Statistics for Auditors

Karl Heins October 10th, 2006 IIA-NCEB meeting

Introduction
Statistics is the use of a sample to make

inferences about a population When and how to use statistics Statement of results in quantitative terms What is your background
Do you use statistics

Agenda
Statistical Concepts Overview

When Should Statistics be Used

What types of Statistics are used by auditors

How to use statistics

Practical Example Statistical Sample in allowable cost audit

Statistics Concepts Overview

Statistics uses a Sample to infer Qualities

of Populations in a Quantifiable way Statistics is based on the mathematics of probability Each Statistical approach is based on different assumptions and needs

Vocabulary
Precision

Confidence
Population

Sample
Statistics Probability Hypothesis Testing

Benefits of Statistics
Quantifiable results are needed

Other tests are not practical Proof in total Destructive samples Costly samples
Large populations With few errors (accounting populations) Recorded amount closely correlates to actual

When to use Statistics

Dont use Statistics Proof in total File comparison (HR ID) Exceptions Limit Data Mining Trend Analysis Recalculate CY -> PY Use Statistics Costly Tests Destructive tests Inventory testing Dental Fraud Test of manual approvals Acceptance of lots Manufacturing controls STAR

How Big a Sample

Travel Reimbursement Validity Requires examination of documents Each test 15 minutes 10,000 Travel Reports How many would you choose?

The Results From the Test

Use the graph

90 percent confidence
State the precision

At the sample sizes selected

Are these acceptable audit Risks?

Test for Attribute

Determine the precision Determine the confidence level Estimate the expected population error rate Compute the sample size (software) Select and audit sample items Evaluate sample results Reach overall conclusion Document results and conclusions

Assumptions
Very few errors random errors only

Less than 5 percent errors is acceptable

If error rate is over 5 percent, our sample should

discover this 90 percent of the time Our sample is random Using Statistics
A Sample of 50 should work

Two types of Statistics

Prior Example an Attribute or Discovery Sample Stated results in terms of Precision Not to Exceed Good for testing attributes Good for testing Dollars (CMA or Dollar Unit) Best for Populations with few errors Population size does not need to be known (skip interval will work) Estimation Sampling Different Statistics use sample to Estimate Value of Population Excellent for test of Inventory perpetual records Best where Records closely approximate the actual inventory Small differences are OK.

Risk of Sample
Assumption Sample represents population Risk of accepting a population with error

rate greater than 5 percent. With a population of a 5 percent error rate the sample will be accepted 10 percent of the time Risk Reject population with error rate less than 5 percent. Requires continued work

CMA or Dollar Unit

Easy to use for financial populations

Size of the population not needed

Materiality = Skip interval when (R=1)

Samples can be combined

Evaluation of Results Easy, does not require

a computer

CMA
Select Sample taking every nth Dollar Evaluate errors Larger than Skip Interval All errors found Smaller than Skip Gross up and add factor End result is stated as With Confidence based on R value, the errors do not exceed X amount (X is design amount plus grossed up errors found) Computer is not needed to evaluate results

Estimation Sample
Sample Calculation Depended on

Variability in Population Computer software needed to evaluate results Results stated as The expected value is between X and Y amounts for a stated Confidence Level

Estimation Sample
Sample size hard to estimate

Sometimes taking a test sample will help

estimate proper sample size Requires Computer Software to evaluate the results Can use more than one variable (Rain, Degree day, Oil price to estimate Restaurant sales)

Using Statistical Sampling in Allowable Cost Audit

Barry Long

Statistical Requirements
Random Sample If skip interval used, population is assumed to be random relative to errors Each item selected must be evaluated (no

substitutions) If pockets of errors are found, isolate and test further

Conclusion
Statistics used by auditors can enable the

auditor a reasonable basis for opinion and assure the auditor has examined sufficient competent evidential matter on which that opinion is based.

Q&A

Other Guidance on Statistics

San Jose Auditor
http://www.sanjoseca.gov/auditor/Procedures/5-06C.pdf

Health Human Services

http://www.oig.hhs.gov/organization/OAS/ratstat.html

The Defense Contract Audit Agency EZ-Quant

http://www.dcaa.mil/ezquant.htm

ANSI

http://www.ansi.org/

International Organization for Standardization

http://www.iso.org/iso/en/ISOOnline.frontpage

American Society for Quality (ASQ)

http://www.asq.org/index.html