SGB

CO . &
Account for Accuracy & Reliability

AUDIT
SAMPLING AND
AUDIT
PROCEDURES
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Audit Sampling Techniques

PSA 530, Audit Sampling, recognizes that auditors are unlikely to test all of the
information available to them because doing so would be both impractical and costly.
Instead, the auditor will shape their findings using sampling as an audit technique. It's
important to note right away that the auditor can use procedures that don't include audit
sampling, For example, 100 percent testing of products within a population. When there are a
limited number of high-value things in a population, or when there is a substantial risk of
material misstatement and other audit procedures may not provide adequate suitable audit-
proof, auditors can consider 100 percent testing to be appropriate. Candidates should be
aware, however, that a 100 percent analysis is highly unlikely in the case of control tests;
such sampling is more common in detail tests, like substantive testing.
Statistical sampling is a sampling process in which the auditor selects items to be
verified using statistical methods. There are two types of statistical sampling techniques used
in auditing. The first is using random selection. Using random number tables or a random
number generator, random selection ensures that all items within a population have an equal
chance of being selected as a sample. Physical items, such as monetary units like accounts
receivable, may be used as sampling units.
Advantages:
● Random samples are the best method of selecting samples from the population of
interest.
● The samples should represent the target population and eliminate sampling bias.
● It is easier to form sample groups.
● It offers a chance to perform data analysis that has less risk of carrying an error.
● Findings can be applied to the entire population base.
● An unbiased random selection and a representative sample are important in
concluding the results of a study.
Disadvantages:
● It is difficult to achieve as more time, money, and effort are needed to execute the
sampling.
● The population group needs to be effective.
● Difficulty gaining access to a list of a larger population.
● It is easy to get the data wrong just as it is easy to get right.
● A large sample size is mandatory but a sample size that is too large is also
problematic.
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The second type is systematic selection. To obtain a
sampling interval, systematic selection divides the number of sampling units within a
population by the sample size. The sample's starting interval can be generated at random, but
PSA 530 recognizes that using a random number generator or random number tables is more
likely to be genuinely random.
Advantages:
● Simpler and more straightforward
● Easy to understand
● Reduces the potential for bias in the information.
● There is no need to number each member of a sample.
● Creates an even distribution of members to form samples.
● Eliminate the phenomenon of clustered selection and a low probability of
contaminated data.
Disadvantages:
● The process requires a close approximation of a population.
● Creates a fractional chance of selection.
● Systematic sampling is less random than a simple random sampling effort.
● Over or under-representation of particular patterns and a greater risk of data
manipulation.
● This method can potentially interact with hidden periodic traits.
● This becomes difficult when the population size cannot be estimated.

Statistical sampling
Statistical sampling is an appropriate statistical procedure in converting a medical
statistical hypothesis into pertinent medical knowledge. With increasing demand and
expenditure rising, it’s more important than ever to understand how well the healthcare
system and all of its components, from staff to regional networks, are doing. This necessitates
data, which will invariably vary in type and quality. It also necessitates the use of statistical
approaches, the results of which must be interpreted in a way that is understandable to those
who need to make decisions. Statistical analysis enables practitioners of medical research to
derive meaningful inferences from their data analysis. Inadequate sampling, study design, and
data analysis can result in insufficient and incorrect results and conclusions. It also covers
quality measurement, data types, risk adjustment, identifying acceptable and unacceptable
performance, statistical monitoring, and presenting outcomes to varied audiences. It puts all
the problems and viewpoints together in a mostly non-technical manner for clinicians,
managers, and methodologists, using examples around the world.
Sampling based on Materiality Level
The nature and size of an audit sample, among other things, influence the sufficiency
of evidential material. The sample size required to provide adequate evidential material is
determined by the sample’s objective as well as its quality. The efficiency of a sample for a
particular objective is determined by its design, where one sample is more efficient than
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another if it can accomplish the goals with a smaller sample size. In
the conduct of an audit, auditors exercise professional judgment when auditing particular line
items.
Sufficiency of the audit evidence is the ultimate goal and one factor considered in
determining such is based on the materiality level of the item being examined.
Materiality influences the auditor’s decisions in determining whether an item is
material or not. The materiality level and sample size are interrelated because the lower the
materiality level, the greater quantity of evidence is needed (vice versa) by auditors and such
requires greater incurrence of cost. The materiality level in which the sample size will be
derived is based on the materiality level computed for the hospital during the audit planning
which is based on 5% income from continuing operations.
When determining the sample size, auditors should take note of the following for
consideration:
a) Tolerable misstatement
The tolerable rate defines the maximum rate of noncompliance the
internal auditor will "tolerate" and still rely on the prescribed control.
b) Expected misstatement
The expected deviation rate represents the auditor's best estimate of the
actual failure rate of control in a population. The rate usually is based on client
inquiries, changes in personnel, process observations, prior year test results, or
even the results of a preliminary sample.
c) Confidence level
The sample's confidence level refers to the reliability the auditor places
on the sample results. Confidence levels of 90 percent to 99 percent are
common. A 95 percent confidence level means the auditor assumes the risk
that five out of 100 samples will not reflect the true values in the population.
At a 95 percent confidence level, 5 percent, the complement of the confidence
level reflects the auditor's risk of "assessing control risk too low."
d) Population size
The population contains all items to be considered for testing. Each
must have an unbiased chance of selection to ensure the final sample is
representative of the population. For large populations containing thousands of
items, population size will cause little impact on total sample size and is often
irrelevant for audit sample planning.
Examples of different sample sizes obtained by a hospital:

Monthly Example 1: Measure set is not Stratified

Hospitals selecting sample cases for the ABC measure set must ensure that its Initial Patient
Population and monthly sample size meet the following conditions:
Monthly Sample Size
Based on Hospital’s Initial Patient Population for the ABC Measure Set
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Average Monthly Minimum Required

Initial Patient Population Sample Size
“n”

516 104

131-515 20% of the Initial Patient Population

26-130 26

< 26 No sampling; 100% of the Initial Patient Population is

required
Examples
● A hospital’s ABC Initial Patient Population is 25 patients during January. Using the
above table, no sampling is allowed – 100 percent (%) of the population is required.
● A hospital’s ABC Initial Patient Population is 130 patients during February. Using the
above table, the required sample size is seen to be a minimum of 26 ABC patients for
this month.
● A hospital’s ABC Initial Patient Population is 301 patients during March. Using the
above table, the required sample size is seen to be 20 percent (%) of the population, or
61 cases for the month (twenty percent of 301 equals 60.2 rounded to the next whole
number equals 61).
● A hospital’s ABC Initial Patient Population is 516 patients during April. Using the
above table, the required sample size is seen to be a minimum of 104 ABC patients
for this month.

Monthly Example 2: Measure set is Stratified

For hospitals selecting sample cases for the XYZ measure set, a modified sampling procedure
is required. Hospitals selecting sample cases for this set must ensure that each strata
population and monthly sample size meets the following conditions:
Select within each of the seven individual measure stratum and the 8th XYZ stratum.
Monthly Sample Size
Based on Hospital’s Initial Patient Population for the XYZ Measure Set
Average Monthly Minimum Required
Stratum Initial Patient Stratum Sample Size
Population “n”

151 16

61 - 150 10% of the Initial Patient Population

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6 - 60 6

<6 No sampling; 100% of the Initial Patient Population is

required
Example
The XYZ Initial Patient Population sizes for a hospital are 5, 50, 15, 141, 35, 201, 3,
and 481 patients respectively in June. The required monthly sample sizes would be 5, 6, 6,
15, 6, 16, 3, and 16.
● The 1st and 7th strata are less than the minimum required monthly sample size, so 100
percent (%) of each of these strata is sampled.
● The 2nd, 3rd, and 5th strata each require 6 cases to be sampled.
● The 4th stratum has 141 patients per month, which requires a 10 percent (%) sample
size, or 15 cases (twenty percent of 141 equals 14.1 rounded to the next whole
number equals 15).
● The 6th and 8th strata are each more than the maximum required monthly sample size,
so this stratum requires 16 cases to be sampled.
The Institute of Internal Auditors has emphasized the value of audit software in a mature
internal audit process (IIA). The IIA states that “optimized” internal audit processes (those
with the highest maturity) use information technology systems to maximize the audit
process's productivity and effectiveness. Hospitals use software to make a sound decision
regarding the efficiency of their internal control and operate well. Hospitals use internal audit
software to continuously improve the quality of healthcare. In this way, one could expect
that, compared with external audits, threats to quality can be more quickly revealed, allowing
the organization to regularly adapt its processes to improve quality at the local level. These
audit software are designed to evaluate and improve the effectiveness of the organization’s
quality management system and focus more on organizational conditions and less on the
behavior of healthcare professionals and patient outcomes.
The following are the possible software used in the audit sampling:
AUDITNET
AuditNet is the global resource for auditors. It was developed as a
communications network portal for the global audit community. The software
promotes the utilization of technology for auditors. AuditNet provides low-cost, high-
quality educational learning opportunities without travel to auditors which became the
focus of such software.
AUDIT DATA ASSISTANT (ADA)
It is an audit data analysis software complete with a full suite of audit
sampling tools. The software is both available for Windows and Mac. It easily
performs millions of records and operations that cannot be done in Microsoft Excel
like audit sampling, fuzzy joins, and fuzzy duplicates. It can perform attribute
sampling, monetary unit sampling, and random sampling and is built for users to
export samples to Excel, audit them for correctness and bring them back for a quick
evaluation. With the use of this software, all samples can be replicated by using the
random seed number.
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SAP AUDIT MANAGEMENT
SAP Audit Management is a fully mobile, end-to-end audit management
solution powered by SAP HANA. It can be used by the audit department to create
audit plans, prepare audits, evaluate relevant data, record findings, shape an audit
opinion, communicate results, and track progress.
AUDITSAMPLER
AuditSampler is a statistical sampling and data analytics software that enables
efficient and effective audits based on statistical methods and the auditing standards
on sampling. The software can be used to design the sampling plan and sample size
for tests of controls and substantive tests of details. Samples can be selected based on
random, systematic, and value-weighted selection methods. Deviations and
misstatements found in the sample can be statistically projected to the population and
the risks measured. The sample size and upper error limits computed are following the
AICPA audit sampling guide. The jfa R package for statistical auditing benchmarks
its results against AuditSampler and the AICPA guide.
STAR SOFTWARE
Star Software Random Sample Generator provides for random number
selections for audit sampling, inventory count validation, and many other purposes.
The population can be entered manually or imported from files. Multiple ranges of
account prefixes and journal pages are supported. Your selection criteria can be saved
and retrieved later for future use in generating selections. The advanced version has
selections for confidence level, precision, tolerable error rate, and maximum expected
error rate.
Microsoft Excel
Microsoft Excel provides a Sampling data analysis tool that can be used to
create samples. The tool works by defining the population as an array in an Excel
worksheet and then using the following input parameters to determine how you would
like to carry out the sampling. Input Range specifies the range of data that contains
the population of values you want to sample. Excel draws samples from the first
column, then the second column, and so on. In random sampling, you specify the
random number of samples. This number of values is drawn from random positions
in the input range. A value can be selected more than once. (i.e., sampling is with
replacement).
RAT-STATS
RAT-STATS is designed to assist in selecting and analyzing random samples
as well as interpreting the results. While many consider RAT-STATS to be a “black
box,” the reality is remarkably less complex. Consider your standard calculator,
which performs discrete functions (add, subtract, etc.). RAT-STATS is no different.
The purpose of this function is to help ensure the selection of a random sample based
upon a predetermined sample size. RAT-STATS generates a set of random numbers
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used to select the specific sampling units from the total
population.

PLANNED AUDIT PROCEDURES:

AUDIT OF CASH
Relevant Assertion/s: The primary relevant cash assertions are existence, accuracy, and cut-
off of transactions related to cash

Objectives:
● Determine the location of cash collection points in addition to the cashier's office,
such as emergency rooms, outpatient facilities, and special service departments.
● Determine if it is required for hospitals to maintain donor-restricted funds separately
from the cash of unrestricted funds.
● Review arrangements or agreements whereby the hospital collects cash for others.

Audit Procedures:
● Confirmation Cash Audit Checklist
● Bank Reconciliation Testing and;
● Cash Walkthrough

Specific Audit Procedures:

1. Confirm cash balances
2. Vouch reconciling items to the subsequent month’s bank statement
3. Ask if all bank accounts are included in the general ledger
4. Inspect final deposits and disbursements for proper cut-off
5. Examining underlying documentation, other legal requirements relating to restricted
cash.
6. Obtain and review organization policies and procedures related to cash deposits, co-
payments, and other patient shares of cost payments.
7. Interview Admissions and Registration staff to identify locations that collect and
process patient cash payments. Select at least two cash collection sites and conduct
on-site observation of the process to ensure that payment requirements are identified,
collected, and deposited in accordance with established policy and procedure.

AUDIT OF INVESTMENTS
Assertions:
● Existence, occurrence, and completeness of transactions related to investments
● Valuation of investments
● Presentation and disclosure

Objectives:
● Determine the existence of investments and that the hospital entity has rights to the
investments
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● Consider internal control over the investments held by the
hospital entity
● Determine that all investments of the entity are reported and transactions affecting the
investments are properly accounted for
● Establish the proper measurements of investments
● Establish accuracy of the amounts recognized relating to investments
● Determine that the presentation and disclosure of the investments are adequate

Audit Procedure:
● Reading custody agreements
● Reviewing control and safeguarding procedures
● Confirming or examining securities
● Testing authorization and documentation supporting transactions
● Reviewing the basis of valuation and reporting income
● Verifying the investments like shares, debentures, bonds, and security certificates

Specific Audit Procedure

The auditor confirms balances with the trustee or broker if the investments are in the
custody of an independent outside entity. Confirmations should be as of the same date to
obtain a reasonable assurance that there is no switching of securities to conceal a shortage.
The confirmation should include the description of each investment held for the hospital
entity, as well as the number of shares and the total amount of investment. If the hospital
entity keeps custody of the investments, the auditor should physically inspect and count all
securities on hand simultaneously. The auditor also verifies them with the investment
register.
The proper measurement of investments is validated by referring to published price
quotations for securities that are measured at fair value. If the securities do not have
published price quotations, the auditor obtains estimates of fair value from security
dealers/brokers or other third-party sources. Lastly, the auditor determines whether
investments are properly classified and the disclosure guidelines in the accounting standards
are observed in the financial statements. In doing so, the auditor obtains an understanding of
management’s process for classifying securities.

AUDIT OF ACCOUNT RECEIVABLES

Assertions:
● Completeness and existence of information regarding accounts receivables in the
financial statements
● Appropriate use of measurement bases and appropriate presentation and disclosure of
financial statement account receivable

Objectives:
● Consider internal control over receivables
● Determine the existence of receivables, that the hospital entity has rights to these
assets
● Establish the completeness of recorded receivables
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● Determine that the receivables are measured at appropriate
amounts
● Establish that the presentation and disclosure of receivables are appropriate

Audit Procedure:
● Confirmation with the third-party payors
● Reviewing the adequacy of provision made for differences between contractual
interim billing rates and full-rate charges
● Reviewing the computation made to estimate the amount of retroactive adjustments
provided for in the accounts
● Reviewing related contracts to determine whether required adjustments have been
reflected in the accounts
● Reviewing of cost-reimbursement reports to determine that they were prepared based
on the principles of reimbursement of the third-party payor

Specific Audit Procedure

The auditor updates information on the hospital entity’s business risk and analyzes
potential motivation to or circumstances that misstate account receivables. The auditor
assures to understand the hospital entity’s operations and identify the proper recognition and
measurement of account receivables.
To establish the correctness of the balance of accounts receivables in the general
ledger, the auditor obtains a list of the accounts receivable from the subsidiary ledgers and
reconciles the total to the balance in the general ledger. As a standard audit procedure,
accounts receivable must be confirmed. Confirmation with the debtors is done to assure that
no lapping or any other form of manipulation has been resorted to by the entity’s employees.
The auditing firm mails directly the confirmation request, with an attached business reply
envelope, to the hospital entity’s patients/customers.

AUDIT OF INVENTORIES
Assertions:
● Completeness and accuracy of inventory records

Objectives:
● Establish the completeness of the inventories
● Establish the clerical accuracy of records and supporting schedules for inventories

Audit Procedure:
● Reviewing the independent organization’s procedures
● Observing physical counts
● Testing pricing

Specific Audit Procedure

Hospitals frequently employ independent organizations to inventory and price drugs,
medicines, and medical supplies. This is done because the quality of these items can usually
be determined more readily and accurately by these organizations than by the hospital’s staff.
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Thus, the auditor participates in the hospital entity’s physical
inventory and reviews the written instructions prepared by management for the employees
who will make the counts. The auditor also performs a test of prices applied to inventories to
determine whether the inventory costing procedure used by the hospital entity has been
properly applied.

AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

Assertions:
● Existence of transactions that result in PPE account
● Correctness and accuracy of depreciation during the period
● VAluation of PPE

Objectives:
● Substantiate the existence of property, plant, and equipment
● Determine the correctness and accuracy of recorded depreciation
● Determine that the measurement of PPE is in accordance with accounting standards

Audit Procedure:
● Evaluating depreciation policy
● Verify the changes in acquisition and retirements of PPE during the current period

Specific Audit Procedure

The auditor considers the internal control procedures adopted by the hospital entity
for fixed assets. The auditor examines the invoices, deeds, and title insurance policies.
The auditor prepares a summary of the amounts of accumulated depreciation for
various groups of assets at the beginning of the year, the amounts provided for depreciation
during the year, the amounts removed because of asset retirements, and the ending balances.
Computations may then be reviewed for a representative number of units and traced to both
the expense accounts and accumulated depreciation accounts. Then, the auditor makes
inquiries of executives and supervisors regarding reti red assets and examines the auditor must
obtain retirement work orders prepared during the year.

AUDIT OF LIABILITIES & DEFERRED REVENUE

This group of accounts includes notes payable, accounts payable, long-term and
interfund debt, deferred revenue, and accruals for salaries, interest, vacations, and taxes.
Included also are liabilities to third-party payors for working capital advances and over-
reimbursement.
Assertions:
Low-risk assertion:
● completeness and categorization of short/long-term debt
High-risk assertions:
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● the completeness, accuracy, and valuation of medical
malpractice and other self-insured liabilities, pension liabilities, or third-party
settlement liabilities.
● proper classification of charity care versus bad debt expense
Objectives:
● All recorded liabilities on the statement of financial position are authentic debts due to
creditors of the entity.
● Completeness. All liabilities owed by the entity at the reporting date are included on
the statement of financial position.
● Valuation and Allocation. Liabilities are included on the statement of financial
position at the appropriate amounts.
● Rights and Obligations. Liabilities reported in the statement of financial position
represent obligations of the entity at the reporting date.
● Presentation and Disclosure. Liabilities and related accounts are properly classified,
described, and disclosed in the financial statements, including notes, in accordance
with the applicable PFRSs
● All recorded liabilities on the statement of financial position are authentic debts due to
creditors of the entity.
● All liabilities owed by the entity at the reporting date are included on the statement of
financial position.
● Liabilities reported in the statement of financial position represent obligations of the
entity at the reporting date.
● Liabilities and related accounts are properly classified, described, and disclosed in the
financial statements, including notes, in accordance with the applicable PFRSs
Audit Procedures for Liabilities
The auditor’s primary substantive procedures for liabilities typically include the
following:
1. Reconciling general ledger and subsidiary ledger;
2. Performing purchase and accounts payable cut-off;
3. Confirming the liabilities to debtors;
4. Inspecting supporting documents such as contracts, invoices, receiving reports, etc.
5. Searching for unrecorded liabilities;
6. Testing the accuracy of interest expense, interest payable, amortization of discount
and
7. premium;
8. Evaluating valuation of liabilities denominated in foreign currencies;
9. Reviewing compliance with terms of debt agreements;
10. Performing analytical review procedures to liabilities and related accounts; and
11. Evaluating proper financial statement presentation and adequacy of disclosure.
12. Audit Procedures for Liabilities:
The auditor’s primary substantive procedures for liabilities typically include the
following:
1. Reconciling general ledger and subsidiary ledger;
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2. Performing purchase and accounts payable cut-off;
3. Confirming the liabilities to debtors;
4. Inspecting supporting documents such as contracts, invoices, receiving reports, etc.
5. Searching for unrecorded liabilities;
6. Testing the accuracy of interest expense, interest payable, amortization of discount
and premium;
7. Evaluating valuation of liabilities denominated in foreign currencies;
8. Reviewing compliance with terms of debt agreements;
9. Performing analytical review procedures to liabilities and related accounts; and
10. Evaluating proper financial statement presentation and adequacy of disclosure.

Specific Audit Procedures for Liabilities in Healthcare Industry:

● Determine that interfund accounts are in balance and that the transactions recorded
therein are authorized by the governing board either by specific approval of each
transaction or by blanket approval of each type of transaction.
● Review third-party payor advance payment balances.
● Review contract commitments with doctors, specialists, technicians, related parties,
and others who perform services by arrangement with the hospital.
● Substantiate deferred fees for educational programs and review existing subsidy or
grant agreements for educational purposes.
● Consider claims against the hospital for negligence and malpractice for possible
disclosure of contingent liabilities. Evidence of claims may usually be obtained from
claims agents, insurance companies, and attorneys. Obtaining written representation
of claims information should be considered by the auditor.
● Consider the effect on financial statements caused by timing differences between the
period in which items enter into the determination of reimbursement under third-party
reimbursement arrangements and the period in which such items enter into the
financial statements.
● Review policies requiring deposits from certain classes of patients, such as maternity
patients. From admitting and medical records, test application of these deposits;
confirmation on a test basis should be considered.
● Ascertain that pension liabilities and income tax are accounted for in accordance with
"Accounting for the Cost of Pension Plans" and, "Accounting for Income Taxes"
respectively.

AUDIT OF EXPENSES
Relevant Assertion/s: The primary relevant expense assertions are existence, completeness,
cut-off, classification, and occurrence.

Objectives:
● Ascertain efficiency in internal control
● Verify the reasonableness of expenses
● Ensure accuracy and proper documentation
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Audit Procedures:
● Compare expenses to budget and examine any unexplained variances
● Design and perform fraud detection procedures
● Check the reasonability of expenses
● Expense walkthrough

Specific Audit Procedures:

1. Review comparative operational statistics and the relationship of such statistics to
changes in expenses.
2. Examine agreements between the hospital and hospital-based physicians and:
a. Test calculations based on agreements.
b. Obtain written representation from the administrator outlining the terms of any
verbal agreement and, where appropriate, confirm the details of agreements with
physicians.
c. Review the basis upon which the hospital has segregated charges if it bills for
hospital-based physicians.
3. Test the hospital's method of recording services (and supplies) furnished to
employees, such as the value of meals, housing, and laundry; test distribution of these
items to various departments and the treatment thereof for Social Security,
withholding tax, and insurance purposes.
4. Test procedures for recording charges for special nurses and the rebilling of such
charges to hospital patients.
5. For hospitals that record values for contributed services, the following should
ordinarily be considered:
a. Test the compensation value assigned to services contributed by non-paid
individuals based on time spent and job description by comparison with
compensation paid to workers in similar positions.
b. Determine that maintenance costs incurred on behalf of contributing personnel
have been considered in arriving at salary equivalents.
c. Examine time records supporting the salary-equivalents for voluntary services
and test computations.
6. Review fund-raising costs of endowment or building fund campaigns to determine
whether such expenses are properly chargeable thereto.
7. Review and analyze, where necessary, the following:
● Maintenance and repairs
● Operations of plant
● Professional fees (other than medical)
● Administration and general expense
● Laboratory supplies and expense
● X-ray supplies and expense
● Pharmacy supplies and expense
● Dietary supplies and expense
● Operating room supplies and expense
● Medical and surgical expense
 Samsona, Beldia, Guiamalodin BOA/PRC Reg. No. 0001, May 14, 2021, valid
Tel: (639) 123 456
& Co. until January, 2024
Fax: (639 456 7878
SGB & Co. 1999 General Santos City SEC Accreditation No. OO14-FR-5 (Group A),
sg.com/ph
Account for Accuracy and Reliability Philippines November 6, 2021, valid until Novembe.5. 2024
● New or unusual expense accounts
● Miscellaneous expense

NOTE: The listed audit procedures are implemented with the consideration of the estimated
risk assessment level in each account.