Use of Statistical Sampling Methods

Use of Statistical Sampling Methods:-


This is the most vital part of auditing. In fact this is the main part of auditing, as the audit programme is
no more than a plan of checking and audit working papers are the records of such checking. Traditionally,
the operations of auditing are classifi ed as casting, posting and vouching. Casting refers to arithmetical
operations whereas posting refers to copying fi gure from one place to another. Vouching on the other
hand is often described as “the backbone of auditing” and is most important operation. Vouching is the
examination of entries in the books of accounts with reference to vouchers and supporting documentary
evidence. The cost auditor, because of time constraints cannot examine each entry with the voucher and
as such has to resort to test check which helps to form an opinion about the nature and quality of work
and enables him to obtain defi nite basis for audit observations. The cost auditor also uses the following
techniques in cost audit :

1. Flow charts
2. Statistical sampling
3. Ratio analysis

Flow Charts:-


Flow chart is chart or diagrammatic representation of fl ow of information etc. In auditing it is used
to diagrammatically represent the fl ow of information with the help of documents. It is useful to
record the “decision” at different levels, the posting of data, and the recording of transactions on
the document. It is customary to indicate the analysis of systems and documents in the fl ow chart
detailed as under –
a) The number of copies of each document.
b) Its movements to different departments and sequence of such movements and where every
copy is fi nally kept.
c) The operations like initialing, approving, etc. done on the documents in each department
with brief description of the operations.
d) The collection from these documents into another register/documents as well as posting any
information in the former from the latter by dotted line.
1.4.12.2 This helps in identifying –
a) The division of responsibilities of the different departments.
b) The source of document whose error would be of far reaching consequences.
c) Possible clerical errors that can occur at each stage.
d) It gives a bird’s eye view of the system and an effi cient documentation for the auditors testing it.
e) It is the most effi cient tool for doing actual analysis.
However, fl ow charts might not give the desired results as details are sometime omitted and the
individual charts are not properly cross referenced and indexed. Failure to standardize the symbols
and incomplete nature of the chart fails to give desired results.

Statistical Sampling:-


It is the principle, established by statistics, that every sample has the attributes of the population to which
it belongs. It follows that from examination of such attributes of the sample, conclusions can be drawn
from examination of every member of the population. Statistics recognizes that every member has certain
662/3% to 97% confi dence level. It has further refi ned tools like stratifi ed sample to ensure that a small
sample reasonably enlarges confi dence level. Statistical sampling is adopted by auditors and is an effective
tool their attempt to express an opinion based on test checking on the sample. Sometimes statistical sample
may be dangerous to the auditor not because the tool is defective but because the auditor’s knowledge
of statistical sample is inadequate. However, if properly applied statistical sampling could enhance the
objectivity of checking and as such auditor’s observation would be more correct.


Ratio Analysis:-

Ratios show the trends and may help in focusing attention to the more important areas where detailed
checking may be necessary. Such ratio analysis may identify anything abnormal or anything which
deviates from the expected and the known. Ratios highlight only symptoms; it is for the auditor to study
those symptoms properly, correlate them and reach defi nite conclusions or identify the areas for further
enquiries. A cost auditor has to work out the fi nancial ratios contained in Para No. 24 of the Annexure to
the Cost Auditor Reports Rules and also to comment on them.