Population size.

Population size is directly

related to sample size.
Table 10-3 summarizes the effects of the various
factors on the required sample size for
substantive test.

FACTORS AFFECTING SAMPLE SIZE FOR

SUBSTANTIVE TESTS
Examples
Relationship Change
Factor Effect on
to Sample in
Sample
Size Factor
Desired Direct Lower Decrease
confidence Higher Increase
level
Tolerable Inverse Lower Increase Example:
Misstatement Higher Decrease
Expected Direct Lower Decrease The population had a book value of P6,250,000
Misstatement Higher Increase and the auditor decided on a tolerable
Population Direct Lower Decrease misstatement for the account of P364,00.
size Higher Increase Auditor assesses control risk at the maximum
level and inherent risk at 100% and decides a 5%
Specifically, the sample size for PPS may be of incorrect acceptance (RIA). Additionally, based
computed as follows: on prior audits, the auditor expect P50,000 of
misstatement in the population.
𝑃𝐵𝑉 𝑥 𝑅𝐹
𝑛=
𝑇𝑀 − (𝐸𝑀 𝑥 𝐸𝐹) 𝑃𝐵𝑉 𝑥 𝑅𝐹
𝑛=
𝑇𝑀 − (𝐸𝑀 𝑥 𝐸𝐹)
n = sample size
PBV = population book value 𝑃6,250,000 𝑥 3.00
𝑛=
RF = reliability factor (Table 10.4) 𝑃364,000 − (𝑃50,000 𝑥 1.6)
TM = tolerable misstatement
EM = expected misstatement 𝑛 = 66
EF = expansion factor (Table 10.5)
Risk of Incorrect Acceptance (RIA) PERFORMANCE
Modification of audit risk model: Step 4: Select Sample Items
AR = IR x CR x DR Auditor usually uses a systematic selection
DR comprised of two types of substantive approach when using PPS. However, since the
procedures, each with an associated type of risk: sampling unit is based on pesos, not individual
accounts, sampling interval is also based on
 Risk associated with AP and other pesos. The sampling interval is calculated as
procedures that do not involve audit follows:
sampling (AP)
𝑃𝐵𝑉
 Risk associated with procedures 𝑆𝐼 =
𝑛
involving audit sampling (RIA)
SI = sampling interval
AR = IR x CR x AP x RIA
PBV = population book value
RIA = AR / (IR x CR x AP) n = sample size
𝑃6,250,000
𝑆𝐼 = = 𝑃95,000
66
A schedule of the customer’s accounts (logical
sampling units) with cumulative peso total is
then prepared. To determine the starting point
for sampling, auditor uses a random number
table, with a starting point being less than or
equal to sample interval.
Step 5: Perform the Audit procedures
The auditor conducts the planned audit
procedures on the logical units containing the
selected sampling units. If it involves confirming
accounts receivable, the auditor performs all
procedures involved in confirming accounts
receivable, including the following up requests
for which no response was received.
Example:
When the sample includes no misstatements,
the projected misstatement is zero.
If misstatements do not exist in the sample, the
method used to project the misstatements in a
particular account depends on whether or not
the book value that are less than the amount of
sampling interval, the projected misstatement
is calculated by multiplying the percent of
misstatement in the account (tainting) times
the sampling interval, the actual misstatement
in the account is equal to the projected
misstatement.

The auditor sends confirmation letter to the The next step in determining the ULM involves
customers selected. calculating the components of the allowance for
sampling risk – the basic precision (BP) and the
Table 10.6 PPS Selection Process incremental allowance for sampling risk – the
Account Book Cumulati Peso Sample
basic precision (BP) and the incremental
Number value ve Total Selecte item
d Book allowance (IA). The BP is always found by
Value multiplying the reliability factor (RF) for zero
000001 80k 80,000 95,000 80,000 misstatements from Table 10.4 by the sampling
000002 50k 130,000 interval (SI).
000003 70k 200,000 190,000 70,000
000004 60k 260,000 When misstatements are discovered in the
000005 1.5k 261,500 sample, the incremental allowance is found by:
000006 5k 266,500
000007 20k 286,500 285,000 20,000 1. Ranking the projected misstatements for
6,250,000 the accounts with book values less than
the sampling interval from largest
projected misstatement to smallest
EVALUATION
projected misstatement.
Step 6: Calculate the Projected Misstatement 2. Multiplying each projected misstatement
and the Upper Limit on the Misstatement by an incremental factor calculated from
reliability factors in Table 10.4.
After the sample has been selected and 3. Summing the resulting amounts
procedures applied to arrive audited values for
the individual accounts, the PPS is evaluated. It When no misstatements of accounts with book
involves calculating the upper limit on values less than the sampling interval are the
misstatement, which is an estimate of the found in the sample, the incremental allowance
maximum amount of misstatement and the is zero.
allowance for sampling risk. The allowance for
Projected Misstatement (PM)
sampling risk is made up of two other
components, the basic precision and the If BV < SI, PM = TF x SI
incremental allowance. The equation to compute
TF = tainting factor = (BV – AV) / BV
for upper misstatement limit is
BV = book value
ULM = PM + BP + IA AV = audit value
Allowance for sampling Allowance for sampling risk

ULM = upper limit on misstatement  Basic precision = SI x RF

PM = projected misstatement  Incremental allowance (IA)
BP = basic precision  If no misstatements in sample
IA = incremental allowance found, IA = 0
The projected misstatement (PM) is determined  If misstatements found:
by summing the projected misstatement for
each account, or other logical unit, in the sample.
For misstatements in which BV < SI, rank order If ULM < or = TM, conclude that population is not
projected misstatements from largest to misstated by more than TM at the specified level
smallest, multiply by corresponding incremental of sampling risk.
factor (from table 10.4) and sum to calculate IA.
If ULM > TM, conclude that the sample results do
After computing the incremental allowance, not provide enough assurance that the
auditor computes for the total upper limit on population misstatement is less than the TM
misstatements (ULM). When misstatements are and balance adjustment may be warranted.
found, the ULM is computed by adding together
Example:
the projected misstatement, the basic precision,
and the incremental allowance. If no Based on Table 10.7 calculation of ULM, the
misstatements are found in the sample, the ULM auditor compares the computed ULM to TM. ULM
consists only the basic precision. (P410,886) exceeds the amount of TM (364,000).
Auditor would not accept the population as being
Example:
materially correct.
After performing confirmation procedures, the
The auditor may do the following:
auditor found the following three
misstatements:  Adjustment of the account
Book Value Audited Value  Expansion of the test
P100 P90  Audit report modification
2,000 1,900
Adjustment of the account. Adjust the P102,008
102,000 102
in actual misstatement found in the sample
(Table 9-5). After the adjustment, the ULM was
/ reduced to P308,878 (P410,886-102,008) and
enable auditor to accept the account as being
materially correct.

APPLICATION OF THE STEPS USING CLASSICAL

VARIABLES TECHNIQUE FOR SUBSTANTIVE TESTS

Classical variables sampling plans enable

auditors to estimate a numerical quantity such
as peso amount of an account balance. This
makes these techniques particularly useful for
performing substantive tests. Classical variable
sampling method includes:

 Mean-per-unit estimation
 Ratio estimation
 Difference estimation
Step 7: Draw final conclusion
MEAN-PER-UNIT ASSUMPTION (MPU)
After calculating the upper limit on
MPU uses the mean audited value of the items in
misstatements, the auditor compares it to the
a sample to calculate an estimate of the total
tolerable misstatement, the sample results
audited value of the account. An estimate of the
support the conclusion that the population is not
total value of the population is obtained by
misstated by more than tolerable misstatement
multiplying the mean audited value of the
at a specified level of sampling risk. If the upper
sample (sample mean) to the number of items in
limit misstatement exceeds the amount of
the population. The projected misstatement may
tolerable misstatement, the sample results do
then be calculated as the difference between the
not provide the auditor with enough assurance
estimated total audited value and the client’s
that the misstatement in the population is less
book value. The general assumption for MPU is
than the tolerable misstatement.
that a sample’s mean audited value will, for a
Compare ULM to TM: certain sampling risk and allowance for