2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

5 - 5
Audit Sampling for Tests of
Controls and Substantive Tests of
Transactions
Chapter 15
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 2
Learning Objective 1
Explain the concept of representative
sampling.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 3
Representative Samples
A representative sample is one in which
the characteristics in the sample of audit
interest are approximately the same as
those of the population.
In practice, an auditor can increase the
likelihood of a representative sample by
using care in designing the sampling
process and selection, and evaluating
the results.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 4
Sampling Risks
Sampling risk is the risk that an auditor
reaches an incorrect conclusion because
the sample is not representative of the
population.
Nonsampling risk is the risk that audit
tests do not uncover existing exceptions
in the sample.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 5
Minimizing Sampling Risk
Use
appropriate
sample
selection
method

Adjust
sample
size

Step 1
Step 2
Sampling Risk Meter
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 6
Learning Objective 2
Distinguish between statistical and
nonstatistical sampling and between
probabilistic and nonprobabilistic sample
selection.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 7
Statistical Versus Nonstatistical
Sampling
Similarities of both approaches:
Select the
sample and
perform the
tests
Plan the
sample
Step 1
Step 2
Evaluate the
results
Step 3
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 8
Statistical Versus Nonstatistical
Sampling
Statistical sampling allows the quantification
of sampling risk in planning the sample (Step 1)
and evaluating the results (Step 3)
In nonstatistical sampling those items that
the auditor believes will provide the most
useful information are selected
Differences in approach:
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 9
Probabilistic Versus Nonprobabilistic
Sample Selection
Probabilistic sample selection is a method
of selecting a sample such that each
population item has a known probability
of being included in the sample.
Nonprobabilistic sample selection is a
method in which the auditor uses professional
judgment rather than probabilistic methods.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 10
Probabilistic Versus Nonprobabilistic
Sample Selection
1. Directed sample selection
2. Block sample selection
3. Haphazard sample selection
Nonprobabilistic selection methods:
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 11
Probabilistic Versus Nonprobabilistic
Sample Selection
1. Simple random sample selection
2. Systematic sample selection
3. Probability proportional to size sample selection
4. Stratified sample selection
Probabilistic selection methods:
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 12
Nonprobabilistic Sample
Selection Methods
Directed sample selection is the selection of
each item based on auditors judgmental criteria.
Items most likely to contain misstatements

Items containing selected population characteristics

Large dollar coverage
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 13
Nonprobabilistic Sample
Selection Methods
Block sample selection is the selection
of several items in sequence.
Haphazard sample selection is the
selection of items without any conscious
bias on the part of the auditor.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 14
Learning Objective 3
Select representative samples.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 15
Probabilistic Sample Selection
Methods
A simple random sample is one in which
every possible combination of elements
in the population has an equal chance
of constituting the sample.
Computer generation of random numbers
offers several advantages
time savings
reduced risk of error
automatic documentation
Random number tables
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 16
Random Sample Selection Tools
Computer generation of random
numbers offers several advantages
time savings
reduced risk of error
automatic documentation
Random number tables
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 17
Probabilistic Sample Selection
Methods
Systematic sample selection:
The auditor calculates an interval and
then selects the items for the sample
based on the size of the interval.
The interval is determined by dividing
the population size by the number of
sample items desired.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 18
Probabilistic Sample Selection
Methods
Probability proportional to size:
A sample is taken where the probability
of selecting any individual population item
is proportional to its recorded amount (PPS).
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 19
Learning Objective 4
Define and describe audit sampling for
exception rates.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 20
Sampling for Exception Rates
The occurrence rate, or exception rate,
is the percent of items in the population
containing the characteristic or specific
attribute of interest to the total number
of population items.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 21
Sampling for Exception Rates
Following are types of exceptions in
populations of accounting data:
1. Deviations from clients established controls
2. Monetary misstatements in populations
of transaction data
3. Monetary misstatements in populations of
account balance details
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 22
Learning Objective 5
Use nonstatistical sampling in tests of
controls and substantive tests of
transactions.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 23
Terms Used in Audit Sampling
Characteristic or attribute
Acceptable risk of assessing control risk too
low (ARACR)
Tolerable exception rate (TER)
Estimated population exception rate (EPER)
Initial sample size
Terms related to planning:
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 24
Terms Used in Audit Sampling
Exception
Sample exception rate (SER)
Computed upper exception rate (CUER)
Terms related to evaluating results:
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 25
I: Plan the Sample
Decide
whether
audit
sampling
applies.
State the
objectives
of the
audit test.

Step 1
Step 2
Define
attributes
and
exception
conditions
Step 3
Define the
population
Step 4
Define the
sampling
unit
Step 5
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 26
I: Plan the Sample
Specify
acceptable
risk of
assessing
control risk
too low
Specify
the
tolerable
exception
rate.
Step 6
Step 7
Estimate the
population
exception
rate.
Step 8
Determine
the initial
sample size
Step 9
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 27
II: Select the Sample and Perform
the Audit Procedures
Perform the
audit
procedures
Select the
sample

Step10
Step 11
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 28
III: Evaluate the Results
Analyze
exceptions

Generalize
from the
sample to
the
population
Step 12
Step 13
Decide the
acceptability
of the
population
Step 14
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 29
Guidelines for ARACR and TER
Tests of Controls
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 30
Guidelines for ARACR and TER
Tests of Transactions
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 31
Effect on Sample Size of
Changing Factors
Effect on initial
Type of change sample size
Increase acceptable risk of
assessing control risk too low
Increase tolerable risk rate
Increase estimated population
exception rate
Increase population size (minor)
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 32
Actions When Population is
Not Acceptable
Revise TER or ARACR

Expand the sample size

Revise assessed control risk

Communicate with the audit
committee or management

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 33
Summary of Audit Sampling Steps
Plan the sample
(Steps 1-9)
Select the sample
(Step 10)
Perform the tests
(Step 11)
Evaluate the results
(Steps 12-14)
Number of
exceptions
in sample
and actual
sample size
To Step 12 To Step 14
F
r
o
m

S
t
e
p

1
2

C
o
m
p
a
r
e

To/From
Step 6
Computed
upper
exception
rate
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 34
Learning Objective 6
Define and describe attributes sampling and
a sampling distribution.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 35
Statistical Audit Sampling
The statistical sampling method most
commonly used for tests of controls
and substantive tests of transactions
is attributes sampling.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 36
Sampling Distribution
It is a frequency distribution of the results
of all possible samples of a specified size
that could be obtained from a population
containing some specific parameters.
Attributes sampling is based on the
binomial distribution.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 37
Sampling Distribution
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 38
Learning Objective 7
Use attributes sampling in tests of controls
and substantive tests of transactions.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 39
Application of Attributes
Sampling
i. Select the table corresponding to the ARACR
ii. Locate the TER on the top of the table
iii. Locate the EPER in the far left column
iv. Read down the appropriate TER column until
it intersects with the appropriate EPER row
in order to get the initial sample size
Use of the tables:
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 40
Application of Attributes
Sampling
Population size is a minor consideration
in determining sample size

Representativeness is ensured by the sample
selection process more than by sample size

Effect of population size:
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 15 - 41
Application of Attributes
Sampling
Select the sample

Perform the audit procedures

Evaluate the results
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
5 - 5
End of Chapter 15