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Chapter 14 Audit Sampling
Chapter 14 Audit Sampling
CHAPTER FOURTEEN
AUDIT SAMPLING
ICAP'S STUDY TEXT
LO # LEARNING OBJCTIVE REFERENCE*
*Explanation of Reference:
First digit in Study Text’s Reference represents chapter number, second and third digits represents
section and sub-section number. Contents in brackets (if any) represent part of the sub-section
which is covered by the learning objective.
100% Selection:
100% examination of population is not done in Tests of Controls but may be done in Substantive
Procedures when:
o Population consists of small number of large values or
o There is a significant risk which cannot be reduced by other means or
o 100% examination becomes cost effective (e.g. when a repetitive calculation is performed
automatically by computer).
Audit Sampling:
Audit sampling:
Audit Sampling is the application of audit procedures to less than 100% of
items within a population in such a way that all sampling units have a chance
of selection, to draw conclusions about the entire population.
Sampling Risk:
Definition:
“Sampling risk is the risk that auditor’s conclusion based on sampling might be different from the
conclusion if entire population would have been tested.”
First type of risk is more important because it may lead to incorrect audit opinion.
Non-Sampling Risk:
Definition:
Non-sampling risk is the risk that auditor’s conclusion may be wrong for any reasons/errors other
than sampling risk.
Examples:
This risk arises due to errors by the auditors or incompetency of the audit team e.g.
Inappropriate selection of audit procedure
Inappropriate application of audit procedures
Inappropriate interpretation of results of audit procedures (i.e. failure to recognize a
misstatement/deviation)
LO 3: STEPS IN SAMPLING:
1) Sample Design
2) Sample Selection
3) Performing Audit Procedures on Sample & Projecting Misstatements
4) Evaluating results of Sampling
LO 4: SAMPLE DESIGN:
Designing of audit sample includes making following decisions:
i. Determine Purpose of sample and Population from which sample will be drawn.
ii. Determine what constitutes a Misstatement or Deviation.
iii. Determine Tolerable Rate of Deviation and Expected Rate of Deviation (For Tests of
Controls)
iv. Determine Tolerable Misstatement and Expected Misstatement (For Tests of Details)
v. Determine Sampling Approach (i.e. whether Statistical or Non-Statistical)
vi. Determine Method of Selection (i.e. whether Systematic, Random or Haphazard)
Tolerable Misstatement:
It is the amount of misstatement (in financial statements) set by auditor for which auditor obtains
assurance that actual amount of misstatements in population does not exceed from this set-amount.
(it is the application of performance materiality in sampling).
Understanding of business
Understanding of Internal Control/Results of Tests of Controls
Statistical Sampling:
An approach of sampling is called Statistical Sampling, if it has following
characteristics:
i. Use of Random selection to select items.
ii. Use of Probability theory to evaluate results.
e.g. Random Selection, Systematic Selection
Random Selection:
Use of a computerized random number generator or random number tables to
select items.
Systematic Selection:
In this method, a random starting point is chosen and then every nth item is
selected e.g. selecting every 50th item.
Haphazard Selection:
Auditor selects sample without a structured technique, however whole
population is considered by auditor in sample selection.
LO 5: SAMPLE SELECTION:
Following factors influence determination of sample size:
Factors Effect on Sample Size
(Increase in) for Tests of Details
Tolerable rate of deviation/misstatement Decrease
Expected Rate of Deviation/Misstatement Increase
Desired Level of Assurance Increase
Risk of Material Misstatement Increase
Stratification of Population Decrease
Other Substantive Procedures (e.g. analytical procedures) Decrease
Population Size Negligible