Both Statistical And Nonstatistical Sampling

Are Acceptable Under Auditing Standards,

But Whichever Is Used, It Must Be Done Right
Bob Lake was the manager on the audit of Images, Inc., a specialty retailer
that had shops throughout the Midwest. Images appealed to upscale working
women and offered its own credit card. Images accounting was done
centrally. Transactions were captured online and sales and accounts receivable
files were maintained on a database.
Bob Lakes firm encouraged the use of statistical sampling in its practice and
provided a train ing program for the development of a statistical coordinator
for each office. The coordinator in Bobs office was Barbara Ennis. Bob believed that
sales transactions and accounts
receivable confirmation tests should be done using statistical sampling and asked
Barbara to help design and oversee
the statistical aspects of this testing.
Barbara developed a program for the design of confirmation audit procedures as part of
doing tests of details of balances
for accounts receivable. Her work included determining sample sizes. She left the
program with Bob to carry out
and said that she would be available to help evaluate the results after the tests were
performed.
When all the confirmation replies were received or alternative procedures were
completed several weeks later, Bob
called Barbara to do the statistical evaluation. Much to his dismay, he found out that
Barbara had left the firm, and
worse, there was no statistically trained person to take her place. Bob was under a lot of
pressure to get the job completed
and decided to make the statistical calculations himself. Based on his calculations, he
concluded that the potential
misstatement was large, but not material, so Bob concluded the objectives of the
confirmation tests had been met.
The next year Images, Inc.s earnings declined sharply, partially because of large writeoffs of accounts receivable. The
stock price dropped sharply and a class action suit was filed, naming Bobs firm among
the defendants. An outside
expert was brought in to review the audit docu mentation. The expert redid all of Bobs
work and found errors in the statistical
calculations. The expert calculated that the misstatement in accounts receivable, based
on the auditors sample,
was significantly more than a material amount. Bobs firm settled the suit for $3.5
million.