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AUDIT II CH-1 Edited
AUDIT II CH-1 Edited
AUDIT SAMPLING
1
What is Sampling?
What is Auditing Sampling?
2
Audit Sampling
Sampling is the process of selecting and
examining a portion of a group of related items
for the purpose of obtaining information or
evaluation of some characteristics about the
group as a whole
The group as a whole is called the
population.
3
Audit Sampling
• “Audit sampling” (sampling) involves the application
of audit procedures to less tha100% of items within an
account balance or class of transactions such that all
sampling units have a chance of selection.
• This will enable the auditor to obtain and evaluate
audit evidence about some characteristic of the items
selected in order to form or assist in forming a
conclusion concerning the population from which the
sample is drawn. 4
According to Statement on Auditing Standard No. 39
(AICPA, SAS No. 39-Audit Sampling (AU 350)), three
conditions must be met to constitute audit sampling. First,
less than 100 percent of the population must be examined.
Second, the sample results must be projected as
population characteristics.
Third, the projected sample results must be compared
with an existing client-determined account balance to
examine whether to accept or reject the client’s balance.
5
In audit sampling, the population may be
represented by an account balance or a class of
transactions.
A sample result can be non representative due
to non sampling error or sampling error.
The risk of these two types of errors occurring
is called non sampling risk and sampling risk.
6
A. Non sampling risk: is the risk that audit tests do not uncover
existing exceptions in the sample.
The two causes of non sampling risk are:
The auditor’s failure to recognize exceptions (exclusion) and
7
“Non-sampling risk” arises from factors that cause the auditor to
reach an erroneous conclusion for any reason not related to the size
of the sample.
For example, most audit evidence is persuasive rather than
conclusive, the auditor might use inappropriate procedures, or the
auditor might misinterpret evidence and fail to recognize an error.
Sources of non-sampling risk include:
human mistakes, such as failing to recognize errors in documents;
applying auditing procedures inappropriate to the audit objective;
misinterpreting the results of a sample
relying on erroneous information received from another party.
8
B. Sampling risk: is the risk that an auditor
reaches an incorrect conclusion because the
sample is not representative of the population.
Sampling risk is an inherent part of sampling
that results from testing less than the entire
population. 9
Auditors have two ways to control sampling risk:
At one extreme, a sample of all the items of a population has a zero
sampling risk.
At the other extreme, a sample of one or two items has an extremely high
sampling risk.
10
There are two types of sampling risk:
A. the risk the auditor will conclude, in the case of a test of control,
that control risk is lower than it actually is, or in the case of a
substantive test, that a material error does not exist when in fact it does.
This type of risk affects audit effectiveness and is more likely to lead to
an inappropriate audit opinion;(Type I error)
B. the risk the auditor will conclude, in the case of a test of control, that
control risk is higher than it actually is, or in the case of a substantive
test, that a material error exists when in fact it does not. This type of
risk affects audit efficiency as it would usually lead to additional work
to establish that initial conclusions were incorrect.(Type II error)
11
There are two types of sampling risk:
Sampling Risk for test of control
1. The risk of assessing control risk too high: when the sample
result causes the auditor to assess control risk at a higher level
than it actually is(relates to efficiency of audit, unnecessary
testing which reduces the efficiency)
2. The risk of assessing control risk too low: If auditors assess
control risk to be lower than it actually is, they will
inappropriately reduce the extent of their substantive tests.
12
There are two types of sampling risk:
Sampling Risk for substantive tests
1. The risk of incorrect rejection (alpha risk) of an account, is the
possibility that sample results will indicate that an account
balance is materially misstated when in fact, it is not misstated.
2. The risk of incorrect acceptance (Beta risk) of an account, is the
possibility that sample results will indicate that an account
balance is not materially misstated when in fact, it is materially
misstated.
13
Sampling risk/substantive test
The substantive The population actually is
procedure sample
indicates
Not materially
Materially misstated
misstated
Misstatement in
account balance Incorrect decision
exceeds tolerable (Risk of incorrect Correct decision
amount rejection) type I error
17
Define the population and sampling unit
21
2.1. Statistical or probabilistic sample
Is the use of mathematical measurement technique to
calculate formal statistical result
Every population item has equal chance of being selected
22
cont…
3. Stratified Sampling
5. Cluster sampling
23
2.1.1. Simple Random Selection
25
cont…
Then, the auditor selects the sample randomly from the
numbers.
Suppose an auditor decides to select a sample from a total
of 12,000 cash disbursement transactions for the year.
i. the auditor determines the population and sample size to be taken for evaluation
ii. Then, the auditor picks the sample systematically from the population
Interval = population size
Sample size
Assuming 1000 pre-numbered sales invoices and 100 sample; the auditor
can calculate an interval to pick the sample item as follows:
27
cont…
Illustration
Assuming 1000 pre-numbered sales invoices and 100 sample; the auditor can calculate an
interval to pick the sample item as follows:
Interval = population size = 1000 = 10
Sample size 100
The auditor then select one invoice randomly from 1 to 10; assumes the numbers selected
is 5, and then the remaining numbers are easily determined by adding the interval 10 on
this number
Therefore, the sample selected are sales invoices with numbers 5, 15, 25, 35, 45, 55, 65,
29
2.1.4. Probabilistic proportion to sample size(PPS)
The representative samples are usually selected
based on the proportionate size of the amount on
each sampling unit.
Steps in a PPS sampling plan:
Determine the objective of the plan
Define the population and sampling unit
Determine the sample size
30
The most common objective of PPS
sampling plan is to obtain evidence that a
recorded account balance is not
materially misstated.
The specific financial statement assertions
to which the sample evidence pertains
depend on the auditing procedures applied
to the sample items.
31
2.1.5. Cluster sampling
The population that is being sampled is
divided into groups called clusters
The subgroup is heterogeneous as possible to
matching the population
A random sample then taken from within one
or more selected clusters
32
2.2. Non statistical sampling
The auditor does not quantify sampling
risk.
Instead conclusion is reached about
population more on judgmental basis
There are three common approaches to
selecting non probabilistic samples from
accounting population. 33
cont…
34
2.2.1. Direct Method
Auditors deliberately select each item in the
sample based on their own judgmental criteria
instead of using random selection.
Is the use of professional judgment in selecting
sample items for test of transaction
When sample size is small, a random sample is
often unlikely to provide a representative sample
35
cont…
Auditor should keep the following three things in
mind
1. Each major type of transaction in the cycle
should be included
2. Transactions prepared by each person or group of
person should be tested
3. Population items with large balance should be
tested heavily than those with small balances.
36
2.2.2. Block Sampling
In block sample selection auditors select the first item in
a block, and the remainder of the block is chosen in
sequence.
Example, the selection of a sequence of 100 sales
transactions from the sales journal for the third week of
March is a block sampling.
Auditors can select the total sample of 100 by taking 5
blocks of 20 items, 10 blocks of 10, 50 blocks of 2 or one
block of 100.
37
2.2.3.Haphazard Sampling
Is the selection of items without any conscious
bias by the auditor.
when the auditor goes through a population
and selects items for the sample without regard
to their size, sources, or other distinguishing
characteristics, the auditors is attempting to
select without biases
This is called haphazard selection 38
Table 1-1 Statistical and Non-statistical sampling
Statistical Non Statistical
Through the application of Auditor does not quantify
mathematical rules. sampling risk.
It allows the quantification circumstances are selected.
(measurement) of sampling risk in Instead, those sample items
planning the sample and evaluating that auditor believes will
the results. provide the most useful
Example: Statistical result at a 95% information in the
confidence level provides a 5% Conclusions are reached
sampling risk. about populations on
judgmental basis.
Statistical Non Statistical
Advantages Disadvantage
Very accurate. Inadequacy of the samples.
Economical in nature Chances for bias.
Very reliable. Problems of accuracy.
High suitability ratio towards the Difficulty of getting the
different surveys representative sample.
Takes less time. Untrained manpower.
In cases when the universe is very Absence of the informants.
large, then the sampling method is Chances of committing the
the only practical method for errors in sampling.
collecting the data.
Audit Sampling for Exception Rates
As an auditor, you need to estimate the proportion of items in a
population containing a characteristic or attribute of interest. The occurrence
rate, or exception rate, is the ratio of the items containing the specific
attribute to the total number of population items. Or Exception rate refers
to the percent of items in a population that include exceptions in
prescribed controls or monetary correctness. Example: invoices are not
properly verified 2 percent of the time.
Following are types of exceptions in populations of accounting data:
1) Deviations from client’s established controls
2) Monetary misstatements in populations of transaction data
3) Monetary misstatements in populations of account balance details
(requires a dollar estimate)
Note that the difference between sample exception rate and population
exception rate is known as Sampling Error and that the reliability
of sampling error estimate is Sampling Risk.
See the next example:
Assume a 3% sample exception rate and sampling error of 1% with a
sampling risk of 10%.
We conclude that the population exception rate is between 2% and 4% at
a 10% risk of being wrong (or 90% chance of being right).
Formula
procedures.
53
3. Define Attributes and Exception Conditions
When audit sampling is used, the auditor must
carefully define the characteristics (attributes) being
tested and the exception condition.
Attributes of interest and exception conditions come
directly from the audit procedures for which the
auditor has decided to use audit sampling.
Attributes are characteristics that provide evidence
that a control was actually performed.
When a sample item does not have one or more of the
attributes, it is classified as deviation(exception)54
Example: assume that the auditor are performing test of controls that the
auditor decide to test is the review of sales invoices that is performed by an
accounting clerk. The clerk review includes:
1. Comparing quantities on each invoice to shipping documents
2. Comparing prices on each invoice to authorized price list
3. Testing the clerical accuracy of each invoice, and
4. Initialing a copy of the invoice to indicate that the procedure was
performed.
The auditor would classify a transaction as a deviation if any one or more of the
ff deviation condition exists.
i. The invoice copy is not initiated by the accounting clerk
ii. The quantities on invoice do not agree w the shipping document
iii. The price on the invoice do not agree w authorized price list
iv. The invoice has a clerical inaccuracy. 55
4. Define the population
The auditor should determine that the population from which the sample
is to be selected is appropriate for the specific audit objective.
Example: if the auditor wishes to test the operating effectiveness of a control
designed to ensure that all shipments have been recorded as sales.
They will not select a sample from sales journal.
The population should be a file of shipping documents.
The lower the assessed CR => The lower the ARACR => The fewer tests
of detailed balances.
59
• The AICPA’S auditing practice releases this guide
Planned assessed level of control risk Tolerable deviation rate
Low 2%-7%
Moderate 6%-12%
Slightly below the maximum 11%-20%
Maximum Omit test
60
Guidelines for ARACR and TER Tests of Controls
Judgment Guideline
Lowest assessed control risk ARACR of low
Moderate assessed control risk ARACR of medium
Higher assessed control risk ARACR of high
100% assessed control risk ARACR is not applicable
61
8. Estimate the population Exception Rate
If the estimated population exception rate
(EPER) is low, a relatively small sample size will
satisfy the auditor’s tolerable exception rate.
This is because a less precise estimate is required.
In other word, to be more precise, estimates of
the population exception rate must be based on
more data, that is, a large sample
62
Estimated population exception or error rate is
exception rate that the auditor expects to find in the
population before testing begins.
EPER is a judgmental estimate based on
knowledge of client.
Low EPER => Low sample size.
As EPER approaches TER, more precision is
needed and larger sample size is needed.
63
9. Determine the initial sample size
Four factors determine the initial sample size for audit sampling
Population size
TER
ARACR(Acceptable Risk of Assessing Control Risk)
and
EPER (Estimate the population Exception
Rate)
64
Population size is not a significance factor and typically can be
ignored, especially for large populations.
Auditors using non statistical sampling decide the sample size
using professional judgment rather than using a statistical
formula.
Once the three major factors affecting sample size have been
determined, the auditor can decide an initial sample size.
It is called an initial sample size because the exceptions in the
actual sample must be evaluated before auditors can decide
whether the sample is sufficiently large to achieve the
objectives of the tests.
65
Statistical sample size for test of controls at 5%risk of assessing
control risk too low (with allowable number of deviation in bracket).
Expected
population Tolerable deviation rate
deviation rate
0.25 149(0) 99(0) 74(0) 59(0) 49(0) 42(0) 36(0) 32(0) 29(0) 19(0) 14(0)
0.50 236(1) 157(1) 117(1) 93(1) 78(1) 66(1) 58(1) 51(1) 46(1) 30(1) 22(1)
0.75 * 157(1) 117(1) 93(1) 78(1) 66(1) 58(1) 51(1) 46(1) 30(1) 22(1)
1.00 * 208(2) 117(1) 93(1) 78(1) 66(1) 58(1) 51(1) 46(1) 30(1) 22(1)
1.25 * * 156(2) 93(1) 78(1) 66(1) 58(1) 51(1) 46(1) 30(1) 22(1)
Cont. 66
B. Select the sample and perform the Audit procedures
10. Perform the Audit procedures
Perform the Audit procedures
The auditor performs the audit procedures by
examining each item in the sample to determine
whether it is consistent with the definition of
the attributes and maintain a record of all the
exceptions found.
67
When audit procedures have been completed for a sampling
application, there will be a sample size and a number of
exceptions for each attributes.
11. Select the sample
The auditor can use one of the sample selection methods
discussed above
The sample exception rate (SER) can be easily calculated from
the actual sample result, SER equals the actual number of
exception divided by the actual sample size
(i.e. actual no. of exception /actual SZ)
Usually the sample exception rate (SER) is different from the
population exception rate. 68
C. EVALUATE THE RESULTS
12. Generalize from the Sample to the population
In order to generalize from the sample to the
population, subtract the sample exception rate
from the tolerable exception rate, which is
calculated sampling error
(TER- SER= Calculated sampling error),
and evaluate whether calculated sampling error is
sufficiently large to indicate the true population
exception rate is acceptable. 69
The sample exception rate (SER) can be easily
calculated from the actual sample results.
SER equals the actual number of exceptions divided by the
actual sample size. It is improper for the auditor to
conclude that the population exception rate is exactly
the same as the sample exception rate, as there is only a
slight chance they are identical.
71
In evaluating the results the auditor must consider
not only the actual number of deviations observed,
but also the nature of deviations.
1. Determine the deviation rate
2. Determine the achieved upper deviation rate
3. Consider the qualitative aspects of the deviation
4. Reach an overall conclusion
72
For example if an auditor takes a sample of 100 items
for an attribute and finds no exception (SER = 0) and
TER 5%, calculated sampling error is 5% (5% - 0%)
On the other hand if there had been four sample
exceptions, calculated sampling error would have
been 1% (5% - 4%)
It is much more likely that the true population
exception rate is less than or equal to the tolerable
exception rate in the first case than in the second
case.
73
13 . Analyze Exceptions
Exceptions can be caused by many factors,
such as carelessness of employees,
misunderstood instructions, or intentional
failure to perform procedures
The nature of an exception and its causes has a
significance effect on the qualitative evaluation
of the system
74
14 . Decide the Acceptability of the population:
If the auditor concludes that TER – SER is sufficiently
large, the control being tested can be used to reduce
assessed control risk as planned, provided a careful
analysis of the cause of exception does not indicate the
possibility of other significant problems with internal
controls.
When the auditor concludes that TER – SER is too
small to conclude that the population is acceptable, the
auditor must take specific action 75
When the auditor concludes that TER – SER is too small
to conclude that the population is acceptable, or when
SER exceeds TER, the auditor must follow one of four
courses of action:
Revise TER or ARACR
Expand the sample size
Revise assessed control risk
Communicate with the audit committee or
management
76
TER minus EPER. The difference between the two
factors is the precision of the initial sample estimate. A
smaller precision, which is called a more precise
estimate, requires a larger sample.
At one extreme, assume TER is 4% and EPER is 3%. In this
case, precision is 1%, which will result in a large sample size.
Now assume TER is 8% and EPER is zero for an 8%
precision. In this case the sample size can be small and still
give the auditor confidence that the actual exception rate is
less than 8%, assuming no exceptions are found when
auditing the sample. 77
Effect on Sample Size of Changing Factors/test of control
Type of Change Effect on Initial Sample Size
78
Effect on Sample Size of Changing Factors/substantive procedure
Factor Change in Factor Effect on Required
Sample Size
Auditors’ Requirements:
Risk of incorrect rejection Increase Decrease
Risk of incorrect acceptance Increase Decrease
Tolerable misstatement Increase Decrease
79
For example, variables sampling might be used to plan, perform, and evaluate a
sample of accounts receivable selected for confirmation.
Frequently used classical variable sampling plans for confirmation include mean
per unit estimation (MPU), ratio estimation and difference estimation.
81
25.0 .67 1.15
Additional information:
Standard deviation of audited values= $16
Estimate of total audited value= $6,100,000
Required:
(A)Determine sample size
(B)Compute acceptance interval for substantive procedure 82
Fig. Population of A/R
Account number Account name book value
000,001 Aron, Williams $65.55
000,002 Adams, james $66.44
……….. ………….. …….
……….. …….. ,,,,,,,,,
………… ……… ………
…………
099,999 dave, chapel $99.2
100,000 suzan, wright $82.5
Total book value $6,250,000
Mean account value $62.5
83
Fig. Auditor sample of A/R
Sample item Account Account name Book value Audited value Difference
no. number
To determine acceptance interval for substantive test, we first compute Adjusted Allowance
for Sampling Risk as follows: If estimated std is different from that of the sample
Adjusted allowance
for sampling risk = Tolerable _ (Population size * Incorrect accept. coef. * Sample SD
misstatement Sample size
86
If the standard deviation of sample is same as
estimate use this formula
87
Classical variable sampling methods are divided in to three:
1. Mean per unit estimation
2. Ratio estimation
3. Difference estimation
___________________________________________________________
$5,910,933 $6,100,000 $6,250,000 $6,289,067
Lower Estimate of Book Value Upper
Book Value of the Precision
Precision
Limit from Sample Account Limit
$150,000
ProjectedMisstatement
89
Exercise:
1. The auditor have sampled 50 accounts from a population of
1000 accounts receivable. The sample item have a mean book
value of $200 and a mean audited value of $203.the book value
in the population is $198000. what is the estimated audited
value of the population using the mean per unit method?
A. $198000 B. $200000 C. $201000 D. $203000
2. What is the estimated total audited value of a population using
the difference method?
B. $198000 B. $200000 C. $201000 D. $203000
90
Exercise:
3. Scot Dufenny, CPA, has randomly selected and audited a sample
of 100 of will-mart accounts receivable. Will-mart has 3,000
accounts receivables with a total book value of $3,000,000.dufenny
has determined that the accounts tolerable misstatement is
$250,000.
His sample results are as follows:
Average audited value=$990
Average book value=$998
Required: calculate the accounts receivable estimated audited value
and projected misstatement using the mean per unit method?
91
Exercise:
4. The auditor wish to use mean per unit sampling to evaluate the
reasonableness of the book values of the accounts recievables of smith,
inc. Smith has 10,000 accounts receivables with a total book value of
$1,500,00. the auditors estimate the population standard deviation to be
equal to $25. after examining the overall audit plan , the auditor belive
that the accounts tolerable misstatement is $60,000. and that a risk of
incorrect rejection of 5% and a risk of incorrect acceptance of 10%are
appropriate,
Required: A. Calculate the required sample size?
B. Assuming the ff results
Average audited value=$146
Standard deviation of sample=$28 92
Use the mean per unit method to:
1.Calculate the point estimate of the accounts audited value?
2. Calculate the projected misstatement for the population?
3. Calculate the adjusted allowance for sampling risk?
4. State the auditors conclusion in this state?
93
END OF CHAPTER
1
THANK YOU!