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SESSION 19 AUDIT SAMPLING

OVERVIEW
Objective

To identify and describe audit sampling and other selective testing procedures.

GATHERING
AUDIT EVIDENCE
Selection
ALL ITEMS
(100%)

Basic principles

methods

SPECIFIC ITEMS

Judgmental selection

AUDIT
SAMPLING

Definitions
Application

DESIGN

Basic principle
Sampling plan
Sample size

SELECTION

STATISTICAL
v NONSTATISTICAL

Statistical
Non-statistical

TESTING

Basic principle
Error projection
Evaluation

Basic principle
Common methods
Other methods

Essential procedure

SAMPLE
RESULTS

1901

SESSION 19 AUDIT SAMPLING

GATHERING AUDIT EVIDENCE

1.1

Basic principles

1.1.1

Selection methods

Items should be selected for testing by appropriate means.

Any one or a combination of

1.1.2

selecting all items (100% examination)


selecting specific items
audit sampling.

Risk considerations

Professional judgment should be used to:

assess audit risk; and

design audit procedures

to reduce audit risk to an acceptable low level.

This requires consideration of:

inherent, control and detection risk;


sampling and non-sampling risk.

SELECTING ALL ITEMS

Example 1
Suggest circumstances in which a 100% check of a class of transactions or
account balances check may be necessary.

Solution

1902

SESSION 19 AUDIT SAMPLING

SELECTING SPECIFIC ITEMS

Example 2
Suggest reasons why it is unnecessary for an auditor to carry out a complete
check of all the transactions and balances of a business.

Solution

3.1

Judgmental selection

3.1.1

Factors to consider

Knowledge of business

Preliminary assessments of inherent and control risk

Characteristics of the population being tested.

3.1.2

Specific items

High-value or key items

All items over a certain amount

Items to obtain information

Items to test procedures.

3.1.3

Main advantage

Usually an efficient means of


gathering audit evidence.

3.1.4

Main disadvantage

It is NOT audit sampling , therefore


cannot validly project results to
population.

1903

SESSION 19 AUDIT SAMPLING

AUDIT SAMPLING [ISA 530]

4.1

Definitions

Audit sampling applying procedures to less than 100% of items . . . such that all
sampling units have a chance of selection . . . in order to form a conclusion concerning
the population.

Error (in Audit sampling) either a control deviations (in tests of control) or a
misstatement (in a substantive procedure).

Anomalous error an error that arises from an isolated event that has not recurred other
than on specifically identifiable occasions and is therefore not representative of errors in
the population.

Population the entire set of data from which the auditor wishes to sample . . . . For
example, all items in an account balance or a class of transactions. A population may be
divided into strata, or sub-populations, with each stratum being examined separately.

Sampling risk arises from the possibility that the auditors conclusion, based on a
sample, may be different from the conclusion that would be reached if the entire
population were subjected to the same audit procedure. Two types:
(a) the risk the audit will conclude that control risk is lower than it actually is (for a test
of control) or that a material error does not exist when in fact it does (for a
substantive test). This type of risk affects audit effectiveness and is more likely to
lead to an inappropriate audit opinion
(b) the risk the auditor will conclude that control risk is higher than it actually is (for a
test of control) or that a material error exists when in fact it does not (for a
substantive test). This type of risk affects audit efficiency as it would usually lead to
additional work to establish that initials conclusions were incorrect.

Confidence level the mathematical complement of risk


(e.g. 5% risk 95% confidence)

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 auditor
might use inappropriate procedures or misinterpret evidence and thus fail to recognize
an error.

Sampling unit the individual items constituting a population, for example credit entries
on bank statements, sales invoices, trade receivable balances, or a monetary unit (e.g.
$1).

Statistical sampling any approach to sampling that has the following characteristics
(a) random selection of a sample; and
(b) use of probability theory to evaluate sample results, including measurement of
sampling risk.

1904

SESSION 19 AUDIT SAMPLING


A sampling approach that does not have characteristics (a) and (b) is considered nonstatistical sampling.

Stratification the process of dividing a population into subpopulations, each of which is


a group of sampling units, which have similar characteristics (often monetary value).

Tolerable error (or deviation rate) the maximum error in the population that the auditor
is willing to accept (and still conclude that the result from the sample has achieved the
audit objective).

For substantive tests, this precision may be expressed as a monetary amount


(which is less than overall materiality) or a percentage of population value.

For tests of control, precision is the maximum rate of failure of an internal control
that can be accepted in order to place reliance on it (and is therefore likely to be
small).

4.2

Application
Audit sampling can be applied using either non-statistical or statistical sampling
methods (see later in this Session). Stages in the sampling process include:

sample design
sample selection
performing audit procedures (testing)
error evaluation.

DESIGN

5.1

Basic principle

Matters to be considered when designing an audit sample are:

5.2

Test objectives; and


Attributes of the population.

Sampling plan
In practice a Sampling plan may be drawn up to cover

audit objectives
population and sampling unit (or attribute)
definition of an error (or deviation)
sample size
method(s) of sample selection.

1905

SESSION 19 AUDIT SAMPLING


Matters to consider

Specific audit
objectives
Note 1

Population and
sampling unit and
use of stratification

Appropriate
and complete
Note 2

Sampling
unit
Note 3

Sample size

Stratification
(into sub-popns)
Note 4

Considerations

Sampling risk
(acceptably
low?)

Tolerable error
(= maximum
error/deviation rate
willing to accept)

Expected error

Notes

(1) For example, customers exist.


(2) Must be appropriate (may be a reciprocal population) and complete.
(3) An item number n (e.g. GRN)
(4) Involves dividing a population into subgroups (strata) to create relatively
homogenous groups in which variations in characteristics are likely to be small.

5.3

Sample size

Example 3 Tests of control


For each of the following factors, decide whether the effect on sample size is an
increase, decrease or no effect:

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SESSION 19 AUDIT SAMPLING

Solution
Effect on Sample Size
(1)

Increase in intended reliance on accounting and internal


control systems

(2)

Increase in tolerable error

(3)

Increase in the rate of deviation expected (expected error)

(4)

Increase in confidence level (i.e. decrease in risk)

(5)

Increase in number of sampling units in the population.

Example 4 Substantive procedures


For each of the following factors, decide whether the effect on sample size is an
increase, decrease or no effect:

Solution
Effect on Sample Size
(1)

Increase in inherent risk assessment

(2)

Increase in control risk assessment

(3)

Increase in use of other substantive procedures aimed at the same


assertion

(4)

Increase in confidence level (i.e. decrease in risk)

(5)

Increase in tolerable error

(6)

Increase in expected error

(7)

Stratification of the population

(8)

Increase in number of sampling units in the population.

1907

SESSION 19 AUDIT SAMPLING

SELECTION

6.1

Basic principle

Items should be selected in such a way that all sampling units have a chance of selection.

6.2

Most commonly used methods

Random number selection by use of random number tables or a computerised random


number generator.

Systematic (also called interval) selection uses a constant interval between items
selected (with a random start). Value-weighted selection is a method which uses
monetary unit values, rather than the items, as the sampling population.
CAUTION: The sampling units must not be structured in such a way that the sampling
interval corresponds with a pattern in the population.

Haphazard selection i.e. without following a structured technique, may be an acceptable


alternative (to random methods) provided that conscious bias and predictability are
avoided.

6.3

Other methods
Block sampling (e.g. all items on a particular page) is not generally appropriate because
populations may be structured so that items in a sequence have similar characteristics
to each other but different characteristics to items elsewhere in the population.

TESTING

7.1

Essential procedure

Audit procedures appropriate to the test objective should be performed on each item
selected.

If an inappropriate item is selected (e.g. a document which has been made void) an
appropriately chosen replacement must be tested instead.

If the planned procedure cannot otherwise be performed (e.g. if a customer does not
reply to a direct confirmation request) a suitable alternative should be performed (e.g.
examination of after-date cash receipts).

If no suitable alternative test can be performed, assume that item to be an error.

1908

SESSION 19 AUDIT SAMPLING

SAMPLE RESULTS

8.1

Basic principles

The auditor should:

consider the sample results;


consider the nature and cause of any identified errors; and
their potential effect on:

the test objective


other audit areas

evaluate sample results to confirm or revise the preliminary assessment of the


relevant characteristic of the population.

Consider qualitative aspects:

ISOLATED

8.2

Obtain corroborative
evidence of anomalous
error

COMMON FEATURE

Identify sub-population

Extend audit procedures in


sub-stratum.

Error projection

Monetary errors (i.e. in respect of substantive procedures) should be projected.

The effect of projected error (on test objective and other audit areas) should be
considered.

Compare:

Projected error + Anomalous error


vs

Tolerable error.

Note that, for tests of control no projection is necessary (i.e. sample error rate represents
population error rate). (See Illustration 2 below.)

1909

SESSION 19 AUDIT SAMPLING

Illustration 1
$
800,000
274,330
4,311
40,000 (5% of population)

Population of trade receivables:


Sample value
Errors (e.g. overpricing of invoices)
Tolerable error

Projected error (ratio method):


Error in sample

Population value
800 ,000
= $12,572
= 4,311
274 ,330
Sample value

Conclusion: Trade receivables are not materially overstated (as the potential
error is less than the tolerable error of $40,000).

8.3

Evaluation of results
If projected error plus uncorrected anomalous error exceeds tolerable error, reassess
sampling risk.

8.3.1

Tests of control

If CR higher than originally


assessed, modify planned
procedures e.g.

extend sample size

test an alternative control

extend substantive
procedures.

1910

8.3.2

Substantive procedures

If maximum potential and/or


most likely error exceeds
tolerable error

request management adjust


for identified errors

re-evaluate unadjusted
errors.

SESSION 19 AUDIT SAMPLING

Illustration 2 Evaluating the results of a test of controls


Summary of deviations:
No. of despatch notes not found
No. of despatch notes without invoices
* include authorised cancellations

1
4*
(3)

DN ref.
(13,685)

(17,345)

___

Actual deviations

2
___

Deviation rate:

2
= 0.016
125

If the tolerable error is 1% (say) the sample size could be extended (to at least
200). If no further errors were found the deviation rate would be acceptable.

STATISTICAL v NON-STATISTICAL SAMPLING

9.1

Statistical sampling

Involves

use of random sample selection AND

probability theory to

evaluate sample results, and


measure the sampling risk.

Statistical sampling precludes the use of haphazard selection.

In practice, a high level of mathematical competence is required if valid conclusions are


to be drawn from sample evidence. Most firms draw up complex plans which can be
operated by staff without statistical training.

1911

SESSION 19 AUDIT SAMPLING

2 Main types

9.1.1

ATTRIBUTE SAMPLING

9.1.2

VARIABLES SAMPLING

Sampling units either have a


property (attribute) or they
do not

Sampling units can take a


value within a continuous
range

Concerns rates of occurrence


of events not monetary
amounts

Used to provide conclusions


on monetary values

Population value can be


estimated by extrapolation.

Therefore used in tests of


controls.

Example 5
Suggest relative advantages/disadvantages of statistical sampling.

Solution
Advantages

Disadvantages

9.2

Non-statistical sampling

Any approach which does not fulfil ALL the conditions set out above in the definition of
statistical sampling.

Includes not only non-random selection but evaluating errors on a judgement basis.

1912

SESSION 19 AUDIT SAMPLING

Example 6
Suggest the relative advantages/disadvantages of non-statistical sampling.

Solution
Advantages

Disadvantages

FOCUS
You should now be able to:

define audit sampling and explain the need for sampling;

identify and discuss the differences between statistical and non-statistical sampling;

discuss and provide relevant examples of the application of the basic principles of
statistical sampling and other selective testing procedures;

discuss the results of statistical sampling including consideration of whether additional


testing is required.

1913

SESSION 19 AUDIT SAMPLING

EXAMPLE SOLUTION
Solution 1 Why 100%

Population consists of a small number of large value items

Items to which monetary materiality does not apply

Unusual, one-off, or exceptional items

Any area where the auditor is put upon enquiry

Exceptionally high risk areas

When the repetitive nature of a CIS operation makes 100% examination cost-effective

Solution 2 Why not 100%

Cost expensive audit resources

Time financial statements unnecessarily delayed

Users of a/cs do not require 100% accuracy

Tedium audit staff might miss errors

Does not add value few errors would normally be expected

Solution 3 Tests of control: factors influencing sample size


Factor

Sample
size

Explanation

(1)

Reliance on
accounting and
internal control
systems (i.e. CR)

Increase

To support a lower assessment of CR, will


require larger sample sizes for tests of control

(2)

Tolerable error

Decrease

If the auditor is prepared to accept, say, a 3%


error rate rather than 1%, the amount of testing
(and hence sample size) is reduced

(3)

Expected error

Increase

If more errors are expected (perhaps because


they are suggested by prior period or other
findings) more work (i.e. greater sample size) is
required. Note that if error rates are expected to be
high, CR would be 100% no tests of control.

(4)

Confidence (i.e.
Risk)

Increase

More confidence requires more audit work i.e.


larger sample sizes

1914

SESSION 19 AUDIT SAMPLING

Factor

(5)

Population

Sample
size

Explanation

Negligible

The size of a large population has little, if any,


effect on the sample size (e.g. a sample size may
be 60 regardless of whether the population
contains 1,600 items, 16,000 items or 160,000
items). For small populations, evidence is
usually gathered by selective testing procedures
other than audit sampling.

Solution 4 Substantive procedures: factors influencing sample size


Factor

Sample
size

Explanation

(1)

IR

Increase

Consider the audit risk model. If IR is higher, DR


must be rendered lower by doing more
substantive work (i.e. greater sample sizes).

(2)

CR

Increase

If CR is higher (i.e. less reliance on tests of


controls) more evidence must be obtained from
substantive procedures (to render DR lower)

(3)

Other
substantive
procedures

Decrease

If assurance is (to be) obtained by analytical


procedures, less assurance is required from tests
of detail.

(4)

Confidence

Increase

As for Solution 3

(5)

Tolerable
error

Decrease

As for Solution 3

(6)

Expected error

Increase

As for Solution 3

(7)

Stratification

Decrease

The aggregate of the sample sizes from the strata


will usually be less than that of a single sample
drawn from the whole population

(8)

Population

Negligible

As for Solution 3. However, an increase in the


monetary value of a population may increase
sample size unless materiality is increased
proportionately.

1915

SESSION 19 AUDIT SAMPLING

Solution 5 Statistical sampling


Advantages

Disadvantages

Imposes more formal discipline to


planning audit of a population

Expense of implementation

Objectively determines sample sizes

Sample sizes may be too large

Evaluates test results more precisely

May be time-consuming (e.g. manually


determining cumulative monetary
amounts)

Quantifies sampling risk

Staff training

Use of judgement is not precluded (as it


is required to set objectives and evaluate
results).

In tests of control, qualitative aspects of


error evaluation cannot be statistically
analysed

Solution 6 Non-statistical sampling


Advantages

Disadvantages

Approach used for many years, is well


understood and refined by experience

Sample sizes may be too small to


satisfy stated objectives

Can use greater judgement and expertise

Sampling risk cannot be quantified

Non-random selection may be


quicker/more cost effective

Statistical sampling may be cheaper if


CAATs used

No special knowledge of statistics


required

Sample sizes may be unnecessarily


large

Less expensive to apply (usually)

Personal bias in sample selection may


be unavoidable (e.g. if using
haphazard selection)

1916