Chapter 11 • Selecting items for

testing
Audit sampling • Audit sampling
and automated • Automated tools and
tools and techniques
techniques • Audit data analytics
(ADA)
 • Define audit sampling and explain the need for sampling.
• Identify and discuss the differences between statistical and
Syllabus non-statistical sampling.
• Explain the use of automated tools and techniques in the
learning audit context, including audit software, test data and
other data analytics tools.
outcomes • Discuss and provide relevant examples of automated tools
and techniques including test data, audit software and
other data analytics tools.
 ISA 200: Principles of Audit

Let's remind ourselves what the overall

objective of the auditor is:
'To obtain reasonable assurance about
whether the financial statements as a whole
are free from material misstatement,
whether due to fraud or error, thereby
enabling the auditor to express an opinion on
whether the financial statements are
prepared, in all material respects, in
accordance with an applicable financial
reporting framework; and to report on the
financial statements, and communicate as
required by the ISAs, in accordance with the
auditor's findings’.

In order to achieve the overall objectives of

an external audit, the auditor needs to plan
and perform the audit with professional
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scepticism and to apply professional
 Chapter summary diagram
Audit procedures and
sampling

Selecting Automated tools

Audit sampling
items for and techniques
testing

Audit Test data

software (tests of
(substantive controls)
Types of Sampling procedures)
Evaluation
sampling risk of sampling
results
Audit data
analytics (ADA)
Selecting items for testing

•The overall aim of the external audit is for the

auditor to give an opinion as to whether the financial
statements are free from material misstatement.
•The auditor does not test everything as it would be
impractical to do so and so they need to decide on
the extent of testing they will perform.
•Considerations:
• Select all items for testing (100%)
• Select specific items (stratification)
• Audit sampling
Selecting items for testing

Selecting items to test

100% of items Specific items Sampling

Not sampling
NON-SAMPLING
Selecting items for testing: Non Sampling
1. Testing 100% of a population
This can be used where a population consists of only a
few items.

2. Testing specific items (for example those with a

certain characteristic)
• High value or key items
• All items over a certain amount
• Items to obtain information
• Items to test procedures
SAMPLING
 Selecting items for testing: Sampling
Definitions:

Audit sampling is the application of audit procedures to less than

100% of items within a population of audit relevance such that all
sampling units have a chance of selection, in order to provide the
auditor with a reasonable basis on which to draw conclusions
about the entire population.

Population: is ‘the entire set of data from which a sample is

selected and about which the auditor wishes to draw conclusions’.
 Audit sampling 2
Why do auditors need to use audit sampling?
Imagine you are the auditor responsible for audit work
on year-end receivables. This balance is the largest
balance on the statement of financial position for your
client and the draft year-end figure is made up of 355
different amounts, ranging in value from $45 to $63,250.
You are one person in a total team of four. It just
wouldn't be practical in terms of time and cost to audit
every single balance making up the total receivables
figure. After auditing receivables, you have to do audit
work on payables, accruals and non-current assets too!
That's why auditors use sampling.
SAMPLING
ADVANTAGES OF SAMPLING

Less costs
Less errors due to less fatigue
Less time
Destruction of elements avoided
INFERENCING
Audit sampling: Recap from Chapter 6

• Sampling risk arises from the possibility that the

auditor's conclusion, based on a sample of a certain
size, may be different from the conclusion that would
be reached if the entire population were subjected to
the same audit procedure.
• 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, the use of inappropriate audit procedures, or
misinterpretation of audit evidence and failure to
recognise a misstatement or deviation.

•Remember!
Detection risk = Sampling risk + Non-sampling risk
 Recap from Chapter 6:

Sampling risk examples Non-sampling risk examples

Sample chosen not
representative of population
Misstatement(s) in
transactions not selected as
part of sample
Auditor’s lack of experience
Time pressure
Financial constraints
Poor planning
New client
Lack of industry knowledge

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Audit sampling approaches
Audit sampling can use either statistical or non-statistical
approaches.

Statistical
• Uses mathematical number tables to choose a sample free from
bias
• Probability theory used to evaluate results

Non-statistical
• No mathematical basis for selecting a sample or evaluating results

So, if each item in the population does not have an equal chance of
being selected, the sampling technique is non-statistical.
 AUDIT SAMPLING APPROACHES

STATISTICAL
Uses mathematical number tables to choose a sample NON-STATISTICAL
free from bias No mathematical basis for selecting a sample or
Probability theory used to evaluate results evaluating results

Random
Systematic Haphazard
Value-weighted selection/monetary unit sampling Block
 Random selection:
Ensures that all items in the population have an equal chance
of selection, eg by the use of random number tables or
random number generators.

STATISTICAL Systematic selection:

Uses mathematical Involves selecting items using a constant interval between sel
number tables to choose a ections, the first interval having a random start.
sample free from bias •When using systematic selection, auditors must ensure that
Probability theory used to
evaluate results
the population is not structured in such a manner that the
sampling interval corresponds with a particular pattern in the
population.

Value-weighted selection/monetary unit sampling

•This is a type of value-weighted selection in which sample
size, selection and evaluation results in a conclusion in
monetary amounts.
 Haphazard selection
This method requires care to guard against making a selection which is
biased, for example, towards items which are easily located, as they
may not be representative. It should not be used if auditors are
carrying out statistical sampling.

May be an alternative to random selection provided auditors are satisfi

ed that the sample is representative of the entire population.
NON-STATISTICAL
No mathematical basis
for selecting a sample Block selection
or evaluating results May be used to check whether certain items have particular
characteristics.
For example, an auditor may use a sample of 50 consecutive cheques
to test whether cheques are signed by authorised signatories rather
than picking 50 single cheques throughout the year.
However, block sampling may produce samples that are not
representative of the population as a whole, particularly if errors only
occurred during a certain part of the period and hence the errors
found cannot be projected onto the rest of the population.
EXERCISE IN LECTURE:

ACTIVITY 1; page 240

 exercise: Selecting samples
You are the auditor of XYZ Co and are Customer Balance ($) Cumulative Selected
intending to audit receivables by total ($) (Y/N)
1 60,000 60,000 N
external confirmation of a sample of 2 70,000 130,000 Y
the year-end balances. 3 90,000 220,000 Y
4 105,000 325,000 Y
5 28,000 353,000 N
6 100,000 453,000 Y
The trade receivables on the next slide 7 46,000 499,000 N
have been randomly tabulated. At the 8 1,000 500,000 Y
9 84,000
year-end, trade receivables amount to 10 94,000
$1 million and materiality is $100,000. 11 108,000
12 34,000
13 160,000
14 20,000 1,000,000 Y
State which receivables balances will 1,000,000
be selected for sampling using valued-
weighted selection (monetary unit
sampling).
 Evaluation of sampling results

• Once the audit procedures have been carried out on

the sample, the auditor should evaluate the sample
results to determine whether they are satisfactory or
whether further work is required.
• Where there are errors, the auditor should consider:
– The nature and cause
– Whether it is a 'one-off' (anomalous) error
– Whether the error affects other audit areas
 Evaluation of sampling results
• An anomaly is a misstatement or deviation that is demonstrably not
representative of misstatements or deviations in a population.
• Deviations: tests of controls
• Misstatements: tests of details (substantive procedures)
• Tolerable misstatement is a monetary amount set by the auditor in
respect of which the auditor seeks to obtain an appropriate level of
assurance that the monetary amount set by the auditor is not exceeded
by the actual misstatement in the population.
• Tolerable rate of deviation is a rate of deviation from prescribed internal
control procedures set by the auditor in respect of which the auditor
seeks to obtain an appropriate level of assurance that the rate of
deviation set by the auditor is not exceeded by the actual rate of
deviation in the population.
 ( RECALL C9) TWO types of AUDIT PROCEDURES
an auditor can carry out:
Substantive
Tests of controls
procedures
Audit procedures designed to Audit procedures designed to
EVALUATE the operating DETECT material misstatements
effectiveness of controls in at the assertion level.
preventing, or detecting and
correcting, material Substantive procedures
misstatements at the assertion comprise:
level. • Tests of detail (of classes of
transactions, account balances
and disclosures); and
• Substantive analytical
procedures.

Remember, substantive
procedures must always be
carried out for material classes
of transactions, account
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 Evaluation of sample results

Tests
Testsof
ofdetails
details Tests
Testsof
ofcontrols
controls

Project/ estimate monetary No projection necessary

errors and compare to
Decide if error rate acceptable
tolerable misstatement
 Evaluation of results (Tests of
details)
• For tests of details, the auditor should project
monetary errors found in the sample to the
population and compare this to the tolerable
misstatement.
• Where an error has been established as an anomaly, it
may be excluded when projecting sample errors to the
population (but still needs to be considered overall in
addition to the projection of the
non-anomalous errors).
• Where a class of transactions or account balance has
been divided into strata, the error is projected for
each stratum separately.
 Question: Evaluation of results (Tests of
details)
You are auditing trade receivables and have obtained the following
results based on your sample:
Total value of population $1,000,000
Number of items in the population 400
Number of items tested 20
Sample value $200,000
Error in sample $9,000

(a) Assuming the errors are not anomalous ones, calculate the
expected error in the population.
(b) Assuming that tolerable misstatement was set at $40,000,
explain what action should be taken.
 Answer: Evaluation of results (Tests of details)
(a) Error rate in sample x total value of population
$9,000
×$1,000,000=$45,000
$200,000

(b) The projected error is ABOVE/ BELOW the tolerable misstatement limit of $40,000. This
means that further evidence is needed. This could be done by:
• Extending the sample tested in the procedure and then re-performing the extrapolation; or
• Designing and performing additional substantive procedures.
If the further evidence allows the auditor to conclude that the actual error in the population
does not exceed tolerable misstatement, then the auditor will conclude that no adjustment is
necessary, although the error of $9,000 will be noted on a schedule of uncorrected
misstatements.
If the further evidence indicates that there is a misstatement that exceeds tolerable
misstatement, then the auditor will ask the client to make an adjustment to the financial
statements.
 Evaluation of results (Tests of
Controls)
Tests of controls
• For tests of controls, no explicit projection of errors is
necessary since the sample error rate is also the
projected rate of error for the population as a whole.
• For example, if the auditor has performed tests of
controls on a sample of 20 items and has found two
deviations, this represents an error rate of 10% (2/20
× 100). The auditor must then decide if this error rate
is acceptable.
Question: Evaluation of results (Tests of
Controls)
You are auditing the internal controls relating to the authorisation of
adjustments made to a client's inventory system in order to determine the
accuracy and validity of the adjustments. You have obtained the following
results based on your sample:
Total number of adjustments made to inventory records during the 1,500
year
Number of adjustments tested in the sample 225
Number of occasions when adjustments tested were not authorised 18

(a) Assuming the errors are not anomalous ones, calculate the error rate in
the population.
(b) Assuming that the tolerable rate of deviation was set at an error rate of
13%, explain what action should be taken.
Question: Evaluation of results (Tests of
Controls)
(a) Error rate in sample:
18
= 18%
225

(b) The projected error rate is ABOVE/ BELOW the tolerable rate of
deviation limit of 13%.
This means that the internal control is believed to have operated
effectively throughout the period and the auditor can rely on it when
assessing the accuracy and validity of adjustments made to the
inventory system.
No further testing is required, however any monetary errors resulting
from the 18 failures of the internal control should be noted on the
schedule of uncorrected misstatements.
 Audit sampling process

1. Determining objectives and characteristics of the population

2. Determining sample size
3. Choosing the method of sample selection
4. Projecting errors and evaluating the results
 • Definition: automated tools and techniques
Automated are ‘applications of auditing procedures
using the computer as an audit tool’.
tools and • Two main types:

techniques • Audit software

• Test data
 Automated tools and techniques
Advantages:
• Auditors can test programme controls as w
ell as general internal
controls associated with computers.
• Auditors can test a greater number of item
s more quickly and
accurately than would be the case
otherwise.
• Auditors can test transactions rather than
paper records of
transactions that could be incorrect.
• Automated tools and techniques are cost-
effective in the long term if the client does
not change its systems.
• Results can be compared with results from
traditional testing – if the results correlate,
overall confidence is increased.
Disadvantages:
• Setting up the software needed for aut
omated tools and
techniques can be time-consuming
and expensive.
• Audit staff will need to be trained so th
ey have a sufficient level of IT
knowledge to apply these procedures.
• Not all client systems will be compatibl
e with the software used with
automated tools and techniques.
• There is a risk that live client data is cor
rupted and lost during the use of auto
mated tools and techniques.
 Automated tools and techniques
Audit software

• Consists of computer programs used by the auditor, as part of

his auditing procedures, to process data of audit significance
from the entity's accounting system.
• Substantive procedures
• Can be used to:
– Read and extract data from a client's system and produce a report in a
specified format
– Select information (eg a sample)
– Perform calculations (eg casting)
– Print reports in specified formats
 Automated tools and techniques
Test data
• Test data techniques are audit procedures which enter data into an entity's
computer system, and compare the results obtained with pre-determined results.
• Test of controls (looking at the process)
• Test data is a fictitious set of test transactions which are input to the client's
system in order to determine whether the internal controls within the entity's
computer systems have operated effectively throughout the period.
• This will require significant co‑operation from the client, especially in terms of
computer access time.
Typical uses of test data
• To test specific controls in computer programs
• To test transactions
– Conducted 'live' or 'dead'
– Sometimes using an integrated (embedded) test facility
 Additional readings:
• The following pair of articles are useful:
https://www.accaglobal.com/ca/en/student/exam-
support-resources/professional-exams-study-resour
ces/p7/technical-articles/auditing-computer-enviro
nment.html
https://www.accaglobal.com/ca/en/student/exam-
support-resources/professional-exams-study-resour
ces/p7/technical-articles/auditing-computer-based-
environment2.html
 Audit data analytics (ADA)
Data Analytics
• Audit data analytics (ADA) routines have emerged in recent years as ‘big data’ technologies are applied by auditors.
• ADA has the potential to totally revolutionise audit – it may allow 100% testing in some areas, which challenges the
risk-based approach of ISAs.
• ISAs do not currently reflect the intensive use of ADA.
• Examples of how data analytics might help auditors include:
o Analyses of revenue trends into product or region
o Matches of orders to cash receipts and of purchases to cash payments
• ADA may contribute to audit effectiveness, improving both quality and cost.
• There are some limitations to the use of ADA, such as:
o Auditors must understand the data they are using, as it may not all be relevant to the audit
o The audit always requires professional judgement
o Technical difficulties acquiring and using large amounts of data
o It is unclear how using ADA relates to the current ISAs
THE END