ACTG-INT3-ACCOUNTANCY INTEGRATION 3_APPLIED AUDITING THEORY

CHAPTER 5 AUDIT SAMPLING

LEARNING OBJECTIVES:
Discuss the audit sampling (based on PSA 530: audit sampling and other
selective testing procedures)
Explain sampling risk.
Discuss the steps in attribute sampling plan.

Discuss the steps in a variable sampling plan.

Selecting items of testing to gather audit evidence

When designing audit procedures, the auditor should determine appropriate means of
selecting items for testing. The means available to the auditor are:
a. Selecting all items (100% examination)
b. Selecting specific items
c. Audit sampling

Selecting all items (100% examination)

 Unlikely in the case of tests of control but more common for substantive
procedures
 May be appropriate when:
a. The population constitutes a small number of large value items
b. When both inherent risk and control risk are high and other
means do not provide sufficient appropriate audit evidence
c. When the repetitive nature of a calculation or other process
performed by a computer information system makes a 100%
examination cost effective

Selecting specific items

 The auditor may decide to select specific items from a population based on such
factors as knowledge of the client’s business, preliminary assessments of
inherent and control risks, and the characteristics of the population being tested

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 The judgmental selection of specific items is subject to nonsampling risk

 Specific selected items may include:
 High value or key items
 All items over a certain amount
 Items to obtain information
 Items to test procedures
 While an efficient means of gathering audit evidence, it does not constitute audit
sampling. The results of audit procedures applied to specific items selected
cannot be projected to the entire population

AUDIT SAMPLING
1. “Audit Sampling” involves the application of audit procedures to less than 100%
of items with an account balance or class of transactions
2. Sampling may be statistical or nonstatistical.
I. Statistical sampling means any approach t sampling that has the
following characteristics:
a. Random selection of a sample
b. Use of probability theory to evaluate sample results

II. Nonstatistical sampling is a sampling approach that does not have

characteristics (a) and (b).

Audit sampling plan refers to the procedures an auditor applies t accomplish a

sampling application. In aids an auditor I forming conclusions about one r more
characteristics or either a particular class of transactions or a particular account
balances

1. ATTRIBUTE SAMPLING
 Applicable to tests of control
 Used to test an entity’s rate of deviation (also called rate of occurrence)
from a prescribed control procedure
2. VARIABLES SAMPLING
 Applicable to substantive test
 Most commonly used to test whether recorded account balances are fairly
stated

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SAMPLING RISK

1. It arises from the possibility that the auditor’s conclusion, based on a sample may
be different from the conclusion reached if the entire population were subjected
to the same audit procedures
2. The confidence level (also called reliability level) is the mathematical
complement of the applicable sampling risk factor
3. It is to be measured and controlled. The auditor controls it by specifying the
acceptable level when developing the sampling design
4. For tests of control, it has the following aspects:
a. Risk of assessing control risk too low (Risk of Overreliance)
 The risk that the auditor would conclude that the control risk
is lower than it actually is
 It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of assessing control risk too high (Risk of under reliance)
 The risk that the auditor would conclude that control risk is
higher than actually is
 It affects audit efficiency as it would lead to additional work
to establish that initial conclusions were incorrect
5. For substantive tests, it has the following aspects:
a. Risk of incorrect acceptance
 The risk that the auditor would conclude that a material error
exists when in fact it does
 It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of incorrect rejection
 The risk that the auditor would conclude that a material error
exists when in fact it does not
 It affects audit effectiveness as it would lead to additional
work to establish that initial conclusions were incorrect

NONSAMPLING RISK
It 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, most audit evidence is

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persuasive rather than conclusive, the auditor might use inappropriate procedures, or
the auditor might misinterpret evidence and fail to recognize an error.

5 STEPS IN ATTRIBUTE SAMPLING PLAN

1. Define the objectives of the plan
2. Define the population
 For example, if an auditor’s objective is to test controls designed
to assure that all shipped goods are invoiced, the population
would be defined as all sipping documents issued during the
period not all sales invoices

3. Define the attribute and deviation conditions

 An attribute s a characteristic of control. For example, the
supervisor’s signature of approval on a document. A deviation is
the absence of an attribute
4. Determine the sample size
The sample size is determined by considering the following factors:
a. Risk of assessing control risk too low
b. Tolerable deviation rate
c. Expected population deviation rate

Risk of assessing control risk too low

 There is an inverse relationship between the risk and the sample size. The
higher the acceptable risk, the smaller the sample size
 Because the risk of assessing control risk too low relates to the
effectiveness of the audit, it is kept at a relatively low level by the auditor

Tolerable deviation rate

 This the maximum deviation rate that the auditor is willing to accept
 The lower the rate of deviation that the auditor is willing to accept, the
larger the sample size needs to be

Expected population deviation rate (expected error)

 The rate of deviation from the prescribed control procedure the auditor
expects to find in the population
 The higher the rate of deviation the auditor expects, the larger the sample
size needs to e so as to be in a position o make a reasonable estimate of
the actual rate of deviation
 Factors relevant to the auditor’s consideration of the expected error rate
include:

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o The auditor’s understanding of the business (in particular,

procedures undertaken to obtain an understanding of the
accounting and internal control systems)
o Charges in the personnel or in the accounting and internal control
systems
o The results of audit procedures applied in prior periods
o The results of other audit procedures

5. Determine the method of sample selections

Some commonly used methods are:
a. Random number sampling
 Each item in the population has an equal chance and nonzero probability
of selection
 It is usually accomplished by generating random numbers from a random
number table or computer program and tracing them to associated
documents or items in the population
 It is appropriate for both statistical and nonstatistical sampling
b. Systematic selection
 The number of sampling units in the population is divided by the sample
size to give a sample interval, for example 50, and having determined the
starting point within the first 50, each 50 th sampling unit is hereafter
selected
 Although the starting point may be determined haphazardly, the sample is
more likely to be truly random if it is determined by use of a computerized
random number generator or random number tables
 When using systematic selection, the auditor would need to determine that
sampling interval corresponds with a particular pattern in the population

c. Block selection or cluster sampling

 It involves selecting a block(s) of contiguous items from within the
population
 It cannot be ordinarily used in audit sampling because most populations
are structured such that items in sequence can be expected to have
similar characteristics to each other, but different characteristics from
items elsewhere in the population
 Although in some circumstances it may be an appropriate audit procedure
to examine a block of items, it would rarely be an appropriate sample
selection technique when the auditor intends to draw valid inferences
about the entire population based on sample

d. Haphazard selection

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 The auditor selects a sample without following a structured technique

 It is not appropriate when using statistical sampling

e. Stratification
 This involves subdividing the population into subpopulations or strata, i.e.,
a group of sampling units which have similar characteristics (often
monetary value)
 The strata must be explicitly defined so that each sampling unit can
belong to only one stratum
 This method enables the auditor to direct his efforts towards the items he
considers would potentially contain the greater monetary error

6. Perform sampling plan

7. Evaluate and document results
These include:
a. Determining the sample deviation rate
Sample deviation rate = number of deviations observed
Sample size
b. Determining the maximum population deviation rate (achieved upper
deviation limit) and the allowance for sampling risk (achieved precision)
 The maximum deviation rate is based on the sample size and the
number of deviations discovered. There are standard tables that yield
maximum population deviation rates at specified risks of assessing
control risk too low
 Allowance for sampling risk = Maximum Deviation Rate – Sample
Deviation Rate
c. Considering qualitative information
The auditor considers each of the deviation’s nature, importance, and
probable cause
d. Reaching an overall conclusion
In assessing control risk, the auditor considers all available quantitative and
qualitative information

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COMMONLY USED ATTRIBUTES SAMPLING TECHNIQUES

1. ATTRIBUTE ESTIMATION SAMPLING

 A statistical sampling plan for tests of controls
 Appropriate when an auditor wishes to estimate a true but unknown
population deviation rate
 Uses a fixed sampling plan, i.e., the auditor tests a single sample
2. SEQUENTIAL SAMPLING (ALSO CALLED STOP-OR-GO SAMPLING)
 The sampling plan is performed in several steps
 Following each step, the auditor decides whether to stop or to go on to the
next step
 Appropriate when the auditor expects zero or very few deviations
3. DISCOVERY SAMPLING
 Appropriate when the expected deviation rate is near zero and when the
auditor’s objective is to find at least one deviation in a sample if the actual
population deviation rate exceeds or equals a predetermined critical rate
(tolerable deviation rate)

STEPS IN A VARIABLE SAMPLING PLAN

1. Determine the objectives of the test
The auditor’s objective is to test the reasonableness of a record account
balance, called hypothesis testing.
2. Define the population and sampling unit
3. Choose an audit sampling technique
a. Statistical vs. Nonstatistical
b. Classical variables sampling vs. Probability-proportional-to-size sampling
4. Determine the sample size
The auditor considers the following:
a. Variation within the population
 Sample size varies in the same direction as the variation in population
amounts. As population variation increases, so does the sample size
 An estimate of population variation is made by determining a population
standard deviation

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b. Acceptable risk of incorrect rejection

c. Acceptable risk of incorrect acceptance
d. Tolerable error – the maximum monetary error that may exist in an
account balance without causing the financial statements to be
materially misstated
5. Determine the method of sample selection
6. Perform the sampling plan
7. Evaluate the sample results
The following procedures are performed:
a. Projecting the same error to the population
b. Considering sampling risk
c. Considering qualitative information
d. Reaching an overall conclusion

CLASSICAL VARIABLES SAMPLING TECHNIQUES

A. Mean-per-unit estimation
A classical variables sampling technique that projects the sample average
to the population by multiplying the sample average by the number of items in the
population

B. Difference estimation
It is a classical variables sampling technique that uses the average
difference between audited amounts and individual recorded amounts to
estimate the total audited amount of a population and an allowance for sampling
risk.

C. Ratio estimation
A classical variables sampling technique that uses the ratio of audited
amounts to recorded amount in the sample to estimate the total amount of the
population and an allowance for sampling risk

Conditions for using difference and ration estimation

1. Each population item must have a recorded book value
2. Total population book value must be known
3. Expected differences between audited and recorded book values must not be
too rare

Choosing between difference and ratio estimation

Ratio estimation is more appropriate when he differences are nearly proportional
to book values.

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Difference estimation is more appropriate when there is little or n relationship

between the absolute amounts of the differences and the book values.

PROBABILITY-PROPROTIONAL-TO-SIZE SAMPLING (PPS)

 PPS uses a peso as the sampling unit
 PPS sampling gives each individual peso in the population an equal chance of
selection
 PPS is only useful for TESTS OF OVERSTATEMENTS (e.g., assets) since the
sample selection method dictates that the larger the transaction or amount, the
more likely that it will be selected.
 PPS is inappropriate for testing liabilities because understatement is the primary
audit consideration

EXAMPLES OF FACTORS INFLUENCING SAMPLE SIZE FOR TESTS OF

CONTROL (PSA 530, APPENDIX I)

Factor Effect on Sample size

An increase in the auditor’s intended reliance on accounting and
Internal control systems increase

An increase in the rate of deviation from the prescribed control

Procedure that the auditor is willing to accept
(Tolerable error) decrease

An increase in the rate of deviation from the prescribes control

Procedure that the auditor expects to find in the population
(Expected error) increase

An increase in the auditor’s required confidence level (or conversely

A decrease in the risk that the auditor will conclude that the auditor will
Conclude that the control risk is lower than the actual control risk in the Population)
increase

An increase in number of sampling units in the population negligible effect

EXAMPLES OF FACTORS INFLUENCING SAMPLE SIZE FOR SUBSTANTIVE

PROCEDURES (PSA 530, APPENDIX II)

Factor Effect on Sample size

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An increase in the auditor’s assessment of inherent risk increase

An increase in the auditor’s assessment of control risk increase

An increase in the use of other substantive procedures

Directed at the same financial statement assertion decrease

An increase in the auditor’s required confidence level (or

Conversely, a decrease in the risk that the auditors will conclude that
A material error does not exist, when in fact it does exist) increase

An increase in the amount of error the auditor expects to find in

The population (tolerable error) decrease

An increase in the amount of error the auditor expects to find in the

Population (expected error) increase

Stratification of the population when appropriate decrease

The number of sampling units in the population negligible effect

Reference:
Compilation of Lecture Notes by Dean Rene Boy R. Bacay, CPA, MBA, FRIAcc

For further discussion please refer to the link provided:

Audit Sampling- https://www.youtube.com/watch?v=sRczLv3zvWM

Sampling Risk- https://www.youtube.com/watch?v=_4iFWZ5YxSo

Attributes Sampling- https://www.youtube.com/watch?v=oI12IxLELf8

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