Chapter 12 Revision

• Chapter Introduction
• Learning Objectives
• Revision slides
• Summary
• Revision Question
 Introduction
• In this chapter, we explain the basic concepts of audit sampling and its
application in tests of controls and substantive tests of details.
• The chapter explains how evidence obtained from sample testing introduces the risk
that the evidence may not be representative of the population from which the
sample is taken. This risk is known as sampling risk.
• The chapter describes the process of sampling in audit testing from the planning
stage, through the selection and testing of the sample, to the evaluation of the
results of sample tests. The use of statistical sampling techniques and the relative
merits of the different techniques are considered.
• The chapter also considers why many practitioners may choose to use non-statistical
sampling rather than statistical sampling.
• The main body of the chapter does not go into detail about the calculations involved
in performing a statistical sample.
• In this chapter, we also discuss the technological disruption that is impacting on
managing audit data.
Chapter 12 – Managing Audit
Data
After studying this presentation, you should be able to:
12.1 define audit sampling and discuss its applicability
12.2 distinguish between sampling and non-sampling risks
12.3 distinguish between statistical and non-statistical
sampling
2.4 explain the steps in planning to select a sample
LO:1 Basic concepts of sampling
• Define audit sampling and discuss its applicability.
• Audit sampling is defined in ASA 530 as:
“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.”
(ASA 530.5(a))
• Sampling is used in both tests of controls (deviations) and
substantive testing (misstatements).
• Important issue – risk of drawing an incorrect conclusion from the
sample selected.
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Basic concepts of sampling

Population Inference Sample

The sample must have characteristics that

are similar to those of the population
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 LO:2 Sampling risk and non-
sampling risk
• Distinguish between sampling and non-sampling risks.

• When sampling is used to obtain evidence uncertainties may result

from:
• the use of sampling (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.
• factors unrelated to sampling (non-sampling risk).

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 Types of sampling risk

• In the case of tests of control, sampling risk is:

• the risk the auditor will conclude that controls are more effective than
they actually are (risk of over-reliance)

• the risk the auditor will conclude that the controls are less effective than
they actually are (risk of under-reliance).

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 Types of sampling risk

• In the case of substantive testing, sampling risk is:

• the risk that the auditor will conclude that a material misstatement does
not exist when in fact it does (risk of incorrect acceptance)

• the risk that the auditor will conclude that a material misstatement exists
when in fact it does not (risk of incorrect rejection).

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 Types of sampling risk
• Risk of overreliance and the risk of incorrect acceptance relate to
audit effectiveness:
• Combined procedures may be insufficient to detect material misstatements
• Auditor may not have a reasonable basis for an opinion.
• Risk of under-reliance and the risk of incorrect rejection relate to the
efficiency of the audit:
• Auditor increases substantive procedures unnecessarily
• Leads to a correct conclusion and the audit will be effective.
Non-sampling risk
• Non-sampling risk means the risk that the auditor reaches an
erroneous conclusion for any reason not related to sampling risk.
• Sources of non-sampling risk:
– Human mistakes
– Reliance on wrong information received from
another party.
• How to keep this risk to a minimum?
– Proper planning and supervision
– Adherence to quality control standards.

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 LO: 3 - Statistical and non-statistical
sampling
• Distinguish between statistical and non-statistical sampling.
• Statistical sampling means any approach to sampling that has the following
characteristics:
– random selection of the sample items
– use of probability theory to evaluate sample results, including
measurement of sampling risk.
• Non-statistical sampling means an approach to sampling that does not have the
above characteristics.
• In non-statistical sampling, the auditor uses judgement in
determining the sample size and in interpreting the results
against the audit objective.

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 Types of testing
• Selecting all items:
• 100% examination
• entire population is taken
• unlikely in tests of controls
• used in substantive testing when:
• a small number of large-value items
• inherent and control risks are high.
• Selecting specific items:
– based on the auditor’s knowledge of the business and the
characteristics of the population being tested.

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 LO: 4 - Use of samples for audit
tests
• Explain the steps in planning to select a sample.

• In sampling the auditor typically undertakes three common steps:

1: planning the sample
2: selecting and testing the sample
3: evaluating the results.

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 Determining the objectives of the
test
• The auditor should consider:
• the specific objectives to be achieved, and
• The combination of audit procedures that is most likely to achieve those
objectives.
• Need to determine what constitutes an error, and the appropriate
population from which to select the sample.
• Audit sampling is applicable to both tests of controls and for
substantive testing.
• Attribute sampling used to test of the operating effectiveness of
controls by measuring the deviation rate.

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 Determining the objectives of the
test
• Substantive tests of details:
• obtain evidence that an account balance is not materially misstated
• make an independent estimate of some amount for which no recorded
carrying amount exists
• Monetary unit sampling is sometimes used because it is a statistical
technique to estimate the dollar amount of an account balance.
 Defining what errors are being
sought
• The auditor must consider what constitutes an error by referring to
the objectives of the test.
• Test of controls - the test objective is the identification of ‘deviations’
from the ‘laid-down’ control procedure.
• Substantive tests - the test objective is the identification of errors or
misstatements in recorded transactions or balances.
• An audit procedure may also reveal errors not being specifically
sought and so extra tests may be required to determine the extent of
such errors.

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 Identifying the population and
sampling unit
• The auditor must identify the population and the sampling unit
based on the objective of the audit test.
• Population:
“the entire set of data from which a sample is selected and about
which the auditor wishes
to draw conclusions.” (ASA 530.5(b))
• The auditor must ensure that the population is appropriate to the
objective of the sampling procedure and is complete.

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 Identifying the population and
sampling unit
• Stratification:
• increases audit efficiency and focuses greater audit work on areas that are of
higher inherent risk or potentially materially misstated
• Strata are commonly based on monetary value
• Stratification is commonly used in the audit of accounts receivable.
• Sampling unit – the individual items constituting a population:
• Examples include sales invoices, debtors’ balances, non-current assets on a
register and a listing of suppliers.

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 Specifying tolerable error and
expected error
• Tolerable misstatement defined in ASA 530.5(i) as:
• 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.
• Tolerable rate of deviation means a rate of deviation (a change or
difference from what is usual) from prescribed internal control
procedures set by the auditor
• The auditor seeks assurance that the actual rate of deviation is not greater
than the rate set by the auditor.
 Specify required confidence level

• Tests of controls:
• is the risk of over-reliance (the risk that the allowable assessed control
risk is lower than it actually is)
• Substantive tests:
• is the risk of incorrect acceptance (the risk that the testing suggests a
material error does not exist when it actually does)

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 Deciding the size of the sample
• In determining an appropriate sample size, the auditor’s main
concern is with reducing sampling risk to an acceptably low level.
• The level of sampling risk that the auditor is willing to accept, will
have an inverse relationship with the sample size required.
• Sample selected needs to be representative of the population from
which it was drawn.
• Population size presumed major influence on sample size but no
effect for populations over 5,000.

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 Selecting the sample
• Basic principle:
• each item in the population has a chance of being selected (though not
necessarily an equal chance)
• Approaches to selecting a sample (ASA 530.A13 and Appendix 4)
• Random
• Systematic
• Haphazard
• Block selection
• Not appropriate unless the auditor suspects fraud in accounts payable –
used to select all transactions for a particular month

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 Random selection

• Generally considered to be the best method of obtaining a sample to

evaluate the results statistically
• Each item in the population has a known (usually equal) chance of
selection
• Random samples can be selected using:
– auditing software
– random number tables.

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 Systematic selection

• The process of dividing the number of sampling units in the

population by the sample size to give a sampling interval.
• As long as the starting number is selected randomly, this method
can be used as a statistical sampling method.
• Drawback is the population may have a fixed pattern which may lead
to bias in the sampling.

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 Haphazard selection

• Selection of a sample without following a structured technique.

• Is only practical when the population is not ordered in any numerical
sequence.
• This method is not recommended where:
• other methods are available
• when statistical sampling is being used.

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 Evaluating the results

• Having drawn the sample, the auditor then examines or tests each
item in accordance with the required audit objective.
• Each error or deviation needs to be evaluated as to its implications.
• Errors or deviations that appear to be consistent with those
expected, can then be projected to consider the effect on the
population.

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 Evaluating the results

• Both non-statistically and statistical sampling require the sample

results to be projected on the population
• Non-statistical sampling results are assessed on a more qualitative basis –
effect whole population or isolated occurrence.

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 Projecting the error to the
population
• When the analysis identifies errors consistent with the objective of the
test, the auditor then draws conclusions as to the population.
• Test of control :
• A projected deviation rate should be estimated
• If the projected deviation rate exceeds the tolerable deviation rate, the
preliminary assessment of control risk is not confirmed:
• reassess control risk at a higher level
• increase the level of substantive procedures.

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 Projecting the error to the
population
• Substantive tests
– The sample results are projected onto the population
– The most common method is the difference estimation method:
• This method looks at the relative differences between the
recorded and audited amounts
• If the projected error approaches or exceeds the tolerable
error, more evidence may be necessary.
• Mean-per-unit method may be used with statistical sampling.

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 LO:5 Statistical sampling
techniques
• Describe the main methods of statistical sampling used in auditing.
• The major statistical sampling techniques used are:
• Attribute sampling plans
• Variable sampling plans
• Probability-proportional-to-size sampling.
 Attribute sampling plans

• Three different methods of sampling used to test the operating

effectiveness of controls by estimating the rate of deviation:
• attribute sampling – used to estimate the proportion of a characteristic in a
population
• sequential sampling – stops testing when enough assurance is obtained
• discovery sampling – when expected deviation rate is low.
 Variable sampling plans
• Generally used for substantive testing to estimate monetary
misstatement in an account balance.
• Two such methods include:
• unstratified mean-per-unit
• auditor estimates a total population amount by calculating the
mean for items in the sample and projecting the mean onto the
number of items in the population.
• difference estimation
• auditor calculates the mean difference between audited and
recorded amounts of the sample items and projects the mean
difference onto the population.
 Probability-proportional-to-size
sampling
• Most commonly used statistical sampling technique for substantive
testing.
• Also known as dollar unit sampling.
• Used to reach conclusions about a population in terms of a
monetary (dollar) amount.
• PPS takes each dollar of the population as the sampling unit and
tests whether it is correctly stated, incorrectly stated or tainted.
• Incorrectly stated and tainted dollars are projected to the number of
dollars recorded as the population to estimate the extent of
monetary error in the population.
 Choice of statistical sampling
method
• Tests of controls – use one of the attribute sampling plans.
• Substantive testing – use PPS sampling or variable sampling.
• PPS sampling:
• useful for verifying the existence of assets and the occurrence of recorded
transactions where sampling risk is moderate to low
• such as inventory pricing and accounts receivable
circularisation.
 Choice of statistical sampling
method
• Variable sampling is preferable where:
• errors of understatement are expected or are being sought
• the population includes zero and negative balances
• many errors are expected
• it may be necessary to extend the sample to estimate the population value
more reliably.
• Variable sampling is most likely to be useful in the audit of large
computerised accounting systems with the assistance of computer
audit software.
 LO: 6 - Non-statistical sampling
techniques
• Indicate why auditors may use non-statistical sampling.
• Less costly and time consuming but can be just as effective in satisfying
audit objectives.
• Advantages:
• Lower training costs
• Ease of implementation
• Impracticality of random selection
• Proposed adjustment based on qualitative analysis.
 Formal and informal non-
statistical sampling
• Formal non-statistical sampling plan uses a structured approach to
determine the sample size and evaluate the results.
• Informal approach is an unstructured approach to determine the sample
size and evaluate the results.
• disadvantages include:
• training difficulties
• absence of consistency and uniformity
• peer review exceptions
• incorrect evaluation of sampling risk.
 LO 7: The impact of technological
disruption on managing audit data
• Discuss the impact of technological disruption on managing audit
data.
• Is the auditing profession ripe for disruption?
• Big 4 firms are investing in technology – using data analytics to make the
audit more effective and efficient.

• Examples of how auditing firms are adapting:

• developing automated data assurance services
• provide a real-time audit service incorporating predictive
analytics.
• embedding technology into the audit approach.
 LO 8 - Integrated reporting
• Have an appreciation of integrated reporting and related audit
issues.
• IR is designed to promote a more cohesive and efficient approach
than currently occurs with corporate reporting.
• Aim is to improve the quality of information available for investors
and regulators, and to ensure a more efficient allocation of capital.
• Technical challenges currently exist for auditors due to difficulty of
developing suitable criteria for assuring an integrated report.
 Integrated reporting
• Key authority – International Integrated Reporting Council (IIRC):
• IR is a concise communication about how an organisation’s strategy,
governance, performance and prospects, in the context of its external
environment, lead to the creation of value over the short, medium and
long term.
 SUMMARY
• The purpose of sampling is to obtain evidence about an account balance or transaction class without examining
each individual item or transaction. The risk is that the sample examined might not be representative of the
population from which the sample is drawn (such as transactions from a transaction class, or items making up an
account balance). Increasing the size of the sample reduces this risk.
• Sample size in auditing is a function of:
• the risk the auditor is willing to accept, based on the audit risk model
• the magnitude of control deviations or errors that are considered material
• the level of expectation that deviations or errors do exist in the population.
• In examining the sample, the auditor must remember that it should be representative of the population and that
the examination’s purpose is to assess the extent to which deviations or errors could be present in the population
from which the sample is drawn. The major statistical sampling techniques used by auditors are attribute sampling
plans, variable sampling plans and probability-proportional-to-size sampling. Attribute sampling is used for
compliance testing, and the other two techniques are used for substantive testing.
• This chapter also raises some of the issues surrounding the current disruptions that the auditing profession is
facing.
• Automation and artificial intelligence will impact the profession in future, and already developments such as blockchain and
Bitcoin are presenting potential challenges for auditors.
• It is a big leap to move from traditional audit approaches to one that fully integrates big data and analytics. The technology
available to do this is arguably still in its infancy, but it is emerging.
• Also, compounding the new technical issues facing auditors, integrated reporting is on the horizon and presenting the auditing
profession with further challenges.
 Professional Question type
Focus - Potential misstatements
The following are a list of risks to the financial report:
• Senior management has offered large bonuses to managers to meet financial targets.
• Analytical procedures for a manufacturer show a significant increase in both profit margins and
inventory turnover days.
• The industry in which the company operates is experiencing economic difficulties.
• Analytical procedures for a retailer show significant decreases in both profit margins and inventory
turnover days.
• An employee responsible for cash payments did not receive a pay rise due to poor performance.
• 
• Required
• For each risk identify the potential type of misstatement in the financial report and
identify if the misstatement would have a pervasive effect on many or all of the
assertions.
 Answering the question
1. First of all identify the risk then discuss the control
• Risk - Management may have the incentive to engage in fraudulent financial reporting in order
to meet the financial targets.
• Control - If the control environment is weak then this could have a pervasive effect on many
assertions.
• Risk - It is possible that inventory is overstated.
• Control - The auditor should be alert to problems with the existence and occurrence or
valuation and allocation of inventory.
• Risk - Management would be under heightened pressure to meet short-term performance
indicators.
• Control - This would have a pervasive effect on many financial statement assertions.
• Risk - It is possible that the retailer is experiencing problems with inventory shrinkage. This
could indicate misappropriation of assets. The relevant assertion would be existence.
• Risk - There is an increased risk of employee fraud with the employee having both the
incentive and the opportunity. The auditor should be alert for problems with the existence and
occurrence of cash disbursements.