- Email: [email protected]
A microcomputer application for attribute sampling
A MICROCOMPUTER ATTRIBUTE
APPLICATION SAMPLING
FOR
Russell F. Briner and Diane T. Pearson THE UNIVERSITY OF MlSSlSSIPPl
UNIVERSITY
James E. Gaunt& Jr. OF ARKANSAS - LITTLE ROCK
Absrracr: A microcomputer application for applying attribute sampling to internal control and the audit process is explained and illustrated. The application allows the auditing student to design an attribute sampling plan, create a unique sample for each application and evaluate the results in terms of deviations from desirable internal control procedures. The application is constructed through a software package that enhances students’ learning of attribute sampling and its relationship to the entire audit process.
The use of application sampling by auditors in the study and evaluation of internal control is a significant part of the evaluation process. The primary objective of this note is to explain a microcomputer application of attribute sampling and to delineate the benefits the application provides in teaching attribute sampling.
THE
APPLICATION
The teaching of attribute sampling in the initial auditing course is based on guidance provided by Statement on Auditing Standards (SAS) No. 39, “Audit Sampling”[AlCPA. 198 I]. Attribute sampling is a process by which a characteristic (or attribute) of an actual internal control procedure is tested for compliance to the designed procedure by selecting a sample of documents which evidence the attribute of interest. The software package described in this note was developed to (1) provide a practical application of attribute sampling and (2) integrate this application with classroom discussions of attribute sampling and its relationship to internal control. To accomplish these objectives, the application requires the student to initially identify characteristics (attributes) of internal control procedures for a simulated business entity. By entering data related to these attributes into a microcomputer software routine, the student is able to generate a random sample of document populations. The microcomputer software then simulates deviations from the internal control procedures being tested. Finally, the student is able to statistically evaluate the number of deviations found in each sample.
162
HARDWARE
AND SOFTWARE
DESIGN
The attribute sampling software package developed for this application provides for statistical sampling routines on a microcomputer. The programs are written in BASIC and were designed initially to be used on a TRS-80 Model III with two disk drives. The BASIC programs have since been converted to provide for use of the application on IBM-PCs and those micros compatible with the IBM-PC.1 The software package, which consists of six programs, provides a main menu from which the user selects the desired option. In addition to clear screen display, the system allows the user to print the completed sampling plan, the selected sample, the deviation characteristics, and the evaluation of results. The various alternatives are selected from a series of menus. Figure 1 illustratesThe main menu from which the five subprograms may be selected. Illustration
Figure 1 of the Main Menu
AUDIT TESTING SOFTWARE ATTRIBUTE SAMPLING (0) (1) (2) (3) (4) (5)
END SESSION DETAILED INSTRUCTIONS BUILD/UPDATE SAMPLING PLAN SPECIFY TESTING PARAMETERS AUDIT SELECT SAMPLE - SIMULATE EVALUATE RESULTS
PLEASE
ENTER
YOUR CHOICE
--->
TESTING
?
Since most attribute sampling plans involve a series of tests to be performed on client documents, the sampling plan allows sample sizes to be calculated for each of several attributes to be tested. The user specifies the characteristics of each attribute of interest: expected deviation rate, tolerable deviation rate, and risk of overreliance. (This terminology is consistent with the AICPA Audit and Accounting Guide for Audit Sampling and SAS No. 39.) The sample size is calculated for each attribute of interest and the user has the opportunity to perform sensitivity analysis by varying the parameters. The usercan specify that all tests be performed on the largest sample selected, or that only the calculated sample size be tested. (Because of the cost of pulling sample items and since the documents are usually available to perform all tests at a low incremental cost, auditors frequently perform all tests on the largest sample chosen.) ‘The software
is available
mailing charges. Interested
to educators individuals
at a nominal charge covering the cost of the diskette and should contact the authors.
163
To simulate an actual sample, the program has a process for generating random deviations for each attribute of interest. Using this process, the program selects a random sample and generates a printout indicating the document number selected and the term “DEV” after the number if the control is violated and the undesirable form of the attribute is present. This simulation process has been used for four semesters in the basic auditing course with very few problems.
AN ILLUSTRATION This section provides an illustration of two assignments given to a senior auditing class. The first assignment requires the student to review an attribute sampling plan already defined on a data diskette. Output generated includes (1) the sampling plan, (2) the simulated sample and (3) the evaluation of deviations. From the main menu the student selects the “Build/ Update Sampling Plan” option. From the menu of options then available, the student selects the”Add/ Update Sampling Plan”option and proceeds to examine the sampling plan provided by the package. An illustration of the sampling plan printout the student receives is shown in Figure 2. Three of the critical parameters are noted in the “Test Specifications”section. These are (1) EDR or Expected Deviation Rate, (2) TR or Tolerable Rate and (3) CL or Confidence Level. Figure 2 of a Sampling
Illustration
SAMPLING SYSTEM NAME
OF SYSTEM
SALES/AR
Plan Printout
PLAN -
SALES
DESCRIPTION
PERIOD
TESTED
JAN 84-DEC
SAMPLE UNIVERSE CREDIT SALES EST. POPULATION SAMPLE DOCUMENT SALES ORDER ASSOCIATED DOCUMENTS SHPR AR JNL AUDIT
OBJECTIVES
SELECTION
BEGINNING
NUMBER
10000
CREDIT APPROVAL CORRECT PRICES QTY SHPD=QTY ORDRD UNIVERSE
SAMPLE
84
SIZE
----SEQUENCES 1002 5025
CHARACTERISTICS OF NUMBERS ENDING
NUMBER
4576 11433
TEST SPECIFICATIONS TEST CREDIT SHIP QTY PRICING
DESCRIPTION CHK FOR CR APPRV COMP QTY SHPD/QTY CHK INV PRICES
OR
OBJECTIVE
CL
EDR
TR
CREDIT CORR SHI CORR VAL
95 95 90
2.0 1.0 2.0
8.0 7.0 8.0
SAMPLE 88 44 54
164
The overall objective of compliance tests is to determine the degree to which control procedures are being followed. The specific audit objectives shown in Figure 2 then further refine the overall objective to those areas of the sales cycle to be tested. These objectives are then listed again under test specifications, corresponding to the compliance test performed, to determine if these objectives are being accomplished. In Figure 2, for example, the test name “Credit” would involve the auditor reviewing a sales order to determine if credit approval has been obtained. This audit procedure would be performed on a sample of 88 sales orders from a population of 10,000. The CL for this test is 95’&, the EDR is 2940,and the TR is 8% as can be found by viewing the “Test Specifications” part of the sampling plan printout or screen display. After reviewing the “Sales”sampling plan, the student returns to the main menu and runs the sample selection and simulated audit testing routines. The simulated sample printout from the sample selection procedure provides the student with the simulated number of deviations related to each test. Since this simulation is based on the random number generator routine, each student’s printout represents a unique sample. The student then enters data from the simulated sample printout and the evaluation of results is generated as illustrated in Figure 3. Figure 3 Illustration of Evaluation of Results Printout SAMPLING PLAN -
SALES
EVALUATION OF DEVIATIONS TEST
CL
ITEMS
CREDIT SHIP QTY PRICING
:z
88 44 54
90
DEVIATIONS 1 0
1
EDR
CDR
TR
ATR
2.0
1.1 0.0 1.9
8.0 7.0 a.0
5.4 6.8 7.2
The CDR symbol is the calculated deviation rate and ATR is the achieved tolerable rate. A final quantitative evaluation of the reliability of internal control in the areas tested is made by viewing the output and comparing the TR with ATR. If ATR exceeds TR, then internal control is considered less than adequate in this particular area as judged on a quantitative basis. Through discussion of the evaluation of results printout during class sessions, the student is made aware that qualitative factors must also be considered in the evaluation of internal control. As a second assignment, the student is required to create two additional sampling plans by changing the critical parameters in the sampling plan. A written evaluation summarizing the reliability of internal control as related to cycles tested by the three different sampling plans is required to complete the assignment.
165
The number of assignments which can be created from this application is substantial. The illustration used here is intended only as an example of the type of assignments which may be used.
PEDAGOGlCAL
BENEFITS
OF THE APPLICATION
The attribute sampling application is introduced in connection with coverage of the transaction cycle audit approach to evaluating internal control explained in most current auditing texts. After the introduction of the application. the student completes the assignments in a microcomputer lab. The first assignment, when completed and in the student’s possession, is discussed in class. This discussion should (1) reinforce the knowledge of objectives of control procedures, (2) further explain the tests of compliance and the meaning of such tests, (3) further elaborate on the tolerable rate and risk of overreliance, and (4) expand on the evaluation of deviations in the sample results. Thus the application has the benefits of (I) providing experience in using the unique terminology of attribute sampling, (2) possibly adding to the understanding of attribute sampling, tests of compliance and internal control, (3) generating and maintaining a higher level of interest on the student’s part than would be the usual case in the coverage of these topics, and (4) providing experience in using the microcomputer as an audit tool. Use of the attribute sampling application has also produced some enlightening factors from an auditing instructor’s viewpoint. Students indicating an understanding of attribute sampling in class have designed sampling applications which have resulted in enormous sample sizes. These sample sizes resulted from selecting, for example, a tolerable rate of 3 percent, an expected deviation rate of 2 percent and a confidence level of 99 percent. The relationship of sample size to expected deviation rate, tolerable rate and confidence level apparently becomes much clearer after performing the application. In addition. students must be careful in evaluating results and are forced to link this evaluation to each compliance test and the control objective of the test. The application with the two assignments described herein can be completed in three to four hours of computer lab time. Feedback from students has been positive. The application is easily adapted to published audit cases or practice sets which include attribute sampling assignments in their makeup.
CONCLUSION The assessment of the attribute sampling microcomputer application after four semesters of usage by the authors in the classroom has been favorable. The application has been more completely integrated into the teaching process with each semester of use and variations in the package have been introduced slowly. While such an application may not be the final answer to the understanding of attribute sampling, the application has been found to
166
enhance
and hopefully
improve
the learning
process
in auditing.
REFERENCE American
Institute
Smndurds
of Certified
No. 39, “Audit
Public Accountants
Sampling.”
June.
I98 I.
(AICPA).
( 1981). Sraremenf
on Auditing
APPLICATION SAMPLING
FOR
Russell F. Briner and Diane T. Pearson THE UNIVERSITY OF MlSSlSSIPPl
UNIVERSITY
James E. Gaunt& Jr. OF ARKANSAS - LITTLE ROCK
Absrracr: A microcomputer application for applying attribute sampling to internal control and the audit process is explained and illustrated. The application allows the auditing student to design an attribute sampling plan, create a unique sample for each application and evaluate the results in terms of deviations from desirable internal control procedures. The application is constructed through a software package that enhances students’ learning of attribute sampling and its relationship to the entire audit process.
The use of application sampling by auditors in the study and evaluation of internal control is a significant part of the evaluation process. The primary objective of this note is to explain a microcomputer application of attribute sampling and to delineate the benefits the application provides in teaching attribute sampling.
THE
APPLICATION
The teaching of attribute sampling in the initial auditing course is based on guidance provided by Statement on Auditing Standards (SAS) No. 39, “Audit Sampling”[AlCPA. 198 I]. Attribute sampling is a process by which a characteristic (or attribute) of an actual internal control procedure is tested for compliance to the designed procedure by selecting a sample of documents which evidence the attribute of interest. The software package described in this note was developed to (1) provide a practical application of attribute sampling and (2) integrate this application with classroom discussions of attribute sampling and its relationship to internal control. To accomplish these objectives, the application requires the student to initially identify characteristics (attributes) of internal control procedures for a simulated business entity. By entering data related to these attributes into a microcomputer software routine, the student is able to generate a random sample of document populations. The microcomputer software then simulates deviations from the internal control procedures being tested. Finally, the student is able to statistically evaluate the number of deviations found in each sample.
162
HARDWARE
AND SOFTWARE
DESIGN
The attribute sampling software package developed for this application provides for statistical sampling routines on a microcomputer. The programs are written in BASIC and were designed initially to be used on a TRS-80 Model III with two disk drives. The BASIC programs have since been converted to provide for use of the application on IBM-PCs and those micros compatible with the IBM-PC.1 The software package, which consists of six programs, provides a main menu from which the user selects the desired option. In addition to clear screen display, the system allows the user to print the completed sampling plan, the selected sample, the deviation characteristics, and the evaluation of results. The various alternatives are selected from a series of menus. Figure 1 illustratesThe main menu from which the five subprograms may be selected. Illustration
Figure 1 of the Main Menu
AUDIT TESTING SOFTWARE ATTRIBUTE SAMPLING (0) (1) (2) (3) (4) (5)
END SESSION DETAILED INSTRUCTIONS BUILD/UPDATE SAMPLING PLAN SPECIFY TESTING PARAMETERS AUDIT SELECT SAMPLE - SIMULATE EVALUATE RESULTS
PLEASE
ENTER
YOUR CHOICE
--->
TESTING
?
Since most attribute sampling plans involve a series of tests to be performed on client documents, the sampling plan allows sample sizes to be calculated for each of several attributes to be tested. The user specifies the characteristics of each attribute of interest: expected deviation rate, tolerable deviation rate, and risk of overreliance. (This terminology is consistent with the AICPA Audit and Accounting Guide for Audit Sampling and SAS No. 39.) The sample size is calculated for each attribute of interest and the user has the opportunity to perform sensitivity analysis by varying the parameters. The usercan specify that all tests be performed on the largest sample selected, or that only the calculated sample size be tested. (Because of the cost of pulling sample items and since the documents are usually available to perform all tests at a low incremental cost, auditors frequently perform all tests on the largest sample chosen.) ‘The software
is available
mailing charges. Interested
to educators individuals
at a nominal charge covering the cost of the diskette and should contact the authors.
163
To simulate an actual sample, the program has a process for generating random deviations for each attribute of interest. Using this process, the program selects a random sample and generates a printout indicating the document number selected and the term “DEV” after the number if the control is violated and the undesirable form of the attribute is present. This simulation process has been used for four semesters in the basic auditing course with very few problems.
AN ILLUSTRATION This section provides an illustration of two assignments given to a senior auditing class. The first assignment requires the student to review an attribute sampling plan already defined on a data diskette. Output generated includes (1) the sampling plan, (2) the simulated sample and (3) the evaluation of deviations. From the main menu the student selects the “Build/ Update Sampling Plan” option. From the menu of options then available, the student selects the”Add/ Update Sampling Plan”option and proceeds to examine the sampling plan provided by the package. An illustration of the sampling plan printout the student receives is shown in Figure 2. Three of the critical parameters are noted in the “Test Specifications”section. These are (1) EDR or Expected Deviation Rate, (2) TR or Tolerable Rate and (3) CL or Confidence Level. Figure 2 of a Sampling
Illustration
SAMPLING SYSTEM NAME
OF SYSTEM
SALES/AR
Plan Printout
PLAN -
SALES
DESCRIPTION
PERIOD
TESTED
JAN 84-DEC
SAMPLE UNIVERSE CREDIT SALES EST. POPULATION SAMPLE DOCUMENT SALES ORDER ASSOCIATED DOCUMENTS SHPR AR JNL AUDIT
OBJECTIVES
SELECTION
BEGINNING
NUMBER
10000
CREDIT APPROVAL CORRECT PRICES QTY SHPD=QTY ORDRD UNIVERSE
SAMPLE
84
SIZE
----SEQUENCES 1002 5025
CHARACTERISTICS OF NUMBERS ENDING
NUMBER
4576 11433
TEST SPECIFICATIONS TEST CREDIT SHIP QTY PRICING
DESCRIPTION CHK FOR CR APPRV COMP QTY SHPD/QTY CHK INV PRICES
OR
OBJECTIVE
CL
EDR
TR
CREDIT CORR SHI CORR VAL
95 95 90
2.0 1.0 2.0
8.0 7.0 8.0
SAMPLE 88 44 54
164
The overall objective of compliance tests is to determine the degree to which control procedures are being followed. The specific audit objectives shown in Figure 2 then further refine the overall objective to those areas of the sales cycle to be tested. These objectives are then listed again under test specifications, corresponding to the compliance test performed, to determine if these objectives are being accomplished. In Figure 2, for example, the test name “Credit” would involve the auditor reviewing a sales order to determine if credit approval has been obtained. This audit procedure would be performed on a sample of 88 sales orders from a population of 10,000. The CL for this test is 95’&, the EDR is 2940,and the TR is 8% as can be found by viewing the “Test Specifications” part of the sampling plan printout or screen display. After reviewing the “Sales”sampling plan, the student returns to the main menu and runs the sample selection and simulated audit testing routines. The simulated sample printout from the sample selection procedure provides the student with the simulated number of deviations related to each test. Since this simulation is based on the random number generator routine, each student’s printout represents a unique sample. The student then enters data from the simulated sample printout and the evaluation of results is generated as illustrated in Figure 3. Figure 3 Illustration of Evaluation of Results Printout SAMPLING PLAN -
SALES
EVALUATION OF DEVIATIONS TEST
CL
ITEMS
CREDIT SHIP QTY PRICING
:z
88 44 54
90
DEVIATIONS 1 0
1
EDR
CDR
TR
ATR
2.0
1.1 0.0 1.9
8.0 7.0 a.0
5.4 6.8 7.2
The CDR symbol is the calculated deviation rate and ATR is the achieved tolerable rate. A final quantitative evaluation of the reliability of internal control in the areas tested is made by viewing the output and comparing the TR with ATR. If ATR exceeds TR, then internal control is considered less than adequate in this particular area as judged on a quantitative basis. Through discussion of the evaluation of results printout during class sessions, the student is made aware that qualitative factors must also be considered in the evaluation of internal control. As a second assignment, the student is required to create two additional sampling plans by changing the critical parameters in the sampling plan. A written evaluation summarizing the reliability of internal control as related to cycles tested by the three different sampling plans is required to complete the assignment.
165
The number of assignments which can be created from this application is substantial. The illustration used here is intended only as an example of the type of assignments which may be used.
PEDAGOGlCAL
BENEFITS
OF THE APPLICATION
The attribute sampling application is introduced in connection with coverage of the transaction cycle audit approach to evaluating internal control explained in most current auditing texts. After the introduction of the application. the student completes the assignments in a microcomputer lab. The first assignment, when completed and in the student’s possession, is discussed in class. This discussion should (1) reinforce the knowledge of objectives of control procedures, (2) further explain the tests of compliance and the meaning of such tests, (3) further elaborate on the tolerable rate and risk of overreliance, and (4) expand on the evaluation of deviations in the sample results. Thus the application has the benefits of (I) providing experience in using the unique terminology of attribute sampling, (2) possibly adding to the understanding of attribute sampling, tests of compliance and internal control, (3) generating and maintaining a higher level of interest on the student’s part than would be the usual case in the coverage of these topics, and (4) providing experience in using the microcomputer as an audit tool. Use of the attribute sampling application has also produced some enlightening factors from an auditing instructor’s viewpoint. Students indicating an understanding of attribute sampling in class have designed sampling applications which have resulted in enormous sample sizes. These sample sizes resulted from selecting, for example, a tolerable rate of 3 percent, an expected deviation rate of 2 percent and a confidence level of 99 percent. The relationship of sample size to expected deviation rate, tolerable rate and confidence level apparently becomes much clearer after performing the application. In addition. students must be careful in evaluating results and are forced to link this evaluation to each compliance test and the control objective of the test. The application with the two assignments described herein can be completed in three to four hours of computer lab time. Feedback from students has been positive. The application is easily adapted to published audit cases or practice sets which include attribute sampling assignments in their makeup.
CONCLUSION The assessment of the attribute sampling microcomputer application after four semesters of usage by the authors in the classroom has been favorable. The application has been more completely integrated into the teaching process with each semester of use and variations in the package have been introduced slowly. While such an application may not be the final answer to the understanding of attribute sampling, the application has been found to
166
enhance
and hopefully
improve
the learning
process
in auditing.
REFERENCE American
Institute
Smndurds
of Certified
No. 39, “Audit
Public Accountants
Sampling.”
June.
I98 I.
(AICPA).
( 1981). Sraremenf
on Auditing