AUDIT SAMPLING AND

SAMPLING RISK

Dr. Mwiga Wiljonsi Mbesi

 Learning Objectives

At the end of this module you should be able to:

 Understand the meaning of audit sampling.

 Differentiate between Statistical and non-statistical sampling

 Describe the audit sampling and sampling risks

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 Introduction to audit sampling

 It should be understood that with exception of smallest organizations, it is

impossible for auditor s to check every transaction.

 Largest companies and of-course public sector have millions of data that
auditors need to consider

 However, the general public has the perception that auditors check everything
(Auditor’s expectation Gap)

 For that reasons auditors are being blamed especially when there is speculation
of financial scandal.

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 Introduction to audit sampling

Because of the difficulty to check everything auditing is done by sampling

And that is why auditors adopts either a system based audit or risk based audit

System based auditing is a technique whereby the auditor review, by testing the
operation of internal control procedures within the client’s accounting system.

Risk-based auditing is a technique which, links auditing to an organization's

overall risk management framework.

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 Definition of audit sampling

 ISA 530 states that: when designing audit procedures the auditor should determine
appropriate means for selecting items for testing so as to gather sufficient appropriate
audit evidence to meet the objectives of the audit procedures.

 Audit sampling is the application of an audit procedure to less than 100 percent of the
items within an account balance or class of transactions for the purpose of evaluating
some characteristic of the balance or class

 Testing less than 100% of the items and then forming an opinion about the population

 Applying a procedure to less than 100% of a population

 The objective of sampling is to draw conclusion about a large volume of data

(Population) based on the examination of a sample taken.

 Auditor expects to obtain evidence about a population from the sample

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 Fundamental issues to be considered in
sampling
1. The population has to be homogenous (sameness of items).
E.g. A sample of invoices should not include credit notes. Likewise, a
sample of finished goods should not include raw materials

2. Every item is the population must have an equal chance of being selected (No
biasness).
E.g. For block sampling for instance, testing all goods return notes for
May is not a good bases for testing because those for January to April
and those for June to December have no chance of being selected

3. Representativeness: the sample should be representative of the population

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 When sampling is not appropriate

 When the auditor has already been advised on high level error, system failures,
or possibility of fraud

 When a population is too small for a valid conclusion

 When all the transactions in a population are material Eg. Manufactures of

aircrafts may sale only 20 in a year but collects of TZS

 Where data is required by the standard to be fully disclosed

 Where the population is not homogenous

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 Sampling risk

 Sampling risk: risk that the auditors’ conclusions based on a sample may be
different from the conclusion they would reach if they examined every item in
the population

 Since auditors do not check all the transaction there is a risk that the sample,
however well chosen will not be representative of the population. This is
called sampling risk.

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 Types of Audit sampling

Audit sampling can be Non-statistical (judgmental) or statistical (Qualitative or

Quantitative)

Judgmental sampling means selecting a sample of appropriate size on the basis

of auditor’s judgment (without using statistical procedures)
 The auditor estimates sampling risk by using professional judgment rather than
statistical techniques

 Provides no means of quantifying sampling risk

 Sample may be larger than necessary or auditors may unknowingly accept a

higher than acceptable degree of sampling risk

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 Advantages of non-statistical sampling

 This approach has been used for many years. Thus it is well understood and
refined by experience

 It allows auditor to use their professional judgment and expertise

 No special knowledge of statistic is required

 No time is spent on struggling with mathematics

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Disadvantages of non-statistical sampling

 It is unscientific

 Sample size may be too large or too small for auditors to form valid opinion

 Consistence of results is questionable in the sense that two different auditors

can select two different sample or produce two different opinion on the same
sample

 Personal biasness is unavoidable

 There is no logic to the selection of the sample size

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 Statistical sampling

Statistical sampling requires the use of mathematical procedures (derived using

the underlying laws of probability). However, the decision requires judgment.
E.g. deciding on what constitute materiality or errors

Objective of statistical sampling:

 It enable the auditor to form certain conclusions about that class or balance as
a whole.

 An auditor can apply sampling in carrying out both compliance procedures (to
evaluate the effectiveness of the internal control system) and substantive
procedures (to obtain evidence regarding the completeness, accuracy and
validity of the data).

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 Advantages Of Statistical sampling

 The sample result is objective

 It is defensible.

 It provides precise mathematical statements about possibilities of correctness.

 The method provides an estimate of sampling error.

 It is efficient, especially when the large sample size is taken

 I can result in a uniform standard of testing.

 The auditor can specify a definite degree of risk (assurance level) using
statistical sampling.

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 Advantages Of Statistical sampling

 The theory of statistical sampling is used in a large number of situations where

a characteristic of a large mass of data is to be evaluated.
 It saves time and money.

 Allows auditors to measure and control sampling risk which helps:

– Design efficient samples

– Measure sufficiency of evidence

– Objectively evaluate sample representativeness

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 Disadvantages of statistical sampling

 It demand the knowledge of mathematics

 Its application require carefulness in generating assumptions

 The principles of testing have to be applied properly in order for the test to be
valid

 It limits professionals to use their professional judgment

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 Sampling methods

There a number of methods of sampling, including:

Random Sample:
 Random sampling: Each item in has an equal chance of being selected

 population is a homogeneous group

 There is no bias in the selection of items of the sample.

 Random sample results in a statistically unbiased sample that may not be a

representative sample

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 Sampling methods

 Systematic sampling: it involve creating an internal by taking the nth item

there after. E.g. if a population is 100 and a number to be sampled is 10 the
sample interval will be 10th transactions

 Block selection: Block sample consists of all items in a selected time period,
numerical sequence or alphabetical sequence. It involves choosing at random
one block of items E.g. All June invoice should be checked

 Stratified sampling: Technique of dividing population into relatively

homogeneous subgroups It involves dividing the population into
subpopulations (strata). Eg. Above TZS10 million check 10 items, between
TZS 7500,000 to 10 million check 30, between TZS 5000,000 to 7500,000
check 50. etc.

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 Sampling and its implications

Sample: A sample is the part of a population selected with a view to drawing

inferences (conclusions) about the total population.

Effect of sample size on allowance for sampling risk and sampling risk

 Sample size increase > sampling risk and allowance for sampling risk decrease

Effect of characteristics of population on sample size

 Generally as Population increases > sample size increase

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 Elementary Concepts of Statistical Sampling

Population: is the totality from which the sample is drawn

Stratification: is defined as the act or process of sorting data, people, and objects
into distinct groups or layers.

• For sampling to be effective, population should be more homogenous.

• A sample is then selected out of each stratum.

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 Requirements of Audit
Sampling Plans
 When planning the sample consider:

 The relationship of the sample to the relevant audit objective

 Materiality or the maximum tolerable misstatement or deviation rate

 Allowable sampling risk

 Characteristics of the population

 Select sample items in such a manner that they can be expected to be representative of
the population

 Sample results should be projected to the population

 Items that cannot be audited should be treated as misstatements or deviations in

evaluating the sample results

 Nature and cause of misstatements or deviations should be evaluated

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 Audit Sampling Steps for
Tests of Controls (compliance test)
 Determine the objective of the test (why are you testing this control?)

 Define the attributes and deviation conditions (what is an “error”?)

 Define the population to be sampled

 Specify the risk of assessing control risk too low

 Specify the tolerable deviation rate

 Estimate the population deviation rate (how many errors do you expect?)

 Select the sample (without conscious bias)

 Test the sample items (don’t “sample the sample”)

 Evaluate the sample results (Is the error rate ok?)

 Document the sampling procedure (Write it down)

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 Audit Sampling Steps for Substantive Tests

 Determine the objective of the test

 Define the population and sampling unit

 Choose an audit sampling technique

 Determine the sample size

 Select the sample

 Test the sample items

 Evaluate the sample results

 Document the sampling procedure

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 Important things to note

 Tolerable error: the maximum error in a population that auditors are

willing to accept and still conclude that the objectives have been achieved.
The error is normally decided at the planning stage

 The quality of the sample estimate depends on the precision and confidence
levels reached in the estimation process. Both high confidence and high
precision are desirable.

 Confidence level: Auditors should decide the level of confidence, which

shows degree of certainty.

 Precision level : For example it is not possible to say that auditors are 95%
certain that for example the error rate in a population is x%. But the error
rate can be x% plus or minus y%. The plus or minus y% is the precision.
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 END OF PRESENTATION

THANK YOU FOR LISTENING

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