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A two-phase sampling scheme with applications to auditing or sed quis custodiet ipsos custodes?

Record type: Article

External auditors such as the National Audit Office (NAO) are the final arbiters on the level of error in accounts presented to them by their clients, and the accuracy or otherwise of individual transactions. In coming to a view on the level of error, they are expected to carry out the audit effectively and efficiently, and therefore need to make the best possible use of all the information at their disposal, even when some of the information may not be totally accurate.
We consider the particular situation where the NAO is given access to the results of tests on a relatively large random sample of transactions, typically conducted by the client's internal auditors. A two-phase sampling scheme arises when the NAO subsequently assesses the quality of the client's data by retesting a subsample of these transactions. The paper discusses methodologies for combining the two sets of data to produce optimum estimates of the proportion of transactions in error (the error rate) and of the level of monetary error in the account. Although a maximum likelihood approach yields a relatively straightforward solution to the error rate problem, there is no uniformly optimum way to estimate the monetary error. Three possible methods are proposed, and the results of a series of simulation experiments to compare their performance under a variety of audit conditions is described.

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Citation

Barnett, V., Haworth, J. and Smith, T.M.F. (2001) A two-phase sampling scheme with applications to auditing or sed quis custodiet ipsos custodes? Journal of the Royal Statistical Society: Series A (Statistics in Society), 164, (2), pp. 407-422. (doi:10.1111/1467-985X.00210).

More information

Published date: 2001
Keywords: audit, efficiency, error rate, estimation, monetary error, performance measurement, post-stratification, regression, simulation, two-phase sampling
Organisations: Statistics

Identifiers

Local EPrints ID: 30038
URI: http://eprints.soton.ac.uk/id/eprint/30038
ISSN: 0964-1998
PURE UUID: eab70586-6e3c-4a55-a75c-0d5d0ef67b3a

Catalogue record

Date deposited: 11 May 2006
Last modified: 17 Jul 2017 15:55

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Contributors

Author: V. Barnett
Author: J. Haworth
Author: T.M.F. Smith

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