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A Case Study on the
| | | Summary audit programs
prepared independently
by 8 different CPAs
to indicate extent of
audit sampling each
considered necessary in
an actual case. |
AMERICAN INSTITUTE OF ACCOUNTANTS
The National Professional Society of Certified Public Accountants
270 MADISON AVENUE, NEW YORK 16, N. Y.
Copyright 1955
by the
AMERICAN INSTITUTE OF ACCOUNTANTS
Preface
Introduction
Description of Business
Financial Statements
Summary Audit Programs
Accountant A
Accountant B
Accountant C
Accountant D
Accountant E
Accountant F
Accountant G
Accountant H
Index
This booklet describes an actual audit situation and presents the views of eight certified public accountants as to the extent of audit sampling each believes would be necessary in the circumstances.
While the results are not conclusive as to what would be the appropriate amount of sampling in a given situation, it is believed that many CPAs will be helped by comparing their views with the views of those who prepared the summary audit programs.
CARMAN G. BLOUGH, Director of Research
AMERICAN INSTITUTE OF ACCOUNTANTS
October, 1955
INTRODUCTION
The practicability of using statistical techniques for determining the extent of sampling that would be appropriate in a particular audit engagement has received increasing attention among certified public accountants in recent years. Many accountants have questioned the usefulness of this approach, largely because they hesitate to place reliance on what seem to them to be largely mechanical procedures in an area where judgment and the results of testing as it is actually performed are such important factors. Others have felt that, properly used, statistical techniques can be very helpful.
The committee on auditing procedure of the American Institute of Accountants recently considered the question, but believed that it did not have sufficient information as to the extent of audit sampling in practice to reach any conclusions. Accordingly, as a step in the direction of obtaining more information as to current thinking, a description of an actual business was prepared and distributed to the members of the committee. Each member was asked to submit to the research department his views as to the extent of sampling he thought would be necessary in the particular case in order to express an unqualified opinion. The programs were submitted only to the research department so that no committee member knew what other committee members had suggested.
Although there was some degree of similarity among the views expressed as to the extent of sampling necessary with respect to most items on the financial statements, no clear-cut pattern resulted. The committee believes, however, that the information obtained is of considerable interest and value, and that it should be made available to the profession. Accordingly, it asked the research department to publish the description of the business and several of the more complete programs.
A major problem to the authors in the preparation of these programs was the unfamiliarity with the people in the companies and their accounting policies and procedures. As a matter of fact, it is almost impossible for anybody to write a complete story on a client so that the outsider could fully understand it and prepare an audit program based upon the information submitted.
From the auditing standpoint, the preparation of these programs really points up the problem that everyone faces in defining in precise terms exactly what he means when he uses the words “check,” “review,” or “test.” On the other hand, no program is prepared in such a manner that an auditor unfamiliar with the engagement could make an examination solely on the basis of the program.
Another matter that is difficult to spell out in an audit program arises in connection with what to do when errors or differences are disclosed. It is easy enough to say that the auditor should check five per cent of the items and if the results are satisfactory, presumably, no further checking is required. On the other hand, if he does check that five per cent of the items and does find substantial errors or differences then, obviously, he may be required to expand his tests or apply other auditing procedures. To express this fact in words in a specific audit program is exceedingly difficult, and that is the reason why in many places the author is apt to use the word “test,” rather than being more specific. Judgment is the most important factor in the making of any audit, but in many situations it is practically impossible to write out in specific language how the auditor applies judgment.
It should be emphasized, therefore, that the programs which follow ...
