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Audit Sampling

AUDIT SAMPLING

JULIUS A GOPITA

SAINT THERESA COLLEGE OF TANDAG, INC

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Audit Sampling

Abstract

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.1 This section
provides guidance for planning, performing, and evaluating audit samples.
In other words, the standard recognizes that auditors will not ordinarily test all
the information available to them because this would be impractical as well as
uneconomical. Instead, the auditor will use sampling as an audit technique in
order to form their conclusions. It is important at the outset to understand that
some procedures that the auditor may adopt do not involve audit sampling,
100% testing of items within a population, for example. Auditors may deem
100% testing appropriate where there are a small number of high value items
that make up a population, or when there is a significant risk of material
misstatement and other audit procedures will not provide sufficient
appropriate audit evidence. However, candidates must appreciate that 100%
examination is highly unlikely in the case of tests of controls; such sampling is
more common for tests of detail (ie substantive testing).
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Audit Sampling

What is Audit Sampling?

Audit sampling is the application of audit procedures to less than all the items within a population of
audit relevance such that all sampling units have a chance of being selected, in order to provide the auditor with
a reasonable basis on which to draw conclusions about the entire population. Readers should note that a
sampling unit is not necessarily a monetary unit; it can be a physical item. For instance, a sampling unit can be
an individual debtor balance, which is a monetary unit. On the other hand, a sampling unit can be an invoice or
even an accounting entry, which are physical items.

Determine whether audit sampling is necessary

In practice, auditors may perform their tests on all items, specific items, and audit samples. In general,
auditors are unlikely to test all items in the case of tests of controls, unless they are using computer assisted
auditing techniques. Full testing in this case is impractical due to both the time and cost involved. It is more
usual to do a full examination on tests of details. For example, an auditor may test all items if a population
includes a small number of large value items, when there is a significant risk and other means do not provide
sufficient appropriate audit evidence, or when a full examination is cost effective. Selecting specific items for
testing is based on the auditors judgement and may be subject to non-sampling risk1. Auditors may select high
value items or all items over a certain amount. These two selection methods do not constitute audit sampling
because the results of audit procedures applied to items selected in these ways cannot be projected to the entire
population.

Audit Planning
Now readers should have an understanding of the risks involved in audit sampling, the next step is to
commence the audit planning. Lets review the implications of sample size. For tests of controls, the auditor
makes an assessment of the expected rate of deviation based on the auditors understanding of the relevant
controls or on the examination of a small number of items from the population. This assessment is made
in order to design an audit sample and to determine the sample size. For example, if the expected rate of
deviation is unacceptably high, the auditor will normally decide not to perform tests of controls. For tests of
details, the auditor makes an assessment of the expected misstatement in the population. If the expected
misstatement is high, all items are examined or a large sample size may be used.

In determining the sample size, the auditor should consider whether sampling risk is reduced to an
acceptably low level. Sample size is affected by the level of sampling risk that the auditor is willing to accept.
The lower the risk the auditor is willing to accept, the greater the sample size will need to be. Absolute
assurance cannot be achieved through sampling procedures. The lower the assurance required, the smaller the
required sample size. For tests of controls, the tolerable rate of deviation is the maximum deviation rate that can
be accepted to
conclude that the audit objective has been achieved. For tests of details, the tolerable misstatement is the
maximum misstatement that can be accepted to conclude the audit objective has been achieved.

Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete sub-
populations which have an identifying characteristic. The objective of stratification is to reduce the variability
of items within each stratum and therefore to allow the sample size to be reduced without increasing the
sampling risk. This enables the auditor to devote more time to items considered most vulnerable to material
misstatement. For example, the auditor may stratify the accounts receivable balances by age and focus on the
overdue accounts.

Evaluating the audit sampling results

After carrying out the planned audit procedures, the auditor has to analyze the misstatements or
deviations detected and uses these results to estimate the total misstatement or deviation rate in the population.
When analysing these results, the auditor should consider their nature, cause and possible impacts on other audit
areas and financial statements as a whole. The risk that the actual misstatement or deviation rate may exceed the
tolerable misstatement or tolerable rate of deviation should be assessed. In extremely rare circumstances, when
the auditor considers a misstatement or deviation discovered in a sample to be an anomaly, the auditor shall
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Audit Sampling

obtain a high degree of certainty that such a misstatement or deviation is not representative of the population.
The auditor shall obtain this degree of certainty by performing additional

audit procedures to obtain sufficient appropriate audit evidence that the misstatement or deviation does
not affect the remainder of the population. For tests of controls, no explicit projection of deviations is necessary
since the sample deviation rate is also the projected deviation rate for the population as a whole. The
auditor determines whether the tests of controls performed provide an appropriate
basis for reliance on the controls, whether additional tests of controls are necessary,
or whether the potential risks of misstatement need to be addressed using substantive
procedures.

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
Nonsampling risk
risk pertaining to nonsampling errors
Can be reduced to low levels through effective planning and supervisions of audit engagements

Nonstatistical sampling

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

Advantages of Statistical Sampling

Allows auditors to measure and control sampling risk which helps:

Design efficient samples
Measure sufficiency of evidence
Objectively evaluate sample results

Selection of Random Sample

Random sample results in a statistically unbiased sample that may not be a representative sample
Random sample techniques
Random number tables
Random number generators
Systematic selection

Other Methods of Sample Selection

Other methods
Haphazard selection
Select items on an arbitrary basis, but without any conscious bias
Block selection
Block sample consists of all items in a selected time period, numerical sequence or
alphabetical sequence
Stratification
Technique of dividing population into relatively homogeneous subgroups

Types of Statistical Sampling Plans

Attributes sampling
Is a statistical approach used with tests of controls. It requires the use of a
probabilistic sample selection method (random or systematic sampling). Attribute sampling allows the
auditor to estimate the proportion of population items containing a specified characteristic.

Discovery sampling
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Audit Sampling

A method of sampling to assess whether the percentage error is not in excess of a specified
percentage of the population. The sampling considers the population size, minimum unacceptable error
rate and the confidence level. If the sample does not have any errors then the actual error rate is below
the minimum unacceptable rate.

Classical variables sampling

Mean-per-unit estimation
Ratio estimation
Difference estimation
Probability-proportional-to-size sampling
Probability proportional to size ( PPS ) sampling is a method of sampling from a finite population of
units in which a size measure ( ) is available for each population unit before sampling and where
the probability of selecting unit is proportional to . It is a special case of unequal probability sampling

Dual Purpose Test

Tested used both as a test of control and substantiating the dollar amount of an account balance
Ex. Test to evaluate the effectiveness of a control over recording sales transactions and to
estimate the total overstatement or understatement of the sales account

Allowance for Sampling Risk

Amount used to create a range, set by + or limits from the sample results, within which the true value
of the population characteristic being measured is likely to lie
Precision
Wider the interval, more confident but less precise conclusion
Can be used to construct a dollar interval

Sample Size

Significant effect on allowance for sampling risk and sampling risk

Sample size increase -> sampling risk and allowance for sampling risk decrease
Sample size affected by characteristics of population
Generally as Population increases -> sample size increase

Requirements of Audit Sampling

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

Audit Sampling Steps for Tests of Controls

Determine the objective of the test

Define the attributes and deviation conditions
Define the population to be sampled
Specify:
The risk of assessing control risk too low
The tolerable deviation rate
Estimate the population deviation rate
Determine the sample size
Select the sample
Test the sample items
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Audit Sampling

Evaluate the sample results

Document the sampling procedure

Attributes Sampling Evaluation of Results

2 possible approaches:
1. Use the bracketed number from Table 9.4. If you find that number or less deviations, conclude that you
have accomplished your audit objective.
2. Use Table 9.5 for a more precise conclusion.

Example A--No Deviations Identified (Evaluating Attributes Sampling Results)

Approach 1You have met your audit objective (because the bracketed number was (2), you meet objective
when you identify 0, 1 or 2 deviations). What can you say?
I believe that the deviation rate in the population is less than 9 percent. You will be wrong 5
percent of the time when the deviation is exactly 9 percent. If the deviation rate is in excess of 9 percent you
will be wrong even less than 5 percent of the time. The planned assessed level of control risk is achieved.
Approach 2
You have tested 68 items, a number not on Table 9-5 (next slide
To be conservative go to next lowest number on table (65) and use it for your conclusions (we could,
but won't interpolate for a more precise answer).

You have met your audit objective. Table 9-5 gives us an answer of 4.6 percent. What can you say?
"I believe that the deviation rate in the population is less than 4.6 percent. You will be wrong 5
percent of the time when the deviation rate is exactly 4.6 percent. If the deviation rate is in excess of 4.6
percent you will be wrong even less than 5 percent of the time. The planned assessed level of control risk is
achieved.

Example B--3 Deviations Identified (Evaluating Attributes Sampling Results

Approach 1You have not met your audit objective. What can you say?
The achieved upper deviation rate is higher than 9 percent. The planned assessed level of control
risk is not achieved. You need to consider increasing the assessed level of control risk above the planned
assessed level.

Accordingly, you may not rely on internal control to the extent planned. Thus, the auditor will
need to increase the scope of substantive procedures (the nature, timing, and/or extent).
Approach 2You have not met your audit objective. Table 9-5 provides us an answer of 11.5 percent
I believe that the deviation rate in the population is less than 11.5 percent. You will be wrong 5
percent of the time when the deviation rate is exactly 11.5 percent. But this is not good enough as you wanted 9
percent rather than 11.5 percent. The planned assessed level of control risk is not achieved. You need to
consider increasing the assessed level of control risk above the planned assessed level.
As per Approach 1, an increase in the scope of substantive procedures is appropriate.

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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Monetary unit sampling

The method of sampling is a value-weighted selection whereby sample size selection and evaluation will result
in a conclusion in monetary amounts. The objective of monetary unit sampling (MUS) is to determine the
accuracy of financial accounts. The steps involved in monetary unit sampling are to:
determine a sample size
select the sample
perform the audit procedures
evaluate the results and arriving at a conclusion about the population.
MUS is based on attribute sampling techniques and is often used in tests of controls and appropriate when each
sample can be placed into one of two classifications exception or no exception. It turns monetary amounts
into units for example, a receivable balance of $50 contains 50 sampling units. Monetary balances can also be
subject to varying degrees of exception for example, a payables balance of $7,000 can be understated by $7,
$70, $700 or $7,000 and the auditor will clearly be interested in the larger misstatement

STATISTICAL VERSUS NON-STATISTICAL SAMPLING

Paper F8 students need to be able to differentiate between statistical and non-statistical sampling techniques.
ISA 530 provides the definition of statistical sampling as follows:

An approach to sampling that has the following characteristics:

i. Random selection of the sample items, and
ii. The use of probability theory to evaluate sample results, including
measurement of sampling risk.2

The ISA goes on to specify that a sampling approach that does not possess the
characteristics in (i) and (ii) above is considered non-statistical sampling.

Projecting misstatements

The auditor is required to project misstatements for the population to obtain a broad view of the scale of
misstatement. When a misstatement has been established as an anomaly, it may be excluded when projecting
misstatements to the population. However, such an effect, if uncorrected, still needs to be considered in addition
to the projection of the non-anomalous misstatements. In the case of tests of details, the projected misstatement
plus anomalous misstatement is the auditors best estimate of misstatement in the population. When the
projected misstatement plus anomalous misstatement exceeds tolerable misstatement, the sample does not
provide a reasonable basis for conclusions about the tested population. Considering the results of other audit
procedures helps the auditor to assess the risk that actual misstatement in the population exceeds tolerable
misstatement, and the risk may be reduced if additional audit evidence is obtained.

If the auditor concludes that audit sampling has not provided a reasonable basis for
conclusions about the tested population, the auditor may:

(i) Ask management to investigate misstatements that have been identified and the potential for further
misstatements, and make any necessary adjustments; or

(ii) Tailor the nature, timing and extent of those further audit procedures to best achieve the required assurance.
For example, in the case of tests of controls, the auditor might extend the sample size, test an alternative control
or modify related substantive procedures.

APPENDIX
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Audit Sampling

Relating the Risk of Incorrect Acceptance for a Substantive Test of Details to Other Sources of Audit Assurance

In Table 1 it is assumed, for illustrative purposes, that the auditor has chosen an audit risk (AR) of 5 percent for
an assertion. Table 1 incorporates the premise that internal control cannot be expected to be completely
effective in detecting aggregate misstatements equal to tolerable misstatement that might occur. The table also
illustrates the fact that the risk level for substantive procedures for particular assertions is not an isolated
decision. Rather, it is a direct consequence of the auditor's assessments of the risk of material misstatement
(RMM) (combined assessments of inherent and control risks), and judgments about the effectiveness of
substantive analytical procedures (AP) and other relevant tests of details (TD), and it cannot be properly
considered out of this context.

Table 1
Allowable Risk of Incorrect Acceptance (TD) for Various
Assessments of RMM and AP; for AR = .05

Auditor's subjective assessment of risk that

substantive analytical procedures and other relevant
substantive procedures might fail to detect
aggregate misstatements equal to tolerable
misstatement.
Auditor's subjective assessment of risk of material misstatement.

RMM APP
10% 30% 50% 100%

TD
10% * * * 50%
30% * 55% 33% 16%
50% * 33% 20% 10%
100% 50% 16% 10% 5%

* The allowable level of AR of 5 percent exceeds the product of RMM and AP,
and thus, the planned test of details may not be necessary unless specified
by regulation or other Standards (e.g., confirmation or inventory observation
procedures).

Note: The table entries for TD are computed from the illustrated model: TD
equals AR/(RMM x AP). For example, for RMM = .50, AP = .30, TD = .05/(.50 x
.30) or .33 (equals 33%).
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Table 2
Factors Influencing Sample Sizes for a

Test of Details in Sample Planning

Conditions leading to Related factor for

Factor Smaller sample size Larger sample size substantive sample planning

a. Assessment of Low assessed level High assessed Allowable risk of incorrect

inherent risk of inherent risk. level of inherent risk. acceptance.

b. Assessment of Low assessed level High assessed Allowable risk of incorrect

control risk. of control risk. level of control risk. acceptance.

c. Assessment of Low assessment of High assessment Allowable risk of incorrect

risk for other risk associated with of risk associated acceptance.
substantive other relevant with other relevant
procedures substantive procedures. Substantive procedures.
related to the
same assertion
(including
substantive
analytical
procedures and
other relevant
substantive
procedures).

d. Measure of Larger measure of Smaller measure of tolerable Tolerable misstatement.

tolerable tolerable misstatement. misstatement.
misstatement for
a specific account.
Tolerable
misstatement.
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REFERENCES

HKICPA (2010) HKSA 530 Audit Sampling

Http://isca.org.sg > media > nov-48-52-a

Http://isca.org.sg > summary-ssa-530-16-jun3

ISA 530, paragraph 5 (a)

ISA 530, paragraph 5 (g)

onlinelibrary.wiley.com/doi/10.1002/9781118445112.stat03346.pub2/full

www.businessdictionary.com/definition/discovery-sampling.html
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