Tag Archives: Function

Cutting Audit Sampling Risk Down to Size: Automating the Sampling Process

Every Accountant professional at some point must take a sample. Sampling is defined as “the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class” according to Audit Sampling guideline AU Section 350. Essentially sampling is the process of examining a small portion of a client’s records to make a judgment on the credibility of the whole. One of the risks associated with this process is selecting a sample which is not an accurate representative of the whole. Samples which are done manually may seem random but fail to meet this rigorous standard. Think about it, random means lack of pattern. As humans we tend to stick to patterns and routines. An auditor may pick all even number selections or every third in an effort at randomness. In this situation the likelihood that gross errors in a client’s books will be missed are exponentially increased. Sadly, many audits rely on manual selections from an Excel spreadsheet. For example, let’s say an audit is needed on accounts payable transactions. The typical audit would involve selecting a sample number of vouchers and back track to the supporting documentation such as invoices and purchase orders. Using the automated Excel technique highlighted below can minimize sampling risk and increase productivity.

 

Using Excel a tool can be developed to automatically apply red highlights random general entries. In order to have Excel automatically select random journal entries, we first need to organize our spreadsheet into two tables like the one below. The first table will contain our journal entries and the second will help us select random entries.

Master List

 

Add Conditional Formatting

 Journal List

1. Highlight the list of journal entry id numbers

Conditional Format Menu

  1. Under the Home menu click conditional formatting > Highlight Cells Rules > More Rules

 

Edit Format Rule Menu

 

  1. Select the formatting Rule type titled “Format only cells that contain”
  2. Change logical condition to “equal to”
  3. Enter J3 cell address in the last box
  4. Click Ok

 

Note: This will check to see if any of the journal ids in column B match journal ids in Column J

 

Edit Format Rules

  1. Click on Conditional Formatting the Manage Rules

 Edit Rule Manager

 

 

  1. Click on New Rule
  2. Follow steps 3 and 4 entering cells J4, J5, J6, J7 in the subsequent conditional format rules

Sample Generator 7

10. An inventory of all conditional format rules should look like the picture above

11. Click Ok

 

 

Add Random Calculation Formula

Sample Generator 812. Enter the following formula in cell A3 =RandBetween(1,10)

 

Note: The RandBetween formula is called a volatile function. This means the result constantly changes. This particular formula will give a random result between 1 and 10. Press F9 to see the result change.

Sample Generator 9

 

13. Copy the RandBetween function into the cells A4 through A12


Add Vlookup Formula

Sample Generator 10

14. In cell J2 type in =Vlookup(I3,$A:$B,2,false)

15. Copy this formula from J4 through J7

The Result

Sample Generator 12

16. Red highlights will be applied to the journal entries which appear with a selection number  between 1 – 5

17. Press F9 to select another random sample

Note: In some instances a cell in the Selected Journal Entry column may appear with #N/A. This means the selected sample number has not been found. Press F9 again to get another sample.

 

Bigger and Better

 

What if you’re working with more journal entries and need a larger sample. How can this approach be adjusted to accommodate? In order to apply this technique to a sample size of 25 we would need to make three adjustments to our spreadsheet:

1. Add more journal entries to the Journal Entry Master List

2. Revisit steps 2 – 8 for conditional formatting and enter cells J8 to J28. This will give the ability to select 20 more samples.

3. Change the RandBetween formula that appears in each cell in column A from RandBetween(1,10) to RandBetween(1,25).

4. Extend the helper table which contains the columns titled Selected Samples and Selected Journal Entry 20 more rows. The column titled Selected Samples should go from 1 to 25. Copy the vlookup formula down 20 rows.

 

This combination of tools is one of many techniques which can be used to simplify and reduce risks in the auditing process. To view a demonstration of this tool in action visit

youtu.be/zXqd-T_14fE.

The Excel Rosetta Stone – Decoding Complex Excel Functions and Formulas

Recently, I’ve been getting quite a few questions about ways to understand complicated Excel formulas.  To put it in simple terms breaking down an Excel formula is like learning another language.  At first glance it may seem difficult and daunting but once you have the “Rosetta Stone” it becomes simple and seamless.  The following outlines a few tools and techniques which can be used to unlock the mysteries of Excel functions and formulas.

 

Evaluate Formula Tool

Complex functions and formulas are typically nested within one another.  What is nesting? Nesting is the process of combining multiple functions into a long formula.  There are pros and cons to creating a large nested formula.  The Pro: Spreadsheet real estate is saved.  A complex calculation is included in one cell. The Con: A large formula is included in one cell.  Large formulas are usually harder to understand and take time to correct or debug.  The evaluate formula tool is one of those tools which can help unlock the mystery behind long complex formulas and functions.   This tool essentially walks you through each calculation step that Excel takes until a final result is displayed.

Select Formula Menue

Select Formula Menu

  1. Click on Formulas
  2. Click on Evaluate Formula

3. The formula in the cell appears in the evaluation window

4. Click Evaluate to watch the first calculation step

  5. Click Evaluate additional times to watch each calculation step

6. The last evaluation step shows a simplified version of the original formula

Function Button

The function button sometimes referred to as FX is a tool which is rarely used but has a tremendous benefit. The FX function is like a dictionary, it gives additional description about a function.  In addition when clicked a dialogue box appears which reveals step by step instructions on how to use the function.  It’s a huge time saver and it helps pinpoint common errors.   In order to use this function to begin to understand a complex function click on the cell that contains the function then on the Fx button.  A dialogue box is exposed showing the purpose of the function, the elements needed and the intended result.  Below are a few brief steps on how to use it.

  1. Click on the Fx button next to the formula bar

Note: The active cell must contain the formula

2. A dialogue box is revealed outlining the following

a. Description of required  elements

b. General description of function

c. Anticipated result based on populated values

 

Understanding the Symbols

 Another way to begin to easily understand complex functions is to understand the operators and symbols. Every Excel formula has symbols and each carries a specific meaning.  Very often using the wrong symbol can be the difference between accuracy and error.  For example there are mathematical operators which are needed for arithmetic in Excel.  In addition there are other characters which are used to define worksheet locations etc.  In our post titled Excel Characters, we highlighted different symbols used in Excel and there meaning.  It’s a great primer to understanding complex functions.

Complex formulas and functions will never be eliminated from the world of Excel.  With the tools and techniques mentioned above these formulas and functions can be translated into plain language.