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CHAPTER ELEVEN

BASIC AUDIT AND SAMPLING CONCEPTS

It requires less effort to do theright things and succeed, than to do the wrongthings andfail.

- Anonymous

Learning Objectives

After studying this chapter, you should be able to:

Define audit sampling.

Explain the different risk considerations in obtaining audit evidence.

Differentiate statistical from non-statistical sampling.

Discuss sampling approaches and other means of testing.

Illustrate sampling for tests of controls.

Illustrate sampling for substantive tests.

Discuss the common projection techniques for sampling in substantive tests.

Identify other sampling considerations.

Introduction

PSA 500 (Redrafted), Audit Evidence states that:

When designing tests of controls and tests of details, the auditor shall determine means

of selecting items for testing that are effective in meeting the purpose of the audit

procedure1.

Actually, the means of selecting items for testing which are available to the auditor are:

1. Selecting all items (100% examination)

2. Selecting specific items

3. Audit sampling.

The decision as to which approach to use will depend on the circumstances, and the

application of any one or combination of the above means may be appropriate in

particular circumstances. While the decision as to which means, or combination or

means, to use is made on the basis of the risk of material misstatement related to the

assertion being tested and audit efficiency, the auditor needs to be satisfied that

methods used are effective in providing sufficient appropriate audit evidence to meet the

objectives of the audit procedure.

1

PSA 500 (Redrafted), par. 10

Auditing and Assurance Principles

**Selecting all items (100% examination)
**

The auditor may decide that it will be most appropriate to examine the entire population

of items that make up a class of transactions or account balance (or a stratum within that

population). 100% examination is unlikely in the case of tests of controls; however, it is more

common for tests of details. For example, 100% examination may be appropriate when the

population constitutes a small number of large value of items, when there is a significant risk

and other means do not provide sufficient appropriate audit evidence, or when the repetitive

nature of a circulation or other process performed automatically by an information system

makes a 100% examination cost effective, for example, through the use of computer-assisted

audit techniques (CAATs).

**Selecting Specific Items
**

The auditor may decide to select specific items from a population based on such factors

as the auditor’s understanding of the entity, the assessed risk of material misstatement, and the

characteristics of the population being tested. The judgmental selection of specific items is

subject to non-sampling risk. Specific items selected may include those mentioned in Table 11-

12:

Table 11-1

Selecting Specific Items

Description

The auditor may decide to select specific items within a population because

High value or key they are of high value, or exhibit some other characteristics, for example

items items that are suspicious, unusual, particularly risk-prone or that have a

history of error.

The auditor may decide to examine items whose values exceed a certain

All items over a amount so as to verify a large proportion of the total amount of class of

certain amount transactions or account balance.

Items to obtain The auditor may examine items to obtain information about matters such as

information the nature of the entity, the nature of transactions, and internal control.

Items to test control The auditor may examine judgment to select and examine specific items to

activities determine whether or not a particular control activity is being performed.

**While selective examination of specific items from a class of transactions or account
**

balance will often be an efficient means of gathering audit evidence, it does not constitute audit

sampling. The results of audit procedures applied to items selected in this way cannot be

projected to the entire population. The auditor considers the need

2

PAS 500 (Redrafted), par. A54

Auditing and Assurance Principles

**to obtain sufficient appropriate audit evidence regarding the remainder of the population when
**

that remainder is material.

Audit Sampling

Audit sampling involves the application of audit procedures to less than 100% of items

within a class of transactions or account balance 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 population3. Audit sampling can use either a statistical or a non-statistical

approach.

The following terms are used in this chapter:

1. Error – means either control deviations, when performing tests of controls, or

misstatements, when performing tests of details.

a. Deviation – difference between what was expected, based on the documentation

of controls, and what actually occurred. Deviations are stated in terms of

percentages.

b. Misstatements – difference between the amount computed by the auditor and the

amount actually recorded or reflected in the accounting records. Misstatements

are presented in terms of monetary amount.

2. Total error – the rate of deviation or total misstatement.

3. Expected error – the error that the auditor expects to be present in the population.

4. Anomaly – an error that arises from an isolated event that has not recurred other than on

specifically identifiable occasions and is therefore not representative of errors in the

population.

5. Population – the entire set of data from which a sample is selected and about which the

auditor wishes to draw conclusions. A population may be divided into strata, or sub-

populations, with each stratum being examined separately. The term population is used

to include the term stratum.

6. Sampling unit – the individual items constituting a population, for example checks listed

in deposit slips, credit entries on bank statements, sales invoices or debtor’s balances,

or a monetary unit.

Audit Sampling

Audit sampling Is based on the premise that a sample can be sufficiently representative

of an audit population to warrant valid and reliable conclusions without testing the entire

population. An audit population may consist of all the items within a class of transactions,

such as all credit sales processed for a specified period, or all the transactions constituting

an account balances, such as accounts receivable.

3

Ibid., par. 5(a)

Audit Sampling and Audit Risk Audit risk as the likelihood that an auditor may unknowingly fail to modify his or her opinion on materially misstated financial statements. or sub-population. Tests of Control Tests of controls are performed when the auditor’s risk assessment includes an expectation of the operating effectiveness of controls. However. risk assessment procedures do not involve the use of audit sampling. The purpose of substantive procedures is to obtain audit evidence to detect material misstatements at the assertion level. and disclosures and substantive analytical procedures. In the context of substantive procedures. Based on the auditor’s understanding of internal control. audit sampling and other means of selecting items for testing. audit sampling and other means of selecting items for testing and gathering audit evidence may be used to verify one or more assertions about a financial statement amount (for example. Audit sampling for tests of controls is generally appropriate when application of the control leaves audit evidence of performance (for example. the existence of accounts receivable). account balances. relate only to tests of details. or to make an independent estimate of some amount (for example. and . with each stratum being examined separately. Ordinarily. Audit sampling can be classified in relation to audit procedures. including its internal control. Risk Assessment Procedures The auditor performs risk assessment procedures to obtain an understanding of the entity and its environment. The term population is used to include the term stratum. Audit risk is a combination of two components: 1. the auditor identifies the characteristics or attributes that indicate performance of a control. as well as possible deviation conditions which indicate departures from adequate performance. The risk that material errors will occur in the process by which financial statements are developed (risk of material misstatement). initials of the credit manager on a sales invoice indicating credit approval. Substantive Procedures Substantive procedures are concerned with amounts and are of two types: tests of details of classes of transactions. the auditor often plans and performs tests of controls concurrently with obtaining an understanding of the design of controls and determining whether they have been implemented. or evidence of authorization of data input to a microcomputer based data processing system. When performing tests of details. the value of obsolete inventories). Auditing and Assurance Principles A population may be divided into strata. The presence or absence of attributes can then be tested by the auditor.

The risk that any material errors that occur will not be detected by the auditor (detection risk). and equipment. control risk would be increased if an entity did not maintain effective physical controls over blank check. Detection risk may be further subdivided into: sampling risk and non-sampling risk. Detection Risk Detection risk is the likelihood that errors could occur and could be material when combined with errors in other accounts. such as property. could be material and that are not monitored by related control procedures. but will not be detected by the auditor’s procedures. but will not be prevented or detected by the entity’s internal control structure. Risk of Material Misstatement The risk of material misstatement can be illustratively shown as follows: Exhibit 11-1 Risk of Material Misstatement Risk of material misstatement Inherent Risk Control Risk Inherent risk represents the susceptibility of an account balance to errors that. For example. than for non-liquid assets. Control risk represents the likelihood that errors could occur. such as cash. plant. For example. when combined with errors in other accounts. Because neither control risk nor inherent risk is directly controllable by an auditor. and could be material when combined with errors in other accounts. Detection risk and its sub- components can be illustratively shown as follows: Exhibit 11-2 Detection Risk Detection Risk Sampling Risk Non-Sampling Risk . The risk that material errors will not be detected is directly controllable by the auditor through substantive tests of details and other substantive audit procedures. inherent risk is higher for liquid assets. Auditing and Assurance Principles 2. the risk that material errors will occur – the first component of audit risk – is not directly controllable by the auditor.

This is the risk that a sample deviation rate supports assessing control risk at the maximum when. Auditing and Assurance Principles The risk that material errors may occur and remain undetected is influenced by two categories of uncertainties: 1. the true deviation rate in the population supports assessing control risk at the maximum. and the true. an auditor estimated a 5 percent rate of deviation but was willing to tolerate 3 percent. See examples of both types of sampling risks below: Example – Risk of Assessing Control Risk Too High If. timing. sampling risk varies inversely with sample size: the greater the sample size. the smaller the sampling risk. That is. therefore. suggesting that the auditor’s conclusions may be different if the entire population were sample size. 2. Sampling risk results from the fact that a particular audit sample may not be representative of the population tested. there would be no sampling and therefore no sampling risk. This relationship is quite logical. 2. Sampling Risk in Tests of Controls Two aspects of sampling risk are critical in test of controls: 1. Risk of assessing control risk too low (or the of over reliance). because if sample size were increased to include all the items in a population. unknown to the auditor. because the sample indicated a higher. Non-sampling risk – uncertainties arising from factors unrelated to sampling. but unknown. unknown to the auditor. and extent of substantive tests. In this example. based in a sample may be different from the conclusion reached if the entire population were subjected to the same audit procedure4. Sampling risk arises from the possibility that the auditor’s conclusion. 4 Sampling risk may be eliminated by testing 100% of the population. This is the risk that a sample does support assessing control risk below the maximum when. the auditor would probably conclude that the control is not effective. Risk of assessing control risk too high (or the risk of under reliance). he would assess a higher level of control risk in determining the nature. the sample may contain disproportionately more or fewer control deviations or monetary differences than exist in the class of transactions or account balance as a whole. based on an unrepresentative sample. Sampling risk – uncertainties related to sampling. the true deviation rate in the population supports assessing control risk below the maximum. population rate of deviation was really 2 percent. . Non- sampling risk includes all aspects for audit risk not due to sampling.

the account is not materially misstated. In this example. effort. timing. Assessing control risk too high affects the efficiency (time. he or she would assess a lower level of control risk in determining the nature.. Example – Risk of Assessing Control Risk Too Low If. If the expanded scope of substantive tests is unjustified. Risk of incorrect rejection is the risk that a sample supports the conclusion that a recorded account balance is materially misstated when. Sampling Risk in Substantive Tests Two aspects of sampling risk are critical in substantive tests: 1. and cost) of the audit. Assessing control risk too low affects the effectiveness of the audit (i. he or she would actually be assessing control risk too high because the true population deviation rate (i. population rate was really 8 percent. 2 percent) is less than the tolerable rate which is 3 percent.e. the audit will be less efficient since more substantive tests will be performed than necessary. and extend to substantive tests. based on an unrepresentative sample. thus. Assessing control risk too high results in inefficiency: when an auditor concludes that a control is ineffective and therefore that control risk is high. he ordinarily sets a lower acceptable detection risk and expands the scope of substantive tests to compensate for the perceived control deficiency. It can be concluded that assessing control risk too low results in under-auditing (doing less substantive tests than necessary). 5 percent) than the auditor was willing to tolerate (7 percent). 8 percent) exceeds the tolerable rate (7 percent). Like the risk of assessing control risk too high in attribute sampling.e.. therefore. because an initially erroneous conclusion that an account balance is misstated would ordinarily be revised . errors in the financial statements may remain undetected) because the scope of substantive tests will be restricted under the erroneous assumption that the control is effective and control risk in low. he would actually be assessing control risk too low since the true population rate (i. the risk of incorrect rejection related to the efficiency of an audit. the auditor would conclude that the control is effective.e. Auditing and Assurance Principles Unknown to the auditor. unknown to the auditor. but unknown. However. the substantive tests may be ineffective in detecting material misstatements.e. It can be concluded that assessing control risk too high results in over-auditing (doing more substantive tests than necessary).. an auditor estimated a 5 percent rate of deviation but was willing to tolerate 7 percent. unknown to the auditor. because the sample indicated fewer deviations (i. and the true..

in contrast. in fact. Like the risk of assessing control risk too low in attribute sampling. because incorrectly accepting a misstated account balance could result in financial statements that are materially misstated and therefore misleading. Several factors can serve to reduce non-sampling risk. and other procedures revealed that Accounts Receivable and Sales were not misstated. is the risk that a sample supports the conclusion that a recorded account balance is not materially misstated when. the auditor may find no errors in a sample and conclude population is. unknown to the auditor. the auditor may choose an inappropriate substantive analytical procedure (non-sampling risk) or may find only minor misstatements in a test of details when. including proper planning and supervision and encouraging effective firm-wide quality control. Risk of incorrect acceptance. For example. such as failing to detect errors contained within sample items or overlooking or misinterpreting errors that are detected. in fact. For example. the risk of incorrect acceptance relates to audit effectiveness and is particularly critical to an auditor. For example. It includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective. when performing tests of controls. the account is materially misstated. Depending on their nature. . Auditing and Assurance Principles When the auditor considers other evidence or performs additional audit procedures. the population misstatement is greater than the tolerable amount (sampling risk). the auditor may use a variety of methods to reduce detection risk to an acceptable level. sampling risk can be reduced by increasing sample size. With respect to substantive procedures. For both tests of controls and substantive tests of details. an auditor would ordinarily revise an initial conclusion that Cost of Goods Sold is misstated if a physical inventory observation and inventory price testing revealed that Inventory was not misstated. Non-Sampling Risk Non-sampling risk includes all aspects of audit risk not due to sampling. non-sampling risk could result from human errors. 2. Risk Considerations in Obtaining Audit Evidence Sampling risk and non-sampling risk can affect the components of the risk of material misstatement. while non-sampling risk can be reduced by proper engagement planning supervision and review. unacceptably high (sampling risk). For example. these methods will be subject to sampling and/or non- sampling risks. Or there may be errors in the sample which the auditor fails to recognize (non-sampling risk).

Non-Statistical Sampling Non-statistical sampling plans rely exclusively on subjective judgment to determine sample size and evaluate sample results. It is not appropriate to use judgment in selecting items for a sample and then use statistical sampling techniques to express a conclusion about the population. Disadvantages of Statistical Sampling 1. it provides a mathematical measurement of the degree of uncertainty. and in evaluating the sample results. It is an auditor-derived tool for examining a sample of items from a population. It provides more objective audit evidence. and sampling error. 3. The cost of statistical sampling would exceed the benefits. Statistical sampling plan measure the risk that a sample is not representative of a population. Auditing and Assurance Principles General Approaches to Audit Sampling Statistical Sampling Statistical sampling plans apply the laws of probability to aid an auditor in designing an efficient sample. 3. There is a danger of accepting statistical evidence at face value. A properly designed non-statistical sampling application can provide results as effective as those from a properly designed statistical sampling application. in measuring the sufficiency of evidence obtained. however. It aids an auditor in determining the sample size required to meet given objectives. one critical difference between a statistical and a non-statistical sampling application: statistical sampling allows an auditor to measure sampling risk. It is a mathematically derived tool that provides the auditor with an objective basis for expressing conclusions about a population characteristic based upon a sample of items from the population. Statistical sampling may be less appropriate in some cases than non-statistical sampling or other audit procedures for gathering evidence. 2. The auditor uses judgment in deciding which items should be included in the sample. Table 11-2 shows the advantages and disadvantages of statistical sampling: Table 11-2 Advantages and Disadvantages of Statistical Sampling Advantages of Statistical Sampling 1. without sufficient skepticism. . There is. It allows an auditor to measure precision. Judgment sampling is preferable to statistical sampling when the auditor desires to perform some operation on the sample items only (for example. non-statistical sampling plans do not. find and correct errors). 2. reliability.

If the sampling units do not have identifying numbers.. Random-number tables contain columns and rows of randomly generated digits. Systematic-sampling This involves selecting every nth item from a population of sequentially ordered items. an auditor could periodically proceed to anew starting point while selecting the sample. If each item in a population is not given an equal chance of selection. the audit assigns numbers to each population item. the sample would be biased toward the population items with the greater chance of selection. . However. there is still a degree of uncertainty about whether sample results are representative of the population. Random-number sampling is appropriate both for statistical and non-statistical sampling plans.g. is merely a means accomplishing audit procedures. A sample can be evaluated in terms of probability only if the sample is randomly selected and thus free from sampling bias. The number of sequential items to skip when selecting a 5 See the Appendices to PSA 530. Systematic sampling eliminates the need to establish correspondence between population items and random digits. an auditor might consider the cost justifiable if the related controls were critical. Some common methods of sample selection are presented below5: Random-Number Sampling This method utilizes random-number tables or computer-generated random numbers to select sampling units from a population. selecting digits corresponding to identification numbers on the sampling units (e. and a measure of sampling risk was therefore deemed essential. Auditing and Assurance Principles Statistical or non-statistical? The choice between a statistical and a non-statistical sampling plan is based primarily on the auditor’s assessment of the relative costs and benefits. Note that the choice between a statistical and non-statistical sampling plan is made independent of the selection of audit procedures. Even with the most carefully designed sampling plan. Sampling Selection Method The objective of audit sampling is to draw conclusions about one or more population characteristics without testing the entire population. Audit sampling. and therefore is useful when population items lack identification numbers. whether statistical or non- statistical. an auditor might use non-statistical sampling if the cost of selecting a statistical random sample was deemed too high. For example. invoice numbers or check numbers). To minimize potential bias in starting-point selection. An auditor begins at any digit in the table – a random start – and proceeds along a column or row or diagonally.

a block sample could consist of all invoices processed during the months of January to March. Systematic selection is useful for non-statistical sampling. For example. haphazard sampling is not appropriate for statistical sampling. Although it may be useful for non-statistical sampling. Block selection (cluster sampling)6 This method involves selecting a group of items arranged contiguously within a larger grouping of sampling units. Appropriateness involves the consideration of the direction of testing. On the other hand. unpaid 6 This is the least desirable sample selection method. the population is not the accounts payable listing but rather subsequent disbursements. it can be useful for statistical sampling. when testing for understatement of accounts payable. For example. if the auditor’s objective is to test for overstatement of accounts payable. Block sampling often results in excessively high sampling risk. Thus. . and complete. Auditing and Assurance Principles Sample systematically is determined by dividing population size by sample size. For example. Haphazard sampling Haphazard sampling consists of sampling units selected without special reasons. the auditor should consider the objectives of the audit procedure and the attributes of the population from which the sample will be drawn. haphazard sampling may fail to select samples that are wholly representative of the population tested. Audit Sampling Considerations Characteristics of Interest When designing an audit sample. Like block sampling. testing large numbers of blocks is likely to be inefficient. Appropriateness and Completeness of the Population It is important for the auditor to ensure that the population is appropriate to the objective of the audit procedure. The characteristic of interest depends on the type of the test that will be performed on the sample selected. the population could be defined as the accounts payable listing. and if the starting point is selected at random. an auditor should not use block sampling for either statistical or non-statistical sampling. unless he or she exercises considerable care in controlling sampling risk. a haphazard sample could consist of 90 items selected simply by pulling invoices from a file cabinet drawer. Although a block sample could be designed with enough blocks to minimize sampling risk. but also without conscious bias.

if the auditor intends to use the sample to draw conclusions about whether a control activity operated effectively during the financial reporting period. A different approach may be to satisfy population and use sampling only to draw conclusions. If the auditor intends to select payment vouchers from a file.e. a population may be stratified according to a particular . Internally Generated Information The auditor is required to obtain audit evidence about the accuracy and completeness of information produced by the entity’s information system when that information is used in performing audit procedures. suppliers’ misstatements. This allows greater audit effort to be directed to the larger value items which may contain the greatest potential monetary error in terms of overstatement. conclusions cannot be drawn about all vouchers for the period unless the auditor is satisfied that all vouchers have in fact been filed (i. Stratification Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete sub-populations which have an identifying characteristic. The monetary amount of misstatement in Substantive tests Misstatements an account balance. say. a class of transaction or account balance or is often stratified by monetary value. about the control activity during. Similarly. The objective of stratification is to reduce the variability of items within each stratum and therefore allow sample size to be reduced without a proportional increase in sampling risk. Similarly. Auditing and Assurance Principles Table 11-3 Characteristics of Interest Procedure Characteristics of Interest Description The number of times a deviation from the Deviation or prescribed internal control occurs in the Test of controls occurrence rate sample. and to use alternative audit procedures or a separate sample regarding the remaining two months. Sub-populations need to be carefully defined such that any sampling unit can only belong to one stratum. unmatched receiving reports or other populations that provide audit evidence of understatement of accounts payable. When performing tests of details. the first 10 months of the year. When performing audit sampling. the population needs to include all relevant items from throughout the entire period. the auditor performs audit procedures to ensure that the information upon which the audit sampling is performed is sufficiently complete and accurate. complete).. invoices.

or which may be considered immaterial. Having selected specific monetary units from within the population. Attributes Sampling The procedures for attributes sampling are presented below: 1. Define the population. 2. Value-Weighted Selection It will often be efficient in performing tests of details. 3. balances may be stratified by age. the accounts receivable balance. the auditor then examines the particular items. that contain those monetary units. Determine the sample size and the sample selection method. The auditor may decide to examine a sample of these items. Choose an audit sampling approach/technique. Example: 20% of the items in a population may make up 90% of the value of an account balance. and can result in smaller sample sizes. particularly when testing for overstatements. Define the attribute (characteristic of a control) and deviation (absence of an attribute) conditions. for example. Auditing and Assurance Principles Characteristic that indicates a higher risk of error. 5. the auditor will need to consider the risk of material misstatement in relation to whatever other strata make up the entire population. to identify the sampling unit as the individual monetary units (for example. 6. To draw a conclusion on the entire population. when testing the valuation of accounts receivable. pesos) that make up a class of transactions or account balance. for example. The results of audit procedures applied to a sample of items within a stratum can only be projected to the items that make up that stratum. for example. Determine the objective(s) of the test. This approach is ordinarily used in conjunction with the systematic method of sample selection and is most efficient when selecting items using CAATs. The auditor evaluates the results of this sample and reaches a conclusion on the 90% of value separately from the remaining 10% (on which a further sample or other means of gathering audit evidence will be used. 8. This approach to defining the sampling unit ensures that audit effort is directed to the larger value items because they have a greater chance of selection. 4. . Evaluate sample results. individual balances. Perform the sampling plan. 7. Comply with documentation requirements.

The rate of deviation from the prescribed control activity the auditor is willing to accept (tolerable error). An increase in the rate of deviation from the prescribed control procedure that Increase the auditor expects to find in the population (Expected deviation rate). the auditor is required to perform tests of controls. The rate of deviation from the prescribed control activity the auditor expects to find in the population (expected error). 2. An increase in the auditor’s required confidence level (or conversely. Auditing and Assurance Principles Sample Size for Tests of Controls Table 11-4 enumerates the following factors that affect the sample size for tests of controls. These factors need to be considered together. When the auditor’s assessment of the risk of material misstatement at the assertion level includes an expectation of the operating effectiveness of controls. the lower the auditor’s assessment of the risk of material misstatement will be. Negligible An increase in the number of sampling units in the population. a decrease in the risk that the auditor will conclude that the control risk is lower Increase than the actual control risk in the population –risk of assessing control risk too low). the more the auditor relies on the operating effectiveness of controls in the risk assessment. The higher the rate of deviation that the auditor expects. . Table 11-4 Factors Affecting Sample Size for Tests of Controls Effect on Factors sample size An increase in the auditor’s intended reliance on accounting and internal Increase control system. Effect 1. Factors relevant to the auditor’s consideration of the expected error rate include the auditor’s understanding of the business (in particular. An increase in the rate of deviation from the prescribed control procedure that Decrease the auditor is willing to accept (Tolerable deviation rate). Other things being equal. The following are factors that the auditor considers when determining the sample size for a test of control. the greater is the extent of the auditor’s tests of controls (and therefore. the sample size is increased). the larger the sample size needs to be. 3. The lower the rate of deviation that the auditor is willing to accept. the larger the size needs to be so as to be in a position to make a reasonable estimate of the actual rate of deviation. The more assurance the auditor intends to obtain from the operating effectiveness of controls. The extent to which the risk of material misstatement is reduced by the operating effectiveness of controls. and the larger the sample size will need to be.

.e. For small populations however. the auditor assesses control risk at a LESS THAN HIGH because the expected population deviation rate (3%) is less than the tolerable deviation rate (5%). effect on sample size. Auditing and Assurance Principles risk assessment procedures undertaken to obtain an understanding of internal control)... High expected error rates ordinarily warrant title. 4. The number of sampling units in the population. the auditor has no fixed sample size. The auditor’s required confidence level. tolerable deviation rate is 6%).e. changes in personnel or in internal control. Suppose that the auditor decided that based on an understanding of the client’s internal control and the auditor’s judgment. Other Sampling Applications for Tests of Controls Sequential sampling is used when the auditor expects very few deviations within the population being tested. The auditor selected 100 samples and noted four deviations in the sample (sample deviation rate is 4%). Accordingly. Discovery sampling involves the determination of a sample size which is sufficient to discover at least one deviation to confirm whether fraud has occurred. the auditor makes a decision whether to stop testing or to continue with the sampling plan (hence the name stop-or-go sampling). the larger the sample size needs to be. even a single deviation is a cause for concern). The greater the degree of confidence that the auditor requires that the results of the sample are in fact indicative of the actual incidence of error in the population. Discovery sampling is most appropriate when no deviations are expected within the population (thus. believes that he can tolerate up to six deviations for every 100 purchase transactions (i. Accordingly. Under this method. This is normally used when the auditor suspects fraud. reduction of the assessed risk of material misstatement. the results of audit procedures applied in prior periods and the results of other audit procedures. if any. the auditor decided to sample purchase invoices and trace them to the related approved purchase orders. if any. audit sampling is often not as efficient as alternative means of obtaining sufficient appropriate audit evidence. the actual size of the population has little. and therefore in such circumstances tests of controls would ordinarily be omitted. expected population deviation rate is 3%). 5. the auditor expects that there are three purchases with improper authorization (deviations) for every 100 purchase transactions (i. For large populations. Basic example on evaluation of samples while performing tests of controls An external auditor is testing the authorization controls over purchases. After testing a sample.

5. 4. SDR of 4% is less than the TDR of 6%. 6. 2. Then the upper deviation rate shall be compared against the tolerable deviation rate and evaluated as follows: If UDR = or < TDR controls may be effective (CR = Less than High) If UDR > TDR controls are not effective (UDR = High) In the above example. 8. Sample size for Substantive Tests Table 11-5 presents factors that the auditor considers when determining the sample size for sampling in substantive audit procedures. Define “fair presentation” and “material misstatement”. the auditor must first consider the effect of sampling risk. the UDR of 5% is less than the TDR of 6%. Comply with documentation requirements. Assume that in the above example. Variables Sampling The procedures for variables sampling are presented below: 1. 3. Determine the objective(s) of the test. Define population. The sample deviation rate shall first be added to the allowance for sampling risk (4% + 1%) to compute the upper deviation rate (5%). Choose an audit sampling approach/technique. Determine the sample size and the sample selection method. 7. Evaluate sample results. hence. the sample deviation rate shall be compared against the tolerable deviation rate and evaluated as follows: If SDR = or < TDR controls may be effective (CR = Less than High) If SDR > TDR controls are not effective (CR = High) In the above example. the appropriate allowance for sampling risk is 1%. . If statistical sampling is used. These factors need to be considered together. Auditing and Assurance Principles If non-statistical sampling is used. the conclusion is that the authorization controls over purchases are effective. the conclusion is that the authorization controls over purchases are effective. Perform the sampling plan. hence.

Increase An increase in the auditor’s assessment of control risk (or a decrease in Increase reliance on internal controls). The higher the auditor’s assessment of the risk of material misstatement. The more the auditor is relying on other substantive procedures (tests of details or substantive analytical procedures) to reduce to an acceptable level the detection risk regarding a particular class of transactions or account balance. the larger the sample size will need to be. An increase in the total error that the auditor us willing to accept (tolerable Decrease error. the auditor’s risk assessment cannot be reduced for the effective operation of internal controls with respect to the particular assertion. . For example. Auditing and Assurance Principles Table 11-5 Factors Affecting Sample Size for Substantive Tests Effect on Factors sample size An increase in the auditor’s assessment of inherent risk. the larger the sample size needs to be. the auditor needs a low detection risk and will rely more on substantive procedures. the smaller the sample size can be. when in fact it does – risk of incorrect acceptance). 2. The auditor’s assessment of the risk of material misstatement. in order to reduce audit risk to an acceptably low level. The auditor’s assessment of the risk of material misstatement is affected by inherent risk and control risk. therefore. An increase in the amount of error the auditor expects to find in the Increase population (expected error). An increase in the auditor’s required confidence level (or conversely. Stratification of the population when appropriate. if the auditor does not perform tests of controls. Decrease Negligible The number or sampling units in the population. the less assurance the auditor will require from sampling and. Therefore. An increase in the use of other substantive procedures directed at the same Decrease financial statement assertion. The use of other substantive procedures directed at the same assertion. The more audit evidence that is obtained from tests of details (that is. Effect 1. the lower the detection risk). a decrease in the risk that the auditor will conclude that a material error does Increase not exist.

When performing tests of controls. 4. and by whom or by what means they were applied. Auditing and Assurance Principles 3. and their possible effect on the particular audit objective and on other areas of the audit.) Nature and Causeof Errors The auditor should consider the sample results. Thus. 6. However. the results of audit procedures applied in prior periods. The number of sampling units in the population. It may be useful to group items of similar size into separate sub- populations or strata. the auditor makes specific . (However. When there is a wide range (variability) in the monetary size of items in the population. when using monetary unit sampling. When a population can be appropriately stratified. the results of risk assessment procedures. the results of tests of control. the actual size of the population has little. The lower the total error that the auditor is willing to accept. an increase in the monetary value of the population increases sample size. The auditor’s required confidence level. The greater the amount of error the auditor expects to find in the population. and the results of other substantive procedures. if any. the larger the sample size needs to be. the aggregate of the sample sized from the strata generally will be less than the sample size that would have been required to attain a given level of sampling risk. For large populations. Factors relevant to the auditor’s consideration of the expected error amount include the extent to which item values are determined subjectively. the larger the sample size needs to be in order to make a reasonable estimate of the actual amount of error in the population. effect on sample size. The amount of error the auditor expects to find in the population (expected error). the auditor is primarily concerned with obtaining audit evidence that controls operated effectively throughout the period of reliance. The total error the auditor is willing to accept (tolerable error). This is referred to as stratification. 7. the larger the sample size needs to be. This includes obtaining audit evidence about how controls were applied at relevant times during the period under audit. audit sampling is often not as efficient as alternative means of obtaining sufficient appropriate audit evidence. when such errors are identified. The greater the degree of confidence that the auditor requires that the results of the sample are in fact indicative of the actual amount of error in the population. the consistency with which they were applied. 5. had one sample been drawn from the whole population. for small populations. unless this is offset by a proportional increase in materiality. the nature and cause of any errors identified. Stratification. The concept of effectiveness of the operation of controls recognizes that some errors in the way controls are applied by the entity may occur.

and b. 48 . the auditor determines whether the tests of controls performed provide an appropriate basis for use as audit evidence. product line or period of time. Auditing and Assurance Principles inquiries to understand these matter and also needs to consider matters such as7: a. and considers the effect of the cause of the breakdown on audit procedures and conclusions. To be considered an anomalous error. for example by examining specific transactions processed on that day. the auditor assesses the effect of the breakdown. The additional audit procedures depend on the situation.. One example is an error caused by a computer breakdown that is known to have occurred on only one day during the period. In analyzing the errors discovered. Another example is an error that is found to be caused by use of an incorrect formula in calculating all inventory values at on particular branch. Sometimes. the auditor may observe that many have a common feature. In such circumstances. the auditor has to have a high degree of certainty that such error is not representative of the population. In that case. location. whether additional tests of controls are necessary. The direct effect of identified errors on the financial statements. 7 Ibid. but are adequate to provide the auditor with sufficient appropriate audit evidence that the error does not affect the remaining part of the population. In these cases. the errors result from management override of a control. par. the auditor needs to ensure the correct formula has been used at other branches. the auditor may be able to establish that an error arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of similar errors in the population (an anomalous error). The auditor obtains this certainty by performing additional audit procedures. for example. for example. such errors may be intentional. or whether the potential risks of misstatement need to be addressed using substantive procedures. The effectiveness of internal control and their effect on the audit approach when. type of transaction. the auditor may decide to identify all items in the population that possess the common feature. and may indicate the possibility of fraud. To establish that this is an anomalous error.

The use of ratio estimation is appropriate when the misstatement in an account is directly proportional to its book value. Ratio estimation is similar to difference estimation except that the point estimate of the population misstatement is determined by multiplying the portion of sample amount misstated times the total recorded population book value. it may be excluded when projecting sample errors to the population. and will be an amount less than or equal to the auditor’s materiality used for the individual class of transactions or account balances being audited. Stratification If a class of transactions or account balance has been divided into strata. and should consider the effect of the projected error on the particular audit objective and on other areas of the audit. This method frequently results in smaller sample sized than any other method. Commonly Used Projection Techniques Commonly used projection techniques are difference estimation. still needs to be considered in addition to the projection of the non-anomalous errors. Difference estimation is used to measure the estimated total misstatement amount in a population when there is both a recorded value and an audited value for each item in the sample. tolerable error is the tolerable misstatement. no explicit projection of errors is necessary since the sample error rate is also projected rate of error for the population as a whole. The use of difference estimation is appropriate when the misstatement in an account is not affected by the book value of the item being examined. The effect of any such error. and it is relatively easy to use. the auditor should project monetary errors found in the sample to the population. the error is projected for each stratum separately. if uncorrected. Projected errors plus anomalous errors for each stratum are then combined when considering the possible effect of errors on the total class of transactions or account balance. The ratio estimates results in even smaller sample sizes than difference estimation if the size of the misstatements in the population is proportionate to the recorded value of the population items. Projections for Substantive Tests For tests of details. and mean-per-unit estimation. The auditor projects the total error for the population to obtain a broad view of the scale of errors. Auditing and Assurance Principles Projecting Errors Projections for Tests of Controls For tests of controls. For tests of details. Anomalous Errors When an error has been established as an anomalous error. . ratio estimation. and to compare this to the tolerable error.

The point estimate of the audited value is the average audited value of items in the sample times the population size.360 – P159.000) P76 (rounded) Ratio estimation 1. Except for the definition of what is being measured. Compute for the Estimated Audited Value (EAV) or estimated population audited value (EPAV) = ratio x Population Book Value (PBV) = 0. The use of mean- per-unit estimation is appropriate when individual populations do not have recorded values.360 Sample Book Value (SBV) 159. The computed precision interval is computed on the basis of the audited value of the sample items rather than the misstatements.9462 x P380.960 Audited value of samples selected 151. Population size is 4.960 Answer: P8.960/2.556 – P380.000. this method is calculated in exactly the same manner as the difference estimate.360/2. the auditor is concerned with the audited value rather than the misstatement amount of each item in the sample.600 Average/mean book value (P159.960 Answer: 94.000 customers. Compute for the projected misstatement = EPAV – PBV = P359. Presented below are the summary results of the examination of confirmation replies received from customers.000) P80 (rounded) Average/mean audited value (P151.000 Answer: P20.800 accounts. Compute for the sample misstatement = SAV – SBV = P151.600 overstated 4.62% or 95% (rounded) 2.444 overstated . Book value of samples selected P159. with a total recorded value of P380.360 Difference P 8. Compute for the ratio of sample audited value to sample book value Sample Audited Value (SAV) P151. Auditing and Assurance Principles Under mean-per-unit estimation. Comprehensive example on projection of errors An external auditor sent out positive confirmation requests to 2.556 3.000 Answer: P359.

800 and P404.200 overstated 3. transactions. Auditing and Assurance Principles Difference estimation 1. the auditor randomly selects individual pesos from a population and then audits the balances.200 overstatement Answer: P360. Compute for EPAV = Average or mean audited value x number of items in the population = P76 x 4.800 Note: Assume that there is an allowance for sampling risk amounting to ±P40. PPS sampling is most appropriate when no errors are expected (although it is also appropriate when one or few errors are expected). and testing for overstatement (normally for assets and income).800 accounts Answer: P364. . In PPS sampling. Compute for projected misstatement = Average difference (number1) x number of items in the population = P4 x 4. Compute for the EPAV = PBV ± projected misstatement = P380. Compute for the average difference between SAV and SBV = Average or mean audited value – Average or mean book value = P76 – P80 Answer: P4 overstated 2. Each peso in the population has an equal chance of being selected. PPS sampling is a sampling technique that uses attribute a sampling theory to evaluate the results when a large number of transactions are captured within a single account. or documents – called logical units – that include the pesos selected.800 Mean-per-unit (MPU) estimation 1.800.800 accounts Answer: P19.000.000 – P19. then the EPAV would be in the range of P324. Probability-Proportional-to-Size (PPS) Sampling Sample selection of individual peso amounts in a population by the use of random or systematic sample selection. but the likelihood of selecting any one logical unit for testing is directly proportional to its size.

However. Auditing and Assurance Principles Evaluating the Sample Results The auditor should evaluate the sample results to determine whether the assessment of the relevant characteristic of the population is confirmed or needs to be revised 8. If the evaluation of sample results indicates that the assessment of the relevant characteristic of the population needs to be revised. in the case of tests of controls. unless further audit evidence substantiating the initial assessment is obtained. in the absence of further audit evidence that no material misstatement exists. an unexpectedly high error amount in a sample may cause the auditor to believe that a class of transactions or account balances is materially misstated. the auditor might extend the sample size. and to male any necessary adjustments.The total of projected error plus anomalous error is the auditor’s best estimate of error in the population. 8 PSA 230. sampling results are affected by sampling risk. 54 . test an alternative control or modify related substantive procedures. while the risk is reduced if additional audit evidence is obtained. timing and extent of further audit procedures. Request management to investigate identified errors and the potential for further errors. In the case of tests of details. and/or 2. Considering the results of other audit procedures helps the auditor to assess this risk. In the case of tests of controls. If the total amount of projected error plus anomalous error is less than but close to that which the auditor deems tolerable. Consider the effect on the audit report. Thus when the best estimate of error is close to the tolerable error. par. the auditor considers the persuasiveness of the sample results in the light of other audit procedures. an unexpectedly high sample error rate may lead to an increase in the assessed risk of material misstatement. the auditor may: 1. the auditor recognizes the risk that a different sample would result in a different best estimate that could exceed the tolerable error. and may consider it appropriate to obtain additional audit evidence. For example. and/or 3. Modify the nature.

g. Audit sampling (sampling) involves the application of audit procedures to less than 100% of items within a class of transactions or account balance such that all sampling units have a chance of selection. b. Non-statistical sampling relies on subjective judgment to determine sample size and evaluate sample results. the auditor still has to contend with non- sampling risk. Comply with documentation requirements. Illustrate sampling for substantive tests. 3. Determine the sample size and sample selection method. Sampling risk may apply to tests of controls (risk of overreliance and risk of underreliance) and to substantive tests (risk of incorrect rejection and risk of incorrect acceptance). e. Determine the sample size and sample selection method. Choose an audit sampling approach/technique. Other means of testing include 100% examination. Sampling approaches may be statistical or non-statistical. As a rule. Statistical sampling involves the use of probability theory allows for the measurement of sampling risk. Define the population. Under this plan. Discuss sampling approaches and other means of testing. d. 6. Define audit sampling. Define “fair presentation” and “material misstatement”. Define the population. Differentiate statistical from non-statistical sampling. selecting specific items. sampling risk is reduced by increasing the sample size. Even if the auditor tests 100% of the population. 4. b. or audit sampling. while non-sampling risk is reduced through proper planning and supervision of the audit work. f. 2. c. Choose an audit sampling approach/technique. h. the following procedures are performed: a. Sampling for substantive tests usually involves the use of a variable sampling plan. 5. . the audit is subject to sampling risk. the following procedures are performed: a. d. Determine the objective(s) of the test. Illustrate sampling for tests of controls. When testing less than 100% of the items in a population. Sampling for tests of controls usually involves the use of an attribute sampling plan. e. c. Perform the sampling plan. Auditing and Assurance Principles Summary of Learning Objectives 1. Define the attribute and deviation conditions. Evaluate sample results. Explain the different risk consideration in obtaining audit evidence. Determine the objective(s) of the test. Under this plan.

Each peso in the population has an equal chance of being selected. Discuss the common projection techniques for sampling in substantive tests. Identify other sampling consideration. h. Under mean-per-unit estimation. transaction. PSA 530 (Redrafted) includes the following consideration when performing audit sampling: a. In PPS sampling. Auditing and Assurance Principles f. Evaluate sample results. The common projection techniques used for sampling in substantive tests are: difference estimation and ratio estimation. the auditor is concerned with the audited value rather than the misstatement amount of each item in the sample. 7.Ratio estimation is similar to difference estimation except that the point estimate of the population misstatement is determined by multiplying the portion of sample amount misstated times the total recorded population book value. Difference estimation is used to measure the estimated total misstatement amount in a population when there is both a recorded value and an audited value for each item in the sample. g. 8. 9. but the likelihood of selecting any one logical unit for testing is directly proportional to its size. Nature and causes of errors b. the auditor randomly selects individual pesos from a population and then audits the balances. Perform the sampling plan. Define PPS sampling. Projecting errors c. Comply with documentation requirements. Evaluating sample results Important Terms and Concepts 100% Examination Population Anomaly Probability-proportional-to-size (PPS) Attribute Projection Attributes sampling plan Random-number sampling Audit risk Ratio estimation Audit sampling Risk of assessing control risk too high Block selection Risk of assessing control risk too low Control risk Risk of incorrect acceptance Detection risk Risk of incorrect rejection Deviation Risk of material misstatement Difference estimation Sampling risk Discovery sampling Sampling unit Expected error Selecting specific items Error Sequential sampling Haphazard sampling Statistical sampling Inherent risk Stratification Mean-per-unit estimation Systematic sampling Misstatement Total error Non-sampling risk Value-weighted selection Non-statistical sampling Variables sampling . or documents – called logical units – that include the pesos selected.

Donald H. PSA 330: The Auditor’s Procedures in Response to Assessed Risks AASC. O. PSA 315: Understanding the Entity and Its Environment and Assessing the Risk of Material Misstatement AASC. What is audit sampling? 2. Basic Auditing: Theory and Concepts. 6. How is non is non-sampling risk reduced? .abrema. and G. PSA 530: Audit Sampling and other Means of Testing International Auditing and Assurance Standards Board. 4. 2002 Taylor. 3. 7e. Principles of Auditing 2001 Ricchiute. 2003 Santos. What are the two components of detection risk? Explain each component briefly. David N. Petronilo S.by the Australian Educational Research Pty Ltd (AER).net/abrema) Discussion Questions 1. Ray and Kurt Pany. 2008 IAASB Handbook International Auditing and Assurance Standards Board. Elenita B. Error in the context of substantive tests. PSA 500 (Revised): Audit Evidence AASC. Error in the context of tests of control b. Describe the relationship between sampling risk and sample size. 2014 IAASB Handbook Books Cabrera. Auditing and Assurance Services 7e. Define the following terms: a. PSA 320: Audit Materiality AASC. 5.Official Website (www. Can you eliminate sampling risk? Explain. Auditing: An assertion Approach. 1997 Whittington. Principles of Auditing 11e Websites Activity-based risk evaluation model (ABREMA). William Glezen. Auditing and Assurance Principles Acknowledgement and Reference Auditing Standards and Other Auditing Literature Auditing and Assurance Standards Council (AASC).

13. Block Selection d. Auditing and Assurance Principles 7. What are advantages and disadvantages of statistical sampling? 14. 4) Sampling risk arises from the possibility that the auditor's conclusion. 20. 12. there are two types of sampling risk. What are other sampling considerations mentioned in PSA 530? 22. there are two types of sampling risk. 2) When designing an audit sample. Ratio estimation c. the auditor should consider the specific audit sample. 19. Random number sampling b. Give at least three determinants of the sample size for tests of controls. For each type. 21. Relate each determinant to sample size. 9. the population from which the auditor wishes to sample and the sample size. Which one is of greater concern to the auditor: risk affecting audit effectiveness or risk affecting audit efficiency? Explain. 10. may be different from the conclusion that would be reached if the entire population were subjected to the same audit procedure. give a short description and identify whether it affects audit efficiency or audit effectiveness. Systematic-sampling c. When is projection necessary? 23. the auditor should consider the specific audit objectives. 8. Haphazard sampling 15. Explain the following sample selection methods: a. Enumerate the different means of selecting items for testing. What is stratification? 16. Give at least three determinants of the sample size for substantive tests. Difference estimation b. 18. Relate each determinant to sample size. Give the steps involved in a variable sampling plan. What are the two general approaches to audit sampling? Explain briefly. 3) The auditor defines the sampling unit in order to obtain an efficient and effective sample to achieve the particular audit objectives. . In tests of control. Give the steps involved in an attribute sampling plan. Discuss the following projection techniques: a. For each type. give a short description and identify whether it affects audit efficiency or audit effectiveness. In substantive tests. What are the risk considerations in obtaining audit evidence? 11. Mean-per-unit-estimation 24. What is probability-proportional -to -size (PPS) sampling? Objective Questions E11-1 True or False 1) Tests performed on 100% or less than 100% of the items within a population involve sampling. based on a sample. What is value weighted-selection? 17.

. 15) Systematic selection ensures that all items in the population have an equal chance of selection. 17) The risk of over reliance and the risk of incorrect rejection affect audit effectiveness and are more likely to lead to an erroneous opinion on the financial statements. a larger sample than when no error is expected ordinarily needs to be examined to conclude that the actual error in the population is not greater than the planned error. 19) The auditor would also consider the qualitative aspects of the errors. these includes the nature and cause of the error and the possible effect of the error on other phases of the audit. 18) Having carried out. 13) If the auditor expects error to be present in the population. 12) In substantive procedures. the auditor should design and select an audit sample. Auditing and Assurance Principles 5) When using either statistical or non-statistical sampling methods. 9) Smaller sample sizes are justified when the population is expected to be error free. 14) The auditor should select sample items in such a way that the sample can be expected to be representative of the population. 6) The risk of under reliance and the risk of incorrect rejection affect audit efficiency as they would ordinarily lead to additional work being performed by the auditor. or the entity. 10) The lower the risk the auditor is willing to accept. the auditor should analyze any errors detected in the sample and project the errors found in the sample to the population. 7) Sample size is affected by the level of sampling risk the auditor is willing to accept and still conclude that the result form the sample has achieved the audit objective. those audit procedures that are appropriate to the particular audit objective. perform audit procedures thereon and evaluate sample results so as to provide sufficient appropriate audit evidence. 16) Stratification may be inappropriate to assist in the efficient and effective design of the sample. which would establish that the initial conclusions were incorrect. the tolerable error is the maximum rate of deviation from a prescribed control procedure that the auditor would be willing to accept based on the preliminary assessment of control risk. 20) There is an inverse relationship between the sample size and tolerable rate. 8) Tolerable error is the maximum error in the population that the auditor would be willing to accept and still conclude that the result from the sample has achieved the audit objective. the larger the sample size will need to be. 11) The larger the tolerable error. on each sample item. the greater the sample size will need to be.

When the repetitive nature of a calculation or other process performed by a computer information system makes a 100% examination cost effective. Items to test control activities. 22) Sampling for attributes is generally used in substantive testing. 2. D. Risk assessment procedures. E11-2 Multiple Choice. B. 23) Haphazard selection may be an alternative to random selection provided that the auditor attempts to draw a representative sample from the entire population with no intention to either include or exclude specific units. 25) The auditor will require a larger sample size if he expects an error in the population. Selective testing. C. Auditing and Assurance Principles 21) Non statistical sampling can also use statistical formulas and techniques aside from the auditor’s judgment. 26) Zero sample size will be required if the population to be tested is expected to be error. 4. Selecting specific items include selecting the following except: A. In certain situations. D. When the population constitutes a small number of large value items. This refers to applying audit procedures to less than 100% of items within an account balance or class of transactions such that all sampling units have a chance of selection: A. 100% testing is considered by the auditor. Analytical Procedures C. Which of the following explanations best describe the distinguishing feature of statistical sampling? . B. B. 1. Audit sampling.free. Risk assessment procedures. All items over a certain amount. B. Which of the following situations will most likely lead the auditor to use 100% testing? A. None of these. Items to obtain information. D. When both inherent and control risks are HIGH and other means do not provide sufficient appropriate audit evidence. Low value or non key items. 3. Which of the following involves audit sampling? A. Audit evidence. C. Testing controls that leave no audit trail. It is designed to detect misstatements in account balances. All of these situations will most likely lead the auditor to use 100% testing. 24) One disadvantage of statistical sampling that cost may exceed the benefits derived. 5. C. D.

The entire set of data about which the auditor wishes to draw conclusions is called A. 7. Unrestricted random sampling with replacement. Sampling frame D. A random sample. In sampling for tests of control. It allows the auditor to have the same degree of confidence as with judgment sampling but with substantially less work. An attributes sample. There are many kinds of statistical estimates that an auditor may find useful. B. C. B. Judgment sampling. 11. The statistical terms that roughly correspond to “quantities” and “error rate”. It provides for measuring the actual misstatements in financial statements in terms of reliability and precision. 9. Constants and variables. C. Attribute sampling. Variables and attributes. Sample C. C. An error that arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of errors in the population is called: A. 12. Sampling error. Replacement of the auditor’s professional judgment. B. but basically every accounting estimate is either of a quantity or of an error rate. Auditing and Assurance Principles A. A representative sample. B. B. Population B. A variable sample. C. C. respectively are A. Deviations and misstatement D. 8. D. Constants and attributes. Measurement of sample risk. D. Sampling unit 10. D. . More efficient samples. Attributes and variables. C. Deviations. Neither deviations nor misstatements. Measurement of sample reliability. Statistical sampling do not allow: A. The sampling method that is most useful when testing for compliance is: A. Stratified random sampling. D. Misstatements. A sample in which the characteristics in the sample are the same as those of the population is A. B. D. It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data. “error” refers to: A. 6. It allows the auditor to substitute sampling techniques for audit judgment.

An auditor may fail to recognize errors in the documents examined for the chosen sample. Proper supervision and instruction of the clients employees. D. C. D. A randomly chosen sample may not be representative of the population as the whole on the characteristic of interest. Contains proportionately fewer deviations from prescribed internal control structure policies or procedures than exist in the balance or class as a whole. 19. C. The use of attributes sampling instead of variables sampling. Effectiveness of the audit. The likelihood of assessing control risk too high is that the sample selected to test controls A. Anomalous error. Failure to draw a random sample. C. Use variable sampling rather than attribute sampling. Failure to draw a representative sample. 18. The documents related to the chosen sample may not be available for inspection. B. Preliminary estimates of materiality levels. B. 16. C. While performing a substantive test of details during an audit. One of the ways to control non-sampling risk is through A. Auditing and Assurance Principles B. An auditor may select audit procedures that are not appropriate to achieve the specific object. The use of attributes sampling rather than variables sampling. Which of the following comments best illustrates the concept of sampling risk? A. C. Supports the auditors planned assessed level of control risk when the true operating effectiveness of the control structure does not justify such an assessment. the auditor determined that the sample results supported the conclusion that the recorded amount balance was . B. Increase the sample size. D. 17. B. 15. Control which ensure the sample drawn is random and representative. D. Non sampling error. Proper supervision and instruction of the audit team. C. B. B. D. C. One of the ways to reduce sampling risk is to A. Efficiency of the audit. D. Carefully design the audit procedures to be used. Allowable risk of tolerable error. 14. The consequence of assessing control risk too low relates to the A. D. Does not support the auditors planned assessed level of control risk when the true operating effectiveness of the control structure justifies such an assessment. 13. Projected error. Contains misstatement that could be material to financial statements when aggregated with misstatements in other account balance or transactions classes. The use of inappropriate or ineffective audit procedures. One of the causes of non-sampling error is A. Provide proper supervision and instruction of the audit team.

The consequence of incorrect acceptance relates to the A. C. Must be systematically replaced in the population after sampling. C. D. Effectiveness of the audit C. Allowable risk of tolerable error. Auditing and Assurance Principles materially misstated. Preliminary estimates of materiality levels. When performing a test of a control with respect to control over cash receipt. Incorrect rejection. Haphazard selection. 26. C. D. 23. Computerize selection. This situation illustrates the risk of A. A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a A. C. Assessing control risk too high. 24. B. Always larger than if unstratified sampling has been used. Random selection. B. B. D. an auditor may use a systematic sampling technique with a start at any randomly selected item. Must be recorded in a systematic pattern before the sample can be drawn. B. in fact. Judgment sample. 22. When selecting a stratified sample. Systematic selection. not materially misstated. D. 25. B. B. Block (cluster) selection. Efficiency of audit. Assessing control risk too low. Representative sample. thus destroying the sample randomness. the sample size is A. C. B. 20. The biggest disadvantage of this type of sampling is that the items in the population: A. Statistical sampling may be applied to test controls when a client’s control procedures . When the auditor goes through a population and selects items for the sample without regard to their size. C. It was. The process which requires the calculations of an interval and then selects the items base on the size of the interval is A. Statistical sampling. source. Systematic selection. D. May occur in systematic pattern. May systematically occur more than once in the sample. 21. Determine for each stratum and selected from that stratum. D. or other distinguishing characteristics. Incorrect acceptance. Statistical sample. D. Random sample. Determined for the unstratified population and then apportioned to each stratum. it is called: A. Random selection. Determined for each stratum and selected randomly form the entire unstratified population.

I B. Unrelated to the expected rate of errors in the related accounting records. D. the auditor assesses control risk too high and thereby increases testing. The frequency with which a certain characteristics occurs within a population. 30. D. C. B. Estimated population rate. C. Lower than the expected rate of errors in the related accounting records. C. The tolerable rate of deviations for a compliance test is generally A. B. This is illustrated by situation: A. B. True State of Population Auditor’s Estimate Based on Sample Deviation Rate Exceeds Deviation rate Less Results tolerable rate Tolerable rate Maximum Deviation Rate Exceeds I III Tolerable rate Maximum Deviation is Less than II IV Tolerable Rate As a result of testing controls. 27. Sample deviation rate. Which of the following best describes what the auditor means by the rate of occurrence in the attribute sampling plan? A. Identical to the expected rate of errors in the related accounting records. The deviation rate the auditor will permit in the population and still be willing to reduce the assessed level of control risk is called the: A. Sample deviation rate. D. is called the A. Acceptable risk of over-reliance. C. Leave an audit trail as evidence of compliance. D. B. B. Population deviation rate. II C. Depend primarily on segregation of duties. The peso range within which the true population total can be expected to fall. 28. D. Tolerable deviation rate. Enable the detection of fraud. Higher than the expected rate of errors in the related accounting records. and also depicts the true population deviation rate compared with the tolerable rate. The number of errors that can be reasonably expected to be found in a population. The acceptable risk that the sample is not representative of the population. Tolerable deviation rate. III D. The deviation rate the auditor expects to find in population. 31. Auditing and Assurance Principles A. IV . Are carefully reduced to writing and are included in client accounting manuals. Computed upper deviation rate. before testing begins. (AICPA) The diagram below depicts the auditor’s estimated maximum deviation rate compared with the tolerable rate. C. 29.

The sample deviation rate equals A. C. Decrease in allowable risk of assessing control risk too low B. 37. The number of items in the population multiplied by the number of deviations in the sample. a larger sample size should be selected as the expected population deviation rate decreases. while deviations from control procedures increase the risk of material misstatements. As the population size doubles. C. B. B. B. This explains why A. Has been properly voided C. the sample size also should double. III D. Refer to the table in Number 31. the auditor should consider that. Deviations from pertinent control procedures at a given rate ordinarily would be expected to result in errors in a higher rate. The number of deviation in the population divided by the sample size. I B. Deviation would result in errors in the accounting records only if the deviations and the errors occurred on different transactions. Which of the following combinations results in a decrease in sample size for attributes? A. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded. Constitutes deviation B. D. If a random number matches the number of avoided voucher. . 35. For a given tolerable rate. When assessing the tolerable rate. The expected population deviation rate has little or no effect on determining sample size except for very small populations. Cannot be determined without additional information 34. D. Represents an immaterial peso amount 36. The risk assessing control risk too low is illustrated by situation: A. such deviations do not necessarily result in errors. The number of deviations in the population divided by the sample size. An auditor is testing internal control procedures that are evidenced on an entity’s vouchers by matching random numbers with voucher numbers. Which of the following statements is correct concerning statistical sampling in test of controls? A. The population size has little or no effect on determining sample size except for a very small population. Decrease in tolerable deviation rate C. the voucher should ordinarily be replaced by another voucher in random sample if the voucher A. C. Decrease in expected population deviation rate D. Auditing and Assurance Principles 32. Cannot be located D. The number of deviations in the sample divided by the sample size. II C. IV 33.

an auditor’s evaluation would include a statistical conclusion concerning whether: A. . Tolerate error is a measure of the maximum monetary error that may exist in an account balance without causing the financial statements to be materially misstate. D. Modify planned reliance on the control because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate. C. Audit risk . Modify planned reliance on the control because the sample deviation plus the allowance for sampling risk exceeds the tolerable rate. C. the expected population deviation rate is 3%. Determine the error in each sample. D. Accept the sample results as support for planned reliance on the control because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate. B. Deviations in the population were within an acceptable range. The final step in the evaluation of audit results in test of controls is the decision to: A. Determine various rates of occurrence for specified attributes. Population characteristics occur atleast once in the population. Conclude whether the control tested is effective or not effective. B. Predict a monetary population value within a range of precision. 43. A recorded disbursement that is properly authorized may be nevertheless be a transaction that contains a material error. 39. Auditing and Assurance Principles D. C. Monetary precision is in excess of a certain predetermined amount. What is an auditor’s evaluation of a statistical sample for attributes when a test of 100 documents results in 4 deviations if tolerable rate of 5%. 40. D. The lower bound. The upper bound. Discover atleast one instance of critical deviation. Cost-benefit analysis. 38. and is directly related to: A. 42. The acceptable risk of incorrect acceptance. C. C. Accept the sample results as support for planned reliance on the control because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. Reliability of evidence. an auditor attempts to: A. The population’s total monetary value is not in error by more than a fixed amount. Materiality. B. D. B. C. When using statistical sampling for tests of controls. an the allowance for sampling risk is 2%? A. B. D. Estimate qualitative characteristics of interest. D. Project the point estimate. B. Determine sampling error and the total population error. The risk which the auditor is willing to take of acceptance a balance as correct when the true error in the balance is equal to or greater than the tolerable misstatements is A. In applying variables sampling. 41. The tolerable risk.

The final step in the evaluation of the audit results in substantive tests is the decision to: A. Greater reliance on analytical procedures. Increase. In statistical sampling methods used in substantive testing. D. C.respectively. Both a and b. 46. when would an auditor most likely stratify a population into meaningful groups? A.respectively. Greater reliance on internal controls. Determine sampling error and total population error. 50. The auditor randomly chooses a receipt form the first 25 receipts and then selects ever 25th receipt thereafter.decrease. C. A number of factors influences the sample size for a substantive test of details of an account balance.respectively. D. How would increases in tolerable misstatements and assessed level of control risk affect the sample size in a substantive test of details? A. Smaller expected frequency of errors. B. C. Smaller measure of tolerable misstatements. Accept the population as fairly stated or to require further action. 48. 45. Systematic selection C. If probability proportional to size sampling is used. B. B. because the sample misstatement is larger than the total misstatement. Random number sampling B. B.respectively. Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? A. If the population has highly variable recorded amounts. Decrease.increase. B. Judgment interval sampling D. None of these. Auditing and Assurance Principles 44. because the misstatement in the sample is not necessarily the total misstatement. Should errors in the sample be projected to the population? A. which of the following would lead to a larger sample size? A. An auditor wishes to sample 200 sales receipt from a population of 5000 receipts issued during last year. D. Variables sampling 49. because projection of errors is required by generally accepted accounting standards. Yes. No. If the auditor’s estimated tolerable misstatement is extremely small. 47. D. No. D. because the sample misstatement is equal to the total misstatement. All other factors being equal. B. Yes. C.increase. The receipts have preprinted serial numbers and are arranged in chronological (and thus serial number) order. The sampling procedure described here is called A.decrease. Decrease. Measure of tolerable misstatements. Expected amount of misstatements. C. Increase. If the standard deviation of recorded amounts is relatively small. .

52. Project the point estimate. The estimated total audited of the population multiplied by the number of items in the sample. Expects no errors. D. 51. C. Anticipates overstatement errors. The summation of the sample multiplied by the number of discrete samples in the population. C. B. D. D. C. Has assessed control risk is HIGH. The mean per unit estimation method calculates the estimated total audited value of a population of accounts receivable as: A. Determine the error in each sample. The sample mean audited value multiplied by the number of the items in the population. an external auditor has accumulated the following data: Number of Accounts Book balance Balance determined by the Auditor Population 4100 50000000 ? Sample 200 250000 300000 . Discussion Cases Case 1. Auditing and Assurance Principles C. B. When would difference estimation or ratio estimation sampling methods be inappropriate? A.Ratio Estimation AICPA Using statistical sampling to assist in verifying the year-end accounts payable balance. If the average difference between the audit value and book value of a population is large. If differences between the book value and audit values of a population are rare. B. D. A summation of the total individual account values in the population. If differences between the book value and audit value of a population are numerous. 53. PPS sampling is most appropriate when the auditor A. If the average difference between the audit value and book value of a population is small. Anticipates understatement errors.

Using difference estimation. with a total recorded value of 1900000. determine the estimated population value. Assume an allowance for sampling risk of 200000. Using mean-per-unit estimation. 3. The population size is 24000 accounts.Comprehensive Case on Projection of Errors An external auditor sent out positive confirmation requests to 8600 customers. Auditing and Assurance Principles Case 2 (Adapted). Estimated audited value b. . Projected misstatement 2. Using ratio estimation. compute the compute the following: a. Presented below are the summary results of the examination of confirmation replies received from customers: Total book value of sample items examined 799800 Total audited value of sample items examined 756800 Requirements: 1. compute for the projected misstatement.

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