AUDITING THEORY L. R.

CABARLES
AT.114-Audit Sampling 1st Sem. SY 2013-14

LECTURE NOTES
Means of Selecting Items for Testing procedure. Sampling risk can lead to two types of
erroneous conclusions, such as:
When designing tests of controls and tests of details, the
auditor’s means of selecting items for testing are: Alpha Risk Beta Risk
 Selecting all items (100% examination), (Type I (Type II
 Selecting specific items, and Misstatement) Misstatement)
 Audit sampling. Test of Controls
Sampling risks Assessing control Assessing control
These approaches are described in further detail below. risk too high risk too low
Controls are: less effective more effective than
Selecting All Items than they they actually are
100% examination is unlikely in the case of tests of actually are
controls; however, it is more common for tests of details. Reliance on Underreliance Overreliance
100% examination may be appropriate when, for example: internal control
 The population constitutes a small number of large Test of Details
value items; Sampling risks Incorrect Incorrect Acceptance
 There is a significant risk and other means do not Rejection
provide sufficient appropriate audit evidence; or Material exists when in does not exist when
 Cost effective by using CAATs. misstatement: fact it does not in fact it does
Affects audit: Efficiency Effectiveness
Selecting Specific Items
The auditor is more concerned with beta risk. The
Specific items selected may include: mathematical complements of these two risks are termed
 High value or key items. confidence levels.
 All items over a certain amount.
 Items to obtain information about matters such as the Dealing with sampling risks
nature of the entity or the nature of transactions. The auditor can eliminate sampling risks by through
This does not constitute audit sampling. The results of examining the entire population. However, examining the
audit procedures applied to items selected in this way entire population is normally not possible for the auditor.
cannot be projected to the entire population; accordingly, Instead, the auditor usually manages or controls sampling
selective examination of specific items does not provide risk by making the sample more representative of the
audit evidence concerning the remainder of the population. population by:
 Increasing the sample size
Audit Sampling  Using appropriate method of selecting sample items

Audit sampling is the application of audit procedures to Non-sampling Risks

less than 100% of 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. Audit sampling enables the auditor to obtain
and evaluate audit evidence about some characteristic of
the items selected in order to form or assist in forming a
conclusion concerning the population from which the
sample is drawn. This is the case when it is not efficient to
review 100% of the records or other circumstances make
reviewing all of the records difficult.
Representative Sample
A representative sample is one in which the characteristics
in the sample of audit interest are approximately the same
as those of the population. However, the two things that
cause a sample to be non-representative of the population
are sampling risk and non-sampling risk. These could also
be the two aspects of audit risk, i.e., [Audit risk = (f)
Sampling risk x Non-sampling risk].
Sampling Risks
Sampling risk is the risk that the auditor’s conclusion
based on a sample may be different from the conclusion if
the entire population were subjected to the same audit
Non-sampling risk is the risk that the auditor reaches an
erroneous conclusion for any reason not related to
sampling risk. Non-sampling risk is also an aspect of audit
risk not attributable to sampling such as human error due
to:
 Use or application of inappropriate audit procedures
 Failure to recognize errors (misstatements or
deviations) in the samples tested
 Misinterpretation of evidence obtained
Dealing with non-sampling risks
Non-sampling risks cannot be totally eliminated in audit.
There is always human error in audit as the auditor’s
judgment may not always be correct. However, the auditor
can manage non-sampling risks through:
 Proper planning
 Adequate direction and supervision of the audit team
and timely review of their work
The Two Sampling Approaches
Audit sampling can be applied using either non-statistical
or statistical sampling approaches. These two approaches
involve the use of auditor’s professional judgment in
planning and performing the sampling procedure and
evaluating the results of the sample.

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The table below summarizes the comparison between the two sampling
Statistical Sampling
Basic concepts  Random selection of the sample items
 Apply the laws or theory of probability to:
o Design efficient sample
o Measure sufficiency of sample
o Evaluate sample results
o Measure sampling risk quantitatively
Advantages  More defendable
 Free from bias
Disadvantages  Overvalue the evidence it provides
 Reduces auditor skepticism
 Increased cost
o Train auditors
o Design samples
Audit Sampling Process
When designing and performing audit sampling, the
auditor normally observes the following 10 steps:
Step 1: Define the purpose (objective) of the audit test.
Step 2: Define the deviation or misstatement.
Step 3: Identify and understand the relevant population.
Step 4: Determine the relevant sampling unit.
Step 5: Select an appropriate approach of sampling.
Step 6: Determine the sample size.
Step 7: Select the sample items.
Step 8: Examine and evaluate the evidence for the sample.
Step 9: Evaluate the tests results.
Step 10: Document the audit sampling performed.
The steps above are the same regardless of, the sampling
approach selected whether statistical or non-statistical, the
type of audit sampling technique utilized and whether the
test is the performance of test of controls or test of details.
Step 1: Define the purpose (objective) of the audit
test
When designing an audit sample, the auditor shall consider
the purpose (objective) of the audit procedure. The
auditor’s consideration includes the specific purpose (test
of controls or test of details) to be achieved and the
combination of audit procedures that is likely to best
achieve that purpose.
Step 2: Define a deviation or misstatement
The auditor considers what conditions constitute a
deviation or misstatement by reference to the objectives of
the test.
Deviations for Tests of Controls
For example, suppose that a control requires support for
every disbursement to include an invoice, a voucher, a
receiving report, and a purchase order; all stamped “Paid.”
The auditor believes that the existence of an invoice and a
receiving report, both stamped “Paid,” is necessary to
indicate adequate performance of the control. Therefore, in
this case, a deviation may be defined as “a disbursement
not supported by an invoice and a receiving report that has
been stamped ‘Paid.’”
Misstatement for Tests of Details
For example, in a test of details relating to the existence of
accounts receivable, such as confirmation, payments made
by the customer before the confirmation date but received
shortly after that date by the client, are not considered a
misstatement.
Step 3: Identify and understand the relevant
population
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approaches:
Non-statistical Sampling
 A sampling approach that does not have
characteristics of statistical sampling (i.e., no
random selection of sample items and does not
apply laws of probability)
 Cannot measure sampling risk quantitatively,
only based on the auditor’s judgment.
 Easy to apply
 Less costly
 Relies exclusively on professional judgment to
o Determine sample size
o Evaluate sample results
Population means the entire set of data from which a
sample is selected and about which the auditor wishes to
draw conclusions. For example, all of the items in an
account balance or a class of transactions constitute a
population. The auditor needs to identify the relevant
population and consider its characteristics from which the
sample will be drawn. Considering the characteristics of
the population would include:
 Preliminary assessment of expected rate of deviation
or misstatement and the auditor’s tolerable rate of
deviation or misstatement.
 Determining whether stratification or value-weighted
selection is appropriate.
 Ascertaining the completion of population.
In addition, it is important that the population is
appropriate to satisfy the established objective of the audit
procedures by considering the direction of the test.
Assessment of Expected Rate of Deviation or Misstatement
and Tolerable Rate of Deviation or Misstatement
For test of controls, the auditor makes a preliminary
assessment of the expected rate of deviation based on the
auditor’s understanding of the relevant controls or on the
examination of a small number of items from the
population (‘pilot testing’). This assessment is made in
order to design an audit sample and to determine sample
size. For example, if the expected rate of deviation is
unacceptably high than the auditor’s tolerable rate of
deviation, the auditor will normally decide not to perform
tests of controls. Similarly, for test of details, the auditor
makes an assessment of the expected misstatement in the
population. If the expected misstatement is high, 100%
examination or use of a large sample size may be
appropriate when performing tests of details. This is
normally the case when the auditor’s expected
misstatement is approximately or higher than tolerable
misstatement. Tolerable deviation rate or misstatement is
the rate of deviation or monetary amount the auditor is
willing to accept on the population.
Stratification and Value-Weighted Selection
Stratification
Audit efficiency may be improved if the auditor stratifies a
population by dividing it into discrete sub-populations
which have an identifying characteristic. Stratification
reduces the variability of items within each stratum and
allow sample size to be reduced without increasing
sampling risk. For example, 20% of the items in a
population may make up 90% of the value of an account
balance. The results of audit procedures applied to a
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sample of items within a stratum can only be projected to
the items that make up that stratum.
Value-Weighted Selection
When performing tests of details it may be efficient to
identify the sampling unit as the individual monetary units
that make up the population. This is discussed further
below under ‘Monetary Unit Sampling’.
Completeness of the population
The population used to make a sample selection needs to
contain all sampling units that are to be subjected to
sampling procedures. The totality of the population may
be verified by:
 Footing the population items and comparing the total
obtained to that of the population
 Accounting for numerical sequence of prenumbered
documents or records.
Direction of the Test, Appropriate to Test Objective
For test of controls
If the auditor wishes to test the operating effectiveness of
a prescribed control designed to ensure that all shipments
are billed, the auditor would not detect deviations by
sampling billed items because that population would not be
expected to contain items that were shipped but not billed.
An appropriate population for detecting such deviations is
usually the population of all shipped items.
For test of details
When understanding the risks of material misstatement
the direction in which the population may be misstated
may need to be considered.
When testing for overstatement, items to be examined are
selected directly from the population of audit interest.
When testing for understatement, items to be examined
are selected from a reciprocal or independent population.
Populations on which we may perform audit sampling to
test for understatement and examples of appropriate
reciprocal populations may include:
Population of audit Example of a potential
interest reciprocal population
Accounts payable Subsequent disbursements
Sales Shipping documents
Step 4: Determine the relevant sampling unit
Sampling unit is the individual items constituting a
population. The sampling units might be physical items
(for example, checks listed on deposit slips, credit entries
on bank statements, sales invoices or debtors’ balances) or
monetary units. The total population of the sampling units
could be manually prepared documents or lists, documents
generated from computer systems, or an electronic file
provided by the entity.
Step 5: Select an appropriate approach of sampling
The decision whether to use a statistical or non-statistical
sampling approach is a matter for the auditor’s judgment;
in making that judgment the auditor consider the
following:
 The choice is based on relative costs and benefits
 Effectiveness
 Need for quantitative estimate of sampling risk
However, sample size is not a valid criterion to distinguish
between statistical and non-statistical approaches and the
choice between the two approaches is independent of audit
procedures to be performed.
Step 6: Determine the sample size
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The auditor shall determine a sample size sufficient to
reduce sampling risk to an acceptably low level. The
sample size can be determined by the application of a
statistically-based formula or through the exercise of
professional judgment (non-statistical).
The tables below list the factors affecting sample size for
test of controls and test of details.
Test of Controls (Attribute Sampling)
Factor Relationship
Tolerable deviation rate Inverse
Allowable risk of assessing control risk Inverse
too low/Sampling risk (beta risk)
Expected population deviation rate Direct
Population size Negligible effect
Test of Details (Variables Sampling)
Factor Relationship
Tolerable misstatement Inverse
Allowable risk of incorrect Inverse
acceptance/Sampling risk (beta risk)
Expected amount of misstatement Direct
Assessed level of control risk Direct
Population size Negligible effect
Step 7: Select the sample items
The auditor shall select items for the sample in such a way
that each sampling unit in the population has a chance of
selection. It is important that the auditor selects a
representative sample, so that bias is avoided.
Sample Selection Methods
The principal methods of selecting samples are the use of
random selection, systematic selection and haphazard
selection. Sample selection methods are classified into
probabilistic (statistical) and non-probabilistic (non-
statistical).
Probabilistic Sample Selections
a. Random-number Selection
 Every sampling unit has the same probability of
being selected as every other sampling unit in the
population.
 Uses computer-generated numbers to select
sampling units.
 Match number to prenumbered documents.
 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 sampling
interval, for example 50, and having determined a
starting point within the first 50, each 50th
sampling unit thereafter is selected. Starting point
may be determined haphazardly or randomly.
 Determine that sampling units within the
population are not structured in such a way that
the sampling interval corresponds with a particular
pattern in the population.
 Useful when identification numbers lacking
 Appropriate for both statistical and nonstatistical
sampling
c. Stratified Selection
 Stratification is the process of dividing a population
into sub-populations, each of which is a group of
sampling units which have similar characteristics
(often monetary value).
 Subdivide population into homogeneous strata
 Select separate sample for each strata by on of
prior methods
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Non-probabilistic Sample Selections
a. Block Selection
 Involves selection of a block(s) of contiguous items
from within the population.
 Inefficient & not generalizable
 Should not be used for statistical or nonstatistical
sampling without care in controlling sampling risk
b. Haphazard Selection
 The auditor selects the sample without following a
structured technique.
 Sampling units selected without special reason or
conscious bias
 Inappropriate for statistical sampling
 Useful for nonstatistical sampling
c. Direct sample selection
 Auditor selects items based on judgmental criteria
such as likelihood of misstatement, characteristics
such as different time periods, or large amounts.
Step 8: Examine and evaluate the evidence for the
sample
The auditor shall perform audit procedures, appropriate to
the purpose, on each item selected.
Voided Sample
The auditor shall perform the procedure on a replacement
item. If the auditor is satisfied that the sample has been
properly voided such that it does not constitute a
deviation, and the chosen replacement is examined.
Missing or Lost Sample
If the auditor is unable to apply the designed audit
procedures, or suitable alternative procedures, to a
selected item, the auditor shall treat that item as a
deviation from the prescribed control, in the case of tests
of controls, or a misstatement, in the case of tests of
details.
Stopping the Test Before Completion
Occasionally the auditor might find a large number of
deviations in auditing the first part of a sample. As a
result, the auditor might believe that even if no additional
errors were to be discovered in the remainder of the
sample, the results of the sample would not support the
planned assessed level of control risk.
Step 9: Evaluate the tests results
The auditor uses judgment in evaluating the results and
reaching an overall conclusion. In evaluating the sample
results, the auditor:
 Considers the nature and causes of deviations and
misstatements,
 Calculates and projects the sample deviations and
misstatements, and
 Reaches an overall conclusion.
Nature and Cause of Deviations and Misstatements
The auditor shall investigate the nature and cause of any
deviations or misstatements identified, and evaluate their
possible effect on the purpose of the audit procedure and
on other areas of the audit.
In the extremely rare circumstances the auditor considers
a misstatement or deviation discovered in a sample to be
an anomaly (not representative of population). The auditor
shall obtain a high degree of certainty that such
misstatement or deviation is not representative of the
population. For example is an error that is found to be
caused by use of an incorrect formula in calculating all
inventory values at one particular branch.
Projecting Sample Deviations and Misstatements
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Projecting Deviations for Tests of Controls
For tests of controls, no explicit projection of deviations is
necessary since the sample deviation rate (SDR) is also the
projected deviation rate (PDR) for the population as a
whole. SDR is the rate of deviation in the operation of
controls detected in the sample by performing tests of
controls. SDR = # of sample deviations / sample size.
PDR, a.k.a., upper deviation or precision limit, is the rate
of deviation that the auditor estimates to be in the
population. PDR = SDR + allowance for sampling risk
(Beta risk). An allowance for sampling risk can only be
calculated where the auditor has used statistical sampling.
Projecting Misstatements for Tests of Details
For tests of details, the auditor shall project misstatements
found in the sample to the population. Sample
misstatement is the monetary misstatement detected in
the sample by performing tests of details.
Projected misstatement is the monetary misstatement that
the auditor estimates to be in the population, and is
calculated by adjusting the sample misstatement by an
allowance for sampling risk. An allowance for sampling risk
can only be calculated where the auditor has used
statistical sampling. The methods for calculating an
allowance for sampling risk and projecting the sample
error differ between classical variables sampling and
Monetary Unit Sampling (MUS). This is discussed below.
When a misstatement has been established as an anomaly,
it may be excluded when projecting misstatements to the
population.
Evaluate Sample Results and Reach an Overall Conclusion
Overall Conclusion for Tests of Controls
There are two generally accepted approaches for
evaluating the sample results for tests of controls:
 Compare PDR to tolerable deviation rate. If the PDR <
tolerable deviation rate = the control is operating
effectively. If the PDR = or > tolerable deviation rate =
the control is not operating effectively as designed.
 Compare SDR to expected deviation rate. If the SDR <
expected deviation rate = control is operating
effectively. If the SDR = or > expected deviation rate
= control is not operating effectively as designed.
Overall Conclusion for Tests of Details
When the projected misstatement plus anomalous
misstatement, if any, exceeds tolerable misstatement, the
sample does not provide a reasonable basis for conclusions
about the population that has been tested. The closer the
projected misstatement plus anomalous misstatement is to
tolerable misstatement, the more likely that actual
misstatement in the population may exceed tolerable
misstatement.
If the auditor concludes that audit sampling has not
provided a reasonable basis for conclusions about the
population that has been tested, the auditor may:
 Request management to investigate misstatements
identified and the potential for further misstatements
and to make any necessary adjustments; or
 Tailor the nature, timing and extent of those further
audit procedures to best achieve the required
assurance.
Step 10: Document the Audit Sampling Performed
The auditor should document the sampling application and
related audit procedures.
Types of Statistical Sampling
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The two commonly used statistical sampling used in
auditing are:
1. Attributes sampling–generally used for tests of controls
 Tests rate of deviation from a prescribed control
procedure
 Estimate frequency of errors in population based
on frequency in sample
 Determine whether or not estimated error rate
indicates control is working effectively
 Attribute – a characteristic of control
 Deviation – absence of the attribute
2. Variables Sampling–generally used for tests of details
 Tests whether recorded account balances are fairly
stated
 Estimate value of population based on value of
items in sample
Attributes Sampling
a. Traditional (Classical) attributes sampling
 This has been already discussed above under the
steps of audit sampling.
 Under traditional attribute sampling, sample size is
determined and sample tested to estimate error
rate in population
b. Stop-or-go (Sequential) sampling
 Performed in stages
 Auditor decides to stop or continue sampling after
each stage
 Appropriate when expected deviation rate is low
 Sample selected in steps
 Each step is based on results of previous step
 No fixed sample size and may result in lower
sample if few or no errors detected
c. Discovery sampling
 Sample size is very small
 Appropriate when expected deviation rate is
extremely low or zero
 Sample large enough to detect at least one error if
it exists
 Any errors in sample results in rejection
Variables Sampling
a. Traditional (Classical) variables sampling – The
procedures the auditor follows to apply this sampling
have been discussed above under the steps of audit
sampling. There are three approaches to classical
variables sampling for auditing applications that differ
in the way the misstatement is projected to the
population are:
 Mean-per-unit approach – The auditor estimates a
total population amount by calculating an average
MULTIPLE CHOICE
Selecting Items for Testing
1. Evaluate whether each of the following statements
qualifies as sampling:
1.1 – Test performed on 100% of the items within a
population
1.2 – Selecting items over a certain amount
1.3 – Selecting items for the total population on the
basis that was expected to be representative
a. 1.1, 1.2, 1.3 qualify
b. 1.1 and 1.2 qualify; 1.3 does not qualify
c. 1.1 and 1.2 do not qualify; 1.3 qualifies
d. 1.1, 1.2, 1.3 do not qualify
Basic Concepts of Audit Sampling
2. Audit sampling, which involves the application of audit
procedures to less than 100 percent of items within a
population of audit relevance such that all sampling
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audited amount for all items in the sample and
multiplying that average amount by the number of
items constituting the population.
 Difference approach – The auditor calculates the
average difference between audited and recorded
amounts of the sample items and projects that
average difference to the population.
 Ratio approach – The auditor calculates the ratio
between the sum of the audited amounts and the
sum of the recorded amounts of the sample items
and projects this ratio to the population. The
auditor estimates the total population amount by
multiplying the total recorded amount for the
population by the same ratio.
Using normal distribution theory based on the
variability of the audited amounts in the sample, the
auditor also calculates an allowance for sampling risk.
b. Monetary unit sampling (a.k.a., Probability Proportional
to Size (PPS) or Value-weighted selection)
 Uses attributes sampling theory to express a
conclusion in amounts rather than as a rate of
occurrence.
 Probability of selecting an item is proportional to
its recorded amount.
 Automatically stratifies an audit population
 Appropriate for testing for overstatement and few
or no errors are expected
Useful for testing assets and revenues
 Advantages over classical variables sampling
o Items with larger amounts have a greater
probability of being selected
o An item that is individually material will
automatically be selected
o Sample size may be reduced as the same item
may be selected more than once
o The sample distribution does not have to be
close to the distribution in the population for
the sample to be valid
o Sampling can be initiated prior to year-end
more easily
 Disadvantages of PPS
 Understated items have a lower probability of
being selected
 Items with zero or negative balances are not
generally included in the sample
 A high frequency of misstatements results in
an increase in sample size
- done -
units have a chance of selection, identifies two general
approaches to audit sampling. They are
a. Random and nonrandom
b. Statistical and nonstatistical
c. Precision and reliability
d. Risk and nonrisk
3. An advantage of statistical sampling over nonstatistical
sampling is that statistical sampling helps an auditor to
a. Minimize the failure to detect errors and
irregularities.
b. Eliminate the risk of nonsampling errors.
c. Reduce the level of audit risk and materiality to a
relatively low amount.
d. Mathematically measures sampling risk.
4. A nonstatistical sampling plan can:
a. Overstate the estimate of sampling risk
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b. Misdirect an auditor to unreliable sampling units

Audit Sampling Process
c. Replicate the results of a statistical sampling plan
13. Which of the following is not one of the basic phases in
d. Understate the degree of audit assurance desired
audit sampling?
5. The risk that the auditor’s conclusion based on a a. Planning the sample
sample may be different from the conclusion if the b. Evaluating the results of the sample
entire population were subjected to the same audit c. Selecting the sample and performing the tests
procedure d. Each of the above is a phase in audit sampling.
a. Sampling risk
14. Sampling unit is
b. Confidence levels
a. A process that divides population into sub-
c. Statistical sampling
populations which have an identifying
d. Tolerable rate and the expected rate of deviation
characteristic and reduces the variability of items
6. Which of the following best illustrates the concept of within each stratum and allows sample size to be
sampling risk? reduced without increasing sampling risk
a. A randomly chosen sample may not be b. A selection that treats each sampling unit as the
representative of the population as a whole on the individual monetary units that make up the
characteristic of interest. population.
b. An auditor may select audit procedures that are c. The individual items constituting a population.
not appropriate to achieve the specific objective.
d. The entire set of data from which a sample is
c. An auditor may fail to recognize errors in the
selected and about which the auditor wishes to
documents examined for the chosen sample.
draw conclusions.
d. The documents related to the chosen sample may
not be available for inspection. Sample Size: Test of Controls
15. When sampling for attributes, which of the following
7. At times a sample may indicate in the case of a test of
would decrease sample size?
controls, that controls are more effective than they
a b c d
actually are. This situation illustrates the risk of
Operating Increase Decrease Increase Decrease
a. Over-reliance. c. Incorrect precision.
effectiveness
b. Under-reliance. d. Incorrect rejection.
of controls
8. At times a sample may indicate in the case of a test of Tolerable rate Decrease Increase Increase Increase
details that a material misstatement does not exist of deviation
when in fact it does. This situation illustrates the risk Expected Increase Decrease Decrease Decrease
of control
a. Incorrect rejection c. Over reliance deviation
Risk of over Decrease Increase Increase Decrease
b. Incorrect acceptance d. Under reliance
reliance
9. The risk likelihood of assessing control risk too low
16. To determine the sample size for a test of control, an
(risk of over reliance) and risk of incorrect acceptance
auditor should consider the tolerable rate of deviation,
relate to the
the allowable risk of assessing control risk too low, and
a. Efficiency of the audit the
b. Effectiveness of the audit a. Expected deviation rate
c. Preliminary estimates of materiality levels b. Upper precision limit
d. Allowable risk of tolerable misstatements c. Risk of incorrect acceptance
10. The risk that the auditor does not recognize d. Risk of incorrect rejection
misstatements or deviations included in the sample for
17. The tolerable rate of deviations for a test of controls is
what they are
generally
a. Sampling risk c. Statistical sampling
a. Lower than the expected rate of errors in the
b. Confidence levels d. Nonsampling risk
related accounting population.
11. Which of the following is not an element of b. Higher than the expected rate of errors in the
nonsampling risk? related accounting records.
a. The auditor uses inappropriate procedures in c. Identical to the expected rate of errors in the
auditing accounts receivable related accounting records.
b. The use of unreasonable small sample size d. Unrelated to the expected rate of errors in the
c. Misinterpretations of audit evidence related accounting records.
d. Auditor fails to recognize the error in the sample
18. Which of the following statements is correct concerning
12. Which of the following would be an example of statistical sampling in tests of controls?
sampling error? a. The population size has little or no effect on
a. The auditor chose a random sample, calculated a determining sample size except for very small
sample error rate of 4%, and concluded that the population.
population error rate was 4%. The true population b. The expected control deviation has little or no
error rate was 6%. effect on determining sample size except for very
b. The auditor selected a non-random sample and small populations.
generalized the sample results to the population c. As the population size doubles, the sample size
using statistical methods. also should double.
c. The auditor chose a non-random sample to focus d. A large sample size should be selected as the
on transactions for only 2 months of the year. expected control deviation decreases.
d. The auditor chose a random sample and divided
19. Which of the following statements is correct concerning
the number of errors in the sample by the number
statistical sampling in tests of controls?
of accounts in the sample to calculate the sample
error rate.
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a. There is an inverse relationship between the client’s internal control procedures. One of the
sample size and the expected control deviation purchase orders in the chosen sample of 20 cannot be
rate. found, and the auditor is unable to use alternative
b. As the population size doubles, the sample size procedures to test whether that purchase order was
should also double. properly approved. The auditor should
c. The qualitative aspects of deviations are not a. Chose another purchase order to replace the
considered by the auditor. missing purchase order in the sample.
d. There is an inverse relationship between the b. Consider this test of control invalid and proceed
sample size and the tolerable rate of deviation. with substantive tests since internal control cannot
be relied upon.
Sample Size: Test of Details
c. Treat the missing purchase order as a deviation for
20. In substantive testing, which of the following would
the purpose of evaluating the sample.
increase sample size?
d. Select a completely new set of 20 purchase orders.
a b c d
Assessment Increase Increase Increase Decrease 27. An auditor is testing internal control procedures that
of control risk are evidenced on an entity’s vouchers by matching
Reliance on Increase Decrease Decrease Increase random numbers with voucher numbers. If a random
other number matches the number of a voided voucher, that
substantive voucher ordinarily should be replaced by another
procedures voucher in the random sample if the voucher
Tolerable Decrease Increase Decrease Increase
a. Constitutes a deviation.
misstatement
b. Has been properly voided.
Expected Increase Decrease Increase Decrease
c. Cannot be located.
amount of
misstatement d. Represents an immaterial peso amount.
Risk of Decrease Increase Decrease Increase 28. Anomalous error means
incorrect a. An error (deviation or misstatement) that arises
acceptance from an isolated event that has not recurred other
21. Determine which of the following would lead to a larger than on specifically identifiable occasions and is
sample size for substantive test of details of an therefore not representative of errors in the
account balance. Assume all other factors being equal. population.
a. Smaller measure of tolerable misstatement b. An deviation or misstatement (error) that the
b. Greater reliance of analytical procedures auditor expects to be present in the population.
c. Greater reliance on internal controls c. Rate of deviation from prescribed internal control
d. Smaller expected frequency of errors procedures set by the auditor in respect of which
the auditor seeks to obtain an appropriate level of
Sample Selection Methods assurance that the rate of deviation set by the
22. Identify the sample selection method used, following auditor is not exceeded by the actual rate of
the same order: deviation in the population.
I. Selecting items using a constant interval between d. Monetary amount set by the auditor in respect of
selections; the first interval having a random start. which the auditor seeks to obtain an appropriate
II. Selecting items from the entire population with no level of assurance that the monetary amount set
intention to include or exclude specific units by the auditor is not exceeded by the actual
III. All items in the population or within each stratum misstatement in the population.
have a known chance of selection
a. Systematic, random, haphazard. Attributes Sampling
b. Systematic, haphazard, random. 29. Which of the following sampling methods is most
c. Haphazard, systematic, random. useful to auditors when performing tests of controls?
d. Random, systematic, haphazard. a. Discovery sampling.
b. Attribute estimation/sampling.
23. An underlying feature of random-based selection of c. Variable sampling.
items is that each d. Unrestricted random sampling with replacement.
a. Stratum of the accounting population be given
equal representation in the sample. 30. Which of the following statistical sampling plans does
b. Item in the accounting population be randomly not use a fixed sample size for tests of controls?
ordered. a. Ratio estimation sampling c. MUS sampling
c. Item in the accounting population should have an b. Sequential sampling d. Variables sampling
opportunity to be selected. 31. If the auditor is concerned that a population may
d. Item must be systematically selected using contain exceptions, the determination of a sample size
replacement. sufficient to include at least one such exception is a
24. If certain forms are not consecutively numbered characteristic of
a. Selection of a random sample probably is not a. Discovery sampling. c. Random sampling.
possible. b. Variables sampling. d. PPS sampling.
b. Systematic sampling may be appropriate.
c. Stratified sampling should be used. 32. An auditor desired to test credit approval on 10,000
d. Random number tables cannot be used. sales invoices processed during the year. The auditor
designed a statistical sample that would provide 1%
25. Which of the following statistical selection techniques is risk of assessing control risk too low (99% confidence)
least desirable for use by an auditor? that not more than 7% of the sales invoices lacked
a. Systematic selection c. Block selection approval. The auditor estimated from previous
b. Stratified selection d. Sequential selection experience that about 2 ½% of the sales invoices
Nature and Cause of Error lacked approval. A sample of 200 invoices was
26. An auditor plans to examine a sample of 20 purchase examined and 7 of them were lacking approval. The
orders for proper approvals as prescribed by the
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auditor then determined the achieved upper precision c. Accounts with negative balances.
limit to be 8%. The allowance for sampling risk was d. Accounts with small recorded balances that are
a. 5 ½% c. 3 ½% significantly understated.
b. 4 ½% d. 1%
38. In statistical sampling methods used in substantive
33. In the evaluation of this sample, the auditor decided to testing, an auditor most likely would stratify a
increase the level of preliminary assessment of control population into meaningful groups if
risk (CR is high) because the a. Probability proportional to size (PPS) sampling is
a. Tolerable rate (7%) was less than the achieved used
upper precision limit (8%). b. The population has highly variable recorded
b. Expected deviation rate (7%) was more than the amounts
percentage of errors in the sample (3 ½%). c. The auditor’s estimated tolerable misstatement is
c. Achieved upper precision limit (8%) was more than extremely small.
the percentage of error in the sample 3-1/2%). d. The standard deviation of recorded amount is
d. Expected deviation rate (2 - ½ %) was less than relatively small.
the tolerable rate (7%).
39. An auditor is evaluating the results of a variables
34. An auditor who uses statistical sampling for attributes sampling plan. Which of the following is not relevant to
in testing internal controls should increase the the auditor's judgment about the sample?
assessed level of control risk (CR is high) when the a. Management's explanations for why errors in the
a. Sample rate of deviation is less than the expected sample occurred.
rate of deviation used in planning the sample. b. Projecting the sample error to the population.
b. Tolerable rate less the allowance for sampling risk c. Considering the effects of sampling risk.
exceeds the sample rate of deviation. d. Qualitative information that lends insight into
c. Sample rate of deviation plus the allowance for errors found.
sampling risk exceeds the tolerable rate.
d. Sample rate of deviation plus the allowance for 40. Using statistical sampling to assist in verifying the
sampling risk equals the tolerable rate. year-end accounts payable balance, an auditor has
accumulated the following data:
Variables Sampling Number Book Balance
35. Which of the following sampling methods would be of balance determined
used to estimate a numerical measurement of a accounts by the
population, such as a peso value? auditor
a. Attributes sampling c. Variables sampling
Population 4,100 P5,000,000 ?
b. Stop-or-go sampling d. Random sampling
Sample 200 P 250,000 P300,000
36. The following are the classical variables techniques,
except: Using the ratio estimation technique, the auditor's
a. Ratio estimation c. Value weighted selection estimate of year-end accounts payable balance would
b. MPU estimation d. Difference estimation be
37. Which of the following is not a problem with monetary- a. P6,150,000 c. P5,125,000
unit selection? b. P6,000,000 d. P6,025,000
a. Population items with a zero recorded balance.
b. Population items that should have a zero balance
 - end of AT.114 - 
but do not.

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