AUDIT 1: Audit Sampling

CLASSICAL VARIABLE
SAMPLING
Mean-per-unit estimation
Difference estimation
Ratio estimation

LANDONG || RAVALO
 CVS

Estimates the total audited value of an account or class of transaction

Sampling method used in performing substantive tests – it estimates
the total amount of monetary misstatement in an account
Methods of estimation in CVS:
Mean-per-unit estimation
Ratio estimation
Difference estimation
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MEAN-PER-UNIT ESTIMATION
 CVS

Mean-per-unit estimation
Projects the sample average to the total population by multiplying the
sample average by the number of items of the population
Assumption is that a sample’s mean audited value will represent the true
audited mean of the population
Wherein:
PM = projected misstatement
AV (Pop’n) =Audited value of the population
AV (SS) = Audited value of the sample size
BV (Pop’n) = Book value of the population
SS = sample size
Pop’n = number of units of the population
 CVS

Controlling Sampling Risk

Determination of Sample Size

Standard Deviation
ILLUSTRATION CVS

1.Determine the objective of the substantive test

To test the existence and gross valuation of recorded accounts receivable in a small public
utility.
2. Define the population and sampling unit
Population: 100,000 account records of
ABC Company with a book value of
P6,250,000.
Sampling Unit: Account Balance
ILLUSTRATION CVS

3. Choose a sampling technique

Mean-per-unit estimation
4. Determine sample size
Tolerable misstatement = $364,000
Risk of incorrect acceptance = 5%
Risk of incorrect rejection = 4.6%
Standard Deviation = $15
ILLUSTRATION CVS

5. Select the sample

6. Test the sample items.
7. Evaluate the sample results.
8. Document the sampling procedures.
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RATIO ESTIMATION
 CVS

Ratio Estimation
A sampling plan that uses the ratio of audited (correct) values to book
values of items in the sample to calculate the estimated total audited
value of the population.
Is used in lieu of difference estimation when the differences are nearly
proportional to book values.

PM =. Sample net misstatements x Population book value

Book Value of sample
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DIFFERENCE ESTIMATION
 CVS

Difference Estimation
A sampling plan that uses the difference between the audited (correct)
values and book values of items in a sample to calculate the estimated
total audited value of the population
Is used in lieu of ratio estimation when the differences are not nearly
proportional to book values

PM = Sample net misstatements x Population items

Sample items
 CVS

To be applicable, the following must be present:

The total book value of the population must be known.
The book value, on a per item basis, for all items in the population must
be known.
The total population book value must be known.
The expected difference between audited and recorded book values
must not be too rare.
ILLUSTRATION CVS

Number of Audited
Book Values Misstatements
Items values

Population 6,250,000 100,000 ? ?

Sample size 14,175 225 13,725 450

The projected misstatement is calculated using the above methods.

Ratio Estimation

PM = | (P450/P14,175) x P6,250,000) | = P198,413

Estimated total audited value = Population book value - Projected overstatement
= 6,250,000 - 198,413
= 6,051,587
ILLUSTRATION CVS

Number of Audited
Book Values Misstatements
Items values

Population 6,250,000 100,000 ? ?

Sample size 14,175 225 13,725 450

The projected misstatement is calculated using the above methods.

Difference estimation

PM = (450/225) x 100,000 = P200,000

Estimated total audited value = Population book value - Projected overstatement
= 6,250,000 - 200, 000
= 6,050,000
1. Precision - Classical variable sampling tends to provide higher precision compared to other
sampling methods. This precision is especially valuable when auditors need to estimate the
total value of a population with a high degree of accuracy.
2. Efficiency - Variable sampling can be more efficient than attribute sampling, as it allows
auditors to focus on the variability of amounts rather than categorical attributes. This
efficiency can lead to a smaller required sample size to achieve the desired level of
precision.
3. Quantitative Analysis - Classical variable sampling allows for a quantitative analysis of the
financial data. Auditors can assess not only the presence or absence of errors but also the
magnitude of errors, providing a more detailed understanding of the population under audit.
4. Flexibility - Variable sampling offers flexibility in adapting to various audit scenarios.
Auditors can apply it to different types of accounts and financial statement assertions,
making it a versatile approach.
1. Complexity - Implementing classical variable sampling can be more complex than simpler
methods, such as attribute sampling. It requires a good understanding of statistical concepts,
and auditors may need specialized training to apply it correctly.
2. Subjectivity in Materiality - Setting materiality levels in variable sampling can be subjective.
Decisions about what level of misstatement is material may vary, and auditors need to exercise
judgment in determining the significance of errors.
3. Resource Intensive - Variable sampling may require more resources, including time and
expertise, compared to simpler methods. Gathering and analyzing quantitative data may involve
more effort, especially in cases where the data is not readily available or easily measurable.
4. Data Reliability - The effectiveness of variable sampling relies on the reliability and accuracy of
the underlying financial data. If the data used for sampling is not dependable, the results may
not accurately reflect the true characteristics of the population.
5. Difficulty in Planning - Determining an appropriate sample size and setting parameters for
variable sampling may be challenging. The calculation of sample size often involves estimates
of population variability, and inaccuracies in these estimates can impact the reliability of the
results.
Thank you for listening!
Landong, Stephanie Anne
Ravalo, Jodie Lois