CHAPTER 8: SPECIALIZED AUDIT TOOLS: ATTRIBUTES SAMPLING, MONETARY UNIT SAMPLING, AND

DATA ANALYTICS Tools

- All these tools are helpful to auditors in assessing the validity of management’s assertions
Using Sampling and Data Analytics Tools for Gathering and Evaluating Audit Evidence
● Two broad types of tools that auditors use to efficiently gather and evaluate evidence:
(1) sampling for either testing the effectiveness of controls (attributes sampling) or direct tests of
account balances and assertions (monetary unit sampling), and
(2) data analytics tools that the auditor can use for obtaining, analyzing, visualizing, and evaluating
client data
Audit Sampling
● Audit sampling involves looking at less than 100% of the transactions that occurred during the audit
period.
● Sampling techniques would be appropriate when an auditor wants to perform procedures
such as examining documents, reperforming calculations, or sending confirmations.
● Other types of audit procedures such as inquiry, observation, and analytical procedures
would not involve sampling.
● Audit sampling is used to test the operation of controls and accuracy of account balances.
● Samples should be representative of the population if the auditor is going to minimize the
risk of reaching an incorrect conclusion about the population.
● To increase the likelihood that samples will be representative, they must be of sufficient
size and must be selected from the appropriate underlying population.
Data Analytics Tools
● Include qualitative and quantitative techniques and processes that auditors use to enhance their
productivity and effectiveness.
● Data analytics tools are software programs that facilitate testing 100% of a population when
appropriate and help focus the auditor’s attention on specific risk areas or transactions.
● Auditors use data analytics tools to import a client’s data; then the auditor can employ these tools
in various ways.
o Scan the data, sort and summarize it, stratify it, and transform it into visual
representations
o To duplicate items (invoices), gaps in data (gap in check sequence), and outliers in a
population (invoices that exceed two times the average for a particular costumer)
 ● Includes platforms such as EXCEL, ACL, and IDEA. (auditor should be flexible and adaptive to change
in utilizing to complete audit and other accounting tasks)

Approaches to Gathering Audit Evidence about Assertions

Objectives of Sampling and Risks Associated with Sampling

● The objective of sampling when testing controls is to determine whether the controls are operating
effectively.
● Sampling units; e.g., individual accounts receivable balances
● Population; e.g., the total balance of accounts receivable
● If the controls are not operating effectively, the auditor needs to consider this when deciding on
the opinion for internal controls and hen designing the substantive procedures.
● The objective of sampling when testing account balances is to estimate the amount of
misstatement on the account balance.
● Sampling always contain some risk.
● The auditor needs to answer four questions when sampling:
1. Which population and sampling unit should be tested, and what characteristics should be
examined (population)?
2. How many items should be selected for audit testing (sample size)?
3. Which items should be included in the sample (sample selection)?
 4. What inferences can be made about the overall population from the sample (sample
evaluation)?

Nonsampling and Sampling Risks

● When making inferences about a population from a sample, the auditor could make an error about
the underlying population because either:
(a) the auditor used a sample that was not representative of the population (sampling risk); or
(b) the auditor did not appropriately carry out the audit procedures or inappropriately
diagnosed problems (nonsampling risk), i.e., any other type of error
o Audit firms can control both of these risks through adequate planning and effective quality control
● Nonsampling risk
o Risk that the auditor reaches an erroneous conclusion for any reason not related to
sampling risk
o Auditor may not have the appropriate knowledge to perform the test or may be fatigued or
facing time pressure when performing the test
o Audit firm control this through proper training and adequate supervision of the auditors,
well-designed sampling programs, and carefully designed and executed audit programs.
● Sampling risk
o Risk that the auditor’s conclusion based on a sample might be different from the conclusion
that would be reached if the audit procedure were applied in the same way to the entire
population.
o The smaller the sample, the more uncertainty; the larger the sample, the less uncertainty.

Sampling Risks Related to Tests of Controls

● Risk of incorrect acceptance of internal control reliability (also referred as risk of assessing control
risk too law or the risk of overreliance)
o Risk that the auditor will conclude that internal controls are effective (i.e., control risk is
low) when internal controls are actually not effective
● Risk of incorrect rejection of internal control reliability (also referred to as risk of assessing control
risk too high or the risk of under reliance)
o Risk that the auditor will conclude that the internal controls are not effective (i.e., control
risk is high) when internal controls are actually effective.
 - The

auditor’s main concern when using sampling to test controls is the risk of incorrect acceptance
Sampling Risks Related to Tests of Details of Account Balances
● Risk of incorrect acceptance of book value
o Risk that the auditor will conclude that the account balance does not contain a material
misstatement when the account balance actually does contain a material misstatement.
o The account balance contains a material misstatement, but the sample results lead the
auditor to conclude the account does not contain a material misstatement
o No additional audit work would be performed, and the FS will be issued with a material
misstatement
● Risk of incorrect rejection of book value
o Risk that the auditor will conclude that the account balance contains a material
misstatement when the account balance actually does not contain a material
misstatement.
o Affects the efficiency of the audit, but it should not affect the auditor’s overall conclusion
about the fairness of the FS
- The auditor’s main concern when using sampling to perform substantive tests of details is the risk of
incorrect acceptance of book value

Nonstatistical and Statistical Sampling

● Statistical sampling
 Involves a probability sampling method, which provides an objective method of
determining sample size and selected items
 Provide a means of quantitatively assessing sampling risk
 In practice: limited
 Does not eliminate the needs for professional judgment
● Nonstatistical sampling
 Selection of sample items based on the auditor’s judgment, rather than on a formal
statistical method
 If the auditor uses judgment to determine one of more of the following, the sampling
approach is nonstatistical:
● Sample size
● Items selected for the sample
● Evaluation of a sample
 Does not allow the auditor to statistically measure sampling risk
● For both sampling approaches, the auditor considers the nature of control deficiencies or
misstatements detected in the sample, projects the sample findings to the population, and
concludes on the overall population.
Attributes Sampling for Tests of Controls
● The assessment of control effectiveness may be based on:
o A sample to test the effectiveness of controls in operation
o The auditor’s observation of the controls within significant business processes
o Tests of controls built into the client’s computer system
o Inquiry of relevant employees
o Review of monitoring reports
● Sampling techniques are not used for all test of controls
● Attributes sampling
o Sampling method used to estimate the rate of control procedure failures based on selecting
a sample and performing the appropriate audit procedure

● Attribute
 o Characteristic of the population of interest to the auditor
o Typically, the attribute the auditor wishes to examine is the effective operation of a control,
e.g. the evidence that the client has matched vendor invoice details with the purchase
order and receiving report before payment approval, and noting that they match before
authorizing a payment for the goods received

Steps in Attributes Sampling

1. Define the attributes of interest and what constitutes failure(s).
o Auditor tests only important controls
o Control failures should be precisely defined to make sure that the auditor clearly
understands what to look for, thereby reducing nonsampling risk
o Control failure does not mean a misstatement has occurred.
o It may however, affect the valuation of receivables at year-end.
2. Define the population from which the auditor takes the sample.
o Period covered by the test (e.g. the audit year, or an interim period)
 Time period covered by the audited FS
o Sampling unit
 Is the item identified in the population as the basis for testing
 It could be a document, an entry in the computer system, or a line item on a
document
 E.g. one company may require supervisory approval with initials to authorize
payment of several invoices; the sampling unit would be the document
authorizing the invoices.
o Completeness of population
 Help assure that the population sampled is the total population of interest
 Procedures such as footing the file and reconciling the balance to the general
ledger or reviewing the completeness of prenumbered documents, to assure
that the population is complete
3. Determine the sample size.
o Sampling risk
 Is often set at 5% or 10%
 Sometimes referred to as ALLOWABLE RISK OF OVERRELIANCE
o Tolerable rate of deviation
  Rate of deviation set by the auditor in respect of which the auditor seeks to
obtain an appropriate level of assurance that the rate of deviation set by the
auditor is not exceeded by the actual rate of deviation in the population.
 Sometimes referred to as TOLERABLE FAILURE RATE
 Level at which the control’s failure to operate would cause the auditor to
conclude that the control is not effective and would likely change the auditor’s
planned assessment of control risk in performing tests of account balances
o Expected population deviation rate
 Anticipation of the deviation rate in the entire population
 Sometimes referred to as EXPECTED FAILURE RATE
 Failures occur when personnel are in a hurry or careless, are not competent, or
are not properly trained.
 Should be LESS THAN the tolerable failure rate; otherwise the auditor should not
test controls
o Testing multiple attributes

4. Determine the method of selecting the sample.
o Simple random sampling
 Every item in the population has an equal chance of being selected for the
sample
 Appropriate for both nonstatistical and statistical sampling applications
 Random number generator (EXCEL)
o Systematic sampling
 Dividing the number of physical units in the population by the sample size to
determine a uniform interval; a random starting point is selected in the first
interval, and one item is selected throughout the population at each of the
uniform intervals after the starting point
 Sampling interval- the interval is calculated by dividing the population size by the
desired sample size
 Auditor must be sure that there is not a systematic pattern in the population
 Based on the assumption that the items in the population are randomly
distributed (no repeating or coinciding pattern)
o Haphazard sampling
  Nonstatistical sample selection method that attempts to approximate a random
selection
 Auditor chooses the sample items, trying to select items that are representative
of the population
 Selection bias: knowingly or unknowingly creating unrepresentative samples
o Block sampling
 Nonstatistical sampling selection method that involves selecting a sample that
consists of contiguous population items, such as selecting transactions by day or
week.
 Efficient approach, but the risk is that the way the transactions were processed
on these days may not be representative of how they were processed the other
364 days or 51 weeks.
 Most appropriate for year-end cutoff tests
5. Select the sample items and perform the test of control.
o Decide how to handle inapplicable, voided, or unused documents
o When selected items cannot be located, and the auditor is not able to perform appropriate
alternative procedures for those items, the auditor should consider the reasons for this
limitation, and should ordinarily consider those selected items to be control deviations for
the purpose of evaluating the sample
6. Evaluate the sample results and consider the effect on planned substantive procedures and the
opinion on internal control effectiveness.
o Project the sample results to the population before drawing a conclusion about the
population
 Quantitative evaluation
 Auditor needs to determine whether the upper limit of the possible
deviation rate exceeds the tolerable deviation rate
 Auditor should use statistical evaluation approach (exhibit 8.6)
 If the upper limit of the possible deviation rate exceeds the tolerable
deviation rate, the auditor should:
a. Test a different control designed to mitigate the same risk
b. Adjust the nature, timing, and extent of the related substantive
testing of the accounts affected by the control
 Sample evaluation—an illustration
  Qualitative evaluation
 The auditor should try to determine whether the failures:
a. Were intentional or unintentional
i. If intentional, might indicate fraud
b. Were random or systematic
i. If systematic, the auditor should be cautious in deciding to
isolate the problem and reducing substantive testing
c. Had a direct dollar effect on the account balance
d. Were of such magnitude a material misstatement could occur and
not be detected
 Linkage of test of controls to substantive procedures
7. Document all phases of the sampling process.
BASIC STEPS IN SAMPLING ACCOUNT BALANCES AND ASSERTIONS: A NONSTATISTICAL SAMPLING
APPLICATION

The basic steps for substantive test of details are the same for both nonstatistical and statistical sampling
approaches:
1. Specify the audit objective of the test and define a misstatement
o Factual misstatement – those that have been specifically identified and about which there
is no doubt, such as a difference identified in a sample item or item in a population
examined 100%. Also referred to as KNOWN MISSTATEMENTS
o Projected misstatements – developed by extrapolation from the factual misstatements in
sample items of the population
 Those that the auditor’s best estimate of the misstatements in a given
population based on the sample results
 Also referred to as LIKELY MISSTATEMENTS
o Tolerable misstatement – monetary amount set by the auditor in respect of which the
auditor seeks to obtain an appropriate level of assurance that the monetary amount set by
the auditor is not exceeded by the actual misstatement in the population
 The maximum amount of misstatement the auditor can accept in the population
without requiring an audit adjustment or a qualified audit opinion
o Expected misstatement – the level of misstatement that the auditor expects to detect, and
it is based on projected misstatements in prior-year audits, results of other substantive
tests, professional judgment, and knowledge of changes in personnel and the accounting
system.
2. Define the population from which the auditor takes the sample
o Define the sampling unit
 Sampling units – are the individual auditable items and often are made up of
individual account balances
 Sampling unit for confirming accounts – individual customer’s balance,
individual unpaid invoices, or a combination of these two (choice depends
on the effectiveness and efficiency of the process and manner in which the
client has recorded the individual items)
o Completeness of the population
  Sample is selected from a physical representation of the population, such as a list
of customer balances or a computer file
 The auditor needs assurance that the list accurately represents the population
 Common procedure: foot the list and reconcile it with the general ledger
 Use data analytics tools
o Identify individually significant items
 Top stratum – large-dollar items
 population items whose book values exceed the sampling interval and are
therefore included in the sample
 no estimate or projection of errors is required
 Lower stratum – items that are not in the top stratum; the audit results reflect
the sum of top-stratum misstatements and the projected misstatement based on
lower-stratum items
 The auditor uses judgment to determine the cutoff point for top-stratum
items
 Stratification – division of the population into two or more subgroups
 Can be enhanced with the use of data analytics tools that have the
capability of creating a profile of the population of book values, e.g. sorted
by dollar value, size of customer, and customer credit rating
3. Choose an appropriate sampling method
o The most common approaches for substantive testing are classical variables sampling and
monetary unit sampling (MUS).
o Monetary Unit Sampling – is a subset of a broader class of procedures, sometimes referred
to as:
 Probability proportional to size (PPS) sampling – Method of sample selection
where the probability of an item’s selection for the sample is proportional to its
recorded amount
 MUS is a specific method of PPS that has been developed for auditors.
 PPS and MUS are terms used interchangeably
4. Determine the sample size
5. Select sample items and perform the substantive procedures
6. Evaluate the sample results
o (STEPS 4,5,6) – depends on the sampling method used
o Whatever sampling method is chosen, the auditor must consider the risk of material
misstatement in the account, sampling risk, and the auditor’s assessment of tolerable and
expected
o If statistical sampling method – the sample must be selected randomly to give each item in
the population an equal chance to be included in the sample
o Unacceptable sample results – when the total estimated misstatement (the sum of the
total factual and projected misstatement) exceeds the tolerable misstatement, the auditor
has several possible courses of action. The auditor can:
 Ask the client to correct the factual misstatements
 The total estimated misstatement can be adjusted for those corrections,
but not for the projection of misstatements associated with those items.
 Analyze the detected misstatements for common problem(s)
 The auditor should look beyond the quantitative aspects of the
misstatements to understand the nature and cause off the misstatements
– especially to determine if there is a systematic pattern to the
misstatements
 If a systematic pattern is found, the client can be asked to investigate and
make an estimate of the correction needed
 The auditor can review and test this estimate
 Design an alternative audit strategy
 Auditor should plan the rest of the audit accordingly
 Expand the sample
 The auditor can calculate the additional sample size needed by the
substituting the most likely misstatement from the sample evaluation for
the original expected misstatement in the sample interval formula and
determine a new interval and total sample size based on the new
expectations
 The number of additional sample items can then be determined by
subtracting the original sample size from the new sample size.
 The new sampling interval can be used for selection of items not already
included in the sample
 Change the audit objective to estimating the correct value
  In cases where material misstatement are likely, it may be necessary to
change from an objective of testing details to an objective of estimating
the correct population value
 A lower detection risk and a smaller tolerable misstatement should be
used because the auditor is no longer testing the balance but is estimating
the correct population value from the sample
 The auditor will expect the client to adjust the book value to the estimated
value
 A larger sample size will be normally required
7. Document all phases of the sampling process
o To allow for appropriate supervision and provide adequate support for the conclusions
reached

NONSTATISTICAL SAMPLING FOR SUBSTANTIVE TESTS OF ACCOUNT BALANCES AND ASSERTIONS

● In determining the sample size, all significant items should be tested.

MONETARY UNIT SAMPLING (MUS)

- A sampling method based on attributes sampling, but involving dollar misstatements rather than
control failure rates
- Widely used statistical sampling method because it results in an efficient sample size and concentrates
on the dollar value of the account balances
- Developed for use in auditing
- Effective in testing for overstatements in situations when few or no misstatements are expected
- Strengths
o Generally easier to apply than other statistical sampling approaches
o Automatically selects a sample in proportion to an item’s dollar amount, thus providing
automatic stratification of the sample
o If the auditor expects and finds no misstatements, it usually results in a highly efficient sample
size
- Sample size depends on the
o Risk of incorrect acceptance
o Risk of expected misstatement to tolerable misstatement
o Ratio of tolerable misstatement to the total population value