Chapter 11: BASIC AUDIT SAMPLING CONCEPTS

Means of Selecting Items:

1. Selecting all items (100% examination)
2. Selecting specific items
3. Audit Sampling

Selecting All Items (100% Examination)

 The auditor may decide that it will be most appropriate to examine the entire population
of items that make up a class of transactions or account balance (or a stratum within that
population)
 It is unlikely in case of test of controls
 More common for test of details
 May be appropriate when:
o the population constitutes a small number of large value items
o there is significant risk and the other means do not provide sufficient appropriate
evidence
o when the repetitive nature of a calculation or other process performed
automatically by an information system makes a 100% cost effective

Selecting Specific Items

 The auditor may decide to select specific items from a population based on such factors
as the auditor’s understanding of the entity, the risk of material misstatement, and the
characteristics of the population being tested
 While selective examination of specific items from a class of transactions or account
balance will often be an efficient means of gathering audit evidence, it does not constitute
sampling

High Value or Key Items
All Items Over a Certain Amount
Items to Obtain Information
Items to Test Control Activities
Description
The auditor may decide to select specific
items within a population because they are of
high value, or exhibit some other
characteristics
E.g. items that are suspicious, unusual,
particularly risk prone or that have a history
of error
The auditor may decide to examine items
whose values exceed a certain amount so as to
verify a large proportion of the total amount
of class of transactions or account balance
The auditor may examine items to obtain
information about matters such as the nature
of the entity, the nature of transactions, and
internal control
The auditor may use judgement to select and
examine specific items to determine whether
or not a particular control activity is being
performed.

Audit Sampling
 Involves the application of audit procedures to less than 100% items within a class of
transactions or account balance such that all sampling units have a chance of selection in
order to provide the auditor with a reasonable basis on which to draw conclusions about
the entire population.

ERROR

Deviation Misstatement
difference between what was expected , difference between the amount computed by
based on the documentation of controls and the auditor and the amount actually recorded
what actually occurred or reflected in the accounting records
 Total Error – the rate of deviation or total misstatement
Expected Error - the error that the auditor expects to be present in the population
Anomaly – an error that arises from an isolated event that has not recurred other than on
specifically identifiable occasions and is therefore, not representative of errors in the
population

Population – the entire set of data from which a sample is selected and about which the
auditor wishes to draw conclusions. A population may be subdivided into strata or sub-
populations which with each stratum being examined separately. The term population is
used to include the term stratum

Sampling Unit – the individual items constituting a population, for example checks listed
on deposit slips, credit entries on bank statements, sales invoices or debtor’s balances, or
a monetary unit.

Risk Assessment Procedures – sampling is not used

 To obtain an understanding of the entity and its environment, including its
internal control
Test of Controls – sampling is used
 Performed when the auditor’s risk assessment includes an expectation of the
operating effectiveness of controls.
 Based on the auditor’s understanding of internal control, the auditor identifies the
characteristics or attributes that indicate performance of a control, as well as
possible deviation conditions which indicate departures from adequate
performance.

Substantive Testing – sampling is used

 Concerned with amounts and are of 2 types: test of details of classes of
transactions, account balances, and disclosures and substantive analytical
procedures.
 The purpose of substantive procedures is to obtain audit evidence to detect
material misstatements @ the assertion level

Audit Sampling and Audit Risk

Audit Risk as the likelihood that an auditor may unknowingly fail to modify his/her opinion on
materially misstated financial statements.
Audit Risk is a combination of 2 components:
a. The risk that material errors will occur in the process by which financial statements are
developed (Risk of Material Misstatement)
b. The risk that any material errors that occur will not be detected by the auditor (Detection
Risk)
Risk of Material Misstatement

Risk of Material Misstatement

Inherent Risk

Control Risk
Inherent Risk
 Represents the susceptibility of an account balance to errors that, when combined with
errors in other accounts, could be material and that are not monitored by related control
procedures.
 E.g. there is higher inherent risk for liquid assets such as cash than for non-liquid assets
such as PPE

Control Risk
 Represents the likelihood that errors could occur, and could be material when combined
w/ errors in other accounts, but will not be prevented or detected by the entity’s internal
control structure.
 E.g. control risk would be increased if an entity did not maintain effective physical
controls over blank checks.

Detection Risk
 Represents the likelihood that errors could occur, and could be material when combined
w/ errors in other accounts, but will not be detected by the auditors’ procedures.
 The risk that material errors will not be detected is directly controllable by the auditor
through substantive tests of details and other substantive audit procedures.
 Detection Risk

Sampling Risk Non- Sampling Risk

Audit sample may not Includes all aspects of

be representative of audit risk not due to
the population tested sampling
Sampling Risk in Test of Controls
Sampling Risk in Substantive Tests