risk factors

Degree of safety Criterion Risk

Seminficative Under 2% error rate 13,5%
Moderate Under 5% error rate 23%
Low Under 10% error rate 56%
Zero Over 10% error rate 100%

Tab. 5. Risk bandwidth

 For less than 400 elements For more than 400 elements

 RDLS Samples extent RDLS Samples extent

78,4%-100% 53 72,1%-100% 59
58,5%-78,3% 48 58,7%-72,0% 52
43,8%-58,4% 43 47,8%-58,6% 48
33,0%-43,7% 38 39,0%-47,7% 44
24,9%-32,9% 33 30,2%-38,9% 40
18,9%-24,8% 28 23,4%-30,1% 35
14,4%-18,8% 23 18,1%-23,3% 30
11,1%-14,3% 18 14,0%-18,0% 25
8,5%-11,0% 13 10,9%-13,9% 20
6,6%-8,4% 8 8,4%-10,8% 15
0-6,5% 3 6,5%-8,3% 10

Tab. 6. Ihnerent specific risk audit work sheet

 General Questions
 inherent
 risk = low 1 2 3 4 5 6

Fixed assets -- -- [check] -- -- --
Merchandise and
 products [check] -- [check] [check] -- --
Debtors [check] -- -- -- -- --
Short term
 investments -- -- -- -- -- --
Cash and bank
 transactions -- -- -- -- -- --
Creditors -- -- [check] -- -- --
Long term
 creditors -- -- -- -- -- --
Sales -- -- [check] -- -- --
Acquisitions -- -- - -- -- --
Costs -- -- [check] -- -- --
Salaries -- -- -- -- -- --
Other audit
 sections -- -- -- -- -- --
Trial balance -- -- -- -- -- --

 General Evaluation
 inherent
 risk = low %

Fixed assets Low 50
Merchandise and
 products Low 70
Debtors Low 50%
Short term
 investments Low 50%
Cash and bank
 transactions Low 50%
Creditors Low 50%
Long term
 creditors Low 50%
Sales Low 50%
Acquisitions Low 50%
Costs Low 50%
Salaries Low 50%
Other audit
 sections Low 50%
Trial balance Low 50%

Tab. 7. Determination of samples audit work sheet

 Risk Sample
 IR Rdus CR band dim
 Tab7 Tab5 Tab4 Tab5 Tab 6

Fixed assets 50% 56% 56,0% 15,68% 23
Investment group
 accounts 50% 56% 56,0% 15,68% 23
Merchandise,
 products 70% 99% 100,0% 70,0% 52
Debtors 50% 56% 23,0% 6,44% 3
Short term
 investments 50% 31% 13,5% 2,09% 3
Cash, bank
 payments 50% 56% 56,0% 15,68% 23
Creditors 50% 56% 23,0% 6,44% 3
Long term
 creditors 50% 56% 23,0% 6,44% 3
Sales 50% 56% 56,0% 15,68% 23
Acquisitions 50% 56% 56,0% 15,68% 23
Costs 50% 56% 56,0% 15,68% 23
Salaries 50% 56% 23,0% 15,68% 23
Other sections 50% 56% 23,0% 6,44% 3
Trial balance 50% 56% 23,0% 6,44% --