CHAPTER

Audit and Assurance

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1 AUDIT SAMPLING: ISA 530
1.1 Selecting Items for testing to obtain Audit Evidence
Approaches available to the auditor for selecting items for testing are:
(a) Selecting all items (100% examinations)
(b) Selecting specific items; and
(c) Audit sampling

Selecting All Items

100% examination is unlikely in the case of test of controls; however, it is more common for test of
details.
100% examination may be appropriate when, for example:
 The population constitutes of small number of large value items
 There is a significant risk and other means do not provide sufficient appropriate audit
evidence
 The repetitive nature of calculation or other process performed automatically by an
information system makes 100% examination cost effective.
 The population is not homogenous (items have different characteristics).
Selecting Specific items
The auditor may decide to select specific items from population. In making this decision factors
that may be relevant include the auditor’s understanding of the entity, the assessed risk of material
misstatement, and the characteristics of the population being tested.
The judgmental selection of specific items is subject to non-sampling risk (explained later).
Specific items selected may include:
 High value or key items; The auditor may decide to select specific items within a population
because they are of high value, or exhibit some other characteristics for example items that
are suspicious, unusual, particularly risk prone or that have a history.
 All items over a certain amount: The auditor may decide to examine items whose recorded
value exceeds a certain amount so as to verify a large proportion of the total amount of a
class of transactions or account balance.
 Items to obtain information: The auditor may examine items to obtain information about
certain matters such as the nature of the entity or the nature of the transactions.
Audit sampling (sampling)
The application of audit procedures to less than 100% of population such that all sampling units have a
chance of selection to provide the auditor with a reasonable basis to draw conclusions about the entire
population.
Audit sampling is used in:
 Test of Controls (evaluating effectiveness of internal controls).
 Test of Details (verifying specific amounts or transactions).

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2 Steps in Sampling
Sampling involves performing following steps: (for Test of Controls as well as Test of Details)
1) Sample design
(i) Determine purpose and population for sampling
(ii) Define what will be deviation or misstatement
(iii) Make assessment of tolerable rate of deviation or misstatement.
(iv) Make assessment of expected rate of deviation or misstatement
(v) Determine sampling approach (statistical or non-statistical)
(vi) Determine Sample size
(vii) Select items by choosing appropriate method
2) Performing audit procedures on sample
3) Projecting rate of deviation or misstatement
4) Evaluating result of sampling

2.1 Sample design, size and selection of items for testing

When designing a sample, the auditor is required by ISA 530 to:
1. Consider the purpose and population of the sampling i.e.
 Whether sampling is for Test of Controls or Test of Details
 Whether we’re testing overstatement or understatement
The population is determined by the purpose of sampling.
2. What constitutes a misstatement or deviation
 Deviation (for Test of Controls): Any failure in following a control process.
 Misstatement (for Test of Details): Any error in the financial statement amunts.
3. Determine ‘Tolerable Rate of Deviation’ or ‘Tolerable Misstatement’:
Tolerable rate of deviation
A rate of deviation from prescribed internal control procedures set by the auditor in respect of which
the auditor obtains assurance that the actual rate of deviation in the population does not exceed the
rate of deviation set by the auditor.
Tolerable misstatement
A monetary amount set by the auditor in respect of which the auditor obtains assurance that the
actual misstatement in the population does not exceed the monetary amount set by the auditor.
Tolerable misstatement is the application of performance materiality to a particular sampling
procedure. Tolerable misstatement may be the same amount or an amount lower than performance
materiality.
4. The sampling approach to be used (statistical or non-statistical)
Statistical sampling
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.

Non-Statistical Sampling

A sampling approach that does not have characteristics of Statistical sampling is considered non-
statistical sampling. It is based on a judgmental opinion by the auditor about the results of the sample.
Statistical sampling or non-statistical sampling?
Statistical sampling techniques are now widely used in auditing. However, not all audit practices
are convinced of their value and worth.
The benefits of statistical sampling techniques are as follows:
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  It is based on scientific techniques
 Statistical sampling provides an objective, mathematically precise basis for the sampling
process.
 It is free from bias and can be easily defended in review.
 Special softwares are available to help efficient execution
 It is effective in case of large population.
The disadvantages of statistical sampling techniques are as follows:
 A degree of training and technical expertise is required if auditors are to use statistical sampling
techniques effectively.
 This requires an investment in the necessary training for audit staff.
 Sample sizes may be larger than under a judgmental approach, thus increasing the time (and the
cost) involved in the audit.
 Some auditors take the view that it is preferable to rely on the skill, experience and judgment of the
auditor, rather than on mathematical/statistical models.
5. Sample Size
Factors affecting Sample size for Test of details
 The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level.
 The level of sampling risk that the auditor is willing to accept affects the sample size required. The
lower the risk the auditor is willing to accept, the greater the sample size will need to be.

Factors influencing sample size Effect on

sample size
1. Increase in auditor's assessment of the risk of material misstatement. Increase

2. Increase in tolerable misstatement Decrease

3. Increase in amount of misstatement ,auditor expects in population Increase

4. Increase in the auditor’s desired level of assurance that tolerable Increase

misstatement is not exceeded by actual misstatement in population

5. Increase in use of other substantive procedures for same assertion Decrease

6. Stratification of population Decrease

7. Population Size (i.e. amount of transactions) Negligible

Factors affecting Sample size for Test of controls

Factors influencing sample size Effect on

sample size
1. Increase in extent to which auditor's risk assessmenttakes into account Increase
relevant controls

2. Increase in tolerable rate of deviation Decrease

3. Increase in expected rate of deviation of the populationto be tested Increase

4. Increase in auditor's desired level of assurance that thetolerable rate of Increase

deviation is not exceeded by actual rate of deviation in population

5. Extent to which auditor plans to rely on controls Increase

6. No of sampling units in population Negligible

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 6. The sample selection method
ISA 530 requires auditors to select a sample in such a way that each item in the population (each‘sampling
unit’) has an equal chance of being selected.
A wide range of sample selection methods is available to the auditor:
 Random sampling: All items in the population have an equal chance of selection. This is typically
achieved by the use of random numbers to select items for testing.
 Systematic sampling: With systematic sampling, a random starting point is chosen from the
population and then items are selected with a standard gap between them (for example, every 10th
item). For example, suppose that a sample will be 10% of the items in a population and the items in
the population can be arranged in a sequence, such as listed in invoice number order, or account
number order or date order. A systematic sample would be to select one of the first 10 items in the list
at random, and then to select every 10th item in the list for testing in order to obtain the 10% sample.
 Haphazard sampling: The auditor selects the sample on an arbitrary basis, for example, choosing
any 100 invoices from a file. This is not a scientifically valid method and the resulting sample may
contain a degree of bias. It is therefore not recommended for use withstatistical sampling techniques.
 Block sampling: The auditor selects a complete block of sampling units from the population (for
example all invoices of the month of May).
Note: In non-statistical sampling, any method can be used except block selection.

3 Important Definitions
Population
The entire set of data from which a sample is selected and about which the auditor wishes to drawconclusions.
Sampling risk
The risk that the auditor’s conclusion based on a sample may be different from the conclusionif the entire
population were subjected to the same audit procedure. Sampling risk can lead to two types of erroneous
conclusions:
In the case of a TOC, that controls are more effective than they actually are, or in the case of a TOD, 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.
In the case of a TOC, that controls are less effective than they actually are, or in the case of atest 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.
Non-sampling risk
The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.
Examples of non-sampling risk include use of inappropriate audit procedures, or misinterpretation ofaudit evidence
and failure to recognize a misstatement or deviation.
Anomaly
A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a
population.
Sampling unit
The individual items constituting a population. The sampling units might be physical items.
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).

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