Audit Sampling

7 Audit Sampling

Question 1 : Explain the following terms with reference to

Audit Sampling .
i. Stratification
ii. Tolerable misstatement
iii. Tolerable rate of deviation [RTP –MAY 2021]
Answer 1 :
i. Stratification – The process of dividing a population into sub-
populations, each of which is a group of sampling units which
have similar characteristics (often monetary value).
ii. Tolerable misstatement – 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.
iii. Tolerable rate of deviation – 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.

Question 2 : In most of the circumstances, the evidence

available is not conclusive and the auditor always takes a
calculated risk in giving his opinion. Even by undertaking
hundred percent checking of the transactions, the auditor does
not derive absolute satisfaction. This state of uneasiness led
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Question Answer Booklet 7.1
 Audit Sampling

pragmatic auditors to adopt the statistical theory of sampling

to derive the necessary satisfaction about the state of affairs by
checking only a part of the total population of entries. Explain
in detail. [RTP –MAY 2021]
Answer 2 : In most of the circumstances, the evidence available is
not conclusive and the auditor always takes a calculated risk in
giving his opinion. Even by undertaking hundred percent checking
of the transactions, the auditor does not derive absolute
satisfaction. This state of uneasiness led pragmatic auditors to
adopt the statistical theory of sampling to derive the necessary
satisfaction about the state of affairs by checking only a part of the
total population of entries.
Auditors realised that they can derive good satisfaction by
undertaking a much lesser checking by adoption of this technique in
the auditing process. It is a mathematical truth that the sample, if
picked purely on a random basis would reveal the features and
characteristics of the population.
By adopting the sampling technique, the auditor only checks a part
of the whole mass of transactions. The satisfaction he used to derive
earlier, by checking all the transactions, can be derived by a sample
checking provided he can put reliance on the internal controls and
checks within the client’s organisation because they provide the
reliability of the records. Sampling is used as a part of Test of
controls. Auditor will check few internal controls and their
operating effectiveness. Based on the conclusion derived, he can
then design the sample size for test of details (i.e checking of
transactions and balances)
If the internal control is satisfactory in its design and
implementation, a much smaller sample can give the auditor the
necessary reliability of the result he obtains.
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 Audit Sampling

On the other hand, if in certain areas controls are slack or not

properly implemented, the auditor may have to take a much larger
sample for getting satisfactory result.
Another truth about the sampling technique should be noted. It can
never bring complete reliability; it cannot give precisely accurate
results. It is a process of estimation. It may have some error. What
error is tolerable for a particular matter under examination is a
matter of the individual’s judgment in that particular case.
Question 3 : When designing an audit sample, the auditor shall
consider the purpose of the audit procedure and the
characteristics of the population from which the sample will be
drawn. Explain in detail. [RTP –NOV 2021]
Answer 3 : Audit sampling enables 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. Audit
sampling can be applied using either non-statistical or statistical
sampling approaches.
When designing an audit sample, the auditor’s consideration
includes the specific purpose to be achieved and the combination of
audit procedures that is likely to best achieve that purpose.
Consideration of the nature of the audit evidence sought and
possible deviation or misstatement conditions or other
characteristics relating to that audit evidence will assist the auditor
in defining what constitutes a deviation or misstatement and what
population touse for sampling. In fulfilling the requirement of
relevant portion (paragraph 8) of SA 500, when performing audit
sampling, the auditor performs audit procedures to obtain
evidence that the population from which the audit sample is drawn
is complete.
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 Audit Sampling

The auditor’s consideration of the purpose of the audit procedure

includes a clear understanding of what constitutes a deviation or
misstatement so that all, and only, those conditions that are relevant
to the purpose of the audit procedure are included in the evaluation
of deviations or projection of misstatements. For example, in a test
of details relating to the existence of accounts receivable, such as
confirmation, payments made bythe customer before the
confirmation date but received shortly after that date by the
client, are not considered a misstatement. Also, a misposting
between customer accounts does not affect the total accounts
receivable balance. Therefore, it may not be appropriate to consider
this a misstatement in evaluating the sample results of this
particular audit procedure, even though it may have an important
effect on other areas of the audit, such as the assessment of the risk
of fraud or the adequacy of the allowance for doubtful accounts.
In considering the characteristics of a population, for tests of
controls, the auditor makes an assessment of the expected rate of
deviation based on the auditor’s 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 sample size. For example, if the
expected rate of deviation is unacceptably high, the auditor will
normally decide not to perform tests of controls. Similarly, for tests
of details, the auditor makes an assessment of the expected
misstatement in the population. If the expected misstatement is
high, 100% examination or use of a large sample size may be
appropriate when performing tests of details.
In considering the characteristics of the population from which the
sample will be drawn, the auditor may determine that
stratification or value-weighted selection is appropriate.
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 Audit Sampling

The decision whether to use a statistical or non-statistical sampling

approach is a matter for the auditor’s judgment; however, sample
size is not a valid criterion to distinguish between statistical and
non-statistical approaches.

Question 4 : In considering the characteristics of the

population from which the sample will be drawn, the auditor
may determine that stratification or value-weighted selection
technique is appropriate. Guide the auditor on the use of
stratification and value-weighted sampling techniques. [RTP –
NOV 2021]
Answer 4 : In considering the characteristics of the population from
which the sample will be drawn, the auditor may determine that
stratification or value-weighted selection technique is appropriate.
SA 530 provides guidance to the auditor on the use of stratification
and value- weighted sampling techniques.
Stratification: 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 allow sample size to be reduced
without increasing sampling risk.
When performing tests of details, the population is often stratified
by monetary value. This allows greater audit effort to be directed to
the larger value items, as these items may contain the greatest
potential misstatement in terms of overstatement.
Similarly, a population may be stratified according to a particular
characteristic that indicates a higher risk of misstatement, for
example, when testing the allowance for doubtful accounts in the
valuation of accounts receivable, balances may be stratified by age.
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 Audit Sampling

Dividing a population into discrete sub population which have

identifying characteristics is called as Stratification. Each Sub
population is called as Stratum and units under those sub
population are referred to as Strata.
The results of audit procedures applied to a sample of items within
a stratum can only be projected to the items that make up that
stratum. To draw a conclusion on the entire population, the auditor
will need to consider the risk of material misstatement in relation to
whatever other strata make up the entire population.
The results of samples from the units drawn under each sub
population are projected to that respective stratum. In order to
draw an opinion on the overall population, the auditor needs to
combine the results of all the stratum to check for possible
deviation or risk of material misstatement.
Projected misstatements of each stratum will be combined together
to consider the possible effect of misstatement in the account
balances and class of transactions.
Example
20% of the items in a population may make up 90% of the value of
an account balance. The auditor may decide to examine a sample of
these items. The auditor evaluates the results of this sample and
reaches a conclusion on the 90% of value separately from the
remaining 10% (on which a further sample or other means of
gathering audit evidence will be used, or which may be considered
immaterial).
Value-Weighted Selection: When performing tests of details it
may be efficient to identify the sampling unit as the individual
monetary units that make up the population. Having selected
specific monetary units from within the population, for example, the
accounts receivable balance, the auditor may then examine the
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 Audit Sampling

particular items, for example,individual balances, that contain those

monetary units.
One benefit of this approach to defining the sampling unit is that
audit effort is directed to the larger value items because they have a
greater chance of selection, and can result in smaller sample sizes.
This approach may be used in conjunction with the systematic
method of sample selection and is most efficient when selecting
items using random selection.
In value weighted selection, the sample size, its selection and
evaluation will resultin a conclusion in monetary amounts.
Question 5 : What are the advantages of Statistical sampling
technique in auditing ? [RTP –MAY 2022]
Answer 5 : Advantages of Statistical Sampling in Auditing: The
advantages of statistical sampling may be summarized as follows
i. The amount of testing (sample size) does not increase in
proportion to the increasein the size of the area (universe)
tested.
ii. The sample selection is more objective and thereby more
defensible.
iii. The method provides a means of estimating the minimum
sample size associatedwith a specified risk and precision.
iv. It provides a means for deriving a “calculated risk” and
corresponding precision (sampling error) i.e. the probable
difference in result due to the use of a sample in lieu of
examining all the records in the group (universe), using the
same audit procedures.
v. It may provide a better description of a large mass of data than
a complete examination of all the data, since non-sampling
errors such as processing and clerical mistakes are not as large.

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 Audit Sampling

Question 6 : Sampling risk can lead to two types of erroneous

conclusions. Explain clearly stating the meaning of sampling
risk.[RTP –MAY 2022]
Answer 6 : Sampling Risk. The risk that the auditor’s conclusion
based on a sample may be different from the conclusion if the entire
population were subjected to the same audit procedure. This risk
will always be in existence when auditor uses sampling technique in
conducting his audit.
Sampling risk can lead to two types of erroneous conclusions:
i. In the case of a test of controls, that controls are more effective
than they actually are, or in the case of a test of details, that a
material misstatement does not exist when in fact it does. The
auditor is primarily concerned with this type of erroneous
conclusion because it affects audit effectiveness and is more
likely to lead to an inappropriate audit opinion. This is because
of over reliance on the internal controls.
ii. In the case of a test of controls, that controls are less effective
than they actually are, or in the case of a test of details, that a
material misstatement exists when in fact it does not. This type
of erroneous conclusion affects audit efficiency as it would
usually lead to additional work to establish that initial
conclusions were incorrect. This is because of under reliance on
the test of controls and detailed substantive procedures
performed by the auditor. Here risk of giving wrong opinion is
minimum but it will lead to more detailed checking which is
time consuming.
Question 7 : Explain the meaning of Audit Sampling as per the
relevant standard on auditing. State the requirements relating
to audit sampling, sample design, sample size and selection
of items for testing. [RTP –NOV 2022]
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 Audit Sampling

Answer 7 : Audit Sampling: As per SA 530 on “Audit Sampling”,

the meaning of the term 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.
The requirements relating to sample design, sample size and
selection of items for testing are explained below-
▪ Sample design - When designing an audit sample, the auditor
shall consider the purpose of the audit procedure and the
characteristics of the population from which the sample will be
drawn.
▪ Sample Size - The auditor shall determine a sample size
sufficient to reduce sampling risk to an acceptably low level.
▪ Selection of Items for Testing - The auditor shall select items
for the sample in such a way that each sampling unit in the
population has a chance of selection.
Question 8 : This method is considered appropriate provided
the population to be sampled consists of reasonably similar
units and fall within a reasonable range i.e . it is suitable for a
homogeneous population having a similar range. Explain
about that method. [RTP –NOV 2022]
Answer 8 : Simple Random Sampling: Under this method each
unit of the whole population e.g. purchase or sales invoice has an
equal chance of being selected. It is considered that random
number tables are simple and easy to use and also provide
assurance that the auditors’ bias does not affect the selection. Each
item in a population is selected by useof random number table

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 Audit Sampling

either with a help of computer or picking up a number in a

random way (may be randomly from a drum). Today random
numbers are also generated using various applications on the
cellphones like the random number generator.
This method is considered appropriate provided the population to
be sampled consists of reasonably similar units and fall within a
reasonable range i.e . it is suitable for a homogeneous population
having a similar range.
Question 9 : The approach to audit and extent of checking are
undergoing a progressive change in favour of more attention
towards the questions of principle and controls with a
curtailment of non-consequential routine checking. Discuss
the given statement. [MAY 2022]
Answer 9 : Sampling: An Audit Procedure: No conscious effort in
human society is divested of economic considerations and auditing
is no exception. There is a growing realisation that the traditional
approach to audit is economically wasteful because all the efforts
are directed to check all transactions without any exception. This
invariably leads to more emphasis on routine checking, which often
is not necessary in view of the time and the cost involved. With the
shift in favour of formal internal controls in the management of
affairs of organisations, the possibilities of routine errors and
frauds have greatly diminished i.e., the internal controls as
designed by the management are for the very purpose of
Prevention, Detection and Correction of Frauds and Errors. Thus,
the auditors often find extensive routine checking as nothing more
than a ritual because it seldom reveals anything material. Now the
approach to audit and the extent of checking are undergoing a
progressive change in favour of more attention towards the
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 Audit Sampling

questions of principles and controls with a curtailment of non-

consequential routine checking. By routine checking, we
traditionally think of extensive checking and vouching of all the
entries, disregarding the concept of materiality.
The extent of the checking to be undertaken is primarily a matter
of judgment of the auditor. There is nothing statutorily stated
anywhere which specifies what work is to be done, how it is to be
done and to what extent it has to be done. It is also not obligatory
that the auditor must adopt the sampling technique. What he is to
do as an auditor is to express his opinion on the financial
statements and become bound by that.
To ensure good and reasonable standard of work, he should adopt
standards and techniques that can lead him to an informed
professional opinion. On consideration of this fact, it can be said
that it is in the interest of the auditor that if he decides to form his
opinion on the basis of a part checking (i.e., sampling), he should
adopt standards and techniques which are widely followed and
which have a recognised basis.
Since statistical theory of sampling is based on a scientific law, it
can be relied upon to a greater extent than any arbitrary technique
which lacks in basis and acceptability. This enables the auditor to
make conclusions and express fair opinion without having to
check all of the items within the financial statements.
Question 10 : With reference to SA 530 “Audit Sampling”,
explain briefly the following factors that the auditor may
consider when determining the sample size for the Test of
Details –
i. The desired level of assurance
ii. Stratification of the pollution. [DEC 2021]
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 Audit Sampling

Answer 10 : Examples of factors influencing Sample Size for

Test of Details:
i. Desired Level of Assurance: An increase in the auditor’s
desired level of assurance that tolerable misstatement is not
exceeded by actual misstatement in the populationwill
increase the sample size. Hence, greater the level of assurance
that the auditor requires that the results of the sample are in
fact indicative of the actual amount of misstatement in the
population, the larger the sample size needs to be.
ii. Stratification of population: When stratification of the
population is appropriate then sample size will decrease as
when there is a wide range (variability) in the monetary size of
items in the population, it may be useful to stratify the
population. When a population can be appropriately stratified,
the aggregate of the sample sizes from the strata generally will
be less than the sample size that would have been required to
attain a given level of sampling risk, had one sample been
drawn from the whole population.
Question 11: CA B is appointed as an auditor of M/s. Divine
Pharmacy, a wholesale medicine supplier. While auditing for
the financial year 2020-21, CA B wants to use test checking
technique. Advise CA B, what kind of precautions should be
taken by him in this regard. [JULY 2021]
Answer 11 : While auditing the accounts of Divine Pharmacy, CA B
wanted to use Test Checking technique. The following Precautions
should to be taken by CA B while applying test check techniques:
▪ Thorough study of accounting system should be done before
adopting sampling

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 Audit Sampling

▪ Proper study of internal control systems.

▪ Areas which are not suitable for sampling should be carefully
considered. eg:compliance with statutory provisions,
transactions of unusual nature etc.
▪ Proper planning for Sampling methods to be used and
explaining the staff,
▪ Transactions and balances have to be properly classified
(stratified)
▪ Sample size should be appropriately determined.
▪ Sample should be chosen in unbiased way,
▪ Errors located in the sample should be analyzed properly.
Question 12: In the context of SA 530 ‘Audit Sampling’, explain
the terms ‘Sampling Risk’ and ‘Non- Sampling risk’. [JAN 2021]
Answer 12 : Sampling Risk. The risk that the auditor’s conclusion
based on a sample may be different from the conclusion if the entire
population were subjected to the same audit procedure. Sampling
risk can lead to two types of erroneous conclusions:
i. In the case of a test of controls, that controls are more effective
than they actuallyare, or in the case of a test of details, that a
material misstatement does not exist when in fact it does. The
auditor is primarily concerned with this type of erroneous
conclusion because it affects audit effectiveness and is more
likely to lead to an inappropriate audit opinion.
ii. In the case of a test of controls, that controls are less effective
than they actually are, or in the case of a test of details, that a
material misstatement exists when in fact it does not. This type
of erroneous conclusion affects audit efficiency as it would

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 Audit Sampling

usually lead to additional work to establish that initial

conclusions were incorrect.
Non-Sampling Risk. The risk that the auditor reaches an erroneous
conclusion for any reason not related to sampling risk.
Example
Examples of non-sampling risk include use of inappropriate audit
procedures, or misinterpretation of audit evidence and failure to
recognize a misstatement or deviation.
Sources of Non Sampling risk are :
i. Human Mistakes
ii. Applying audit procedures not appropriate to the objectives of
audit
iii. Relying on erroneous information e.g. erroneous confirmation
iv. Misinterpreting the sample results
Non sampling risk can never be mathematically measured.
Question 13 : It is imperative for the auditor to project
misstatements for the population while performing audit
procedures through sampling. Comment.[NOV 2020]
Answer 13 :
i. The auditor is required to project misstatements for the
population to obtain a broad view of the scale of misstatement
but this projection may not be sufficient to determine an
amount to be recorded.
ii. When a misstatement has been established as an anomaly, it
may be excluded when projecting misstatements to the
population. However, the effect of any such misstatement, if
uncorrected, still needs to be considered in addition to the
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 Audit Sampling

projection of the non-anomalous misstatements.

iii. For tests of details, the auditor shall project misstatements
found in the sample to the population whereas 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.
Question 14: ABC Ltd is a Large Company with huge purchase
and sales transactions. Which sampling approach is
recommended in such a company? Explain giving features of
such sampling approach along with example.[MTP MAY 2022]
Answer 14 : In larger organisations, with huge transactions,
statistical sampling is always recommended as itis unbiased, and
the samples selected are not prejudged.
Features/Characteristics of Statistical Sampling:
i. Audit testing done through this approach is more scientific than
testing based entirely on the auditor’s own judgment because it
involves use of mathematical laws of probability in
determining the appropriate sample size in varying
circumstances.
ii. Statistical sampling has reasonably wide application where a
population to be tested consists of a large number of similar
items and more in the case of transactions involving compliance
testing, trade receivables’ confirmation, payroll checking,
vouching of invoices and petty cash vouchers.
iii. There Is no personal bias of the auditor in case of statistical
sampling. Since it is scientific,the results of sample can be
evaluated and projected on the whole population in a more
reliable manner.
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 Audit Sampling

For Example: An auditor while verifying the Purchases during

the year realised that the purchase transactions in that year are
more than 45000 in number, then in such case, statistical
sampling will be highly recommended in the audit program.
Random Sampling (discussed ahead in this topic) is the method
you decide to choose sample in such a situation.
Question 15 : State the requirements relating to audit
sampling, sample design, sample size and selection of items for
testing.[MTP NOV 2021]
Answer 15 : Audit Sampling: As per SA 530 on “Audit Sampling”,
the meaning of the term 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.
The requirements relating to sample design, sample size and
selection of items for testing areexplained below-
Sample design - When designing an audit sample, the auditor shall
consider the purpose of theaudit procedure and the characteristics
of the population from which the sample will be drawn.
Sample Size- The auditor shall determine a sample size sufficient
to reduce sampling risk to anacceptably low level.
Selection of Items for Testing- The auditor shall select items for
the sample in such a way thateach sampling unit in the population
has a chance of selection.

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 Audit Sampling

Question 16 : CA X is not sure about the kind of Sampling

method to be used for audit of a company. Advise him about the
choice of methods (name of methods only) of Sampling to be
used in various circumstances. Also explain briefly the
advantages of the Sampling to be used by him in auditing.
[MTP MAY 2021]
Answer 16 : Sample Selection:
CA. X should obtain the knowledge before using the sampling
methods. The principal methodsare as follows:
1. Random selection.
2. Systematic selection.
3. Monetary Unit sampling.
4. Haphazard selection.
5. Block selection.
Advantages of Statistical Sampling in Auditing:
i. The amount of testing (sample size) does not increase in
proportion to the increase in thesize of the area (universe)
tested.
ii. The sample selection is more objective and thereby more
defensible.
iii. The method provides a means of estimating the minimum
sample size associated with a specified risk and precision.
iv. It provides a means for deriving a "calculated risk" and
corresponding precision (sampling error) i.e. the probable
difference in result due to the use of a sample in lieu of
examining all the records in the group (universe), using the
same audit procedures.
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 Audit Sampling

V. It may provide a better description of a large mass of data than

a complete examination ofall the data, since non-sampling
errors such as processing and clerical mistakes are not as large.
Question 17 : Sampling risk can lead to erroneous
conclusions". Justify. [MTP MAY 2021]
Answer 17 : Sampling Risk is the risk that the auditor’s conclusion
based on a sample may be different fromthe conclusion if the entire
population were subjected to the same audit procedure. Sampling
risk can lead to two types of erroneous conclusions:
i. In the case of a test of controls, that controls are more effective
than they actually are, or in the case of a test of details, that a
material misstatement does not exist when in fact it does. The
auditor is primarily concerned with this type of erroneous
conclusion because it affects audit effectiveness and is more
likely to lead to an inappropriate audit opinion.
ii. In the case of a test of controls, that controls are less effective
than they actually are, or in the case of a test of details, that a
material misstatement exists when in fact it does not. This type
of erroneous conclusion affects audit efficiency as it would
usually lead to additional work to establish that initial
conclusions were incorrect.

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 Audit Sampling

Question 18 : Audit testing done through Statistical sampling is

more scientific than testing based entirely on the auditor’s own
judgment because it involves use of mathematical laws of
probability in determining the appropriate sample size in
varying circumstances. Explain and also state advantages of
Statistical sampling. [MTP NOV 2020]
Answer 18 : Audit testing done through this approach is more
scientific than testing based entirely on the auditor’s own
judgment because it involves use of mathematical laws of
probabili ty in determining the appropriate sample size in varying
circumstances. Statistical sampling has reasonably wide
application where a population to be tested consists of a large
number of similar items and more in the case of transactions
involving compliance testing, trade receivables’ confirmation,
payroll checking, vouching of invoices and petty cash vouchers.
The advantages of statistical sampling may be summarized as
follows -
1. The amount of testing (sample size) does not increase in
proportion to the increase in the size of the area (universe)
tested.
2. The sample selection is more objective and thereby more
defensible.
3. The method provides a means of estimating the minimum
sample size associated with a specified risk and precision.
4. It provides a means for deriving a “calculated risk” and
corresponding precision (sampling error) i.e. the probable
difference in result due to the use of a sample in lieu of

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 Audit Sampling

examining allthe records in the group (universe), using the

same audit procedures.
5. It may provide a better description of a large mass of data than
a complete examination of all the data, since non-sampling
errors such as processing and clerical mistakes are not as
large.

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