MASTERS TECHNOLOGICAL INSTITUTE OF

MINDANAO

Lesson 9
Audit sampling

OVERVIEW

PSA 530 Audit Sampling and Other Selective Testing Procedures

LEARNING COMPETENCIES

Upon completion of the course, the students will be able to:

 Distinguish between statistical and non-statistical sampling.

 Describe the methods of selecting a representative sample.
 Discuss the different types of sampling plans used in auditing.
 Explain the effects of changes in various population characteristics and changes in sampling risk on
required sample size.
 Plan, perform, and evaluate samples for tests of controls using statistical and non-statistical methods.
 Plan, perform, and evaluate samples for substantive procedures using mean-per-unit sampling.
 Describe the difference and ratio methods of estimation.
 Plan, perform, and evaluate samples for substantive procedures using non-statistical methods.

INTRODUCTION

The auditor’s selection of audit procedures is based on the assessment of risks. The higher the auditor’s assessment of
risk, the more reliable and relevant is the audit evidence sought by the auditor form substantive procedures. Similarly, in
determining the audit procedures to be performed, the auditor considers the reasons for the assessment of the risk of
material misstatement at the assertions level for each class of transactions, account balances or disclosure (the inherent
risks) and whether the auditor’s risk assessment takes into account the entity’s controls (the control risk).

Audit testing procedures are used during the performance of both TESTS OF CONTROL AND SUBSTANTIVE PROCEDURES.
These include:
1. preparation of the audit testing plan
2. selection of the items to be tested
3. performance of the audit procedures
4. evaluation of exceptions
5. comparison of tolerable level with the estimated actual level

PSA 530 (Red), ‘Audit Sampling and Other Selective Testing Procedures’ provides guidance on the use of audit sampling
and other means of selecting items for testing to gather evidence which includes
a. selecting all items, or 100% examination
b. selecting specific items
c. audit sampling

Although the decision as to which approach to use is based on the audit risk and audit efficiency, the auditor needs to be
satisfied that the methods used are effective in providing sufficient appropriate audit evidence to meet the objectives of
the test.

MODULE: AUDITING AND ASSURANCE PRINCIPLES 1

 MASTERS TECHNOLOGICAL INSTITUTE OF
MINDANAO

EXCITE

Selecting items of testing to gather audit evidence

When designing audit procedures, the auditor should determine appropriate means of selecting items for testing. The
means available to the auditor are:
a. Selecting all items (100% examination)
b. Selecting specific items
c. Audit sampling
Selecting all items (100% examination)
 Unlikely in the case of tests of control but more common for substantive procedures
 May be appropriate when:
a. The population constitutes a small number of large value items
b. When both inherent risk and control risk are high and other means do not provide sufficient
appropriate audit evidence
c. When the repetitive nature of a calculation or other process performed by a computer
information system makes a 100% examination cost effective
Selecting specific items
 The auditor may decide to select specific items from a population based on such factors as knowledge of the
client’s business, preliminary assessments of inherent and control risks, and the characteristics of the population
being tested
 The judgmental selection of specific items is subject to nonsampling risk
 Specific selected items may include:
 High value or key items
 All items over a certain amount
 Items to obtain information
 Items to test procedures
 While an efficient means of gathering audit evidence, it does not constitute audit sampling. The results of audit
procedures applied to specific items selected cannot be projected to the entire population

AUDIT SAMPLING
1. “Audit Sampling” involves the application of audit procedures to less than 100% of items with an account
balance or class of transactions
2. Sampling may be statistical or nonstatistical.
I. Statistical sampling means any approach t sampling that has the following characteristics:
a. Random selection of a sample
b. Use of probability theory to evaluate sample results

II. Nonstatistical sampling is a sampling approach that does not have characteristics (a) and (b).

Audit sampling plan refers to the procedures an auditor applies t accomplish a sampling application. In aids an auditor I
forming conclusions about one r more characteristics or either a particular class of transactions or a particular account
balances

1. ATTRIBUTE SAMPLING
 Applicable to tests of control
 Used to test an entity’s rate of deviation (also called rate of occurrence) from a prescribed control
procedure
2. VARIABLES SAMPLING
 Applicable to substantive test
 Most commonly used to test whether recorded account balances are fairly stated

SAMPLING RISK
1. It arises from the possibility that the auditor’s conclusion, based on a sample may be different from the
conclusion reached if the entire population were subjected to the same audit procedures
2. The confidence level (also called reliability level) is the mathematical complement of the applicable sampling
risk factor
3. It is to be measured and controlled. The auditor controls it by specifying the acceptable level when developing
the sampling design
MODULE: AUDITING AND ASSURANCE PRINCIPLES 2
 MASTERS TECHNOLOGICAL INSTITUTE OF
MINDANAO

4. For tests of control, it has the following aspects:

a. Risk of assessing control risk too low (Risk of Overreliance)
 The risk that the auditor would conclude that the control risk is lower than it actually is
 It affects audit effectiveness and is more likely to lead to an inappropriate audit opinion
b. Risk of assessing control risk too high (Risk of under reliance)
 The risk that the auditor would conclude that control risk is higher than actually is
 It affects audit efficiency as it would lead to additional work to establish that initial
conclusions were incorrect
5. For substantive tests, it has the following aspects:
a. Risk of incorrect acceptance
 The risk that the auditor would conclude that a material error exists when in fact it does
 It affects audit effectiveness and is more likely to lead to an inappropriate audit opinion
b. Risk of incorrect rejection
 The risk that the auditor would conclude that a material error exists when in fact it does
not
 It affects audit effectiveness as it would lead to additional work to establish that initial
conclusions were incorrect
NONSAMPLING RISK
It arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the size of
the sample. For example, most audit evidence is persuasive rather than conclusive, the auditor might use inappropriate
procedures, or the auditor might misinterpret evidence and fail to recognize an error.

7 STEPS IN ATTRIBUTE SAMPLING PLAN

1. Define the objectives of the plan
2. Define the population
 For example, if an auditor’s objective is to test controls designed to assure that all shipped goods are
invoiced, the population would be defined as all sipping documents issued during the period not all sales
invoices

3.Define the attribute and deviation conditions

 An attribute s a characteristic of control. For example, the supervisor’s signature of approval on a
document. A deviation is the absence of an attribute
4. Determine the sample size
The sample size is determined by considering the following factors:
a. Risk of assessing control risk too low
b. Tolerable deviation rate
c. Expected population deviation rate

Risk of assessing control risk too low

 There is an inverse relationship between the risk and the sample size. The higher the acceptable risk, the
smaller the sample size
 Because the risk of assessing control risk too low relates to the effectiveness of the audit, it is kept at a
relatively low level by the auditor

Tolerable deviation rate

 This the maximum deviation rate that the auditor is willing to accept
 The lower the rate of deviation that the auditor is willing to accept, the larger the sample size needs to
be

Expected population deviation rate (expected error)

 The rate of deviation from the prescribed control procedure the auditor expects to find in the population
 The higher the rate of deviation the auditor expects, the larger the sample size needs to e so as to be in a
position o make a reasonable estimate of the actual rate of deviation
 Factors relevant to the auditor’s consideration of the expected error rate include:
o The auditor’s understanding of the business (in particular, procedures undertaken to obtain an
understanding of the accounting and internal control systems)
o Charges in the personnel or in the accounting and internal control systems
o The results of audit procedures applied in prior periods
o The results of other audit procedures

5. Determine the method of sample selections

MODULE: AUDITING AND ASSURANCE PRINCIPLES 3
 MASTERS TECHNOLOGICAL INSTITUTE OF
MINDANAO

Some commonly used methods are:

a. Random number sampling
 Each item in the population has an equal chance and nonzero probability of selection
 It is usually accomplished by generating random numbers from a random number table or computer
program and tracing them to associated documents or items in th population
 It is appropriate for both statistical and nonstatistical sampling
b. Systematic selection
 The number of sampling units in the population is divided by the sample size to give a sample interval,
for example 50, and having determined the starting point within the first 50, each 50 th sampling unit is
hereafter selected
 Although the starting point may be determined haphazardly, the sample is more likely to be truly
random if it is determined by use of a computerized random number generator or random number
tables
 When using systematic selection, the auditor would need to determine that sampling interval
corresponds with a particular pattern in the population

c. Block selection or cluster sampling

 It involves selecting a block(s) of contiguous items from within the population
 It cannot be ordinarily used in audit sampling because most populations are structured such that items
in sequence can be expected to have similar characteristics to each other, but different characteristics
from items elsewhere in the population
 Although in some circumstances it may be an appropriate audit procedure to examine a block of items, it
would rarely be an appropriate sample selection technique when the auditor intends to draw valid
inferences about the entire population based on sample

d. Haphazard selection
 The auditor selects a sample without following a structured technique
 It is not appropriate when using statistical sampling

e. Stratification
 This involves subdividing the population into subpopulations or strata, i.e., a group of sampling units
which have similar characteristics (often monetary value)
 The strata must be explicitly defined so that each sampling unit can belong to only one stratum
 This method enables the auditor to direct his efforts towards the items he considers would potentially
contain the greater monetary error

6. Perform sampling plan

7. Evaluate and document results
These include:
a. Determining the sample deviation rate
Sample deviation rate = number of deviations observed
Sample size
b. Determining the maximum population deviation rate (achieved upper deviation limit) and the allowance for
sampling risk (achieved precision)
 The maximum deviation rate is based on the sample size and the number of deviations discovered.
There are standard tables that yield maximum population deviation rates at specified risks of
assessing control risk too low
 Allowance for sampling risk = Maximum Deviation Rate – Sample Deviation Rate
c. Considering qualitative information
The auditor considers each of the deviation’s nature, importance, and probable cause
d. Reaching an overall conclusion
In assessing control risk, the auditor considers all available quantitative and qualitative information

COMMONLY USED ATTRIBUTES SAMPLING TECHNIQUES

1. ATTRIBUTE ESTIMATION SAMPLING
 A statistical sampling plan for tests of controls
 Appropriate when an auditor wishes to estimate a true but unknown population deviation rate
 Uses a fixed sampling plan, i.e., the auditor tests a single sample
2. SEQUENTIAL SAMPLING (ALSO CALLED STOP-OR-GO SAMPLING)
 The sampling plan is performed in several steps
 Following each step, the auditor decides whether to stop or to go on to the next step
MODULE: AUDITING AND ASSURANCE PRINCIPLES 4
 MASTERS TECHNOLOGICAL INSTITUTE OF
MINDANAO

 Appropriate when the auditor expects zero or very few deviations

3. DISCOVERY SAMPLING
 Appropriate when the expected deviation rate is near zero and when the auditor’s objective is to find at
least one deviation in a sample if the actual population deviation rate exceeds or equals a
predetermined critical rate (tolerable deviation rate)

STEPS IN A VARIABLE SAMPLING PLAN

1. Determine the objectives of the test
The auditor’s objective is to test the reasonableness of a record account balance, called hypothesis
testing.
2. Define the population and sampling unit
3. Choose an audit sampling technique
a. Statistical vs. Nonstatistical
b. Classical variables sampling vs. Probability-proportional-to-size sampling
4. Determine the sample size
The auditor considers the following:
a. Variation within the population
 Sample size varies in the same direction as the variation in population amounts. As population variation
increases, so does the sample size
 An estimate of population variation is made by determining a population standard deviation
b. Acceptable risk of incorrect rejection
c. Acceptable risk of incorrect acceptance
d. Tolerable error – the maximum monetary error that may exist in an account balance without causing
the financial statements to be materially misstated

5. Determine the method of sample selection

6. Perform the sampling plan
7. Evaluate the sample results
The following procedures are performed:
a. Projecting the same error to the population
b. Considering sampling risk
c. Considering qualitative information
d. Reaching an overall conclusion

CLASSICAL VARIABLES SAMPLING TECHNIQUES

A. Mean-per-unit estimation
A classical variables sampling technique that projects the sample average to the population by
multiplying the sample average by the number of items in the population

B. Difference estimation
It is a classical variables sampling technique that uses the average difference between audited amounts
and individual recorded amounts to estimate the total audited amount of a population and an allowance for
sampling risk.

C. Ratio estimation
A classical variables sampling technique that uses the ratio of audited amounts to recorded amount in
the sample to estimate the total amount of the population and an allowance for sampling risk

Conditions for using difference and ration estimation

1. Each population item must have a recorded book value
2. Total population book value must be known
3. Expected differences between audited and recorded book values must not be too rare

Choosing between difference and ratio estimation

Ratio estimation is more appropriate when he differences are nearly proportional to book values.
Difference estimation is more appropriate when there is little or n relationship between the absolute amounts of
the differences and the book values.

PROBABILITY-PROPROTIONAL-TO-SIZE SAMPLING (PPS)

 PPS uses a peso as the sampling unit
 PPS sampling gives each individual peso in the population an equal chance of selection
MODULE: AUDITING AND ASSURANCE PRINCIPLES 5
 MASTERS TECHNOLOGICAL INSTITUTE OF
MINDANAO

 PPS is only useful for TESTS OF OVERSTATEMENTS (e.g., assets) since the sample selection method dictates that
the larger the transaction or amount, the more likely that it will be selected.
 PPS is inappropriate for testing liabilities because understatement is the primary audit consideration

EXAMINE

To be announced.

MODULE: AUDITING AND ASSURANCE PRINCIPLES 6