AUDIT SAMPLING

AUDIT SAMPLING
“Audit Sampling” involves the application of audit procedures to less than 100%
of items within an account balance or class of transactions.

Sampling may be statistical or nonstatistical.

1. STATISTICAL SAMPLING means any approach to sampling that has the

following characteristics:
a. Random selection of a sample; and
b. Use of probability theory to evaluate sample results.

2. NONSTATISTICAL SAMPLING – A sampling approach that does not have

characteristics (a) and (b).
AUDIT SAMPLING
AUDIT SAMPLING PLAN refers to the procedures an auditor applies to accomplish a sampling
application. It aids an auditor in forming conclusions about one or more characteristics of
either a particular class of transactions or a particular account balance.

1. ATTRIBUTE SAMPLING
• Applicable to tests of control.
• Used to test an entity’s rate of deviation (also called rate of occurrence) from a
prescribed control procedure.

2. VARIABLES SAMPLING
• Applicable to substantive tests.
• Most commonly used to test whether recorded account balances are fairly stated.
AUDIT SAMPLING
SAMPLING RISK

“Sampling risk” arises from the possibility that the auditor’s conclusion, based
on a sample may be different from the conclusion reached if the entire
population were subjected to the same audit procedures.

The confidence level (also called reliability level) is the mathematical

complement of the applicable sampling risk factor.

Sampling risk is to be measured and controlled. The auditor controls sampling

risk by specifying the acceptable level when developing the sampling plan.
AUDIT SAMPLING
For tests of control, sampling risk has the following aspects:

Risk of assessing control risk too high (Risk of Underreliance/Alpha risk/Type I risk)
• The risk that the auditor will conclude that control risk is higher than it actually is.
• It affects audit efficiency as it would usually lead to additional work to establish
that initial conclusions were incorrect.

Risk of assessing control risk too low (Risk of overreliance/Beta risk/Type II risk)
• The risk that the auditor will conclude that control risk is lower than it
actually is.
• It affects audit effectiveness and is more likely to lead to an inappropriate
audit opinion.
AUDIT SAMPLING
For substantive tests, sampling risk has the following aspects:

Risk of incorrect rejection (Alpha risk/Type I risk)

• The risk that the auditor will conclude that a material error exists when in fact it
does not.
• It affects audit efficiency as it would usually lead to additional work to establish
that initial conclusions were incorrect.

Risk of incorrect acceptance (Beta risk/Type II risk)

• The risk that the auditor will conclude that a material error does not exist when in
fact it does.
• It affects audit effectiveness and is more likely to lead to an inappropriate audit
opinion.
AUDIT SAMPLING
NONSAMPLING RISK

Nonsampling risk arises from factors that cause the auditor to reach an
erroneous conclusion for any reason not related to the size of the sample.

For example, most audit evidence is persuasive rather than conclusive, the
auditor might use inappropriate procedures, or the auditor might misinterpret
evidence and fail to recognize an error.
Let’s Test!

Audit sampling involves the

A. Selection of all items over a certain amount.
B. Application of audit procedures to less than 100% of items within a class of transactions
or an account balance such that all items have a chance of selection.
C. Application of audit procedures to all items that comprise a class of transactions or an
account balance.
D. Application of audit procedures to all items over a certain amount and those that are
unusual or have a history of error.
Let’s Test!

Audit sampling involves the

A. Selection of all items over a certain amount.
B. Application of audit procedures to less than 100% of items within a class of
transactions or an account balance such that all items have a chance of selection.
C. Application of audit procedures to all items that comprise a class of transactions or an
account balance.
D. Application of audit procedures to all items over a certain amount and those that are
unusual or have a history of error.
AUDIT SAMPLING
STEPS IN AN ATTRIBUTE SAMPLING PLAN

1. Define the objectives of the plan.

The auditor should clearly state what is to be accomplished.

2. Define the population.

For example, if an auditor’s objective is to test controls designed to assure that all shipped
goods are invoiced, the population would be defined as all shipping documents issued during
the period, not all sales invoices.

3. Define the attribute and deviation conditions.

An attribute is a characteristic of a control.

For example, the supervisor’s signature of approval on a document.

A deviation is the absence of an attribute.
AUDIT SAMPLING
STEPS IN AN ATTRIBUTE SAMPLING PLAN

4. Determine the sample size.

The sample size is determined by considering the following factors:
• Risk of assessing control risk too low
• Tolerable deviation rate
• Expected population deviation rate

Risk of assessing control risk too low

• There is an inverse relationship between this risk and the sample size. The higher the acceptable risk, the
smaller the sample size.
• Because the risk of assessing control risk too low relates to the effectiveness of the audit, it is kept at a
relatively low level by the auditor.

Tolerable deviation rate (tolerable error)

• This is the maximum deviation rate that the auditor is willing to accept.
• The lower the rate of deviation that the auditor is willing to accept, the larger the sample size needs to be.
AUDIT SAMPLING
STEPS IN AN ATTRIBUTE SAMPLING PLAN

Expected population deviation rate (expected error)

• The rate of deviation from the prescribed control procedure the auditor expects to find in
the population.
• The higher the rate of deviation that the auditor expects, the larger the sample size needs
to be so as to be in a position to make a reasonable estimate of the actual rate of deviation.
• Factors relevant to the auditor’s consideration of the expected error rate include:
• The auditor’s understanding of the business (in particular, procedures undertaken to
obtain an understanding of the accounting and internal control systems);
• Changes in personnel or in the accounting and internal control systems;
• The results of audit procedures applied in prior periods; and
• The results of other audit procedures.
AUDIT SAMPLING
STEPS IN AN ATTRIBUTE SAMPLING PLAN

5. Determine the method of sample selection.

Some commonly used methods are:
 Random number sampling
• Each item in the population has an equal chance and nonzero probability of selection.
• It is usually accomplished by generating random numbers from a random number table or computer program
and tracing them to associated documents or items in the population.
• It is appropriate for both statistical and nonstatistical sampling.
 Systematic selection
• The number of sampling units in the population is divided by the sample size to give a sampling interval, for
example 50, and having determined the starting point within the first 50, each 50th sampling unit is thereafter
selected.
• Although the starting point may be determined haphazardly, the sample is more likely to be truly random if it is
determined by use of a computerized random number generator or random number tables.
• When using systematic selection, the auditor would need to determine that sampling units within the
population are not structured in such a way that the sampling interval corresponds with a particular pattern in
the population.
AUDIT SAMPLING
STEPS IN AN ATTRIBUTE SAMPLING PLAN
(sample selection methods continuation)
 Block selection (or cluster sampling)
• It involves selecting a block(s) of contiguous items from within the population.
• It cannot ordinarily be used in audit sampling because most populations are structured such that items in
sequence can be expected to have similar characteristics to each other, but different characteristics from items
elsewhere in the population.
• Although in some circumstances it may be an appropriate audit procedure to examine a block of items, it would
rarely be an appropriate sample selection technique when the auditor intends to draw valid inferences about
the entire population based on the sample.
 Haphazard selection
• The auditor selects the sample without following a structured technique.
• It is not appropriate when using statistical sampling.
 Stratification
• This involves subdividing a population into subpopulations or strata, i.e., a group of sampling units which have
similar characteristics (often monetary value).
• The strata must be explicitly defined so that each sampling unit can belong to only one stratum.
• This method enables the auditor to direct his efforts towards the items he considers would potentially contain
the greater monetary error.
AUDIT SAMPLING
STEPS IN AN ATTRIBUTE SAMPLING PLAN

6. Perform the sampling plan.

The sampling units selected should be examined for the attributes of interest and deviations should be documented in the working papers.

7. Evaluate and document results.

These include:
a. Determining the sample deviation rate.

b. Determining the maximum population deviation rate (achieved upper deviation limit) and the allowance for sampling risk
(achieved precision).
• The maximum deviation rate is based on the sample size and the number of deviations discovered. There are standard tables
that yield maximum population deviation rates at specified risks of assessing control risk too low.

c. Considering qualitative information.

• The auditor considers each of the deviation’s nature, importance, and probable cause.

d. Reaching an overall conclusion.

• In assessing control risk, the auditor considers all available quantitative and qualitative information
AUDIT SAMPLING
COMMONLY USED ATTRIBUTES SAMPLING TECHNIQUES
 Attribute estimation sampling
• A statistical sampling plan for tests of controls.
• Appropriate when an auditor wishes to estimate a true but unknown population deviation rate.
• Uses a fixed sampling plan, i.e., the auditor tests a single sample.

 Sequential sampling (also called stop-or-go sampling)

• The sampling plan is performed in several steps.
• Following each step, the auditor decides whether to stop or to go on to the next step.
• Appropriate when the auditor expects zero or very few deviations.

 Discovery sampling
• Appropriate when the expected deviation rate is near zero and when the auditor’s objective is to find at
least one deviation in a sample if the actual population deviation rate exceeds or equals a predetermined
critical rate (tolerable deviation rate).
Let’s Test!

The risk that the auditor’s conclusion based on a sample may be

different from the conclusions reached if the entire population were
subjected to the same audit procedure.
A. Audit risk
B. Sampling risk
C. Control risk
D. Information risk
Let’s Test!

The risk that the auditor’s conclusion based on a sample may be

different from the conclusions reached if the entire population were
subjected to the same audit procedure.
A. Audit risk
B. Sampling risk
C. Control risk
D. Information risk
AUDIT SAMPLING
STEPS IN A VARIABLES SAMPLING PLAN

1. Determine the objectives of the test.

The auditor’s objective is to test the reasonableness of a recorded account balance, called
hypothesis testing.

2. Define the population and sampling unit.

For example, the population might consist of 1,000 accounts receivable with a reported book
value of P1,500,000.

3. Choose an audit sampling technique.

Statistical vs Nonstatistical
Classical Variables Sampling vs Probability-Proportional-To-Size Sampling
AUDIT SAMPLING
STEPS IN A VARIABLES SAMPLING PLAN

4. Determine the sample size.

The auditor considers the following:

a. Variation within the population
• Sample size varies in the same direction as the variation in population amounts.
As population variation increases, so does the sample size.
• An estimate of population variation is made by determining a population standard
deviation.
b. Acceptable risk of incorrect rejection
c. Acceptable risk of incorrect acceptance
d. Tolerable error – the maximum monetary error that may exist in an account balance
without causing the financial statements to be materially misstated.
AUDIT SAMPLING
STEPS IN A VARIABLES SAMPLING PLAN

5. Determine the method of sample selection.

6. Perform the sampling plan.

7. Evaluate the sample results.

The following procedures are performed:

a. Projecting the sample error to the population
b. Considering sampling risk
c. Considering qualitative information
d. Reaching an overall conclusion
AUDIT SAMPLING
CLASSICAL VARIABLES SAMPLING TECHNIQUES
DIFFERENCE ESTIMATION – A classical variables sampling technique that uses the average difference between audited
amounts and individual recorded amounts to estimate the total audited amount of a population and an allowance for
sampling risk.

RATIO ESTIMATION – A classical variables sampling technique that uses the ratio of audited amounts to recorded amounts in
the sample to estimate the total amount of the population and an allowance for sampling risk.

Conditions for using difference and ratio estimation

• Each population item must have a recorded book value.
• Total population book value must be known.
• Expected differences between audited and recorded book values must not be too rare.
AUDIT SAMPLING
DIFFERENCE ESTIMATION and RATIO ESTIMATION
AUDIT SAMPLING
Choosing between difference and ratio estimation

Ratio estimation is more appropriate when the differences are nearly proportional to book values.

Difference estimation is more appropriate when there is little or no relationship between the absolute
amounts of the differences and the book values.

PROBABILITY-PROPORTIONAL-TO-SIZE SAMPLING (PPS)

• PPS uses a peso as the sampling unit.
• PPS sampling gives each individual peso in the population an equal chance of selection.
• PPS is only useful for TESTS OF OVERSTATEMENTS (e.g., assets) since the sample selection method
dictates that the larger the transaction or amount, the more likely that it will be selected.
• PPS is inappropriate for testing liabilities because understatement is the primary audit consideration.
AUDIT SAMPLING
AUDIT SAMPLING
Let’s Test!

While performing a test of details during an audit, the auditor determined that
the sample results supported the conclusion that the recorded account balance
was materially misstated. It was, in fact, not materially misstated. This situation
illustrates the risk of
A. Incorrect rejection
B. Incorrect acceptance
C. Assessing control risk too low
D.Assessing control risk too high
Let’s Test!

While performing a test of details during an audit, the auditor determined that
the sample results supported the conclusion that the recorded account balance
was materially misstated. It was, in fact, not materially misstated. This situation
illustrates the risk of
A. Incorrect rejection
B. Incorrect acceptance
C. Assessing control risk too low
D.Assessing control risk too high