Statistical Sampling for the Audit of Accounts Payable

1. Provide a brief description of your project.

The Office of the Comptroller, Division of Accounting and Auditing, saw a way to be
more efficient by reducing the workload and costs associated with auditing small dollar
invoices. Through reengineering efforts, and brainstorming with the Division of
Information Systems, innovative modifications were made to the States accounting
system to allow for the implementation of statistical sampling for auditing purposes.

During the 1995/96 fiscal year, a sampling threshold for auditing invoices was
established at $250. This meant all invoices above $250 were preaudited by the
Comptrollers Office. Invoices at or below $250 were only sampled. The $250 threshold
reduced the number of invoices audited by the Comptrollers Office by 47%, while
experiencing only a 0.16% exception rate for sampled invoices. As a result of the
1995/96 fiscal year experience, the statistical sampling threshold was raised to $1,000 for
the 1996/97 fiscal year. The increase in the threshold resulted in approximately a 66%
reduction in the number of invoices required to be audited by the Comptrollers Office.

2. What problem(s) did your project address?

Faced with budget reductions and the desire to reengineer our business processes, the
dramatic decrease in workload due to statistical sampling allowed us to accommodate a
reduction in staff, while also freeing up time for other employees to work on quality
improvement initiatives to the States accounting system. Also, the reduction in paper
sent to the Comptrollers Office allowed the agencies to reduce their copying and courier
costs associated with processing invoices.

3. What did your project accomplish? Who are the current and potential
beneficiaries?

With the implementation of statistical sampling, the Division was able to operate with
nine fewer employees and provided a 66% reduction in the amount of paper processed

and stored. Cost savings to the Division alone was $190,000. An independent review by
the Office of Program Policy and Government Accountability indicated in their
November 25, 1996, Report Number 96-20, that the Statewide

annualized savings from statistical sampling was $5 million.

The current and potential beneficiaries of statistical sampling is the States vendors. They
are now paid faster because of the shortened time it takes for small dollar invoices to be
audited. Another current beneficiary is the Division. We have been able to redirect staff
to work on other cost saving initiatives, which includes agency training and a greater
audit emphasis on large dollar invoices.

4. What measurements have been established to monitor the success/benefits of

the project?

Modifications have been made to the States information warehouse to collect the
measurements and data used to monitor the success of the statistical sampling project.
Rejected invoice data is captured by reason code at the transaction level for each invoice
processing site. This information provides the monitoring reports needed for analyzing
the statistical sampling results. Each report contains the sample count and amount, the
error count and amount, and the resulting error rate. Sample sizes are based on Arkins
Handbook of Sampling, using a 95% confidence that the rate of occurrence in the sample
is 2%.

5. List the funding source(s), costs incurred, benefits derived, and return on
investment.

All costs were covered within existing budget resources. The costs incurred included the
programming required to modify the States accounting system and the training provided
to each agency on the effect statistical sampling would have on their workflow. Statistical
sampling provides significant personnel cost savings to the State, on an on going basis, as
well as a significant reduction in the amount of paper used during the disbursement
process. An overall benefit is that statistical sampling continues to result in faster
payments to the States vendors.

6. Describe the schedule of the projects development and implementation.

The development of the project began in April 1995 with program modifications to the
States accounting system. In August 1995, software modifications were completed and
agency training on the use of the system was started. Four agencies were initially
established in September 1995 to pilot the statistical sampling project. Full statewide
implementation was completed in January 1996.
 7. How replicable do you consider your project to be? What obstacles or
problems might other states encounter in trying to implement this or a
similar project?

The programming constraints of a specific accounting system will determine whether or

not this project would be able to be replicated. However, the concept of statistical
sampling can be implemented without system modifications if a manual system is
desired. The obstacles and problems that we encountered were related to each agencies
structure, the number of invoice processing locations, credit memos, and the assignment
of an agency control number for batch processing of invoices. The solution to these
problems were usually resolved by the agency adjusting their workflow and processing
procedures based on the threshold amounts established for statistical sampling.