1. What is audit sampling?

Involves the application of audit procedures to less than 100% of items within the class not 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 population.

2. Define the following terms:

a. Error in the context of tests of controls- auditor’s risk assessment includes an expectation of the
operating effectiveness of controls. The auditor should determine the maximum rate of deviations from
the prescribed control that he would be willing to accept without altering his planned assessed level of
control risk.

b. Error in the context of substantive tests- concern with amounts and are of two types: test of details of
classes of transactions, account balances, and disclosures.

3. What are the two components of detection risk? Explain each component briefly.

 Sampling risk – related to sampling arising from the fact that sample may not be representative
of the population tested.
 Non-sampling risk – arising from factors unrelated to sampling.

4. Can you eliminate sampling risk? Explain.

Sampling risk varies inversely with the sample size: the greater the sample size the smaller the sampling
risk. If sample size were increased to include all the items in the population there would be no sampling
and no sampling risk. Therefore, we cannot eliminate sampling risk because as long as there is sampling,
there is also sampling risk.

5. Describe the relationship between sampling risk and sample size.

Sampling risk varies inversely with the sample size: the greater the sample size the smaller the sampling
risk.

6. How is non-sampling risk reduced?

Sampling risk is reduced by increasing the sample size.

7. In tests of controls, there are two types of sampling risk. For each type, give a short description and
identify whether it affects audit efficiency or audit effectiveness.

 Risk of assessing control risk too high – Unknown to the auditor, the true deviation rate in the
population assessing control risk is below the maximum
 Risk of assessing control risk too low – Sample does support assessing control risk below the
maximum when, unknown to the auditor the true deviation rate in the population supports
assessing control risk at the maximum.

8. In substantive tests, there are two types of sampling risk. For each type, give a short description and
identify whether it affects audit efficiency or audit effectiveness.
  Risk of incorrect rejection – sample supports the conclusion that a recorded account balance is
materially misstated when unknown to the auditor, the account is not materially misstated.
 Risk of incorrect acceptance – in contrast, it is the risk that a sample supports the conclusion
that a recorded account balance is not materially misstated when, unknown to the auditor, the
account is materially misstated.

9. Which one is of greater concern to the auditor: risk affecting audit effectiveness or risk affecting audit
efficiency? Explain.

Incorrect rejection relates to the efficiency of audit would ordinarily be revised when the auditor
considers other evidence or performs additional audit procedures. However, risk of incorrect acceptance
which relates to audit effectiveness is critical ang great concern to an auditor because incorrectly
accepting a misstated account balance could result in financial statements that are materially misstated
and therefore misleading.

10. What are the risk considerations in obtaining audit evidence?

Sampling risk and non-sampling risk can affect the components of the risk of material misstatement.

11. Enumerate the different means of selecting items for testing.

 Selecting all items;

 Selecting specific items; and
 Audit sampling.

12. What are the two general approaches to audit sampling? Explain briefly.

 Statistical sampling – apply the laws of probability to aid an auditor in designing an efficient
sample, in measuring the sufficiency of evidence obtained, and in evaluating sample results.
 Non-statistical sampling – rely exclusively on subjective judgment to determine sample size and
evaluate sample results.

13. What are the advantages and disadvantages of statistical sampling?

Advantages of statistical sampling:

 It aids an auditor in determining the sample size required to meet given objectives
 It provides more objective audit evidence
 It allows an auditor to measure precision, reliability, and sampling error

Disadvantages of statistical sampling:

 There is a danger of accepting statistical evidence at face value, without sufficient skepticism
 The cost of statistical sampling could exceed the benefits
 Statistical sampling may be less appropriate in some cases than non-statistical sampling or othe
audit procedures for gathering evidence.

14. Explain the following sample selection methods:

a. Random number sampling- utilizes random-number tables or computer generated random numbers
to select sampling units from a population.
b. Systematic-sampling- selecting every nth item from a population of sequentially ordered items.

c. Block selection- selecting a group of items arranged contiguously within a larger grouping of sampling
units.

d. Haphazard sampling- sampling units selected without special reasons but also without conscious bias.

15. What is stratification?

Dividing population into discrete sub-populations which have an identifiable characteristic.

16. What is value-weighted selection?

Having selected specific monetary units from within the population, for example the account receivable
balance, the auditor then examines the particular items, like for example individual balances,

17. Give the steps involved in an attributes sampling plan.

1. Determine the objectives of the test

2. Define the attribute and deviation
3. Define the population
4. Choose an audit sampling approach/technique
5. Determine the sample size and the sample selection method
6. Perform the sampling plan
7. Evaluate sample results
8. Comply with documentation requirements

18. Give at least three determinants of the sample size for tests of controls. Relate each determinant to
sample size.

 The extent to which the risk of material misstatement is reduced by the operating effectiveness
of controls. The more assurance the auditor intends to obtain from the operating effectiveness
of controls, the lower the auditor’s assessment of the risk of material misstatement will be, and
the larger the sample size will need to be.
 The rate of deviation from the prescribed control activity the auditor is willing to accept
(tolerable error). The lower the rate of deviation that the auditor is willing to accept, the larger
the sample size needs to be.
 The rate of deviation from the prescribed control activity the auditor expects to find in the
population (expected error). The higher the rate of deviation that the auditor expects, the
larger the sample size needs to be so as to be in a position to make a reasonable estimate of
the actual rate of deviation.

19. Give the steps involved in a variables sampling plan.

1. Determine the objectives of the test

2. Define “fair representation” and “material misstatement”
3. Define the population
4. Choose an audit sampling approach/technique
5. Determine the sample size and the sample selection method
6. Perform the sampling plan
 7. Evaluate sample results
8. Comply with documentation requirements

20. Give at least three determinants of the sample size for substantive tests. Relate each determinant to
sample size.

 The auditor’s assessment of the risk of material misstatement – the higher the auditor’s
assessment of th3e risk material misstatement, the larger the sample size needs to be
 The total error the auditor is willing to accept – the lower the total error that the auditor is
willing to accept, the larger the sample size needs to be.
 The auditor’s required confidence level – 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 larger the sample size needs to be.

21. What are other sampling considerations mentioned in PSA 530?

 random selection.
 systematic selection.
 monetary unit sampling.
 haphazard selection, and.
 block selection.

22. When is projection necessary?

Projection is necessary for substantive tests. The auditor should project monetary errors found in the
sample to the population, and should consider the effect of the projected error on the particular audit
objective and on other areas of audit.

23. Discuss the following projection techniques:

a. Difference estimation – used to measure the estimated total misstatement amount in a population
when there is both recorded value and an audited value for each item in the sample.

b. Ratio estimation- similar to difference estimation except that the point estimate of the population
misstatement is determined by multiplying the portion of the sample amount misstated times the total
recorded population book value.

c. Mean-per-unit estimation- the auditor is concerned with the audited value rather than the
misstatement amount of each item in the sample.

24. What is probability-proportional-to-size (PPS) sampling?

Sample selection of individual peso amounts in population by the use of random or systematic sample
selection. 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 amount.