CHAPTER 1

BASIC CONCEPTS IN
AUDIT SAMPLING

QUESTION 1

What are the different means in selecting items for testing to gather audit evidence?

ANSWER 1

When designing audit procedures, the auditor may choose either or a combination of
the following means of selecting items for testing:

a. Selecting all items or 100% examination.

b. Selecting specific items.
c. Audit sampling

QUESTION 2

In what instances does an auditor select all items for examination?

ANSWER 2

An auditor may select all items for testing when:

a. The population constitutes small number of large value items.

b. The risks of material misstatement are high and other means do not provide
sufficient appropriate audit evidence.
c. The repetitive nature of a calculation or other process performed by a computer
information system makes a 100% examination feasible or cost effective.

100% examination is often used for substantive procedures as opposed for tests
controls

QUESTION 3

When will the auditor resort to selecting specific items only for testing?

ANSWER 3

An auditor will often select specific items for examinations with regards to:

a. High value or key items.

b. All items over a certain amounts.
c. Items to obtain information.
d. Items to test certain procedures.
This method is somewhat subjective and may result in an increased level of
nonsampling risk.

QUESTION 4

What is audit sampling?

ANSWER 4

As defined in PSA 530 (Redrafted), “Audit Sampling”, audit sampling involves the
application of audit procedures to less than 100% of the items within a population of
audit relevance such that all sampling units have a chance of selection in order to
provide the auditor with a reasonable basis on which to draw conclusions about the
entire population. Simply stated, sampling is a process of selecting a subset of a
population of items for the purpose of making inferences to the whole population.
Accounting populations usually consist of a large number of items, often totalling
millions of peso, and a detailed or 100% examination of all accounts is almost
impossible.

Audit sampling can be used in tests of controls and substantive procedures. In relation
to substantive procedures, sampling can only be used in performing substantive tests
of details because substantive analytical procedures should be applied to a complete
set of data or information so that the relationships generated by computing ratios and
trend analysis are realistic.

QUESTION 5

What are the general approaches to sampling?

ANSWER 5

When examining account balances or classes of transactions using audit sampling, an

auditor uses either one of two approaches, namely:

Statistical sampling

Statistical sampling is a sampling approach that involves the random selection of a

sample for inspection and uses probability theory to evaluate sample results
and measure sampling risk. In statistical sampling, each item in the population has a
calculate chance of being selected.

A commonly held misconception about statistical sampling is that this approach

eliminates the need for the use of professional judgement. While statistical sampling
uses statistical methods to determine the sample size and to select and evaluate audit
samples, it is the auditor‟s responsibility to consider and specify in advance factors
such as materiality, the expected error rate or amount, the risk of over-reliance and the
risk of incorrect acceptance, audit risk, inherent risk, control risk, and population size,
before the sample size can be determined. Statistical sampling allows an auditor‟s
judgement to be concentrated on those areas of the audit where it is most needed. It
permits the auditor to:
 a. Quantify sampling risk.
b. Design an efficient sample.
c. Measure the sufficiency of the audit evidence gathered.
d. Objectively evaluate the sample results.

Nonstatistical or judgemental sampling

Nonstatistical sampling is a selection process where the auditor decides which items
are to be audited. It involves a subjective selection of items for testing and a subjective
evaluation of the results. This approach relies on intuition and non-quantitative
methods in the evaluation process. The reliability of the sample results obtained using
judgemental sampling cannot be estimated because the probability of selection of the
individual items in the population cannot be ascertained.

Judgemental sampling is an acceptable means of gathering audit evidence concerning

the fairness of the financial statements provided the auditor is satisfied that the sample
is not unrepresentative of the entire population. It is often cheaper and less
time-consuming to perform compared to statistical sampling.

QUESTION 6

Which of the two approaches in sampling provides more useful audit evidence?

ANSWER 6

Auditors disagree on which sampling method is better. When used properly, both
statistical and nonstatistical sampling approaches may provide sufficient appropriate
audit evidence. Both approaches involve judgement in planning, executing the
sampling plan, and evaluating sample results. Also, both require that appropriate
sampling methods be utilized to provide reasonable assurance that the samples
selected are representative of the population.

Those in favor of statistical sampling maintain that such approach would carry greater
evidential weight in a court of law and that conclusions drawn from statistical sampling
are more defensible in court because the risk of error in the population is objectively
and quantifiably determined.

On the other hand, auditors in favor of the nonstatistical sampling approach believe
that the use of professional judgment is a better defense than a statistical measure of
risk. It may be better to have an expert witness explain how important professional
judgment is in an audit than let a statistician explain that there is a known chance (e.g.,
20% or 50%) that the auditor‟s conclusion was incorrect.

QUESTION 7

Illustrate the audit risk model for audit sampling purposes.

ANSWER 7

In obtaining audit evidence, the auditor should use professional judgment in assessing
audit risk and in designing audit procedures to ensure that such risk is reduced to an
acceptably low level. Audit risk is the risk that the auditor may unknowingly fail to
appropriately modify his opinion on financial statements that are materially misstated.
It can be expressed as:

AUDIT RISK = IR x CR x DR

Or

AUDIT RISK = IR or CR x (AP x TD)

Where: IR = Inherent risk

CR = Control risk
DR = Detection risk
AP = Analytical procedures risk and other
relevant substantive procedures
TD = Test of details allowable risk of
Incorrect acceptance for this
substantive procedures

For sampling purposes, audit risk can be affected by sampling and nonsampling risks.

QUESTION 8

What is nonsampling risk?

ANSWER 8

Nonsampling risk arises from factors that cause the auditor to reach an erroneous
conclusion for any reason not related to the size of the sample, such as:

a. The failure to select appropriate audit procedures.

b. The failure to recognize misstatements in documents examined.
c. Misinterpreting the result of audit tests.

Nonsampling risk result from human error. It exists regardless of the number of items
selected from a population for testing. Since nonsampling risk is a risk that is
attributable to the auditor, it can never be eliminated but can only be appropriately
reduced through proper engagement planning, supervision and review of the audit
report.

QUESTION 9

What is sampling risk?

ANSWER 9

Sampling risk is the probability that a properly drawn sample may not be
representative of the population; that is, the auditor‟s conclusion based on the sample
may be different from the conclusion reached if the entire population were subjected to
the same audit procedure. Sampling risk exists because the sample chosen may not
be representative of the true population characteristic.
Sampling risk can be reduced by increasing sample size, and it can be eliminated if the
auditor chooses to examine all items in the population.

QUESTION 10

What are the two types of sampling risk?

ANSWER 10

The two types of sampling risk are:

1. Test of control sampling risks.

 Risk of assessing control risk too high.

 Risk of assessing control risk too low.

2. Substantive procedure sampling risks.

 Risk of incorrect rejection.

 Risk of incorrect acceptance.

QUESTION 11

Explain the two types of test of control sampling risks.

ANSWER 11

Test of control sampling risks maybe classified into:

a. Risk of assessing control risk too high. It refers to the risk that sample does not
support the auditor‟s planed degree of reliance of the control when the true compliance
rate supports such reliance. In other words, the risk of assessing control risk too high is
the risk that the assessed level of control risk based on the sample is greater than the
true operating effectiveness of the control structure policy or procedure.

This type of risk pertains to audit efficiency and is likely to result in greater audit effort.
The auditor‟s over-assessment of control risk may result to an unnecessary increase
or extension of substantive procedure. For instance, when an auditor concludes that
control risk is high, he ordinarily sets a lower acceptable level of detection risk and
expands the scope of his substantive procedures in order to compensate for the
perceived control deficiency or weakness. Such additional effort is unwarranted and
would only result to inefficiencies in the audit because more substantive procedures
will be performed than necessary.

The risk of assessing control risk too high is also termed a type 1 error, alpha risk, or
the risk of under-reliance.

b. Risk of assessing control risk too low. It refers to the risk that sample support the
auditor‟s planned degree of reliance on the control when the true compliance rate does
not justify such reliance. Simply stated, the risk of assessing control risk too low is the
risk that the assessed level of control risk based on the sample is less than the true
operating effectiveness of internal control.
This type of risk relates to audit effectiveness and could lead to audit failure. The
auditor‟s under-assessment of control risk may result to reduced scope of substantive
procedures. For instance, if an auditor erroneously concludes that the controls are
effective, control risk would be assessed at a low level and the auditor will
subsequently reduce or restrict the extent and scope of his substantive procedures.
Thus, the substantive procedures may not be effective or enough in detecting material
misstatements that otherwise may exist in the population.

The risk of assessing control risk too low is also referred to as type 2 error, beta risk, or
the risk of over-reliance.

The risk of assessing control too low is more important to auditors tan the risk of
assessing control risk to high.

QUESTION 12

Explain the two types of substantive procedure sampling risks.

ANSWER 12

Substantive procedure sampling risk may be classified into:

a. Risk of incorrect rejection. It refers to the risk that the sample supports the
conclusion that the recorded account balance is materially misstated when in fact, it is
not materially misstated.

The type of risk relates to the audit efficiency. Because of the risk involved in
sampling, an audit might select a sample containing disproportionately more misstates
than the population contains. However, audit client would likely maintain that the
balance is properly stated. The auditor would then perform additional procedures and
gather additional evidence to confirm or dispel previous findings; thus, resulting to
additional effort and extra expanding.

The risk of incorrect rejection is also called type 1 error or alpha risk. This risk is similar
to the risk of assessing control risk too high for test of control.

b. Risk of incorrect acceptance. It refers to the risk that the sample supports the
conclusion that the recorded account balance is not materially misstated when in fact,
it is materially misstated.

This type of risk relates to audit effectiveness. Owing to sampling risk, an auditor
might select a sample containing disproportionately less misstatements than what the
population contains. If the auditor incorrectly accepts a materially misstated account
balance as fairly stated, this would cause the auditor to express an unmodified opinion
on financial statements which actually departs from PFRSs. Ultimately, audit
ineffectiveness results to audit failure.

The risk of incorrect acceptance is also called type2 error or beta risk. This risk is
similar to the risk of assessing control risk too low for test of control.

The risk or incorrect acceptance is far more consequential o the auditor than the risk f
incorrect rejection.
QUESTION 13

The confidence (reliability) level is the complete of sampling risk. Hence, for the test
of control, if the risk of assessing control risk too low is 10%, the auditor‟s confidence
level would be 90% (100%-10%). For a substantive procedure, if the risk of incorrect
acceptance is 15%, the auditor‟s confidence level would be 85% (100%-15%).

QUESTION 14

Define the term „population‟ and „sampling unit‟.

ANSWER 14

Population refers to the entire set of data from which a sample is selected and about
which the auditor wishes to draw conclusion. A sampling unit. On the other hand, is
defined as the individual items constituting a population.

QUESTION 15

What are the common methods in selecting samples?

ANSWER 15

The auditor should select items for the sample with the expectation that all sampling
units in the population have a chance of select. The auditor may use the following
sample selection methods:

a. Random sampling
b. Systematic sampling
c. Stratified sampling
d. Haphazard sampling
e. Block sampling

QUESTION 16

Explain random sampling.

Radom or probability sampling involves selecting items from the population so that
each items has an equal or know chance of being selected. Random selection requires
the use of random number tables or random number generators. A random number
table is composed of a list of randomly selected number which may be used by auditor.
Random number generators are computer programs that generate random numbers.

The auditor should make sure that the sample bang selected is representative of the
population from which it is drawn. Random sampling typically involves the following
steps:

 Relating identifying numbers (or letters) to sampling units in the population.

 Deriving a random sample from the population with the aid of a random number
table or a random number generator.
The sampling units may be in physical terms. Examples of physical identifiers are
check number, invoice number, page number, and warehouse row.

Random sampling may be restricted or unrestricted. In unrestricted or simple

random sampling without replacement, a fixed number of number of items
selected. Each time an item is selected, any item on the frame can be selected in the
once again. This means that a sample item can be selected into the sample multiple
times. Conversely, in restricted or simple random without replacement, a fixed
number of items are selected each time. An item can be selected into the sample only
once; therefore, the sample contains unique items. Only items not selected earlier can
be selected into the sample. This is one of the most common methods of random
sampling. For same sample size, random sampling without replacement will always be
statistically more efficient than random sampling with replacement.

Random sampling can be used for both statistical and nonstatistical sampling
approaches.

QUESTION 17

Explain systematic sampling.

ANSWER 17

Systematic or interval sampling consists of sequencing all items all items or the
population. Sampling units are put in numerical order. The auditor divides the
population into n intervals of equal sizes based on the number of sampling units that
must be chosen for the sample (n). He then chooses sampling unit from each of the
derived intervals. The selection interval can be determined by dividing the population
size (N) by the required sample size (n).

For instance, if the population is composed of 1,000 units and the desired sample size
is 100 units, the auditor select a random starting points between one and the sampling
interval of 10 (1,000/100), He then randomly chooses the first sampling unit from the
first interval. After including the random start unit (e.g.4) as part of the sample, he
auditor then sequentially select every 10 th item of the population (e.g., 14th, 24th,
34th,….).This approach usually result in a true random sample.

However, bias my result if a pattern in the population exist that coincides with the
selection interval. For instance, if every 10th sampling units or multiple of 10 happens to
be a departmental manager, then based on the random start, the sample derived may
yield either all departmental manager or none. Nonetheless, the possibility of
introducing the bias into the sample as a result of a pattern in the population can be
minimized by having multiple starting points in the selection process or by using an
interval that does not coincide with the said pattern.

When there is no numerical sequence to a population, the auditor will find it easier to
use a systematic sampling rather than random sampling. If documents, records, or
transaction are unnumbered, there is no need with systematic sampling to number
them physically. If random number table selection was involved, the drawback would
be to require numbering. With systematic sampling, the auditor uses the sampling
interval as the basis for selecting the documents to examine.
Systematic sampling can be used for both statistical and nonstatistical sampling
approaches.

QUESTION 18

Explain stratified sampling.

ANSWER 18

Stratification simply involves subdividing the population into subpopulations or strata,

each of which is a group of sampling units which have similar characteristics.
Stratification of accounting population is usually based on the recorded book value
amounts of the line items wherein the population is divided into strata according to their
book values and a sample is selected independently from each stratum. Stratified
sampling enable‟s the auditor to direct his effort on items which contain the greatest
potential misstatement (e.g., the auditor will focus his attention in auditing larger value
items to detect material errors and fraud).
Stratified sampling is used when a population has a high variability, that is, certain
parts of the population are distinct from the other parts. For instance, some accounts in
the population are stated in terms on millions, while others, only in thousands or
hundreds.
Stratified sampling may be used for both statistical and nonstatistical sampling
approaches.

QUESTION 19

Explain haphazard sampling.

ANSWER 19

Haphazard sampling involves selecting items from the population without following a
structured technique. Simply stated, the auditor must select sample items without
regard to their size, shape, location, or other physical features.
In using haphazard sampling, the auditor should avoid any conscious bias in the
selection of population items, for example, by selecting only unusual or physically
small items, or omitting the first or last items in a population. Due care must be
exercised in selecting representative samples using this method.
Haphazard selection, however, is not appropriate when using statistical sampling
because it does not allow the auditor to measure the probability of selecting a given
combination of sampling units.

QUESTION 20

Explain block sampling.

ANSWER 20

Block or cluster sampling involves selecting items from the population in contiguous
groups (or blocks).
A block sample is obtained by selecting several items in sequence. Once the first item
in the block is selected, the remainder of the block is chosen automatically. For
instance, the sample may consist of all vouchers processed during a two-week period
or all vouchers processed on specific days. Block samples could theoretically be
representative samples but are rarely used because they are inefficient. The time and
expense to select sufficient blocks so that the samples could be considered
representative of the total population is absurd.

Block sampling is considered the least desirable for use by the auditor and, like
haphazard sampling, is also inappropriate for statistical sampling.
Haphazard selection, however, is not appropriate when using statistical sampling
because it does not allow the auditor to measure the probability of selecting a given
combination of sampling units.

QUESTION 21

What are the usages of sampling?

ANSWER 21

Sampling may be used in:

 Tests of controls. It is directed towards the design or operation of a control

to assess its effectiveness in preventing, detecting and correcting material
misstatements in a financial statement assertion.
 Substantive procedures. It is used to obtain evidence about the validity and
propriety of the accounting treatment of transactions and balances.
 DuaI-Purpose tests. It is used to test a control and to serve as a substantive
procedure of a recorded balance or class of transactions. When a dual-purpose
test is used, auditors select the sample size as the higher of that required for
the two purposes.