Explain what is meant by Audit sampling and explain the need for this?

When I was working for an Audit company, we needed to check the process of claims management for a huge insurance company. It was absolutely impossible to check every single transaction, but we needed to make sure that they have relevant policies and procedures in place and that those are enforced and applied correctly on a consistent basis.

Based on this rationale, we had to use a sample of claims that were recorded in the year we were auditing. The way we did it was to order all of the claims in each type of insurance cover by its estimated size and test 100% of the claims over the set materiality threshold and 20% of the claims under the threshold. The materiality threshold was set by the Audit Partner based on analysis of claims sizes.

If we found that the policies and procedures were implemented consistently and correctly in 95% of the sampled cases, we assumed then that the rest of the business was fine as well. If not, we had to dig deeper.

Hope this helps,

Anna