RISK BASED AUDIT AND STATISTICAL
SAMPLING
APPLICATIONS IN CENTRAL EXCISE
RECEIPT AUDIT
Session 9.1-P-1
1
RISK BASED AUDIT
 Risk based audit is an approach to audit
whereby the limited audit resources are
efficiently focused only on those areas
where the risk of audit is high instead of
focusing equally on all areas & thereby
spreading resources thinly.
 Risk based audit avoids:
 under auditing in high risk situations, &
 over auditing in low risk situations
 thereby ensure cost-effective
audit
Session 9.1-P-1
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THE RISK MODEL
 OAR = IR*CR*DR
where,
OAR: overall audit risk
IR: inherent risk
CR: Control risk
DR: Detection risk
 Given the OAR and an
assessment of IR and CR, it is
possible to assess
DR
Session 9.1-P-1
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THE RISK MODEL
Overall audit risk: Maximum risk
acceptable to the auditor
Inherent Risk: Risk that a material
error will occur in the first place
Control Risk: Risk that internal
controls will fail to detect the error
Detection Risk: Risk that audit
procedures will fail to detect the error
Session 9.1-P-1
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RISK ASSESSMENT STRATIFIES
POPULATION
Based on risk perception, the population
would have the following kinds of items:
– Key Items which require high assurance from
audit and are highly significant which could be
checked 100%
– High value items are generally checked
100% as a prudent audit practice
– High risk, highly significant items would be
subject to higher level of substantive test
– Low risk, less significant items would be
tested through lesser
substantive tests
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THE SAMPLING PROCESS
The Sampling process entails the following steps:
Determine the assurance levels of audit
Assess the inherent risk and control risk for the
entity and at the transaction level
Design audit procedures for each strata of the
population
Session 9.1-P-1
Contd…
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Contd…
Use sampling techniques for drawing samples
from each strata
Substantive audit tests on the sample
Evaluation of the results
Projection of the sample results on
the population
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Statistical Sampling and Risk analysis in
CERA to be applied in 2 areas
Risk assessment and selection of
unit for audit
Drawing a sample of transactions
after assessment of inherent risk
and control risk
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Factors having a bearing on the risk
perception of a unit
Revenue (Through PLA)
Chapter
Single Product, Multi Product
Assesee prone to evasion
Audit output
MODVAT
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Statistical Sampling in Central Excise Audit
Presently, one month and one week from each
quarter with highest revenue are selected for test
check of transactions in a financial year
In new system, the risk model is an analytical
tool for selection of the sample size and
samples.
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Selection of Unit
Two units viz. M/s Max India ltd., and M/s Swaraj
Engines ltd. were selected for carrying out this
study.The reasons for selection of these units
were:Computerized system of accounting and
invoicing
The number of inputs/outputs was small so as to
make the study easily manageable
Session 9.1-P-1
Contd…
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Contd…
As the category of transaction being not large, it was
easier to segregate the transactions in various
categories and select the sample
Units are public limited companies having professional
staff
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In the first unit:Items in each category were allocated consecutive
numbers and then the required sample size was
selected by using Random Selection tables
Sample size selected was irrespective of the value
It was feared where the transactions in the population
vary in value, the sample might concentrate on low
value transactions.
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In the second unit:Modified technique of selecting samples on
monetary basis was adopted
All items in each category above a certain limit
were segregated for 100% checking
For the rest of the population, monetary unit
sampling was adopted to select the sample size
& sample with the help of computer using
software IDEA 2001
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Control Risk Assessment
Assess the adequacy of the policies and
procedures in the auditee organization for
detecting material error
Evaluation of both the control environment and
control systems existing in the company on the
following parameters:
Session 9.1-P-1
Contd…
15
Contd…
Management philosophy and working style
Functioning of Audit Committee
Organizational set up
Internal Audit system
Control of Central Excise department
Segregation of incompatible functions.
Control over accounting system.
Restricted access to assets.
Control of computer operations
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Identification of Areas for Sampling
The following two areas were identified where statistical
sampling can be applied
Availment of CENVAT credit on inputs as well as on
capital goods
Sale invoices
Session 9.1-P-1
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Stratification of Audit Population
( MAX INDIA Ltd.)
On perusal of Sales/CENVAT records, the transactions of both
types were segregated into following homogenous categories
CENVAT
SALES
(I) Imported Material
Domestic Sale
a) General Buyers
b) Sister concern
c) Captive consumption
(II) Indigenous Material
Export
(a) Major Suppliers
(b) Sundry Suppliers
(III) Capital Goods
Job Workers
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Stratification of Audit Population
(Swaraj Engines Ltd.)
CENVAT
Imported Material
Indigenous Material
a) High Value
b) Others
Capital Goods
a) High Value
b) Others
Session 9.1-P-1
SALE
High Value
Sister Concern
Miscellaneous
Job Work
Without duty
Export
Captive Consumption
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Inherent Risk Assessment
MAX INDIA LIMITED
Sr.No
Category
Inherent Risk
evaluation
1
Imported material
High
2
Major suppliers
Medium
3
Sundry supplier
High
4
Capital goods
Low
5
General buyers
Medium
6
Sister concern
High
7
Captive consumption
High
8
Export
High
9
Job Worker
High
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Inherent Risk Assessment
SWARAJ ENGINES LIMITED
Sr. No
Category
Inherent risk evaluation
1
High value
2
Sister Concern
Cent percent items were
checked.
High
3
Miscellaneous
Medium
4
High
High
6
Job Work
Without Duty
Export
7
Captive Consumption
High
8
Imported Material
Medium
9
Indigenous material
Medium
10
Capital Goods
Low
5
Session 9.1-P-1
N.A as the goods are
entirely sold to PTL, Mohali
21
Determination of Required Audit Assurance and
Sample
After working out the control risk and inherent
risk for each category of transactions, required
audit assurance level and Sample size for each
category has been worked out on the basis of
Standard Statistical tables( Max India ltd.) and
IDEA 2001( Swaraj Engines)
Session 9.1-P-1
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COMPARATIVE ANALYSIS
Session 9.1-P-1
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Max India Ltd.
Details of Sale Invoices
Sr
No
Category
Sample for Pilot Study
No.
%wrt
population
Old System
Amount
(Rs in lakh)
No.
%wrt
population
Amount
(Rs in lakh)
1.
General
Buyers
194
2.71
297.31
1244
17.38
2097.29
2.
Sister
Concern
58
100.00
22.35
7
12.06
2.56
3.
Export
114
79.72
1212.85
30
20.98
371.43
4.
Job work
57
100.00
110.12
13
22.81
21.99
5.
Captive
use
114
36.66
45
14.47
Total
537
6.95
1339
17.33
1642.63
Session 9.1-P-1
2493.27
24
Max India Ltd.
Details of CENVAT Invoices
Sr. Category
No.
Sample for Pilot Study
No.
1.
Imported
Material
2.
Indigenous
material
3.
%wrt
Amount
population (in lakh)
Old System
No.
%wrt
population
Amount
( in lakh)
114
93.44
145.05
22
18.03
23.13
(a) Major
Suppliers
114
28.93
117.39
83
21.07
88.00
(b) Sundry
Suppliers
114
7.41
19.32
283
18.40
47.80
Capital
goods
114
57.87
22.24
25
12.69
0.87
TOTAL
456
20.26
304.00
Session 9.1-P-1
413
18.35
159.80
25
Swaraj Engines Ltd.
Details of Sale Invoices
Sr
No
Category
Sample for Pilot Study
% w.r.t.
Population
1.
High Value
2.
% w.r.t.
Value
Old System
% w.r.t.
Population
% w.r.t.
Value
100.00
100.00
20.27
20.30
Sister
Concern
16.37
22.89
19.48
21.07
3.
Misc.
16.28
63.04
19.18
17.63
4.
Job Work
30.50
37.80*
19.31
19.38*
5.
Without
Duty
53.74
87.38*
14.97
33.12*
Total
21.66
33.45
Session 9.1-P-1
44.39*
19.23
20.91
26
21.21*
Swaraj Engines Ltd.
Details of CENVAT Invoices
Sr
No
Category
Sample for Pilot Study
% w.r.t.
Population
A
Inputs
a) Imported
b) High Value
c) Others
Total (A)
B
Capital Goods
a) High Value
b) Others
Total (B)
Total (A+B)
% w.r.t.
value
Old System
% w.r.t.
Population
% w.r.t.
Value
100.00
100.00
5.71
100.00
100.00
15.43
-23.44
20.76
-22.20
22.08
7.13
29.32
20.78
21.97
100.00
16.09
100.00
49.48
-20.07
-19.38
16.67
90.63
19.93
3.59
31.90
20.68
21.20
Session 9.1-P-1
8.20
27
Thank You
Session 9.1-P-1
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