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AUDIT SAMPLING

Learning Check

13-1. No. Audit sampling is applicable to both tests of controls and substantive tests. However, it

is not equally applicable to all auditing procedures. For example, it is widely used in

vouching, confirming, and tracing, but it is ordinarily not used in inquiring, observing, and

analytical procedures.

13-2. a.

b.

**Sampling risk relates to the possibility that a properly drawn sample may not be
**

representative of the population from which it is drawn. Nonsampling risk refers to

the portion of audit risk that is not due to examining only a portion of the data.

There are two types of sampling risks for tests of controls and two for substantive

tests. The types of sampling risk and their potential effects on the audit are:

Tests of controls:

The risk of assessing control risk too low is the risk that the assessed level of

control risk based on the sample supports the planned assessed level of control

risk when the true operating effectiveness of the control structure policy or

procedure, if known, would not be considered adequate to support the planned

assessed level.

The risk of assessing control risk too high is the risk that the assessed level of

control risk based on the sample does not support the planned assessed level of

control risk when the true operating effectiveness of the control structure policy

or procedure, if known, would be considered adequate to support the planned

assessed level.

Substantive tests:

The risk of incorrect acceptance is the risk that the sample supports the

conclusion that the recorded account balance is not materially misstated when it

is materially misstated.

The risk of incorrect rejection is the risk that the sample supports the conclusion

that the recorded account balance is materially misstated when it is not materially

misstated.

The risk of assessing control risk too low and the risk of incorrect acceptance relate

to audit effectiveness. The risk of assessing control risk too high and the risk of

incorrect rejection relate to the efficiency of the audit.

13-3.

a.

**Both nonstatistical and statistical sampling (1) require the exercise of judgment, (2)
**

can provide sufficient evidential matter required by the third standard of field work,

and (3) are subject to some sampling and nonsampling risk. The critical difference is

that the laws of probability are used to measure and control sampling risk in

statistical sampling.

b.

**Statistical sampling benefits the auditor in (1) designing an efficient sample, (2)
**

measuring the sufficiency of the evidence obtained, (3) evaluating sample results,

and (4) quantifying and controlling sampling risk.

13-4. a.

b.

13-5. a.

b.

**The types of statistical sampling techniques used in auditing are attribute sampling
**

and variables sampling.

Attribute sampling is used in tests of controls to estimate the rate of deviations from

prescribed controls in a population. Variables sampling is used in substantive tests to

estimate the total dollar amount of a population or the dollar amount of error in a

population.

The primary purpose of a test of controls is to estimate the rate of deviations from

prescribed controls in a population. For example, the auditor wants to estimate the

percentage of the time that a specific internal controls fails to function as designed.

The primary purpose of a substantive test is to estimate the total dollar amount of a

population or the dollar amount of error in a population. For example, the auditor

wants to estimate the amount by which total accounts receivable might be misstated

and determine whether the potential misstatement is material to the financial

statements.

**13-6. The concepts associated with audit sampling does not apply to the following tests of
**

controls:

Tests that rely primarily on inquiry and observation. (e.g., many tests of the control

environment, tests of segregation of duties, or observation of physical controls).

Tests of computer application controls because they can test a programmed decision

point with only two elements of test data (one test to determine that the control

appropriately accepts transactions that meet the control criteria and one to see that it

appropriately rejects transactions that fail to meet control criteria).

Tests of computer application controls that may show exceptions on a computer screen

and prevent further processing of a transaction (Tested with inquiry and observation, and

by submitting transactions that may generate expected error messages).

13-7. a.

**Five types of control procedures where the auditor is likely to use some form of
**

nonstatistical sampling for tests of controls include: (1) programmed control

procedures, (2) computer general control procedures, (3) manual follow-up of

exceptions identified by programmed controls, (4) management performance

reviews, and (5) controls over management discretion in financial reporting. Other

**examples might include controls over management’s use of spreadsheets in the
**

financial reporting process, or tests of the control environment.

b.

**When testing programmed control procedures the auditor usually want to know that
**

the key aspect of the program (1) processed transactions that met that criteria of the

control procedures and should be processed and (2) rejected transactions that did not

meet the criteria of the control procedures and should not be processed. When using

CAATs, such as test data, it is sufficient to test each condition.

c.

**If the auditor wants to assess control risk as low based on a programmed control
**

procedure the auditor will usually (1) directly test the programmed control

procedures using CAATS, (2) test computer general control procedures to gain

assurance that the programmed control functioned effectively over time, and (3) test

the effectiveness of manual follow-up of exceptions identified by the programmed

control procedure.

**13-8. The following table outlines the steps in a nonstatistical sampling plan for tests of controls
**

and identifies the professional judgment(s) involved in each step.

1.

Step

Determine the objectives of the test of controls

2.

Determine procedures to evaluate internal controls

3.

Make a decision about the audit sampling technique.

4.

Define the population and sampling unit.

5.

Use professional judgment to determine sample size.

6.

Select a representative sample.

7.

Apply audit procedure.

8.

Evaluate the sample results.

9.

Document conclusions

Professional Judgment

Determine audit objectives and how the objectives of the

test relate to financial statement assertions.

The determination of procedures is a matter of

professional judgment that provides evidence about the

effective design and operation of internal controls.

The choice of using statistical or nonstatistical sampling is

a matter of professional judgment.

The population depends on the control being tested. In

many cases, there may be several ways to identify

different sampling units for the same control (e.g., each

report or each item on a report).

Sample size is a function of a variety of factors. The

auditor uses professional judgment to make a decision

about each judgment that influences sample size. If the

auditor uses nonstatistical sampling the auditor also uses

professional judgment to determine the sample size used.

The auditor uses professional judgment in determining the

technique used to select a representative sample from the

population.

In step 2 the auditor used professional judgment to

determine the procedures to be performed. Now the

auditor uses judgment to apply those procedures to each

sampling unit. Judgment is necessary to determine if

evidence supports a control deviation or whether the

control functioned effectively.

The auditor uses professional judgment to sum the sample

results and project the sample results on the population,

particularly in a nonstatistical sample.

Professional judgment is an integral part of documenting

the audit conclusions about effective operation of a control

based on sample results.

**13-9. The following discussion explains each factor that influences sample size.
**

1.

The nature of the control. Management’s review of weekly expenditure reports is a

manual control and should be tested more extensively than an automated control.

2.

The frequency of operation of the control. The control operates weekly and would

be tested less extensively than controls that operate daily or on every transaction.

3.

The importance of the control. If management’s review of weekly expenditure

reports is critical to the audit strategy, it needs to be tested more extensively than if

the control is only tangential to the audit strategy.

4.

The risk of assessing control risk too low. The smaller the amount of sampling risk

the larger the sample size.

5.

Tolerable deviation rate. The smaller the rate of deviation (inappropriate or

inadequate review of weekly reports) from the proscribed control procedure that the

auditor can tolerate, the larger the sample size.

6.

Expected population deviation rate. The closer the tolerable deviation rate and the

expected deviation rate are to each other, the larger the sample size.

7.

Population size. For small population sizes, such as a weekly control activity,

sample size decrease as the population size decreases.

13-10. In a few instances the logic behind audit sampling does not apply to substantive tests. For

example, audit sampling does not apply to:

Initial procedures,

Substantive analytical procedures,

Many tests of details of accounting estimates, and

Many tests of details of disclosures.

13-11. The following table outlines the steps in a nonstatistical or statistical sampling plan for

substantive tests and identifies the professional judgment(s) involved in each step.

1.

Step

Determine the objectives of the substantive test

2.

Determine substantive audit procedure to perform

3.

Make a decision about the audit sampling technique.

4.

Define the population and sampling unit.

5.

Use professional judgment to determine sample size.

6.

Select a representative sample.

Professional Judgment

Determine audit objectives and the objectives of the test

relate to financial statement assertions.

The determination of substantive audit procedures is a

matter of professional judgment that provides evidence

about the potential amount of misstatement in an account.

The choice of using statistical or nonstatistical sampling is

a matter of professional judgment.

The population depends on the account balance being

evaluated. In many cases, there may be several ways to

identify different sampling units for the same account

balance (e.g., each customer or each sales invoice

receivable from a customer).

Sample size is a function of a variety of factors. The

auditor uses professional judgment to make a decision

about each judgment that influences sample size. If the

auditor uses nonstatistical sampling the auditor also uses

professional judgment to determine the sample size used.

The auditor uses professional judgment in determining the

technique used to select a representative sample from the

population.

7.

Apply audit procedures.

8.

Evaluate the sample results.

9.

Document conclusions

13-12. a.

b.

**In step 2 the auditor used professional judgment to
**

determine the procedures to be performed. Now the

auditor uses judgment to apply those procedures to each

sampling unit. Judgment is necessary to determine if

evidence is present of a misstatement in the amount of the

balance or transaction tested.

The auditor uses professional judgment to sum the sample

results and project the sample results on the population,

particularly in a nonstatistical sample.

Professional judgment is an integral part of documenting

the audit conclusions about the potential for material

misstatement in the financial statements.

**The inventory population can be defined as (1) all inventory irrespective of location,
**

or (2) all inventory in the warehouse and then all inventory at retail locations, or (3)

each location may be treated as a separate population.

The sampling unit could be defined as each stock number (irrespective of location),

or each stock number at each location, or it could be defined in terms of physical

location, such as bin number, or rack in a retail store.

**13-13. The AICPA’s Audit Sampling Guide (pp. 68–69) identifies several advantages and
**

disadvantages of PPS sampling. The advantages of PPS sampling are:

It is generally easier to use than classical variables sampling because the auditor can

calculate sample sizes and evaluate sample results by hand or with the assistance of

tables.

The size of a PPS sample is not based on any measure of the estimated variation of audit

values.

PPS sampling automatically results in a stratified sample because items are selected in

proportion to their dollar values.

PPS systematic sample selection automatically identifies any item that is individually

significant if its value exceeds an upper monetary cutoff.

If the auditor expects no misstatements, PPS sampling will usually result in a smaller

sample size than under classical variables sampling.

A PPS sample can be designed more easily, and sample selection may begin before the

complete population is available.

In contrast, PPS sampling has the following disadvantages:

It includes an assumption that the audit value of a sampling unit should not be less than

zero or greater than book value. When understatements or audit values of less than zero

are anticipated, special design considerations may be required.

If understatements are identified in the sample, the evaluation of the sample may require

special considerations.

The selection of zero balances or balances of a different sign (e.g. credit balances)

requires special consideration.

**PPS evaluation may overstate the ASR when misstatements are found in the sample. As
**

a result, the auditor may be more likely to reject an acceptable book value for the

population.

As the expected number of misstatements increases, the appropriate sample size

increases. Thus, a larger sample size may result than under classical variables sampling.

Professional judgment should be exercised by the auditor in determining the appropriateness

of this approach in a given audit circumstance.

13-14. a.

b.

13-15. a.

**The sampling unit in a PPS sample is the individual dollar (the population is
**

considered to be a number of dollars equal to the dollar amount o the population).

The logical sampling unit is the account, document, transaction, etc., with which an

individual dollar unit selected for inclusion in the sample is associated.

Since the individual dollar is the sampling unit in PPS sampling, the more dollars

associated with a logical sampling unit the greater its chance of selection.

Conversely, logical units with zero balances have no chance of selection. Therefore,

they should be treated separately when using PPS sampling. In testing accounts with

credit balances, such as liabilities, the auditor is usually primarily concerned with

understatement. Since PPS sampling results in selection proportional to size. The

more an item is understated, the less its chance of selection. Accordingly, the

approach is incompatible with the objective.

The formula for calculating sample size in a PPS sample is:

n

b.

BV x RF

TM ( AM x EF )

**Explanations of the factors in the above formula and their effect on sample size are:
**

Relationship to

Sample Size

Factor

Explanation

BV

Book value of

population tested

Direct

RF

**Reliability factor for
**

specified risk of incorrect acceptance

Direct (1)

TM

Tolerable misstatement

Inverse

AM

Anticipated misstatement

Direct (2)

EF

**Expansion factor for anticipated
**

misstatement

Direct

(1)

(2)

**Note that while the relationship between RF and n is direct, the relationship
**

between the risk of incorrect acceptance (which is controlled through the RF

factor) and n is inverse.

Note that while the relationship between AM and n is direct, the relationship

between the risk of incorrect rejection (which is controlled through the AM

factor) and n is inverse.

**13-16. The specification of anticipated misstatement provides the auditor with a means to control
**

the risk of incorrect rejection. The auditor uses prior experience and knowledge of the client

and professional judgment in determining an amount for anticipated misstatement, bearing

in mind that an excessively high anticipated misstatement will unnecessarily increase sample

size while too low an estimate will result in a high risk of incorrect rejection.

13-17. The three factors considered in evaluating the result of a PPS sample are (a) the projected

misstatement determined from the sample, (b) the allowance for sampling risk, and (c) the

upper misstatement limit.

13-18. The two components of the allowance for sampling risk for PPS samples are (a) basic

precision and (b) an incremental allowance resulting from any misstatements found.

13-19. A tainting percentage and projected understatement are calculated for each logical unit with

a book value less than the sampling interval that contains a misstatement. The tainting

percentage is calculated by dividing the difference between the book and audit values by the

book value. The tainting percentage is then multiplied by the sampling interval to project the

degree to which a logical unit is tainted with misstatement to all of the dollars in the

sampling interval it represents.

For each logical sampling unit with a book value greater than or equal to the sampling

interval, projected misstatement is simply the difference between the book value and the

audit value.

Appendix A

13A-1. a.

b.

**The factors that influence sample size for tests of controls using statistical attribute
**

sampling are:

Risk of assessing control risk too low

Tolerable deviation rate

Expected population deviation rate

Population size when auditing small populations (fewer than 5,000 units).

Some auditors use the same risk of assessing control risk too low for all statistical

tests of controls. Other auditors vary the risk of assessing control risk too low

depending on the planned assessed level of control risk, such that the lower the

planned assessed level of control risk, the lower the risk of assessing control risk too

low.

c.

**If the auditor plans a “low” assessed level of control risk, the auditor should set
**

tolerable deviation rates between 2% and 7%.

d.

**When using a statistical attribute sample the auditor can get a sample size of 59 with
**

a 5% risk of assessing control risk too low, a 5 percent tolerable deviation rate, and a

0% expected deviation rate (assuming a large population size).

13A-2. a.

**The three steps involved in quantitatively evaluating sample results for a statistical
**

test of controls are (1) calculating the sample deviation rate, (2) determining the

upper deviation limit, and (3) determining the allowance for sampling risk.

b.

**The steps involved in using the sample evaluation tables are:
**

1.

Select the table that corresponds to the risk of assessing control risk too low.

2.

Locate the column that contains the actual number of deviations (not the

deviation rate) found in the sample.

3.

Locate the row that contains the sample size used.

4.

Read the upper deviation limit from the intersection of the column and row

determined in steps two and three.

c.

**With a sample size of 59 and one deviation, the auditor can conclude that he or she is
**

95% confident that the maximum deviation rate in the population is not more than

7.7%.

13A-3. a.

**When evaluating qualitative factor the auditor will want to consider whether there is
**

evidence of management override of controls, collusion, or fraud.

b.

**When the sample results do not support the planned assessed level of control risk the
**

auditor should increase the final assessed level of control risk to a level supported by

the sample and decrease the level of detection risk associated with substantive tests

of details accordingly.

Appendix B

13B-1. a.

**The formula for determining sample size in mean-per-unit sampling is:
**

N U R S xj

A

n

2

**When the relationship between n and N is greater than .05, a finite correction factor
**

is recommended resulting in an adjusted sample size (n') calculated as follows:

n

b.

n

1

n

N

**The elements in the formula for n given above represent the following:
**

N

=

Population size

UR

=

rejection

Sxj

=

A

=

c.

13B-2. a.

**The standard normal deviate for the desired risk of incorrect
**

Estimated population standard deviation

Planned allowance for sampling risk

**The formula differs for difference and ratio estimation only in the term for
**

the estimated standard deviation. In difference estimation, Sdj (the estimated

standard deviation of the differences) is substituted for Sxj. In ratio estimation,

Srj (the estimated standard deviation of the ratios) is substituted for Sxj.

**The risk of incorrect acceptance is controlled in classical variables sampling plans by
**

specifying the planned allowance for sampling risk (A) in the sample size formula.

(A) is determined by multiplying the auditor's specified tolerable misstatement (TM)

by a ratio (R) of planned allowance for sampling risk to tolerable misstatement. The

ratio is determined from a table based on the auditor's specified risks of incomplete

rejection and acceptance.

b.

**Three ways of estimating the standard deviation for a mean-per-unit sampling plan
**

are: (1) in a recurring engagement, the standard deviation found in the preceding

audit may be used, (2) it may be estimated from available book values in the current

year, and (3) it may be based on the audit values found in a presample of 30 to 50

items selected from the current year's population.

13B-3. a.

**Planned allowance for sampling risk in a classical variables sampling plan provides
**

the means by which the risk of incorrect acceptance is controlled. It is found by

multiplying the auditor's specified tolerable misstatement by a ratio determined from

a table based on the specified risks of incorrect rejection and acceptance.

b.

**The achieved allowance for sampling risk is calculated from the sample. When the
**

achieved allowance is not greater than the planned allowance used to determine

sample size, it is used to calculate a range, plus and minus, about the estimated total

population value, if the recorded book value falls within this range, the sample

results support the conclusion that the book value is not materially misstated at a risk

of incorrect acceptance not exceeding that specified in designing the sample.

c.

**An adjusted achieved allowance for sampling risk is calculated from a sample when
**

the achieved allowance is greater than the planned allowance. This adjustment is

required so that the risk of incorrect acceptance associated with the range calculated

for the estimated total population value will not exceed that originally specified by

the auditor.

13B-4. When sample results do not support the book value, the auditor must use professional

judgment in deciding on an appropriate course of action. If the auditor believes the sample is

not representative of the population, he or she may expand the sample and reevaluate. Also,

if the auditor believes the achieved allowance is larger than the planned allowance because

the sample size was too small (e.g., because the population standard deviation used to

**determine sample size was underestimated), he or she may expand the sample and
**

reevaluate. If the auditor believes the population book value may be reinstated by more than

tolerable misstatement, he or she may have the client investigate, and, if warranted, adjust

the book value. The auditor would then reevaluate the sample results relative to the adjusted

book value.

Appendix C

13C-1. Consideration of the same factors in nonstatistical samples as in statistical samples may help

to produce more efficient and effective samples. However, in nonstatistical samples the

factors need not be explicitly quantified. The factors to be considered are: (1) book value of

the population, (2) variation in the population, (3) tolerable misstatement, and (4) risk of

incorrect acceptance.

13C-2. Two acceptable methods for projecting the misstatement found in nonstatistical samples to

the population are: (1) the ratio method which divides the total dollar amount of

misstatement in the sample by the fraction of total dollars from the strata of the population

included in the sample; (2) the difference method which multiplies the average difference

between audit and book values for sample items by the number of units in the strata of the

population. In either case the results of each strata should be added together to determine a

estimated misstatement for the population.

13C-3. In nonstatistical samples, the difference between the auditor's total projected misstatement

and tolerable misstatement may be viewed as an allowance for sampling risk.

Comprehensive Questions

13-20. (Estimated Time – 20 minutes)

a.

b.

1.

**In determining an acceptable level of risk of assessing control risk too low, an
**

auditor should consider the importance of the control to be tested in

determining the extent to which substantive tests will be restricted and the

planned control risk.

2.

**In determining the tolerable deviation rate, an auditor should consider the
**

planned control risk and how materially the financial statements would be

affected if the control does not function properly.

3.

**In determining the expected population deviation rate, an auditor should
**

consider the results of prior years' test, the overall control environment, or

utilize a preliminary sample.

1.

**There is a decrease in sample size if the acceptable level of risk assessing
**

control risk too low is increased.

2.

There is a decrease in sample size if the tolerable deviation rate is increased.

3.

**There is an increase in sample size if the population deviation rate is
**

increased.

c.

**For a low risk of assessing control risk too low, it is generally appropriate to
**

reconsider the planned control risk as the calculated estimate of the population

deviation rate identified in the sample (7%) approaches the tolerable deviation rate

(8%). This is because there may be an unacceptably high sampling risk that these

sample results could have occurred with an actual population deviation rate higher

than the tolerable deviation rate.

d.

**If statistical sampling is used, an allowance for sampling risk can be calculated. If
**

the calculated estimate of the population deviation rate plus the allowance for

sampling risk is greater than the tolerable deviation rate, the sample results should be

interpreted as not supporting the planned control risk.

**13-22. (Estimated time - 25 minutes)
**

a.

**The auditor's justification for accepting the uncertainties that are inherent in the
**

sampling process is based upon the premise that the

Cost of examining all of the financial data would usually outweigh the benefit of

the added reliability of a complete (100%) examination.

Time required to examine all of the financial data would usually preclude

issuance of a timely auditor's report.

b.

**The uncertainties inherent in applying auditing procedures are collectively referred
**

to as audit risk. Audit risk, with respect to a particular account balance or class of

transactions, is the risk that there is a monetary misstatement greater than tolerable

misstatement in the balance or class that the auditor fails to detect. Audit risk is a

combination of three types of risks as follows:

Inherent Risk- The susceptibility of an assertion to a material misstatement

assuming the client does not have any related internal controls.

Control Risk. The risk that a material misstatement that could occur in an

assertion will not be prevented or detected on a timely basis by the client's

internal controls.

Analytical Procedures Risk. The risk that the auditor’s analytical procedures will

not detect a material misstatement that exists in an assertion.

Tests of Details Risk- The risk that the auditor’s tests of details will not detect a

material misstatement that exists in an assertion.

Audit risk includes both uncertainties due to sampling and uncertainties due to

factors other than sampling. These aspects of audit risk are referred to as

sampling risk and nonsampling risk, respectively.

c.

**Sampling risk arises from the possibility that when a test of controls is restricted to a
**

sample, the auditor's conclusions may be different from the conclusions that might be

reached if the test were applied in the same way to all items in the population. That

is, a particular sample may contain proportionately more or less deviations from a

control than exist in the population as a whole.

Nonsampling risk includes all the aspects of audit risk that are not due to sampling.

An auditor may apply to a procedures to all transactions and still fails to detect a

material internal control weakness. Nonsampling risk includes the possibility of

selecting audit procedures that are not appropriate to achieve the specific objective,

or failing to recognize errors in documents examined, which would render the

procedures ineffective even if all items were examined.

The auditor is concerned with two aspects of sampling risk in performing tests of

controls:

The risk of assessing control risk too low is the risk that the assessed level of

control risk based on the sample supports the planned assessed level of control

risk when the true operating effectiveness of the control structure policy or

procedure, if known, would not support the planned assessed level.

The risk of assessing control risk too high is the risk that the assessed level of

control risk based on the sample does not support the planned assessed level of

control risk when the true operating effectiveness of the control structure policy

or procedure, if known, would support the planned assessed level.

The risk of assessing control risk too low relates to the effectiveness of an audit in

detecting an existing material misstatement. The risk of assessing control risk too

high relates to the efficiency of the audit. The auditor should apply professional

judgment in assessing sampling risk.

**13-23. (Estimated time - 30 minutes)
**

a.

Areas where judgment may be exercised by a CPA in planning a statistical test

include:

Determining the objectives of the plan. The CPA must identify the controls that

are of interest and relate the controls to relevant financial statement assertions.

Selecting the sampling method to be used. The CPA may choose from among

several methods including attribute and discovery sampling.

Defining the population and sampling unit. The CPA must give consideration to

the appropriateness of the population to the objectives of the plan, the

population's homogeneity with respect to control procedures to be tested,

multiple client locations, changes in control procedures during the year, and

population size. In defining the sampling unit, the CPA must consider

compatibility with the objective of the test and audit efficiency.

Specifying the attributes of interest. In attribute sampling, the CPA must identify

attributes that relate to the effectiveness of the controls being tested.

Determining sample size. The CPA must specify the acceptable level of risk of

assessing control risk too low, tolerable deviation rate, expected population

deviation rate, and population size.

**Determining the sample selection method. The CPA must decide which sampling
**

selection method to use (e.g., random number sampling or systematic sampling).

b.

**The CPA must consider the qualitative aspects of the deviations as well as the
**

number of deviations. Deviations that directly affect the financial statements or

appear to be irregularities have greater audit significance. When the sample results

do not support the planned control risk, the nature, extent, or timing of substantive

tests are ordinarily modified, or, if applicable, tests may be made of other

compensating controls.

c.

**Two techniques for selecting a nonstratified sample of 80 accounts payable vouchers
**

are:

Random number sampling. Use a table of random numbers or a computer

program that generates random numbers to identify 80 four digit numbers that

can be uniquely related to items in the population. When a table of random

numbers is used, the starting point in the table should be selected randomly and

the path to be followed through the table should be determined in advance and

followed consistently.

Systematic sampling. Select every 40th voucher (3200 - 80) after selecting the

initial voucher (from 1-40) randomly. If the CPA is concerned that there may be a

cyclical pattern in the population, he or she may use multiple random starts,

multiplying the skip interval for a single random start (40) by the number of

multiple starts.

**13-24. (Estimated time - 25 minutes)
**

a.

The advantages of PPS sampling over classical variables sampling are as follows:

PPS sampling is generally easier to use than classical variables sampling.

Size of PPS is not based on the estimated variation of audited amounts.

PPS sampling automatically results in a stratified sample.

Individual significant items are automatically identified.

If no misstatements are expected, PPS sampling will usually result in a smaller

sample size than classic variables sampling.

A PPS sample can be easily designed and sample selection can begin before the

complete population is available.

b.

**Sample Size Calculations:
**

Sampling Size

RF BV

TM ( AM EF )

3.00 $300,000

$15,000 (0)

60

BV

n

$300,000

60

$5,000

Sampling Interval

c.

Recorded

Audit

Tainting

Sampling

Projected

Amount

Amount

Percentage Interval

Misstatement

1st misstatement

$ 400

$ 320

20%

$1,000

$ 200

2nd misstatement

500

0

100%

1,000

1,000

3rd misstatement

3,000

2,500

*

1,000

500

Total Projected Misstatement

$ 1,700

*

The recorded amount is greater than the sampling interval; therefore, the projected

misstatement equals the actual misstatement.

13-25. (Estimated time - 30 minutes)

a.

**Sample size = 47; Sampling interval = $10,638 (Basis for these conclusions in
**

included in an excel file labeled Problem 13-25).

b.

**The conclusion would state that the auditor is 90% confident that the maximum
**

amount of misstatement does not exceed $27,936.17. This exceeds tolerable

misstatement so the book value as stated appears to contain material misstatements.

c.

**By not specifying an amount for anticipated misstatement, the auditor incurs an
**

unspecified but potentially high risk of incorrect rejection. The known misstatements

are immaterial, but the project a material amount of misstatements in the population.

Additionally, there is always the chance that a sample is not representative.

Accordingly, the auditor may wish to examine additional sampling units, possibly

redesigning the sample specifying an amount for anticipated misstatement. If the

auditor believes the inventory is misstated by more than tolerable misstatement, he or

she may request the client to investigate the misstatements and, if appropriate, adjust

the book value.

d.

**The advantages of PPS sampling are:
**

It is generally easier to use than classical variables sampling because the auditor

can calculate sample sizes and evaluate sample results by hand or with the

assistance of tables.

The size of a PPS sample is not based on any measure of estimated variation of

audit values.

PPS sampling automatically results in a stratified sample because items are

selected in proportion to their dollar values.

PPS systematic sample selection automatically identifies any item that is

individually significant if its value exceeds an upper monetary cutoff equal to the

sampling interval.

If the auditor expects no misstatements, PPS sampling will usually result in a

smaller sample size than under classical variables sampling.

**A PPS sample can be designed more easily and sample selection may begin
**

before the complete population is available.

**13.26. (Estimated Time: 20 minutes)
**

a.

1.

2.

**Projected misstatement = $4,570
**

Projected misstatement = $4,890

b.

1.

2.

3.

**Basic precision = $3,800
**

The incremental allowance for sampling risk = $1,700

The upper misstatement limit = $10,390

c.

**The auditor is 85% confident that the maximum overstatement in the population is
**

$10,390. This is significantly less than tolerable misstatement of $50,000 so the

auditor can conclude that the population is materially correct.

**Note: This solution is supported by an excel worksheet labeled Problem 13-26.
**

13.27. (Estimated Time: 25 minutes)

a.

Sample Size = 66

b.

The sampling interval = $44,455

c.

1.

2.

3.

d.

**The auditor is 90% confident that the maximum overstatement in the population is
**

$251,431.82. This is exceeds tolerable misstatement of $150,000. The know errors

are immaterial, so there is a risk that he auditor is incorrectly rejecting the

population. The auditor might consider increasing the sample size. Alternatively,

the client might further investigate the errors and choose to adjust the book value of

accounts receivable.

**Projected misstatement = $97,727.27
**

The incremental allowance for sampling risk = $48,704.55

The upper misstatement limit = $251,431.82

**Note: This solution is supported by an excel worksheet labeled Problem 13-27.
**

13-28. (Estimated time - 25 minutes)

a.

N U R S xj

n

A

2

1,520 1.64 $2,000

$250,000

n

2

398

b.

1,520 1.64 $2,500

$250,000

2

n

621

c.

UR

A n

N S xj

UR

**$250,000 325
**

1.48 slightly under 15% risk of incorrect rejection

1,520 $2,000

d.

A

A

N U R S rj

n

1,520 1.64 $2,000

325

$276,551

e.

n

n

n

N

398

n

315

398

1

1520

1

**13-29. (Estimated time – 30 minutes)
**

a.

b.

**Using the formula TD = AR/ (IR x CR x AP) from Chapter 8, the risk of incorrect
**

acceptance for the test of details (TD) for each sampling plan is:

1.

TD

.05

.40

1.0 .50 .25

2.

TD

.05

.25

1.0.40.50

3.

TD

.05

.15

1.0.40.85

**Based on R values obtained from Figure 12,-8 and the formula A R x TM, the
**

planned allowance for sampling risk for each sampling plan is:

A .863 $110,000 $94,930

1.

2.

3.

**A .742 $140,000 $103,880
**

A .612 $170,000 $104,040

N U R S xj

Using the formula n

A

5,000 1.64 $80

$94,930

2

**sample size for each sampling plan is:
**

2

1.

n

48

n

6,000 1.96 $105

$103,880

2

2.

2

3.

8,000 1.64 $125

n

$104,040

141

248

**Note: Since n/N is less than .05 in each case, the finite correction factor is not applied.
**

13.30 . Estimated Time: 25 minutes)

a.

**Company X sample size = 160
**

Company Y sample size = 144

b.

**Accept the population as materially correct because the book value of $90,000 falls
**

within the precision interval of $78,821 to $91,514.

c.

**Reject the population as containing material misstatements because the book value of
**

$200,000 falls within the precision interval of $170,559 to $191,104.

**Note: This solution is supported by an excel worksheet labeled Problem 13-30.
**

13-31. (Estimated Time – 20 Minutes)

a.

**The pricing test is a substantive test that relates to the detection risk component of
**

audit risk.

b.

**Factors that should influence sample size are:
**

Population size

Variation in the population

Tolerable misstatement

Risk of incorrect acceptance

The sampling unit is stock items appearing on the computer printout. The items may

be selected by any of the following methods: (1) simple random, (2) systematic

random, (3) haphazard, and (4) block sampling. The method used should provide a

representative sample. Use of a single block is generally not acceptable. Accordingly,

when this method is used, several blocks should be selected.

c.

d.

**In interpreting the results, Wheeler and Jones should (1) project the misstatement
**

found in the sample to the population and (2) consider the sampling risk. 'The

projected misstatement can be calculated in either of the following ways:

**Total dollar amount of misstatement in sample
**

Fraction of population dollars in sample

$4,800

$121,600

$75,000 / $1,900,000

Projected misstatement

**Projected misstatement Average difference between audit Number of units
**

and book value for sample items

in population

($4,800 / 100) 3,000 $144,000

In this case, the two approaches yield different results. 'This will occur whenever the

average of the recorded values of the sample items differs from the average of the

recorded values for the entire population. The Audit Sampling Guide (p. 62) provides

the following guidance for situations when the difference is significant: 'the auditor

chooses between the approaches on the basis of his or her understanding of the

magnitude and distribution of misstatements in the population. For example, if the

auditor expects that the amount of misstatement relates closely to the size of an item,

he or she ordinarily uses the first approach. On the other hand, if the auditor expects

the misstatements to be relatively constant for all items in the population, he or she

ordinarily uses the second approach."

Both of the estimates of projected misstatement above significantly exceed the

specified tolerable misstatement of $85,000. Thus, the sample does not support the

conclusion that the inventory balance is not materially misstated. If projected

misstatement had been less than tolerable misstatement, then Wheeler and Jones

should have viewed the difference as an allowance for sampling risk. When the

difference is large, reasonable assurance is obtained that there is an acceptably low

sampling risk that the actual misstatement exceeds tolerable misstatement. On the

other hand, when the difference is small, it may be concluded that there is an

unacceptably high sampling risk that the actual misstatement exceeds tolerable

misstatement.

**13-32. (Estimated Time – 15 minutes)
**

a.

**The specific combinations of factors that result in the sample sizes of not less than
**

125 or more than 200 assuming a tolerable deviation rate of 8 percent are as follows:

Risk of Assessing

Expected Population Sample Size

Control Risk too Low

Deviation Rate (%)

5

4

146

10

5

160

b.

(1) 88

(2) Sample size is too large to be cost effective for most audit applications

(3) 93

(4) Sample size is too large to be cost effective;

(5) 132.

13-33. (Estimated time - 25 minutes)

The following table provides the answers for a through e for each attribute.

(a)

(b)

(c)

(d)

(e)

Attri Sample Upper

Allowance

Controls that

Controls

-bute size

Deviation for Sampling Support Planned That Do Not

Limit

Risk

Control Risk

Support Planned

Control Risk

*

**

***

X

1.

192

3.1

2.6

X

2.

157

2.0

2.0

X

3.

127

7.2

4.1

X

4.

150

6.9

3.6

X

5.

95

6.8

4.7

X

6.

176

1.4

1.4

X

7.

132

4.4

2.9

X

8.

132

6.6

3.6

X

9.

88

4.8

3.7

X

10.

94

8.7

4.4

*

Upper deviation limit - sample deviation rate.

**

Upper deviation limit < tolerable deviation rate.

***

Upper deviation limit > tolerable deviation rate.

13-34. (Estimated time - 30 minutes)

a.

1.

2.

b.

1.

**When the auditor seeks evidence to support a low planned control risk, a tolerable
**

deviation rate in the range 2 to 7 percent is recommended. Since the tolerable

deviation rate is inversely related to sample size, a tolerable rate of 7 percent will

produce the minimum sample size consistent with low planned control risk. Thus,

based on a tolerable deviation rate of 7 percent, an expected deviation rate of 2

percent, and a 5 percent risk of assessing control risk too low, the minimum sample

size is 88.

A tolerable deviation rate in the range 6 to 12 percent is recommended for moderate

planned control risk. A tolerable rate of 6 percent will produce the maximum sample

size. When combined with the expected deviation rate of 2 percent and the 5 percent

risk of assessing control risk too low, the sample size required is 127.

Rounding the sample size of 88 found in a (1) above down to 80 for purposes of

using the sample evaluation tables in Figure 11-8, one deviation results in an upper

deviation limit of 5.8 at 5 percent risk of assessing control risk too low. Since this is

less than the tolerable rate of 7, the result support using the low planned control risk.

c.

2.

**Three deviations in the same circumstances result in an upper deviation limit of 9.4.
**

This exceeds the tolerable deviation rate of 7. Consequently, the results do not

support the low planned control risk.

1.

**If the control being tested requires evidence of management approval in the form of
**

the manager's initials, the absence of initials constitutes a deviation even though the

manager properly reviewed the documentation and no errors were present. However,

the auditor may consider this information in evaluating the qualitative aspects of the

sample and in reaching an overall conclusion.

2.

This is clearly a deviation.

3.

This is not a deviation.

**13-35. (Estimated time - 30 minutes)
**

The incorrect assumptions, incorrect statements, and inappropriate applications of attribute

sampling in Baker's procedures include the following:

Baker's use of statistical sampling in tests of controls does not eliminate the need for

judgment. Judgment must still be exercised in both planning and executing the sampling

plan. For example, judgment is required in specifying such parameters as the risk of

assessing control risk too low and the tolerable deviation rate in determining sample

size, and in evaluating the information obtained from sample items to determine whether

a deviation from a control has occurred. Furthermore, judgment must be exercised in

making a qualitative evaluation of sample results.

Baker's specification of a tolerable rate of deviation or acceptable upper precision limit

of 20 percent was inappropriate given the objective of obtaining evidence to support a

planned assessed level of control risk of low. In such cases, the Audit Sampling Guide

suggests the tolerable deviation rate should fall in the range of 2 to 7 percent. According

to the Guide, a 20 percent tolerable deviation rate is the maximum level compatible with

obtaining evidence to support a planned control risk assessment of high. Furthermore, if

evidence about more than one attribute is being sought, it may be appropriate to specify

different tolerable deviation rates for the different attributes.

The description provided of the sampling plan does not include definition of the

attributes of interest.

The use of a discovery sampling technique to estimate the population deviation rate and

the achieved upper precision limit is inappropriate when the expected population

deviation rate is as high as 3 percent. Discovery sampling is appropriate when the

auditor wishes to design a sample to locate at least one deviation if the rate of deviations

in the population is at or above a specified critical rate, which rate should be very low

(less than 3 percent). For the application to Mill's shipping and billing functions where

conditions are expected to support a low assessed level of control risk, Baker should use

conventional attributes sampling rather than discovery sampling. An estimated

population deviation rate can be based on the results of the prior year's nonstatistical

sample, the initial assessment of control risk for the current year, or a presample of 30 to

50 items.

Cases

**Using statistical attributes sampling requires specification of the risk of assessing control
**

risk too low as part of the sample design in order to determine sample size. Specification

of the risk of assessing control risk too low should not be deferred to the evaluation

stage.

Once population size reaches 5,000, further increases in population size have little or no

effect on sample size. Therefore, upon determining that the population consisted of

10,000 shipping documents rather than 8,000, it would not be necessary for the auditor

to increase sample size provided all 10,000 documents were included in the sampling

frame from which the actual sample was selected.

To obtain evidence that shipments had been properly billed, Baker should have selected

a sample of shipping documents and traced them to invoices, rather than selecting

invoices for comparison to shipping documents. The latter test relates to the existence or

occurrence (or validity) of the transactions described on the invoices, whereas the former

relates to the completeness of the data represented by the invoices used to record sales.

Baker's selection of the first 25 invoices from the first month of each quarter does not

satisfy the requirements of random selection for a statistical sample. Simple or

systematic random selection procedures should have been used to identify shipping

documents from throughout the period under audit for inclusion in the sample.

It is not clear whether the eight errors discovered in the sample all pertain to the same

attribute or to multiple attributes. If they pertain to different attributes, a separate

evaluation must be made for each attribute.

The $9 billing error should be counted as an error because an attributes sampling plan

designed for use in a test of controls is based on frequency of deviations, not the dollar

amount of deviations.

If all the errors pertained to one attribute, and if there were only eight errors instead of

nine, Baker's determination of an upper deviation limit of 14 percent based on a 5

percent risk of assessing control risk too low would be correct. Including the ninth error

for the $9 billing error would yield a slightly higher upper limit. However, the allowance

for sampling risk is not the difference between the sample deviation rate of 8 percent and

the expected deviation rate of 3 percent. Rather, it should be calculated as the difference

between the upper deviation limit of 14 percent and the sample deviation rate of 8

percent, or 6 percent.

Baker's comparison of the sample deviation rate of 8 percent plus Baker's calculated

allowance of sampling risk of 5 percent with the upper deviation limit of 14 percent is

not the proper basis for concluding whether the sample results support the planned

control risk assessment of low. Instead, Baker should have compared the upper deviation

limit with the tolerable deviation rate. Because the upper deviation limit of 14 percent is

greater than the maximum tolerable deviation rate of 7 percent compatible with the

objective of obtaining evidence to support a control risk assessment of low (per the

Audit Sampling Guide guidelines), it should be concluded the sample does not support

the planned control risk assessment.

**13-36. See separate file with answers to the comprehensive case related to the audit of Mt. Hood
**

Furniture that is included with this chapter.

Professional Simulation

Research

Situation

Nonstatistical

Audit

Sampling

Audit

Conclusions

**AU 350.16 -.23 addresses the factors that should be considered when planning a sample for
**

substantive tests of details. These are presented below.

.16

When planning a particular sample for a substantive test of details, the auditor should

consider

The relationship of the sample to the relevant audit objective (see section 326, Evidential

Matter).

Preliminary judgments about materiality levels.

The auditor's allowable risk of incorrect acceptance.

Characteristics of the population, that is, the items comprising the account balance or class of

transactions of interest.

.17

When planning a particular sample, the auditor should consider the specific audit objective

to be achieved and should determine that the audit procedure, or combination of procedures, to be

applied will achieve that objective. The auditor should determine that the population from which he

draws the sample is appropriate for the specific audit objective. For example, an auditor would not

be able to detect understatements of an account due to omitted items by sampling the recorded

items. An appropriate sampling plan for detecting such understatements would involve selecting

from a source in which the omitted items are included. To illustrate, subsequent cash disbursements

might be sampled to test recorded accounts payable for understatement because of omitted

purchases, or shipping documents might be sampled for understatement of sales due to shipments

made but not recorded as sales.

.18

Evaluation in monetary terms of the results of a sample for a substantive test of details

contributes directly to the auditor's purpose, since such an evaluation can be related to his judgment

of the monetary amount of misstatements that would be material. When planning a sample for a

substantive test of details, the auditor should consider how much monetary misstatement in the

related account balance or class of transactions may exist without causing the financial statements

to be materially misstated. This maximum monetary misstatement for the balance or class is called

tolerable misstatement for the sample. Tolerable misstatement is a planning concept and is related to

the auditor's preliminary judgments about materiality levels in such a way that tolerable

misstatement, combined for the entire audit plan, does not exceed those estimates.

.19

The second standard of field work states, "A sufficient understanding of the internal control

structure is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to

be performed." After assessing and considering the levels of inherent and control risks, the auditor

**performs substantive tests to restrict detection risk to an acceptable level. As the assessed levels of
**

inherent risk, control risk, and detection risk for other substantive procedures directed toward the

same specific audit objective decreases, the auditor's allowable risk of incorrect acceptance for the

substantive tests of details increases and, thus, the smaller the required sample size for the

substantive tests of details. For example, if inherent and control risks are assessed at the maximum,

and no other substantive tests directed toward the same specific audit objectives are performed, the

auditor should allow for a low risk of incorrect acceptance for the substantive tests of details. fn 3

Thus, the auditor would select a larger sample size for the tests of details than if he allowed a higher

risk of incorrect acceptance.

.20

The Appendix illustrates how the auditor may relate the risk of incorrect acceptance for a

particular substantive test of details to his assessments of inherent risk, control risk, and the risk that

analytical procedures and other relevant substantive tests would fail to detect material misstatement.

.21

As discussed in section 326, the sufficiency of tests of details for a particular account

balance or class of transactions is related to the individual importance of the items examined as well

as to the potential for material misstatement. When planning a sample for a substantive test of

details, the auditor uses his judgment to determine which items, if any, in an account balance or

class of transactions should be individually examined and which items, if any, should be subject to

sampling. The auditor should examine those items for which, in his judgment, acceptance of some

sampling risk is not justified. For example, these may include items for which potential

misstatements could individually equal or exceed the tolerable misstatement. Any items that the

auditor has decided to examine 100 percent are not part of the items subject to sampling. Other

items that, in the auditor's judgment, need to be tested to fulfill the audit objective but need not be

examined 100 percent, would be subject to sampling.

.22

The auditor may be able to reduce the required sample size by separating items subject to

sampling into relatively homogeneous groups on the basis of some characteristic related to the

specific audit objective. For example, common bases for such groupings are the recorded or book

value of the items, the nature of controls related to processing the items, and special considerations

associated with certain items. An appropriate number of items is then selected from each group.

.23

To determine the number of items to be selected in a sample for a particular substantive test

of details, the auditor should consider the tolerable misstatement, the allowable risk of incorrect

acceptance, and the characteristics of the population. An auditor applies professional judgment to

relate these factors in determining the appropriate sample size. The Appendix illustrates the effect

these factors may have on sample size.

Nonstatistical

Audit

Sampling

Research

Audit

Conclusions

Situation

**1. The estimate of the audited value of the population using nonstatistical ratio estimation is
**

$6,944.898.

2. The estimate of the audited value of the population using nonstatistical difference estimation is

$6,952,500.

The calculations supporting these estimates are included in the spreadsheet embedded in the

solutions manual above.

Audit

Conclusions

Research

Situation

Nonstatistical

Audit Sampling

To:

Audit File

Re:

Results of Audit Sampling of Western Region Warehouse for Astor Electronics, Inc.

From: CPA Candidate

The sample selection associated with a nonstatistical sample of the Astor Electronics, Inc. inventory

is presented below. The sample represented 1% of the number of items (7,350 individual stock

numbers) in inventory and 1% of the dollar value of the inventory ($7,500,000). Tolerable

misstatement for inventory is $350,000.

**The estimated audited value of inventory using nonstatistical ratio estimation is $6,944.898. The
**

estimated audited value of inventory using nonstatistical difference estimation is $6,952,500. Both

of these estimates fall outside the range of the book value of inventory less tolerable misstatement

($7,150,000). The population cannot be accepted as materially correct.

The known misstatements are immaterial. Due to the small sample size they result in projecting

material misstatements on the population. At this stage the sample size might be increased, or the

client can investigate the misstatements and considering adjusting the book value of the population

in line with the sample results.

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