Chapter One
Audit Sampling
LEARNING OBJECTIVES
After studying this chapter, you should be able
to:
1 Describe the audit sampling
2 Explain the concept of representative sampling
3 Differentiate between statistical and non-statistical sampling
4 Distinguish between probabilistic and non-probabilistic sample
selection
5 Select representative samples
6 Define and describe audit sampling for exception rates
7 Use non-statistical sampling in tests of controls and substantive
tests of transactions
8 Define and describe attributes sampling and a sampling distribution
Audit Sampling
Audit Sampling-sampling is the process
of selecting a group of items (called the
sample) or representatives from large
characteristics of the sample to draw
inference about the characteristics of the
entire population of items.
Sampling-statistical or non-statistical
Representative sample
A representative sample is the one in which
the characteristics in the sample of audit
interest are approximately the same as those of
the population.
A sample result can be non representative due to
non sampling error or sampling error. The risk of
these two types of errors occurring is called non
sampling risk and sampling risk, respectively.
Con---------
Non-sampling risk- is the risk that auditors draw wrong
conclusions because of non-sampling errors such as failure to
apply appropriate audit procedures or failure to recognize
errors in the documents or transactions that are examined.
Non-sampling risk can generally be reduced to low levels
through effective planning and supervision of audit
engagements and implantation of appropriately designed
quality control procedures by the audit firm(s). Non-sampling
error occurs when audit tests do not uncover errors that exist
in the sample. Non-sampling error can result from:
1. The auditor's failure to recognize exceptions, or
2. Inappropriate or ineffective audit procedures.
Con---------
For example, confirming recorded
receivables cannot be relied on to reveal
unrecorded receivables.
Non-sampling risk also arises because the
auditor may fail to recognize
misstatements included in documents that
he examines, which would make that
procedure ineffective even if he/she were
to examine all items.
Con----
Sampling risk is the risk that an
auditor reaches an incorrect
conclusion because the sample is not
representative of the population.
Sampling risk is an inherent part of
sampling that results from testing less
than the entire population.
Statistical Versus Non-statistical Sampling
Statistical sampling
Is the use of mathematical measurement
techniques to calculate formal statistical
results.
Therefore, the auditor quantifies sampling risk
when statistical sampling is used.
Non-statistical sampling
Auditor does not quantify sampling risk.
Instead, conclusions are reached about
populations on judgmental basis.
Probabilistic Versus Non-
probabilistic 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.
It is commonly associated with statistical
sampling.
Probabilistic Versus Nonprobabilistic
Sample Selection
Non-probabilistic sample selection
is a method in which the auditor uses
professional judgment rather than
probabilistic methods.
It is commonly associated with non-
statistical audit sampling.
Probabilistic Versus
Nonprobabilistic Sample Selection
Nonprobabilistic:
1. Directed sample selection
2. Block sample selection
3. Haphazard sample selection
Probabilistic Versus
Nonprobabilistic Sample Selection
Probabilistic:
[Link] random sample selection
2. Systematic sample selection
3. Probability proportional to size
sample selection
4. Stratified sample selection
Nonprobabilistic Sample
Selection Methods
Directed sample selection is the
selection of each item based on auditor
judgmental criteria.
The following issues should be considered when
using directed sample selection method:
Items most likely to contain misstatements
Items containing selected population characteristics
Large dollar coverage
Nonprobabilistic Sample
Selection Methods
Block sample selection: is the selection of
items in measured sequence.
Haphazard sample selection: this method
assumes selection of sample without regard to
size, source, or distinguishing characteristics.
When the auditor uses this method of
sampling, he does so without following a
structured technique. This method of sampling
is not appropriate when using statistical
sampling.
Select representative samples
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.
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.
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).
Probabilistic Sample Selection Methods
Stratified sample selection:
The population is divided into
subpopulations by size and larger
samples are taken of the larger
subpopulations.
Audit sampling for exception rates
The occurrence rate, or exception rate,
is the ratio of the items containing the
specific attribute to the total number of
population items.
Exception rate refers to the percent of
items in a population that include
exceptions in prescribed controls or
monetary correctness.
Sampling for Exception Rates
Following are types of exceptions in
populations of accounting data:
1. Deviations from client’s established
controls
2. Monetary misstatements in
populations
of transaction data
3. Monetary misstatements in
populations of account balance details
Tests of details of balances
There are 14 steps required in audit
sampling for tests of details of balances.
I: Plan the Sample
Step 1: State the objectives of the audit
test.
Step 2: Decide whether audit sampling
applies.
Step 3: Define attributes and exception
conditions.
Step 4: Define the population.
Step 5: Define the sampling unit.
Tests of details of balances
Step 6: Specify the tolerable exception
rate.
Step 7: Specify acceptable risk of assessing
control risk too low.
Step 8: Estimate the population exception
rate.
Step 9: Determine the initial sample size.
Tests of details of balances
II: Select the Sample and Perform the
Audit Procedures
Step 10: Select the sample.
Step 11: Perform the audit procedures.
Tests of details of balances
III: Evaluate the Results
Step 12: Generalize from the sample to the
population.
Step 13: Analyze exceptions.
Step 14: Decide the acceptability of the
population.
Factors that influence
sample size for tests of
controls (examples)
Factors that influence sample
size for substantive testing
Statistical Audit Sampling
The statistical sampling method most
commonly used for tests of controls
and substantive tests of transactions
is attributes sampling.
Attributes sampling: a statistical,
probabilistic method of sample evaluation
that results in an estimate of the proportion
of items in a population containing a
characteristic or attribute of interest.
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.
Application of Attributes
Sampling
Effect of population size:
Population size is a minor consideration
in determining sample size
Representativeness is ensured by the sample
selection process more than by sample size
Attributes Sampling
For example, the auditors might use
attribute sampling to estimate the
percentage of the cash disbursements
processed during the year that are not
approved.
E.g. If an attribute sample indicates a
deviation rate of 5% with an allowance for
sampling risk of -3 to +3 percent, the
auditors could infer that between 2 and 8
percent of the items in the population
contain deviations.
Attributes Sampling
The relevant questions from the above example is
whether the auditors can accept a deviation rate
as high as 8%, not whether they can accept a
deviation rate as low as 2%. The lower deviation
rate is not pertinent to the objective of the test.
For this reason, auditors generally use one-sided
tests in attribute sampling; they consider only the
upper deviation rate that will permit them to
assess control risk at the planned level.
Attributes Sampling
In test of controls, the upper deviation rate
is called the tolerable deviate on rate.
Attribute sampling for test of controls
generally involves the following 10-steps.
1) Determine the objective of the test
2) Define the attributes and deviations
3) Define the population to be sampled
4) Specify the risk of assessing control risk
too low, and the tolerable deviation rate.
5) Estimate the expected population rate.
Attributes Sampling
Attribute sampling for test of controls
generally involves the following 10-steps.
6) Determine the sample size
7) Select the sample
8) Test the sample item
9) Evaluate the sample results
10) Document the sampling procedures in
working papers
The End of Chapter
1
Thank you!!!
