Advantages & Disadvantages of Sampling & Forensic Accounting
Audit sampling involves the procedures of choosing particular transactions for analysis during an audit. The sampling enables the auditor to arrive at a more informed decision if an account balance contains serious errors or if the company's internal control over its financial reporting systems is operating at peak efficiency. Audit sampling is often a component of forensic accounting, a set of accounting methods that relates to legal matters. Auditors and clients must understand the advantages and drawbacks of audit sampling.
Forensic accountants employ their professional accounting skills in matters that might involve civil or criminal court proceedings. These skills can include the assessment of the company's use of generally acceptable accounting principles, or GAAP; evaluation of the company's internal accounting controls; and locating evidence of fraud or mismanagement of company funds. Forensic accounting investigations often accompany any type of legal action involving the company, whether that legal action involves criminal charges or civil lawsuits.
Sampling in Forensic Accounting
Because investigating all of a company's financial records would be too time-consuming, forensic accountants employ sampling methods to examine typical transactions. In the sampling process, the forensic accountant takes a section of accounting data and tests the transactions against GAAP to determine their accuracy. The sampling occurs during or after the audit and allows auditors to assure the investigating body that the company's records do not contain significant errors or evidence of fraud.
The major advantage to sampling is that it allows auditors to reach conclusions about large data sets without examining each individual transaction. Sampling saves time, money and effort in forensic accounting investigations while still enabling investigators to find what they need. If some of the sample data show irregularities that appear suspicious, the forensic auditors can expand the scope of the investigation. If not, the investigators can close the case and assure the company that its practices show no evidence of wrongdoing.
The major disadvantage to sampling is that it could miss potentially incriminating data. The sample transactions could come across as prime examples of proper accounting methods, but other transactions not included in the sample data could show evidence of fraud or malfeasance. Another disadvantage is that the auditors could find a few points of sample data that appear incriminating and extrapolate a deeper level of fraud from those few data points when one does not necessarily exist.
- Forensic Accounting Today: ACFE Definition of Forensic Accounting
- Forensic Accounting: Forensic Accounting Demystified
- Louisiana State University: Forensic Accounting to the Forefront
- State University of New York at Albany: Lecture Notes on Forensic Accounting Investigations
- New Jersey State League of Municipalities: What to Expect When the Forensic Accountant Arrives
- California State University Los Angeles: Chapter 1 Introduction to Forensic and Investigative Accounting
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