CHAPTER 19: Visual Overview

CHAPTER 19: Audit Samplings

Objective: To identify and d=escribe audit sampling and other selective testing
procedures.

19.1.1 Basic Principles

1.1 Basic Principles

ISA 500 Audit Evidence requires that sufficient appropriate audit evidence be obtained.
In designing tests, the auditor determines how to select items that will be effective in
meeting the purpose of the test. That will be any or a combination of:
 selecting all items (100% examination);
 selecting specific items ("judgmental sampling"); and
 audit sampling.

1.1.1 Selecting All Items

Selecting all items is most likely to be suitable:
 For a population of a small number of large value items (e.g. non-current
asset additions).
 When a significant risk exists and other methods do not provide sufficient
appropriate evidence.
 When the repetitive nature and reliability of an operation (e.g. performed
automatically by an information system) makes a 100% examination cost-
effective.
100% examination is unlikely to be suitable for tests of controls and is more common for
tests of details.

1.1.2 Selecting Specific Items

Factors that assist judgmental sampling include understanding the entity, the assessed
risks of material misstatement and the characteristics of the population being tested.
Although it may be an effective means of gathering evidence, it is highly dependent on
the auditor's professional judgment. Also, the test results cannot be extrapolated to the
rest of the population, because of the selective examination of specific items.
 High-value or key items (e.g. suspicious, unusual, risk-prone, or with a history
of misstatement).
 All items above a certain amount (e.g. performance materiality level). It is
likely to be material if a misstatement is discovered in this population.
 Items to obtain information (e.g. about the nature of the entity or
transactions).

1.1.3 Audit Sampling (ISA 530)

Definitions

Audit sampling – applying audit procedures to less than 100% of items in a population, such that all
sampling units have a chance of selection, in order to draw a conclusion about the population.
Activity 1 Why Not 100%

Suggest reasons why it is unnecessary for an auditor to carry out tests on all the
transactions and balances of a business.
*Please use the notes feature in the toolbar to help formulate your answer.
Cost/benefit – testing all transactions and balances would incur higher costs without
meaningfully reducing detection risk.
Time – the additional time it could take to test all transactions and balances might result
in undue delay in issuing the financial statements.
Reasonable assurance – the auditor’s responsibility is to obtain reasonable assurance;
this is not a guarantee.
Materiality – the auditor concludes on whether the financial statements are free from
material misstatement; this does not require 100% accuracy.

19.1.2 Terminology
1.2 Terminology
 Definitions

Anomaly – a misstatement or deviation that is demonstrably not representative of misstatements o

deviations in a population (e.g. because it arises from an isolated event that has not reoccurred other
on specifically identifiable occasions).

Key Point

ISA 530 does not use the term “error” but distinguishes between:
 Misstatement (i.e. a monetary difference) identified by a test of details; and
 Deviation (i.e. when an internal control procedure has not been applied as prescribed) as
identified by a test of controls.

Definitions

 Population – the entire set of data from which the auditor wishes to sample (e.g. all items i
account balance or a class of transactions).
 Sampling risk – the risk that arises from the possibility that the auditor's conclusion, based
sample, may be different from the conclusion that would be reached if the entire population
were subjected to the same audit procedure.
Sampling risk can lead to two types of incorrect conclusions that affect the effectiveness
or efficiency of the audit:
 effectiveness – the risk the auditor will conclude that control risk is lower
than it actually is (conclude that controls are more effective than they actually
are) or that for a test of details, a material misstatement does not exist when
in fact it does. These risks affect audit effectiveness and are more likely to
lead to an inappropriate audit opinion.
 efficiency – the risk the auditor will conclude that control risk is higher than it
actually is (conclude that controls are less effective than they actually are) or
for a test of details that a material misstatement exists when in fact, it does
not. These risks affect audit efficiency, as they required additional work to
show that the initial conclusions were incorrect.
Key Point

The smaller the sample size, the greater the sampling risk.

Definitions

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
reason not related to the size of the sample. For example, the auditor might use inappropriate proced
or misinterpret evidence and fail to recognise a deviation or misstatement. (Judgmental selection is
subject to non-sampling risk.)
Sampling unit – the individual items that constitute a population, for example credit entries on bank
statements, sales invoices, trade receivable balances or a monetary unit ($1).
 Definitions

Statistical sampling – any approach to sampling that has the following characteristics:
1. random selection of a sample; and
2. use of probability theory to evaluate sample results, including measurement of sampling ris

Key Point

A sampling approach that does not have both characteristics is non-statistical sampling.

Definitions

Stratification – the process of dividing a population into subpopulations, each of which is a group of
sampling units with similar characteristics (often monetary value).
Tolerable misstatement (in tests of details) – the highest misstatement that could occur before the
population would be considered materially misstated.
Tolerable rate of deviation (in tests of controls) – the highest deviation rate (i.e. the proportion of ite
with deviations from controls) the auditor could accept and still conclude that the design and operation
an internal control over the population is effective.
Tolerable misstatement is the application of performance materiality to a sampling
procedure; it cannot be greater than performance materiality.
The tolerable deviation rate may be zero (i.e. any deviation in a control must be
investigated).

19.2.0 Introduction

2.0 Introduction

For both statistical and non-statistical audit sampling, the stages in the sampling
process include:
 sample design;
 sample size;
 sample selection;
 performing audit procedures ("testing"); and
 evaluating results.
The distinction between statistical and non-statistical audit sampling is considered later
in s.3.

19.2.1 Design

2.1 Design
Matters to be considered when designing an audit sample include:
 Specific purpose to be achieved (the test objective);
 The nature of the audit evidence sought;
 Evidence that the population from which the sample is drawn is complete;
 Characteristics of the population;
 What will be regarded as a deviation or misstatement (e.g. when testing
collectability of receivables, reconciling items – cash or goods in transit –
would not be considered misstatements); and
 Whether the approach will be statistical or non-statistical.

19.2.2 Sample Size

2.2 Sample Size

Key Point

 The sample size should be sufficient to reduce sampling risk to an acceptably low level.
 In general, the lower the sampling risk the auditor is prepared to accept, the greater the sam
size will need to be.
 The sample size can be determined statistically or using professional judgment.
Different firms use different methodologies to determine sample sizes (e.g. based on
population value and performance materiality). For example, a minimum of 30 and a
maximum of 60 randomly selected items for a “robust” sample (i.e. representative of the
population as a whole).
Activity 2 Tests of Controls

For each of the following factors, decide whether the effect on sample size is an
increase, decrease or no effect.
 Increase in intended reliance on operating effectiveness of internal controls.
 Increase in the tolerable deviation rate.
 Increase in the expected deviation rate.
 Increase in confidence level (i.e. decrease in risk).
 Increase in the number of sampling units in the population.
*Please use the notes feature in the toolbar to help formulate your answer.

Sample
Factor size Explanation

To support a lower assessment of CR will require larger

↑Reliance on sample sizes for tests of control.
1 internal controls If zero assurance is placed on controls, the sample size for
. (i.e. ↓CR) ↑Increase testing controls would be zero
 Sample
Factor size Explanation

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

2 ↑Tolerable rather than 1%, the amount of testing (and hence sample
. deviation rate ↓Decrease size) is reduced.

If a higher proportion of deviations is expected (perhaps

because they are suggested by a prior period or other
findings) more work (i.e. greater sample size) is required.
3 ↑Expected Note: If deviation rates are expected to be high, CR would be
. deviation rate ↑Increase the same as IR; therefore, no tests of control.

More confidence requires more audit work (i.e. larger sample

sizes).
4 ↑Confidence If the confidence (assurance) is to be 100%, the entire
. (i.e. ↓Risk) ↑Increase population would need to be tested.

A large population has little, if any, effect on the sample size

(e.g. a sample size may be 100 regardless of whether the
population contains 1,600 items, 16,000 items or 160,000
5 items). For small populations, evidence is usually gathered by
. ↑Population Negligible selective testing procedures other than audit sampling.
Activity 3 Tests of Details

For each of the following factors, decide whether the effect on sample size is an
increase, decrease or no effect.
1. Increase in the auditor’s assessment of the risk or material misstatement.
2. Increase in the use of other substantive procedures aimed at the same
assertion.
3. Increase in confidence level (i.e. decrease in risk).
4. Increase in tolerable misstatement.
5. Increase in expected misstatement.
6. Stratification of the population.
7. Increase in the number of sampling units in the population.
*Please use the notes feature in the toolbar to help formulate your answer.

Sample
Factor size Explanation

Consider the audit risk model. If RoMM is higher, DR must

1 be reduced – by doing more substantive work (i.e. greater
. ↑RoMM ↑Increase sample sizes).
 Sample
Factor size Explanation

2 ↑Other substantive If assurance is (to be) obtained by analytical procedures,

. procedures ↓Decrease less assurance is required from tests of details.

3
. ↑Confidence ↑Increase As for Solution 2

4 ↑Tolerable If the auditor is prepared to accept a higher $ misstatement,

. misstatement Decrease↓ the amount of testing (and hence sample size) is reduced.

5 ↑Expected More work (i.e. larger sample size) is required if more

. misstatement ↑Increase misstatements are expected.

The aggregate of the sample sizes from the strata will

6 usually be less than that of a single sample drawn from the
. ↑Stratification ↓Decrease whole population.

As for Solution 2. However, an increase in the monetary

7 value of a population may increase sample size unless
. ↑Population Negligible materiality is increased proportionately.

19.2.3 Selection
2.3 Selection

Key Point

 In audit sampling, all sampling units must have a chance of selection, by definition. It is
important to avoid bias when selecting a representative sample.
 For statistical sampling, sample items must be randomly selected.
The principal methods of selecting samples for audit sampling are:
 random selection;
 systematic (interval) selection;
 haphazard selection;
 block sampling; and
 monetary unit sampling.

2.3.1 Random Selection

A random sample may be selected using random number tables or a computerised
random number generator.

2.3.2 Systematic (Interval) Selection

Systematic selection uses a constant interval (number of population units divided by the
sample size) between items selected (with a random start). For example, every 20th
voucher number.
Care must be taken to ensure that the population is randomly distributed and that no
bias is introduced due to how the population is structured.
Value-weighted selection uses monetary unit values rather than the items as the
sampling population (e.g. monetary unit sampling).

2.3.3 Monetary Unit Sampling (MUS)

In MUS, items are selected from the specific monetary units (e.g. dollars) that make up
the population. Each unit has the same (i.e. equal) chance of selection, but the
likelihood of each item in the population being selected is "value-weighted".
Having selected the monetary units from the population, the auditor will examine each
balance (e.g. amounts receivable from specific customers) that contains each unit
selected. (Or, if the population is made up of transactions, the auditor examines each
transaction that includes each selected unit.)
This sample selection method will test the higher-value items because they have a
greater chance for selection, resulting in a smaller sample size. Any amount in the
population that exceeds the sampling interval is guaranteed to be selected.

Example 1 Monetary Unit Sampling

A company’s trade receivables balance is $500,000 and includes 900 customer accounts. The audito
selects the sample for the external confirmation (see Chapter 24) of trade receivables using monetary
sampling. He selected a random start of $300 and used a sampling interval of $5,000. The auditor wil
therefore select the customer accounts that include the $300, $5,300, $10,300, $15,300 etc. These a
identified by looking at the cumulative monetary amounts of the balances as follows:
Balance Cumulative total
Customer account $ $
1 150 150
2 800 950^
3 1,400 2,350
4 4,350 6,700^
5 2,300 9,000
6 4,900 13,900^
7 8,500† 22,400^
8 990 23,390
9 6,000† 29,390^
10 1,500 30,890
… … …
900 1,000 500,000
 Example 1 Monetary Unit Sampling

^ Balances including the selected dollar(s) are included in the sample.

† All items in the population greater than the sampling interval must be selected.

2.3.4 Haphazard Selection

Haphazard selection does not follow a structured technique. It may be an acceptable
alternative (to random methods), provided that conscious bias and predictability can be
avoided.

2.3.5 Block Selection

In block sampling, all items selected are contiguous (e.g. all items on the same daybook
page, pre-numbered documents held in order and issued on the same day).
This approach is not generally appropriate because populations may be structured so
that items in a sequence have similar characteristics but different characteristics to
items elsewhere in the population. It does not allow the auditor to draw valid inferences
about the entire population based on the sample taken (e.g. characteristics on a
particular day may not be indicative of the whole year).
Block sampling is mainly used for testing the completeness of populations before
sample selection (e.g. sequence testing of pre-numbered goods despatch notes).

19.2.4 Testing

2.4 Testing

Audit procedures appropriate to the test objective should be performed on each item
selected.
 If an inappropriate item is selected (e.g. a document made "void"), an
appropriately chosen replacement must be tested instead. There is no
deviation or misstatement if the item is properly voided.
 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 a
deviation or a misstatement.

19.2.5 Results
2.5 Results
 Key Point

 The auditor must:

o consider the nature and cause of any deviations or misstatements found d
testing;
o consider their potential effect on test objectives and other audit areas; and
o evaluate results to confirm or revise the preliminary assessment of the rele
characteristic of the population.
 For statistical sampling, results must be evaluated using probability theory.
All misstatements and deviations should be analysed to identify why they occurred and
whether they are isolated incidents or indicative of a common feature (e.g. type of
transaction, location, product line or period).
 If isolated, obtain corroborative evidence of the anomaly.
 If a common feature, identify the sub-population and extend audit procedures
in the sub-stratum.
For example, a deviation that is found to be isolated may not be indicative of the
population as a whole (e.g. a manual control was not operated on a particular day
because of specific circumstances that were found not to have been repeated).
Alternatively, such deviations and misstatements may indicate possible fraud (whether
isolated or sharing a common feature).

19.2.6 Projecting Misstatements

2.6 Projecting Misstatements

Key Point

 Monetary misstatements (i.e. derived from tests of details) in the sample that indicate
misstatements in the population should be projected to the population to obtain a broad vie
the scale of potential misstatement.
 Isolated misstatements (i.e. that are not indicative of the population) should not be extrapo
 The effect of the projected misstatement (on the test objective and other audit areas) shoul
considered to see if any additional work needs to be undertaken.

Example 2 Recoverability of Receivable Balances Through Confirmation

Population of trade receivables 800

Sample value 274
Known isolated misstatements 1
Reconciliation differences (cash/goods in transit) 4
Actual misstatements (e.g. overpricing of invoices) 4
 Example 2 Recoverability of Receivable Balances Through Confirmation

Population of trade receivables 800

Tolerable misstatement (1% of the population) 8
Projected misstatement (ratio method):
Reconciliation differences are not a misstatement as the receivable balances are still collectable in fu
Actual misstatement*(population value/sample value)= 4311*(798500/274330)=12549
Known isolated misstatement = $1,450
Total potential misstatement = $13,999
Conclusion: Trade receivables may be materially overstated (as the potential misstatement is greate
than the tolerable misstatement of $8,000).
Further action: Include in material misstatements to be discussed with the client.
Note: The client can only correct accounting records for actual misstatements. Further investigation b
management or the auditor may be necessary to identify additional misstatements.

19.2.7 Evaluation of Results

2.7 Evaluation of Results

If projected and uncorrected anomalous misstatement exceed the tolerable

deviation/misstatement, the sampling risk should be reassessed.

2.7.1 Tests of Controls

If control risk is higher than initially assessed (i.e. controls doe not appear to be
operating effectively as expected), modify procedures. For example:
 extend sample size; or
 test alternative controls to achieve the objective; or
 extend substantive procedures.

2.7.2 Tests of Details

If maximum potential and/or most likely misstatement exceeds the tolerable
misstatement:
 request management to adjust for identified misstatements; and
 re-evaluate uncorrected misstatements.
Example 3 Evaluating the Results of a Test of Controls

Summary of deviations:
A sample size of 125 despatch notes was selected randomly based on a pre-numbered note seque
 Example 3 Evaluating the Results of a Test of Controls

Block tests were carried out to confirm the completeness of the population.

GDN ref.
No. of despatch notes not found 1 (13,685)
No. of despatch notes without invoices 4
Authorised cancellations in above (3) (17,345)
Actual deviations 2
Statistical sampling approach:
Deviation rate: 2/125=.016= 16%, why???
If the tolerable deviation rate is 1% (say) the sample size could be extended (to at least 200). If no
further deviations were found, the deviation rate would be acceptable.
Non-statistical sampling approach (using judgment on results):
Two deviations have been discovered. Therefore the controls may not have been effective (based o
tolerable deviation of zero). Further work should be carried out to identify if deviations are isolated b
deciding how this affects the audit.

19.3.1 Statistical Sampling

3.1 Statistical Sampling

As defined earlier, statistical sampling involves:

 use of random sample selection; and
 probability theory to evaluate sample results and measure the sampling risk.
Statistical sampling therefore precludes the haphazard and block selection methods.
In practice, a high level of mathematical competence is required if valid conclusions are
drawn from sample evidence. When firms use statistical sampling, they draw up
complex plans that staff can operate without detailed statistical training (e.g. using
tables, graphs or computer methods).
Activity 4 Statistical Sampling

Suggest relative advantages and disadvantages of statistical sampling.

*Please use the notes feature in the toolbar to help formulate your answer.

Advantages Disadvantages
 Imposes more formal discipline  The expense of implementation.
to planning the audit of a  Sample sizes may be "too large".
population.  It may be time-consuming, as higher levels of
 Advantages Disadvantages
 Objectively determines sample sample sizes are often required to evaluate
sizes. misstatements.
 Evaluates test results more  Requires extensive staff training.
precisely.  In tests of control, qualitative aspects of the
 Quantifies sampling risk. evaluation of deviations cannot be statistically
 Use of judgment is not analysed.
precluded but is limited to
setting objectives.

19.3.2 Non-statistical Sampling

3.2 Non-statistical Sampling

Non-statistical sampling is any approach which does not fulfil all the conditions set out
in the definition of statistical sampling.
It includes non-random selection and evaluating results on a "judgment" basis.
Activity 5 Non-statistical Sampling

Suggest relative advantages and disadvantages of non-statistical sampling.

*Please use the notes feature in the toolbar to help formulate your answer.

Advantages Disadvantages
 Approach (usually statistical sample selection, but  Sample sizes may be too small
with judgmental analysis of results) has been in to satisfy stated objectives.
use for many years and is well understood and  Sampling risk cannot be
refined by experience. quantified.
 It may use greater judgment and expertise.  Statistical sampling might be
 Non-random selection may be quicker or more cheaper if CAATs are used.
cost-effective in certain circumstances.  Sample sizes may be
 It requires no special knowledge of statistics. unnecessarily large.
 Less expensive to apply (usually).  Personal bias in sample
selection may be unavoidable
(e.g. if using haphazard
selection)
Syllabus Coverage

This chapter covers the following Learning Outcomes.

D. Audit Evidence
3. Audit sampling and other means of testing
 1. Define audit sampling and explain the need for sampling.
2. Identify and discuss the differences between statistical and non-statistical
sampling.
3. Discuss and provide relevant examples of, the application of the basic
principles of statistical sampling and other selective testing procedures.
4. Discuss the results of statistical sampling, including consideration of whether
additional testing is required.

19 Summary and Quiz

Summary and Quiz
 When gathering evidence about a population, the auditor may select all or
specific items or use audit sampling.
 Stages in audit sampling include:
o Sample design;
o Determination of sample size;
o Sample selection;
o Testing;
o Evaluation.
 Sample size can be determined using probability theory or professional
judgment. The lower the acceptable sampling risk, the larger the sample size.
 When selecting a sample, all sampling units should have an equal chance of
being selected (for meaningful extrapolation of results). The principal methods
are random selection, systematic selection, monetary unit sample selection,
haphazard selection and block sampling.
 The auditor should consider the nature and cause of deviations or
misstatements and determine whether they are isolated or indicative of a
common feature.
 Monetary misstatement should be projected to the population to determine
whether the potential misstatement is material.
 If a sample in a test of controls indicates that control risk is higher than initially
assessed, the auditor may extend the sample size, test alternative controls or
extend substantive procedures.
 If the result of a sample in a test of details indicates that the potential
misstatement exceeds the tolerable misstatement, the auditor should ask
management to correct identified misstatements and then re-evaluate the
uncorrected misstatements.
 Statistical sampling uses random sample selection and probability theory to
evaluate sample results and measure sampling risk.

Chapter 19 Quiz

19 Technical Articles

Technical Articles
ACCA provide technical articles and other resources to guide and help students.
This chapter includes the relevant content of the following related technical articles
available at the time of writing (April 2022):
 Audit sampling (s.2.3 and s.3)
For more recent articles and other resources please visit the ACCA global website.