AUDIT SAMPLING

PSA 530 defines audit sampling as,

“the application of audit procedures to less than 100% of the items

within an account balance or class of transactions such that all
sampling units have a chance of selection”
1
Audit Sampling
 Is the use of an audit procedure on a selection of the items
within an account balance or class of transactions. The
sampling method used should yield an equal probability that
each unit in the sample could be selected.
2

Risk in Sampling
the auditor is faced with an uncertainty of not detecting material
errors in an account balance or class of transactions. This uncertainty
arises because of sampling and non-sampling risks.

Sampling Risk
it refers to the possibility that the auditor’s conclusion based on a
sample may be different from the conclusion reached if the entire
population were subjected to the same audit procedure. this exist
because the sample selected for testing may not be truly
representative of a population.
3

2 TYPES OF SAMPLING RISK

 Alpha risk
 in the case of test of control, that internal control is not reliable
when in fact it is effective and can be relied upon (risk of
underreliance)
 in the case of substantive test, material misstatement exists in an
account balance or transaction class when in fact such
misstatement does not exist (risk of incorrect rejection)
 Beta risk
 in the case of test of control, that internal control is reliable when
in fact it is not effective and cannot be relied upon (risk of
overreliance)
 in the case of substantive test, material misstatement does not
exists when in fact such misstatement does exist (risk of incorrect
acceptance)
4

Non-sampling risk
refers to the risk that the auditor may draw incorrect conclusion about
account balance or class of transactions because of human errors such
as;
 Application of inappropriate audit procedure
 Failure to recognized errors in the sample tested
 Misinterpretation of evidence obtained.
5

Controlling the Risk

 the only way to eliminate the sampling risk is to examine the entire
population. Doing this, however, would not be feasible because of
time and cost constraints.
 Auditor do not normally attempt to eliminate sampling risk. Instead,
auditors control the sampling risk by
 Increasing the sample size; and
 Using an appropriate sample selection method.
6

Controlling the Risk

 Non-sampling risk cannot be eliminated even if the auditor
examines the entire population. This risk can be minimized by
 Proper planning; and
 Adequate direction, review, and supervision of the audit team.
7
General Approaches to Audit Sampling
Statistical Sampling
is a sampling approach that
• Uses random based selection of sample; and
• Uses the law of probability to measure sampling risk to
evaluate sample results.
Non-Statistical Sampling
is a sampling approach that
• Uses auditor’s judgement in estimating sampling risk,
determining sample size, and evaluating sample results.
8

Audit Sampling Plans

is used when performing test of controls or substantive tests.
When statistical sampling is used, the auditor may use either:
 Attribute Sampling
 This is a sampling plan used to estimate the frequency of occurrence
of a certain characteristic in a population (occurrence rate).
 It is generally used when performing test of controls to estimate the
rate of deviations from prescribed internal control policies or
procedures.
 Examples of attribute sampling test are
 50 out of 60 invoices are supported by a sales order.
 13 out of 211 journal entries were posted in the wrong account.
9

 Variable Sampling
 This is a sampling plan used to estimate a numerical measurement
of a population such as peso value. (ex. customers account
balances)
 Used when performing substantive tests to estimate the amount of
misstatements in the financial statements.
10

Basic Steps in Audit Sampling

Evaluate the Result

Apply the Procedure

Select the Sample

Determine the sample size

Determine the Procedure

Define the Objective

11
 Define the objective of the test.

For example, when auditing accounts receivable , the auditor’s

Objective could be to determine whether accounts receivable
balances exists as of the balance sheet date.

 Determine the audit procedure to be performed

Using the existence of accounts receivable as an objective,

the audit procedure may involve sending confirmation letter to
customers.
The population would be the customers’ account balances as of the
balance sheet date and the characteristics to be tested would be the
monetary amount of misstatements in an account balance.
12
 Determine the sample size

The auditor may decide to examine only 100 out of the total 5,000
customers’ account in order to draw a conclusion whether the total
accounts receivable are actually existing as of the balance sheet date.

 Select the sample

In selecting the customers to whom confirmation letters will be sent, the

auditor may use a computer software that produces random numbers
that match with the customer numbering system.
13
 Apply the procedures

The auditor sends confirmation letter to the customers selected to

determine the accuracy of the recorded account balances.

 Evaluate the sample results

The auditor will have to summarize the customers’ confirmation replies

and decide whether the account balance are materially misstated or
whether additional audit procedures need to be performed.
14
Sampling for test of controls
Audit sampling for tests of control is generally appropriate when
application of the control leaves evidence of performance.
Determination of sample size
Acceptable sampling risk
 Sample drawn can only be expected to be representative of the
population.
 The size of the sample is affected by the level of sampling risk the
auditor is willing to accept.
Tolerable deviation rate
 Is the maximum rate of deviation the auditor is willing to accept,
without modifying the planned degree of reliance on the internal
control.
15

 Expected deviation rate

 is the rate of deviations that the auditor expects to find in the
population before testing begins.
 has a direct effect on the sample size, the larger the expected
population deviation rate, the larger would be the sample size.

Sample size Acceptable Tolerable Expected

Sampling risk Deviation rate Deviation rate

Small High High Low

Large Low Low High

16

Sample selection method

the auditor should select items for the sample with the expectation that all
sampling units in the population have a chance of selection. There are (3)
principal methods of selecting samples;
 Random number selection
 Selecting a random sample by matching random numbers
generated by a computer or selected from random number table.
example: document number
 Systematic selection
 Dividing the number of physical units in the population by the
sample size to determine the sampling interval.
 Systematic random selection: the first item is selected randomly from
the interval.
17

Systematic selection
Illustration:
the auditor wants to examine a sample of 100 invoices from the population
of 20,000 invoices. The sampling interval is computed by
20,000/100 = 200
after determining the sampling interval; the auditor randomly selects the
starting point from the first 200 invoices. For example the 25th invoice to be the first
item drawn by the auditor. Then the auditors succeeding items by taking the
(25th + 200) = 225th
(225th + 200) = 425th
(425th + 200) = 625th
(625th + 200) = 825th
18
 Haphazard selection
 Attempts to approximate a random selection by selecting sampling units
without any conscious of bias, or special reason for including or omitting
certain items from the sample.
In selecting the sample and applying the appropriate audit procedure, the
auditor may encounter the following situations.
 Voided Documents
 the auditor may occasionally select a voided or cancelled document in a
sample. if the document has been properly voided, such document should
be replaced by another sample item.
 Missing Documents
 if the auditor encounters missing document and he is unable to determine
whether the control has been properly performed, such item should be
treated as a deviation for the purpose of evaluating sample results.
19
Evaluation of results
both the qualitative and quantitative factors of deviations should be
considered.
 Determine the sample deviation rate.
example: the auditor found 4 deviations out of the 200 sample items.
Sample deviation rate:
4/200 = 2%
 Compare the sample deviation rate with the tolerable deviation rate and draw
an overall conclusion about the population.
 The sample deviation rate exceeds the tolerable deviation rate.
 The sample deviation rate is less than the tolerable deviation rate.
 Sample deviation rate of 2% against tolerable deviation rate of 10%.
 Sample deviation rate of 8% against tolerable deviation rate of 10%.
20

Other sampling applications for tests of controls

 Sequential Sampling
 can be used as an alternative form of testing controls when an
auditor expects very few deviations within the population.
 Under this method the auditor does not use fixed sample size.
 It is sometimes called stop or go sampling because after testing
the sample, the auditor makes a decision of whether to stop or
to go on with the sampling plan.
 Discovery Sampling
 This form of audit sampling is the most appropriate when no
deviations are expected in the population.
 Used when the auditor suspects that an irregularity might have
been committed.
21

Sampling for Substantive Tests

 are concerned with the amounts reported in the financial
statements.
2 types of substantive test
 Analytical procedure
this approach involves comparison of financial information with
auditor’s expectation to determine the reasonableness of an account
balance reported in a financial statement.
 Test of details of transaction and balances
to estimate the amount of misstatements in the financial statements.
22

Determining of sample size

 Acceptable sampling risk
 There is an inverse relationship between the acceptable
sampling risk and the sample size: the lower the risk the auditor is
wiling to accept
 Tolerable misstatements
 is the maximum amount of misstatement that the auditor will
permit in the population and still willing to conclude that the
account balance is fairly stated.
 There is an inverse relationship between the tolerable
misstatement and sample size. A smaller measure of Tolerable
misstatement will cause sample size to increase.
23

 Expected misstatements
 Is the amount of misstatement that the auditor believes exists in the
population.
 the expected amount of misstatements may be determined based
on the results of prior year’s substantive test or pilot sample.
 Has a direct relationship to the sample size. An increase in the
amount of misstatement that the auditor expects to be present in
the population will cause the sample size to increase.
 Variation in the population
 the peso amount included in the population tends to vary
significantly.

 the auditor can estimate the variation based on the prior year’s test
results or a pilot sample.
24
Sample selection method
 Stratified sampling
 is a random sampling technique in which the population is first divided
into small strata and then the samples are randomly selected
separately from each stratum.
For example, the customers’ accounts may be stratified as
Stratum Account balances No. of Sample size
customers
1 More than 1,000,000 40 100%
examination
2 100,000 – 1,000,000 170 50 customers
3 Below 100,000 2040 100 customers
25

 Value weighted selection

it also gives each item in the population an opportunity to be selected.
Sometimes called Probability proportional to size sampling.

Example:
the auditor plans to select one customer from a total accounts
receivable balance of 1,000,000, a customer’s account balance of 100,000.
100,000/1,000,000 = 0.1 or 10%
It will have a 10% probability of being selected.
26

 Evaluating the results

1. Projecting the misstatements to the population
the auditor should project these misstatements to the
population to determine whether the account balance is materially
misstated. Projecting misstatements can be accomplished using
two(2) approaches.
a) Ratio estimation
b) Difference estimation
27 In terms of Amount of
In terms of value number of misstatements
customers found

Population 10,000,000 200 ?

Sample size 1,000,000 24 48,000

Projected misstatements = Amount of misstatements * (Population size / Sample size

Using ratio estimation approach

48,000 x (10,000,000 / 1,000,000 = 480,000

Under the difference estimation approach

48,000 x (200 customers / 24 customers) = 400,000
28

2. Compare the projected misstatements together with the

tolerable misstatements and draw an overall conclusion.
after projecting the sample misstatements to the population,
the auditor will have to compare the projected misstatements with the
tolerable misstatements.
 Projected misstatements > tolerable misstatements
 Projected misstatements < tolerable misstatements
29 Summary of Audit Sampling Steps

Test of controls Substantive tests

1. Define the Specify the control procedures Specify the purpose of the test
object of the to be tested. and its relationship to the
test. financial statements
assertions.

2. Determine Determine the appropriate Determine the appropriate

the audit procedures to be audit procedures to be
procedures performed to satisfy the performed to satisfy the
to be objective. objective.
performed. Determine the population and Define the population and its
the conditions that constitute a characteristics.
deviation.
30
3. Determine Consider the effects of the
the sample following factors in
size determining the size sample
size:
• Acceptable sampling risk
(Inverse)
• Tolerable deviation rate
(Inverse)
• Expected population
deviation rate (Direct)
Consider the effects of the
following factors in
determining the sample size:
• Acceptable sampling risk
(Inverse)
• Tolerable misstatement
(Inverse)
• Expected misstatement
and population (Direct)
31
4. Select the Use any one of the following
Sample techniques:
• Random number selection
• Synthetic selection
• Haphazard selection
(applies only to non-
statistical sampling)
5. Apply the Apply the audit procedures
Audit to the sample items.
Procedures
6. Evaluate Decide whether the results
the sample supported the planned
results degree of reliance on
internal control.
Use any one of the following
techniques and stratify the
population.
• Random number selection
• Synthetic selection
• Haphazard selection (applies
only to non-statistical
sampling)
• Value weighted selection.
Apply the audit procedures to
the sample items.
Decide whether to accept
account balance as fairly
stated or to require further
actions.