AUDIT SAMPLING

CHAPTER 15 & 17

Academic year 2022-2023

 1. Overview of sampling
2. Representative of samples

Outline 3. Audit Sampling method

4. Selection methods
5. Exception rate
6. Sampling for phase II vs phase III
1. Overview

• Auditors obtain sufficient

appropriate evidence to
support audit objectives
• To do this, auditors follow an
audit process of four phases.
 What is SAMPLING?

selection and
evaluation < 100 %
 2. Representative of sample
POPULATION

1000 invoices 3%
30 unqualified

Reasonable
Highly representative Nonrepresentative
representative

3% 5% 0%

3 unqualified invoices 5 unqualified invoices 0 unqualified invoices

out of 100 samples out of 100 samples out of 100 samples
Risk ?
 Sampling Risk
Sampling risk Nonsampling risk

The risk that an auditor reaches an The risk that the auditor reaches an
incorrect conclusion because the sample incorrect conclusion for any reason not
is not representative of the population related to sampling risk:

• Auditor’s failure to recognize exceptions

• Inappropriate or ineffective audit procedures

Sample size Selection method Careful design of audit procedures, proper

instruction, supervision, and review
3. Sampling process
 Sampling Method
Popular Statistical

Monetary Unit
Attribute Sampling Variables sampling
Sampling

For TOC, STOT For TODB For TODB

 Sampling Method

Statistical Non statistical

5% High
10% Medium
20% Low
Sampling Method
Statistical Nonstatistical

• Calculate sampling risk (SR) • Not calculate SR

• Probabilistic method • Nonprobabilistic &

Probabilistic method

• Accept/ reject the population • Accept/ reject the population

Mathematical rule Professional judgement

 4. Selection Method
Probabilistic Nonprobabilistic
sample selection sample selection

1. Simple random 1. Haphazard

2. Systematic 2. Block sample
3. Probability proportional to size
& Stratified sample

Mathematical rule Professional judgement

 Selection Method
Probabilistic
sample selection

1. Simple random
2. Systematic
 Selection Method
Probabilistic
sample selection
3. Probability proportional to size (PPS)
& Stratified sample

PPS
• Take a sample in which the probability of selecting any individual population item is proportional to
its recorded amount.
• It is evaluated using nonstatistical sampling or monetary unit statistical sampling (MUS)

Stratified sample
• Divide the population into subpopulations and take larger samples from the subpopulations with
larger sizes.
• It is evaluated using nonstatistical sampling or variables statistical sampling.
 Sampling Method
Popular Statistical

Monetary Unit
Attribute Sampling Variables sampling
Sampling

For TOC, STOT For TODB For TODB

 5. Exception rate

The occurrence rate, or exception rate, is the ratio of the items

containing the specific attribute to the total number of population
items.

Exception rate of Best estimate of Exception rate of

sample total population
 2. Representative of sample
POPULATION

1000 invoices 3%
30 unqualified

Reasonable
Highly representative Nonrepresentative
representative

3% 5% 0%

3 unqualified invoices 5 unqualified invoices 0 unqualified invoices

out of 100 samples out of 100 samples out of 100 samples
 5. Exception rate

Following are types of exceptions in populations of accounting data:

1. Deviations from the client’s established controls

2. Monetary misstatements in populations of transaction data
3. Monetary misstatements in populations of account balance details
5. Exception rate
6. Samplings for phase II vs III
Sampling process

14 Detailed Steps
14 steps of
sampling
process

TOC & STOT

14 steps of Sampling method

sampling
process Statistic sampling: Nonstatistic
Attribute Sampling sampling

Same 14 steps for both approaches

TOC & STOT The main differences:

The calculation of initial sample sizes / estimated upper

exception rates are developed from statistical
probability distributions using tables or audit software
I. Planning
1. State the objectives of the audit test.
2. Decide whether audit sampling
applies.
3. Define attributes and exception
conditions.
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable exception rate.
7. Specify acceptable risk of
overreliance.
8. Estimate the population deviation or
exception rate.
9. Determine the initial sample size.
II. Select Sample and Perform Test
III. Evaluate the Results
1. Objectives of TOC &STOT:
• Test the operating effectiveness of control
• Determine whether the transactions contain monetary
misstatements
2. The auditor should examine the audit program and
select those audit procedures where audit sampling
applies.
Illustration
Observe whether the duties of the accounts receivable
clerk are separate from handling cash (TOC)
=> Not apply audit sampling
Select a sample of shipping documents and trace each to
related duplicate sales invoices (TOC)
=> Apply audit sampling
I. Planning

1. State the objectives of the audit test.

2. Decide whether audit sampling
applies.
3. Define attributes and exception
conditions.
4. Define the population. When audit sampling is used, auditors must carefully
5. Define the sampling unit. define the characteristics (attributes) being tested and
6. Specify the tolerable exception rate. the exception conditions.
7. Specify acceptable risk of
overreliance.
8. Estimate the population deviation or
exception rate.
9. Determine the initial sample size.

II. Select Sample and Perform Test

III. Evaluate the Results

I. Planning
1. State the objectives of the audit test.
2. Decide whether audit sampling
applies.
3. Define attributes and exception
conditions.
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable exception rate.
7. Specify acceptable risk of
overreliance.
8. Estimate the population deviation or
exception rate.
9. Determine the initial sample size.
II. Select Sample and Perform Test
III. Evaluate the Results
Population
• The population is those items about which the
auditor wishes to generalize.
• Sample must be selected from the entire
population as it has been defined.
• Auditor may generalize only about that population
that has been sampled.
• Completeness and detail tie-in of population should
be tested before a sample is selected
Sampling unit
• The sampling unit is the physical unit that
corresponds to the random numbers the auditor
generates.
Ex: invoice, shipping doc., customer order, pay slip
I. Planning
Tolerable exception rate TER represents the highest
1. State the objectives of the audit test. exception rate the auditor will permit in the control being
2. Decide whether audit sampling tested and still be willing to conclude the control is
applies.
3. Define attributes and exception operating effectively (and/or the rate of monetary
conditions. misstatements in the transactions is acceptable).
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable exception rate.
7. Specify acceptable risk of
overreliance. High reliance on 1 control – lower TER
8. Estimate the population deviation or lower TER – larger sample size
exception rate.
9. Determine the initial sample size.

II. Select Sample and Perform Test

III. Evaluate the Results

I. Planning

1. State the objectives of the audit test.

1. State the objectives of the audit test. Risk of overreliance (ROA): The risk that the auditor
2. Decide whether audit sampling concludes that controls are more effective than they
applies. actually are.
3. Define attributes and exception
conditions.
⇒ impacts the effectiveness of the audit
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable exception rate.
7. Specify acceptable risk of Risk of underreliance: The risk that the auditor will
overreliance. erroneously conclude that the controls are less
8. Estimate the population deviation or effective than they actually are.
exception rate. ⇒ affects the efficiency of the audit
9. Determine the initial sample size.

II. Select Sample and Perform Test

III. Evaluate the Results

I. Planning

1. State the objectives of the audit test.

1. State the objectives of the audit test. ROA represent auditor measure of Sampling Risk
2. Decide whether audit sampling
applies.
3. Define attributes and exception Attribute sampling:
conditions. Quantify
4. Define the population. (5%, 10%...)
5. Define the sampling unit.
6. Specify the tolerable exception rate. Nonstatistical sampling:
7. Specify acceptable risk of High, Medium, Low
overreliance.
8. Estimate the population deviation or
exception rate.
9. Determine the initial sample size.

II. Select Sample and Perform Test

III. Evaluate the Results

I. Planning

1. State the objectives of the audit test.

1. State the objectives of the audit test.
2. Decide whether audit sampling
applies.
3. Define attributes and exception
conditions.
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable exception rate.
7. Specify acceptable risk of
overreliance.
8. Estimate the population deviation or
exception rate.
9. Determine the initial sample size.
II. Select Sample and Perform Test
Estimated population exception rate (EPER):
Exception rate that the auditor expects to find in
the population before testing begins
• use the preceding year’s audit results to
estimate EPER.
• If prior- year results are not available, or if they
are considered unreliable, a small preliminary
sample of the current year’s population can be
tested.

III. Evaluate the Results

I. Planning
Four factors determine the initial sample size:
1. State the objectives of the audit test.
1. State the objectives of the audit test. population size, TER, ARO, and EPER.
2. Decide whether audit sampling
applies.
Attribute sampling:
3. Define attributes and exception using audit software/ table
conditions.
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable exception rate. Nonstatistical sampling:
using professional judgment
7. Specify acceptable risk of
overreliance.
8. Estimate the population deviation or
exception rate.
9. Determine the initial sample size.

II. Select Sample and Perform Test

III. Evaluate the Results

Practice: Statistic method

ARO TER EPER SAMPLE SIZE

5% 6% 1.0% 78
5% 8% 2.5% ?
10% 6% 1.0% ?
10% 4% 0.5% ?
I. Planning

II. Select Sample and Perform Test

10. Select the sample

11. Perform the audit procedures
III. Evaluate the Results
12. Generalize from the sample to the
population.
Attribute sampling:
probabilistic method
Nonstatistical sampling:
Both probabilistic and non probabilistic method

13. Analyze the misstatements.

14. Decide the acceptability of the

population.
I. Planning

II. Select Sample and Perform Test

10. Select the sample Examining each item in the sample to determine
11. Perform the audit procedures
whether it is consistent with the definition of the
III. Evaluate the Results attribute and by maintaining a record of all the
exceptions found.
12. Generalize from the sample to the
population.
Study further in next lectures!
13. Analyze the misstatements.

14. Decide the acceptability of the

population.
I. Planning

II. Select Sample and Perform Test Calculate the sample exception rate (SER):
actual number of exceptions divided by the actual
10. Select the sample sample size.
11. Perform the audit procedures

III. Evaluate the Results Attribute sampling:

CUER at specific ARO
Using table/ audit software
12. Generalize from the sample to the
population.

13. Analyze the misstatements.

Nonstatistical sampling:
Allowance for sampling risk:
14. Decide the acceptability of the (TER – SER)
population. Must be large enough
I. Planning

II. Select Sample and Perform Test

• Analyze individual exceptions to determine
10. Select the sample the breakdown in the internal controls that
11. Perform the audit procedures allowed them to happen
- carelessness of employees
III. Evaluate the Results - misunderstood instructions
- intentional failure to perform procedures
12. Generalize from the sample to the - others
population.
• The nature of an exception and its causes
13. Analyze the misstatements. have a significant effect on the qualitative
evaluation of the system.
14. Decide the acceptability of the
population.
I. Planning

II. Select Sample and Perform Test Attribute sampling:

CUER < or = TER
10. Select the sample Population accepted
11. Perform the audit procedures
CEUR > TER
III. Evaluate the Results Population rejected
12. Generalize from the sample to the Nonstatistical sampling:
population.
SER < or = EPER
13. Analyze the misstatements. Population accepted

14. Decide the acceptability of the SER > EPER

population. Population rejected
Actions when the population is rejected
• Revise TER or ARO
• Expand the Sample Size
• Revise Assessed Control Risk
• Communicate with the Audit Committee or
Management
14 steps of
sampling
process

TDB
14 steps of
sampling
process

TDB
 Sampling Method
Popular Statistical

Monetary Unit
Attribute Sampling Variables sampling
Sampling

For TOC, STOT For TODB For TODB

 Monetary Unit Sampling

MUS is an innovation in statistical sampling methodology

that was developed specifically for use by auditors.
 MUS and Nonstatistical Sampling

Differences Between MUS and Nonstatistical Sampling

• The Definition of the Sampling Unit Is an Individual Dollar

• The Population Size Is the Recorded Dollar Population
• Sample Size Is Determined Using a Formula
• Sample Selection Is Done Using PPS
• The Auditor Generalizes from the Sample to the Population Using MUS Techniques
Variables method

Difference estimation

Ratio estimation

Mean-per-unit estimation

I. Planning
1. State the objectives of the audit test.
2. Decide whether audit sampling
applies.
3. Define a misstatement.
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable misstatement.
7. Specify acceptable risk of incorrect
acceptance.
8. Estimate misstatement in population
9. Determine the initial sample size.
II. Select Sample and Perform Test
III. Evaluate the Results
In tests of details of balances, the population is
defined as the items making up the recorded
dollar population.
The sampling unit is almost always the items
making up the account balance.
Tolerable misstatement may be the same
amount as performance materiality or may be
lower if the population from which the sample is
selected is smaller than the account balance.
Illustration:
The recorded population of accounts receivable in consists of 40
accounts totaling $207,295.
Population
TOC &STOT
40 items
TBD
$207,295
Sampling unit Sale invoice $1
I. Planning

1. State the objectives of the audit test.

2. Decide whether audit sampling
applies. ARIA
3. Define a misstatement.
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable misstatement.
7. Specify acceptable risk of incorrect
acceptance.
8. Estimate misstatement in population ARIR
9. Determine the initial sample size.

II. Select Sample and Perform Test

III. Evaluate the Results

I. Planning

1. State the objectives of the audit test.

2. Decide whether audit sampling
applies.
3. Define a misstatement. 1. Estimate an expected point estimate
4. Define the population. 2. Make an advance population standard
5. Define the sampling unit. deviation estimate – variability of the population.
6. Specify the tolerable misstatement.
7. Specify acceptable risk of incorrect
acceptance.
8. Estimate misstatement in population
9. Determine the initial sample size.

II. Select Sample and Perform Test

III. Evaluate the Results

 Determine the initial sample size by considering the
influence factors (using professional judgement)
I. Planning

1. State the objectives of the audit test.

2. Decide whether audit sampling
applies. Nonstatistical sampling:
3. Define a misstatement.
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable misstatement.
7. Specify acceptable risk of incorrect
acceptance.
8. Estimate misstatement in population
9. Determine the initial sample size.

II. Select Sample and Perform Test

III. Evaluate the Results

 Statistical sampling:
I. Planning 2
SD*(ZA + ZR)N
n=
1. State the objectives of the audit test. (TM – E*)
2. Decide whether audit sampling
applies. where:
3. Define a misstatement.
4. Define the population.
5. Define the sampling unit. n = initial sample size
6. Specify the tolerable misstatement. SD* = advance estimate of the standard deviation
7. Specify acceptable risk of incorrect ZA = confidence coefficient for ARIA
acceptance. ZR = confidence coefficient for ARIR
8. Estimate misstatement in population
N = population size
9. Determine the initial sample size.
TM = tolerable misstatement for the population
II. Select Sample and Perform Test (materially)
E* = estimated point estimate of the population
III. Evaluate the Results misstatement
 Effect on Sample Size of
Changing Factors
Effect on initial
Type of change sample size
Increase acceptable risk of
assessing control risk too low Decrease
Increase tolerable risk rate Decrease
Increase estimated population
exception rate Increase
Increase population size Increase (minor)
I. Planning

II. Select Sample and Perform Test

10. Select the sample

11. Perform the audit procedures
III. Evaluate the Results
12. Generalize from the sample to the
population.
13. Analyze the misstatements.
1. Compute the point estimate of the total
misstatement
2. Compute an estimate of the population standard
deviation
3. Compute the precision interval
4. Compute the confidence limits

14. Decide the acceptability of the

population.
 Effect of Changing Each Factor
Effect on the computed
Type of change precision interval

Increase ARIA Decrease

Increase the point estimate
of the misstatements Increase
Increase the standard deviation Increase
Increase the sample size Decrease
I. Planning
II. Select Sample and Perform Test
10. Select the sample
11. Perform the audit procedures
III. Evaluate the Results
12. Generalize from the sample to the
population.
13. Analyze the misstatements.
14. Decide the acceptability of the
population.
If the misstatement in a population larger than
tolerable misstatement
⇒ Reject the population
1. Take no action until tests of other audit areas
are completed
2. Perform expanded audit tests in specific areas
3. Increase the sample size
4. Adjust the account balance
5. Request the client to correct the population
6. Refuse to give an unqualified opinion
 The end!
Exercise 15-29, 15-30, 17-25, 17-28
Reference: VSA530