The Use Of Statistical Sampling And A Single-Point Estimator To Establish Punitive Fines In Compliance Auditing: A Cautionary Note

Abstract

This paper describes current practices relating to statistical sampling used by auditors performing compliance audits.  An example audit case is presented where a compliance audit is performed using statistical sampling.  Fines for non-compliance are based upon the sample results.  While the practice is quite common and generally accepted, there are significant ramifications associated with the use of a single-point estimator.  Approximately half of the time, an auditee will be charged more than is actually deserved.  We explore the shortcomings associated with the use of a single-point estimator and the appropriateness of the use of a one-tailed confidence interval to provide greater assurance that fines are appropriate and reasonable.