With the aid of both an adequate system of internal control and proper internal auditing, modern auditing methods need not extend to an examination of every transaction. The auditor can make only such selected tests as will convince him of satisfactory conditions of the internal control and internal auditing processes. This greatly reduces the amount of work required and makes modern auditing efficient.
Though sampling was introduced in the Commission on Audit, Philippines as early as in 1956, its application was not implemented in practice, since the auditors were not familiar with the relatively new technique and were under the apprehension that transactions with errors may not be audited. Efforts made in 1978 to introduce statistical sampling scheme in place of the 100% audit in financial or compliance audit work were also not successful. The difficulties in introducing sampling was one of the reasons that contributed to the piling up of post audit backlogs, as transactions in government continued to increase over the years.
In 1980, a research project was undertaken by the Commission on Audit, Philippines (COA), associating experts from the University of Philippines and the Department of Science and Technology, to develop statistical sampling schemes that would be appropriate to post audit work in the context of the Philippine audit system.
As a result COA Memorandum No. 82-316 dated October 5, 1982 and COA Resolution 82-49 dated October 11, 1982 were issued as first policy promulgations of the Commission to utilise statistical sampling in the post-audit of transactions involving national and local agencies as well as government-owned or controlled corporations.
In January 1984, a special sampling committee introduced the so-called Pareto's "Principle of Distribution" which was prescribed under COA Memorandum No. 84-316-A.
1. Pareto's Principle of Distribution
This sampling methodology is appropriate for transactions covered by vouchers and official receipts if the population is not too voluminous, but is not appropriate for payroll where the amounts are homogenous and the ranking and determination of the 20% highest transactions in terms of amount for purposes of identifying the audit domain (20% highest transactions in a given population) would be very difficult and impractical.
Procedure:
In the Pareto's principle of distribution, transactions in the population will be arranged from the highest to the lowest amount. The top 20% of the population, constituting the audit domain, will be removed from the population to be audited 100%, while the remaining 80% which constitutes the audit suburb (rest of the population excluding audit domain), shall be subjected to random sampling.
To determine the sample size, there is a formula and table of sample sizes, where sample sizes for a given population are readily available. The sample size can also be determined using the following formula :
n = NZ2 p(1-P)
Nd2 + Z2p(1-p)
where n = sample size, N = population, d = desired reliability factor = 0.05, p = .50, z - 1.95
After the sample size is determined, the selection of samples will be made using the table of random numbers. For control purposes and to have objectivity in the selection of samples, a memorandum on the random number start (number selected for each month as the basis for drawing the required sample) will be issued by COA Audit Sampling Unit/COA Regional Audit Sampling Unit wherein columns and rows together with the random number start are given.
Tolerable Error Rate
The Commission of Audit set a tolerable error rate (percentage of defective transactions) of 8% of the total sample size. After post-auditing the samples, the results will be evaluated and if the errors found exceed the 8% limit, the auditor must post-audit the entire population.
Auditors in the Local, National and Government-Owned and/or Controlled Corporations objected to the use of the Pareto scheme in their post-audit work. They observed that the process of selecting the samples is difficult
and time consuming, the samples selected are too numerous and the tolerable error rate is very low. The chances that the samples selected will pass in audit are minimal and if the samples fail, 100% audit has to be resorted to.
Presently, the difficulty encountered in sample selection is solved with the help of computers. Auditors in Land Banks are using this methodology in the post-audit of loans. Some auditors in other agencies are also using this scheme.
2. COA Sampling Card Methodology (CSCM)
A Canadian consultant introduced another sampling scheme, that would answer the need of Auditors of the corporate sector and national and local agencies. This sampling technique was referred to as COA Sampling Card Methodology (CSCM).
The CSCM was prescribed by the Commission on Audit under COA Memorandum No. 85-316-C. There are three techniques in extracting samples; each technique is used for a specific type or group of transactions:
The COA Sampling Card Methodology (CSCM) has a pre-determined sample size for a given population, as shown below:
Sample Sizes Tor COA Post-Audit
|
No. of Transactions |
Normal Transactions |
Low Error Rate |
| 0-199 | 100 or all | 75 or all |
| 200- 1999 | 100 | 75 |
| 2000- 4999 | 150 | 100 |
| 5000 + | 200 | 100 |
Percentage To Define The High Value Items (which would be audited 100 %)
| Number of transactions in the Population |
Percentage to Define High Value Items |
| 0-1999 | 5% |
| 2000- 4999 | 2% |
| 5000 + | 1% |
To determine the limit for individual high value items, multiply the total value of the population by the corresponding percentage above, the result of which will be the amount of the individual high value item. This means that any single transaction amounting to or higher than this figure, will be separated from the population and audited 100 %.
Selection of Samples
In the selection of samples, several factors are to be considered. For one, every item in the population must have an equal and known chance of selection. Also, the process of selecting the samples must be unbiased.
For the selection of samples, the following steps/procedures are to be followed for each of the three techniques under this methodology.
| Step |
Procedures |
Systematic sampling | Random sampling | Interval sampling |
| 1. | Separate the Key Items (KIs) and the High Value Items (HVIs) from the population to arrive at the adjusted population. The KIs and HVIs are to be audited 100% | √ | √ | √ |
| 2. | From the adjusted population, determine the desired sample size and determine the sample interval by dividing the adjusted population by the desired sample size. | √ | √ | |
| 3. | Determine the desired sample size and look for the starting number by referring to the memorandum on random number start using the appropriate table for the specific month in which actual post-audit work is done. | √ | ||
| 4. | Refer to the memorandum on random number start for the first sample. The random number start should be less than or equal to the sample interval. The first number to be selected will be the first sample and to get the second sample, add the sample interval to the number of the first sample and to get the third sample, add the sample interval to the number of the second sample and continue the process until the desired sample size is attained. | √ | ||
| 5. | All the selected numbers must be taken from the random number table. Reject any number that is more than the adjusted population and remember that a number must only be selected once. | √ | ||
| 6. | Refer to the memorandum on random number start and using the appropriate table for the month where actual post-audit is done, select the starting number which must be equal to or lesser than the sample interval. | √ | ||
| 7. | Enter the starting number as negative. Add the amount of the first voucher as positive. If the number does not turn positive, continue adding the next voucher until the number turns positive. If the number turns positive, get that voucher as the first sample. Then enter the sample interval as negative. (Remember that the starting number is only used once. Every time that the number turns positive, select the voucher that made the number positive as sample and enter the sample interval as negative. Then add the amount of the next voucher as positive). | √ | ||
| 8. | Continue the process until the desired sample size is attained. | √ |
Development of other sampling schemes
The use of Pareto's Principle of distribution and the CSCM was limited to the corporate sector, because of the tedious process of selecting samples and also the low tolerable error rate set by the Commission. This situation created a large volume of post-audit backlogs in the Commission and the need to introduce another sampling scheme was felt. A Committee was set up to introduce another sampling scheme that would be applicable to national and local agencies as well as government owned and/or controlled corporations.
The Committee came up with the issuance of COA Memorandum No. 93-316-D, prescribing the application of Test Audit Scheme (TAS) and the Simplified Sampling Scheme (SSS) in the audit of current and prior years' transactions and accounts in the national, local agencies as well as government owned and/or controlled corporations.
3. Test Audit Scheme (TAS)
Test Audit Scheme is an audit approach whereby the audit of selected months of the year is deemed to cover the audit of the transactions and accounts of the entire year under audit.
Selection Of Test Audit Months
The selection of the Test Audit Months (TAMs) which shall comprise at least six months of the succeeding year, shall be approved by the COA Director concerned. For this purpose, the Unit Auditor shall submit to the said COA Director, on or before the end of December of each year, the following information:
On the basis of the foregoing information, the COA Director may either adopt the recommendation of the Auditor or make changes in the proposed test audit months as he may deem fit or necessary. The approved test audit months shall be communicated in writing to the Auditor within fifteen days upon receipt for the latter's implementation. The communication of the COA Director approving the test audit months shall form part of the permanent working paper file of the auditing unit.
The approved test audit months shall be kept confidential and any unauthorised release of information relative thereto shall be a ground for disciplinary action.
The peak months of the year, i.e., the months when the transactions are voluminous in terms of amount and quantity (other than the months of January and December) shall likewise be included in the test audit months. The peak months for collection may be different from the peak months for disbursements and other transactions, in which case the peak months for both shall be selected in the order of amount and quantity of transactions.
The months not selected as test audit months during any year may be included as test audit months in the succeeding year subject to the condition that the months of January and December as well as the peak months of the succeeding year shall be included in the test audit months.
The test audit months approved by the COA Director concerned shall not be changed without the prior authority of the said Director except when the change are in addition to the test audit months previously approved. However, when in the judgement of the Auditor, the six test audit months approved by the Director can still be reduced as and when the internal control system of the auditee agency has been established to be adequate or when errors, suspensions and/or disallowances have been minimal or negligible or when the sheer volume of transactions compels further reduction of testing, the Auditor may, upon proper written justification, recommend to the COA Director concerned, the reduction of the six test audit months which in all cases shall not be less than four months.
Where the audit in any of the test audit months results in suspensions and/or disallowances or when there are complaints/ adverse information concerning certain transactions (whether or not the transactions, which are the subject of the adverse information, are included in the test audit months), all other related or similar transactions in all the months of the year under audit (including the non-test audit months) shall be audited. However, when in the judgement of the auditor, the suspensions or disallowances in the test audit months are not material as to warrant the audit of the related or similar transactions in the non-test audit months, he may dispense with the audit of the latter mentioned transactions upon written authority of the Director concerned.
4. Simplified Sampling Scheme (SSS)
The simplified Sampling Scheme (SSS) is a modification of the Pareto's Principle of Distribution and the COA Sampling Card Methodology (CSCM), whereby the tedious process of selecting and evaluating the samples is modified, at the same time making it easier for the Auditors to understand its application.
Procedure
Basic Sampling Determinants
Determination of Populations -
- All ORs per Accountable Officers;
- All ORs as submitted for a particular period by management and as reported by the Chief Cashier regardless of revenue classification;
- All ORs per revenue classification for a particular period. The population may be per month, per two or per three months depending on the volume. In no case shall it exceed four months.
Percentage To Define High Value Items :
| No. of Transactions in the Population |
Percentage to Define High Value Items |
| 0- 1,999 | 5% |
| 2000-4,999 | 2% |
| 5,000 + | 1% |
Sample Sizes for COA Post-Audit (SSS)
| No. of Transactions in Population |
Normal Transactions |
| 0-199 | 75 |
| 200-1999 | 100 |
| 2000-4999 | 150 |
| 5000 + | 200 |
Sample Selection :
The procedures to be followed in selecting samples would be the same as that of the systematic sampling technique under CSCM.
Creation And Functions Of CASU/CRASU
There shall be a COA Audit Sampling Unit (CASU) for operating offices and COA Regional Audit Sampling Unit (CRASU) for Regional Offices or its equivalent unit that will monitor, supervise the activities of auditing units applying sampling techniques and conduct in-house training on sampling. It shall also issue one month before the beginning of each quarter, the Random Number Start (RNS) covering a three month period.
After the post-audit of the samples has been conducted, the errors discovered are to be evaluated. For this purpose, the evaluation is categorised as follows :-
Before the entire population represented by the samples can be considered passed, the samples must pass both in substantive and compliance evaluation. Otherwise, the entire population must be post-audited 100%.
Editor's Note: This article gives a historical and contemporary perspective on the use of sampling techniques in the field of audit in SAI- Philippines. For further details on these techniques, the readers may get in touch with the authors of the article.