Issue for Consideration: Appropriateness of the Drafting of Paragraph A17

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1 Deloitte & Touche LLP Ten Westport Road Wilton, CT USA Tel: Fax: Sherry Hazel Audit and Attest Standards American Institute of Certified Public Accountants 1211 Avenue of the Americas New York, NY USA Dear Ms. Hazel: We appreciate the opportunity to comment on the proposed Statement on Auditing Standard, Audit Sampling (Redrafted) ( the proposed SAS ). We are supportive of the development of this standard and believe, overall, that the drafting of the proposed SAS was completed in accordance with the clarity conventions and criteria adopted by the Auditing Standards Board (ASB). We have addressed the issue for consideration as requested in the Explanatory Memorandum as well as included a general comment on the proposed definition of audit sampling and other comments and recommendations related to specific paragraphs within the proposed SAS. Within our recommendations for editorial changes, additions are noted in bold underline and deletions in double strike-through. Issue for Consideration: Appropriateness of the Drafting of Paragraph A17 Paragraph A17 addresses selection of sample items. We believe the wording in A17 should mirror that of paragraph A11 in International Standard on Auditing (ISA) 530, Audit Sampling. By changing the second sentence to diverge from the same sentence in ISA 510, paragraph A11, the proposed SAS has confused the concept of judgment being used to select sample items. Including haphazard, or random-based in the sentence also creates that impression that these are the only techniques available to select a nonstatistical sample. Paragraph A18 in the proposed SAS lists the principal methods used to select samples; as such, the inclusion of haphazard and random-based selection methods in A17 is also repetitive of what is included in A18. In ISA 530, Sample Selection Methods are further described in Appendix 4. This appendix includes block selection, but appropriately cautions that it would rarely be an appropriate sample selection technique when the auditor intends to draw valid inferences about the entire population based on the sample. Notwithstanding that the Audit Guide, Audit Sampling ( Sampling Audit Sampling Guide ) addresses sample selection methods in more detail, we believe it may be helpful for the proposed SAS to include an Appendix like Appendix 4 of ISA 530 as this would appear to address the concern expressed about the exclusion of block sampling as a sampling technique and would converge with the ISA. The Appendix could be annotated to indicate that the Audit Sampling Guide provides additional guidance. Member of Deloitte Touche Tohmatsu

2 Page 2 Responses to Questions Posed in the Explanatory Memorandum 1. Are the auditor s objectives appropriate? We believe that the objective to be achieved by the auditor as stated in the proposed SAS is appropriate. 2. Are the revisions made to converge the existing standard with ISA No. 530 (Redrafted) appropriate? We believe the revisions from the existing standard to converge with ISA 530 (Redrafted) are appropriate. 3. Are the differences between the proposed SAS and ISA No. 530 (Redrafted) identified in the exhibit, and other language changes, appropriate? We believe there are many differences between the proposed SAS and ISA 530 (Redrafted) identified in the exhibit for which there are not compelling reasons to have a difference. See our general comment as well our comments by paragraph below for detailed comments. General Comment Definition of Audit Sampling We do not understand why the ASB believes there is a compelling reason to diverge from ISA 530 s definition of audit sampling as we do not see a practice issue that needs to be addressed through such a divergence. We are concerned that the proposed definition of audit sampling, by incorporating the concept of representativeness, may be too restrictive and may potentially limit sampling applications that are currently being performed. We believe that the overall purpose of sampling is to provide a reasonable basis to draw conclusions about a population. Making selections that are representative of the population is one way of obtaining a reasonable basis for such a conclusion. However, we also believe other methods may also provide such a basis. We believe an appropriate definition of audit sampling is one that allows greater flexibility in application. For that reason, we recommend that the definition used in the standard align with that in ISA 530 (Redrafted) and that the ASB revise paragraph 8 and its related application paragraphs (A16-A18) to also converge with ISA 530 s paragraphs 8 and A11 A12. 2

3 Page 3 Comments by Paragraph Paragraph 5 Definition of Haphazard Selection We believe inclusion of this definition in the proposed SAS may be confusing to readers. The term is only used twice in the proposed SAS outside of the definition itself and is presently only used once in the AICPA s extant AU Section 350, Audit Sampling (extant AU Section 350). Because of the limited use of the term and the unnecessary difference it creates between the proposed SAS and the ISA, we recommend the deletion of the definition. It would be more appropriate for haphazard selection to be defined in the Sampling Audit Guide. If the ASB decides nevertheless to include a definition of haphazard sampling in the SAS, we recommend aligning the definition more closely with the discussion of haphazard sampling in Appendix 4 of ISA 530. Additionally, we note that a random number generator is not a technique ; it is just a computer program. Paragraph 8 As noted in the general comment above, we believe the definition of audit sampling" should align with that in ISA 530, and as such, the wording in this paragraph should be aligned with the ISA as well, as follows: If the definition of audit sampling remains as is in the proposed SAS, we recommend the following changes to align the wording in the requirement with the definition: The auditor should select items for the sample in such a way that each sampling unit in the population has a chance of selection. the auditor can reasonably expect the sample to be free of intentional bias and thus will be representative of the relevant population and therefore likely to provide the auditor a reasonable basis for conclusions about the population. Paragraph A1 We believe this paragraph would be more appropriately placed in the proposed SAS, Performing Audit Procedures in Response to the Assessed Risks and Evaluating the Audit Evidence Obtained. The paragraph does not discuss audit sampling but rather describes other audit procedures that may be used in certain situations. If the ASB does not wish to include this paragraph in the proposed SAS, Performing Audit Procedures in Response to the Assessed Risks and Evaluating the Audit Evidence Obtained, then we recommend deleting this paragraph as it does not provide further beneficial guidance on audit sampling and is a divergence from the ISA. Paragraph A2 We recommend deleting this paragraph as the same concepts are sufficiently covered in item b. of the definition of sampling risk. If the ASB believes that further clarification 3

4 Page 4 is nevertheless required, then we suggest deleting paragraph A2 and adding such clarification to item b. of the definition as follows: Add i.e., the risk of assessing control risk too high as a parenthetical after less effective than they actually are Add i.e., the risk of incorrect rejection as a parenthetical after that a material misstatement exists when in fact it does not Paragraph A3 We recommend the following changes to this paragraph: Replace reduced with managed as we believe that managed is a more appropriate word in this context Replace can with may Paragraph A5 We do not find the reference to Exhibit A useful as Exhibit A does not provide any more detail about the random selection techniques than what is already included in this paragraph. Furthermore, the addition of this paragraph creates an unnecessary divergence from the ISA as the techniques listed are addressed in the Sampling Audit Guide. We recommend deleting this paragraph from the proposed SAS and including it in the Sampling Audit Guide if necessary to support the information already contained in the guide. Paragraph A9 We believe the concepts in this paragraph are already clearly addressed in the proposed SAS, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards. We believe the removal of this paragraph would not weaken current guidance but would rather enhance convergence with the ISA. If the ASB ultimately decides that this guidance should be retained, then we recommend including it in the Sampling Audit Guide. We also recommend consideration be given to simplifying the guidance and explaining that if risk of misstatement is high and all the auditor s evidence will come from performing substantive tests then a larger sample size should be used than when the risk of misstatement is low or lower and the auditor will be testing and relying on relevant controls, when a smaller sample size may be appropriate. Paragraph A13 We recognize that the last two sentences of paragraph A13 are drawn from paragraph 21 of extant AU section 350. However, as placed in paragraph A13 and without the other sentences of extant paragraph 21 as context we believe these sentences may cause confusion rather than provide useful guidance. We therefore recommend deleting these two sentences. Paragraph A14 Given their length, we recommend that the bulleted items included in the paragraph be moved to appendices at the end of the proposed SAS as they are cumbersome as placed 4

5 Page 5 in the application material. We believe the tables in Appendix 2 and 3 of the ISA are beneficial to the auditor in determining whether factors increase or decrease sample size; inclusion of the tables as appendices in the proposed SAS would assist practitioners in the performance of an audit. Paragraph A15 We recognize that sentences 2 4 of paragraph A15 are drawn from paragraph 23 of the extant AU section 350. In the context of paragraph 23, which also provides factors to consider in determining sample size, the sentences appear as factual statements. However, taken out of that context and placed after the first sentence of A15 (which is an individual paragraph A9 of ISA 530), along with the final sentence of paragraph A15, the statements in sentences 2 4 seem to take on more of a directive or requirement-like context. As a result, we believe there may be some confusion about whether the statements made in A15 drive the auditor to determine the statistical sample size every time the auditor decides to apply non-statistical sampling just to verify that the sample sizes are comparable. We do not believe that is what the ASB intends, but recommend that paragraph A15 be made clearer as to the auditor s responsibility. Paragraph A19 We believe the second example describing the telephone expense item is not helpful and potentially confusing because it begs the question as to why telephone expense would have been included in a population of items expected to be supported by a receiving report. We believe the first example is an adequate illustration of a replacement item in a sample, and therefore recommend deleting the telephone expense item. Paragraph A20 We recommend deleting this paragraph as the statement beginning If the auditor s evaluation of the sample results alludes to the concept of an anomaly, which the ASB has determined to eliminate in the proposed SAS. In accordance with the ISA, the auditor would need to determine that an item for which documentation cannot be located does not constitute a deviation. The inclusion of this paragraph presents the option of not treating an unexamined item as a misstatement, but without specifically stating that the auditor needs to determine that the item does not constitute a deviation. We think this weakens the requirement in paragraph 11, and may therefore be construed as ISA-minus, which we would not believe to be appropriate. Paragraph A23 We believe that this paragraph is repetitive of the intent of paragraph A22 as well as repetitive of paragraph 11 of the proposed SAS, Evaluation of Misstatements Identified During an Audit. As it does not provide additive guidance from what is provided in other paragraphs (both within and outside the proposed SAS), we recommend deleting the paragraph from the proposed SAS. 5

6 Page 6 Paragraph A24 We recognize and agree with the fact that a representative sample is expected to be representative of the population only with respect to the incidence of misstatements or deviations and not necessarily with respect to their nature. However we believe this paragraph should be deleted as it does not provide significant incremental guidance and it also introduces the discussion of anomalies. We agree with the ASB s position as set forth in Exhibit B of the Exposure Draft that states the deletion of the requirement to deal with anomaly from the proposed SAS will enhance audit quality because misstatements identified by the auditor during audit sampling will be treated in the same manner as any other misstatement identified by the auditor. Introducing the concept of an anomaly in application material may could create confusion among practitioners as to whether anomalies are acceptable. Paragraph A30, Exhibit A We recommend that the last sentence in item 1 be deleted as the statement does not relate to audit sampling and therefore may create unnecessary confusion. We also recommend the following change to the last sentence in item 2: The Audit Guide assumes is premised upon the assumption that the auditor uses appropriate and reliable computer programs or tables to perform the calculations and selections necessary for statistical sampling. We would be pleased to discuss our letter with you at your convenience. If you have any questions, please contact Megan Zietsman at (203) Sincerely, /s/ Deloitte & Touche LLP 6